**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe Fiscal Year Ended December 31, 2005**

**or**

** ̈**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Commissionfile number 0-19612**

**IMCLONE SYSTEMS INCORPORATED**

(Exact name of registrantas 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 telephonenumber, 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 $.001 and the associated preferred stock purchase rights.**

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act  Yes  x  No  o

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act  Yes  o  No  x

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes  x  No  o

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

| Large Accelerated  Filer  x | Acclerated  Filer  ̈ | Non-Accelerated Filer   ̈ |
|---------------------------------------|-------------------------------|-----------------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act) Yes   ̈  No  x

The aggregate market valueof the voting and non-voting Common Stock held by non-affiliates of theregistrant as of June 30, 2005 was $2,593,291,253.

Number of shares of CommonStock; par value $.001, as of March 7, 2006: **83,691,684**

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the registrant’s definitive proxystatement to be delivered in connection with its 2006 Annual Meeting ofStockholders are incorporated by reference in Parts II and III of thisreport.

 

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**IMCLONE SYSTEMS INCORPORATED**

**2005 Annual Report on Form 10-K**

**TABLE OF CONTENTS**
|                   | ** ** | ** **                                                                                                              | ** ** | **Page** |
|-------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**   |
| Item 1.           |       | Business                                                                                                                |       |     | 4 |   |
| Item 1A.          |       | Risk Factors                                                                                                            |       |     | 40 |   |
| Item  1B.         |       | Unresolved  Staff Comments                                                                                              |       |     | 48 |   |
| Item 2.           |       | Properties                                                                                                              |       |     | 49 |   |
| Item 3.           |       | Legal  Proceedings                                                                                                      |       |     | 51 |   |
| Item  4.          |       | Submission  of Matters to a Vote of Security Holders                                                                    |       |     | 56 |   |
| **PART II**  |
| Item  5.          |       | Market  for the Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       |     | 57 |   |
| Item  6.          |       | Selected  Financial Data                                                                                                |       |     | 59 |   |
| Item  7.          |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                             |       |     | 60 |   |
| Item  7A.         |       | Quantitative  and Qualitative Disclosures About Market Risk                                                             |       |     | 78 |   |
| Item  8.          |       | Financial  Statements and Supplementary Data                                                                            |       |     | 79 |   |
| Item  9.          |       | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure                                   |       |     | 79 |   |
| Item  9A.         |       | Controls  and Procedures                                                                                                |       |     | 79 |   |
| Item 9B.          |       | Other  Information                                                                                                      |       |     | 83 |   |
| **PART III** |
| Item  10.         |       | Directors  and Executive Officers of the Registrant                                                                     |       |     | 83 |   |
| Item  11.         |       | Executive  Compensation                                                                                                 |       |     | 83 |   |
| Item  12.         |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        |       |     | 83 |   |
| Item  13.         |       | Certain  Relationships and Related Transactions                                                                         |       |     | 83 |   |
| Item  14.         |       | Principal  Accountant Fees and Services                                                                                 |       |     | 83 |   |
| **PART IV**  |
| Item  15.         |       | Exhibits  and Financial Statement Schedules                                                                             |       |     | 84 |   |

 

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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 considersportions of the information in this Annual Report on Form 10-K to be“forward-looking statements” within the meaning of Section 21E of theSecurities Exchange Act of 1934 (the “Exchange Act”) and the Private SecuritiesLitigation Reform Act of 1995. The Company intends such forward-lookingstatements to be covered by the safe harbor provisions for forward-lookingstatements contained in Section 21E of the Exchange Act and the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statementsrelate to, without limitation, the Company’s future economic performance, plansand objectives for future operations and projections of revenue and otherfinancial items. Forward-looking statements can be identified by the use ofwords such as “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “continue”or comparable terminology. Forward-looking statements are inherently subject torisks, trends and uncertainties, many of which are beyond the Company’s abilityto control or predict and some of which the Company might not even anticipate.Although the Company believes that the expectations reflected in suchforward-looking statements are based upon reasonable assumptions at the timemade, it can give no assurance that its expectations will be achieved. Futureevents and actual results, financial and otherwise, may differ materially fromthe results discussed in the forward-looking statements. Readers are cautionednot to place undue reliance on these forward-looking statements.

Important factors that maycause actual results to differ materially from forward-looking statementsinclude, but are not limited to, risks and uncertainties associated with:  the ongoing review of our strategic alternativescurrently being performed by the Company with the assistance of the investmentbank Lazard; the development of market demand for, and continued marketacceptance of, ERBITUX; fluctuations in our royalty, collaborative agreementand manufacturing revenues; our dependence on BMS and Merck KGaA to co-promote,market and sell ERBITUX; our ability to achieve milestones under collaborativearrangements with corporate partners; our ability to compete effectively withother pharmaceutical and biotechnological companies and products; obtaining andmaintaining regulatory approval for our compounds and complying with othergovernmental regulations applicable to our business; obtaining adequatereimbursement from third party payers; expending resources on, and completingpre-clinical and clinical studies of, our compounds that demonstrate suchcompounds’ safety and efficacy; difficulties or delays in product manufacturingand finishing, and the receipt of raw materials, that may cause shortfalls inthe supply of ERBITUX or our product candidates; pressure to lower the price ofERBITUX because of new and/or proposed federal legislation or competition; theimportation of products from overseas; attracting and retaining key personnel;changes in law or FDA policy that expose us to competition from “generic” or “follow-on”versions of our products; protecting our proprietary rights and obtainingpatent protection for new discoveries; commercial limitations imposed bypatents owned or controlled by third parties; the use of hazardous materials inour operations; our exposure to material product liability claims that couldprevent or interfere with the commercialization of products; legal costs andthe duration and outcome of legal proceedings and investigations, including,but not limited to, our investigations pertaining to tax withholding issues;provisions of Delaware law, our charter, bylaws and stockholder rights planthat could hinder, delay or prevent changes in our control; volatility in ourstock price; compliance with covenants in the indenture for our convertiblenotes and with the terms of other contractual obligations; and those otherfactors set forth in this report in Item 1 “Business” and Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”. TheCompany assumes no obligation to update and supplement any forward-lookingstatements that may become untrue because of subsequent events whether as aresult of new information, 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 a portfolio of targeted biologic treatmentsdesigned to address the medical needs of patients with cancer. We focus on whatwe believe are two promising strategies for treating cancer: growth factorblockers 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) of the Exchange Act as soon as reasonably practicable afterwe electronically file such material with, or furnish it to, the Securities andExchange Commission. In addition, our Internet website includes other itemsrelated to corporate governance matters, including among other things, ourcorporate governance guidelines, charters of the various committees of theBoard of Directors, and our corporate compliance program (including our code ofbusiness conduct and ethics).

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-basedchemotherapy has failed. Please see full prescribing information, available atwww.ERBITUX.com, for important safety information relating to ERBITUX,including boxed  warnings. ERBITUX bindsspecifically to the epidermal growth factor receptor (EGFR, HER1, c-ErbB-1)on both normal and tumor cells, and competitively inhibits the binding of theepidermal growth factor (EGF) and other ligands, such as transforming growthfactor-alpha. The EGFR is constitutively expressed in many normal epithelialtissues, including the skin and hair follicle. Expression of EGFR is alsodetected in many human cancers including those of the head and neck, colon andrectum. We are conducting, and in some cases have completed, clinical studiesevaluating ERBITUX for broader use in colorectal and head and neck cancers,lung and pancreatic 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.

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 usein combination with irinotecan for the treatment of patients withEGFR-expressing metastatic colorectal 

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cancer after failure ofirinotecan including cytotoxic therapy.  On December 22, 2005,  Swissmedic approved ERBITUX in Switzerland incombination with radiation in the treatment of patients with previouslyuntreated, advanced SCCHN.

We co-promote and otherwise support the commerciallaunch and sale in new indications of ERBITUX in North America together withour development, promotion and distribution partner Brystol-Myers SquibbCompany (“BMS”) through its wholly-owned subsidiary E.R. Squibb &Sons, L.L.C. (“E.R. Squibb”). We manufacture ERBITUX for clinical studies andfor commercial sales. According to our agreements with BMS and Merck KGaA, eachis obligated to pay us certain royalties 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, includingtwo Phase III randomized studies known as BMS-006 (second-line metastaticsetting) and BMS-025 (refractory metastatic setting). We have completedenrollment in both of these randomized studies. In collaboration with the NationalCancer Institute (NCI) Cooperative groups, studies in first line colorectalcancer (CALGB 80203) and first line pancreatic cancer (SWOG 0205) enrolledpatients in 2004. Subsequently CALGB 80203 was closed to enrollment afteraccruing 238 patients and a new first line colorectal cancer protocol thatincorporates both ERBITUX and Avastin® developed by CALGB (80405) beganenrolling patients in 2005 by all of the NCI Cooperative groups (Intergroup).  Furthermore, the NCI Cooperative groups begana Phase III randomized study to evaluate the merits of adding ERBITUX in theadjuvant setting trials following definitive surgical treatment of Stage C(locoregional) colorectal cancer. Numerous registration-directed studies ofERBITUX are underway in various other locoregional and advanced diseasesettings (colorectal cancer, non-small cell lung cancer, head and neck cancerand pancreatic cancer) and pilot studies are either underway or planned tofurther evaluate the development of ERBITUX for other indications and tumortypes. Additionally, enrollment started in 2004 in a Phase I study of IMC-11F8,a fully human EGFR antibody, in patients with solid tumors who have failedstandard therapy.

In addition to our work developing and commercializingERBITUX, we are developing investigational inhibitors of angiogenesis, whichcould be used to treat various kinds of cancer and other diseases. We haveidentified potential monoclonal antibody-based inhibitors, collectively knownto us as IMC-KDR antibodies. Investigational data available to date indicatethat the IMC-KDR antibodies bind selectively and with high affinity to thekinase insert domain-containing receptor (“KDR”), a principal vascularendothelial growth factor (“VEGF”) receptor, thereby, we believe, inhibitingangiogenesis. A Phase I study of IMC-1121B, a fully human anti-vascularendothelial growth factor receptor 2 (VEGFR-2) antibody, in patients withadvanced solid tumors was initiated in 2004.  In August 2005, ImClone entered into aco-development relationship with UCB to develop CDP-791, a humanizeddi-Fab antibody to VEGFR2 conjugated to polyethylene glycol (PEG). UCB’srandomized Phase II study of non-small cell lung cancer, evaluating treatmentwith  chemotherapy with or without CDP-791,began in 2005.

The Company is no longer working in the area of cancervaccines. No further clinical studies of BEC2, a monoclonal antibody we weredeveloping as a cancer vaccine, will be sponsored by ImClone subsequent to thefailure of the SILVA study to meet its endpoints in small cell lung cancer.Following the analysis of this Phase III data in small cell lung cancer, we andMerck KGaA agreed to discontinue further development of BEC2. In December 2005,we agreed with Merck KGaA to also cease work on the recombinant gp75 antigen,with respect to which we were collaborating with Merck KGaA, as well as ourgp75 DNA vaccine, which is the subject of an ongoing Phase I study as atreatment for melanoma. We have therefore terminated our agreement with Merckfor both BEC2 and gp75 antigen.

In addition to the development and commercializationof ERBITUX and the development of our lead product candidates, we continue toconduct research, both independently and in collaboration with 

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academic and corporatepartners, in a number of areas related to our core focus of tumor cell growthfactor inhibitors and angiogenesis inhibitors. We also have developeddiagnostic products and vaccines for certain infectious diseases, and we havelicensed the rights to these products and vaccines to corporate partners.However, we are no longer actively developing product candidates in the areasof diagnostic and infectious diseases.

On January 24, 2006,we announced that our Board of Directors had engaged the investment bank Lazardto conduct, in conjunction with management, a full review of the Company’sstrategic alternatives to maximize shareholder value. These alternatives couldinclude a merger, sale or strategic alliance. The Company is proceeding inconsultation with its existing partners as the process moves forward.

**CLINICAL DEVELOPMENT 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 tumorcells and select normal cells. Certain cancer types are characterized by theexpression of the EGFR. For example, IMCL-9923 and other studiesconducted by us have indicated that approximately 75% of advanced stagerefractory colorectal cancer cases have been shown to express the EGFR in tumorcells. Similarly, according to the literature in this area, nearly all patientsdiagnosed with SCCHN have been shown to express the EGFR on the surface of thetumor cells, therefore, no EGFR testing is required to use ERBUTUX based on theapproved SCCHN indication. According to the American Cancer Society, anestimated 106,680 cases of colorectal cancer and an estimated 40,500 cases ofhead and neck cancer will be diagnosed in the United States in 2006. Othertypes of cancer are also characterized, in certain patients, by expression ofthe EGFR, including non-small cell lung, renal, and pancreatic cancers. Bypreventing the binding of critical growth factors to the EGFR, we believe it ispossible to inhibit the growth and survival of these tumors.

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***ERBITUX Clinical Studies***

The charts presented belowreflect studies in selected tumor types that we and our partners, Merck KGaAand BMS, are developing or collaborating on with the National Cancer Instituteand various European cooperative groups, and are designed both for registrationpurposes and exploratory development in these indications.

***Colorectal Cancer***

| **Study**                                            | ** ** | ** **                                                                                                                    | ** ** | **Description**                                                 | ** ** | **Population** | ** ** | **Target  Enrollment** |
|------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|----------------|------------|------------------------|
| CALGB 80203  (Enrollment closed)                     |       | Phase III Randomized Study  (FOLFOX +/- ERBITUX)  (Saltz +/- ERBITUX)                                     |       | First line                                                      |       | 2200           |
| CALGB 80405  (Intergroup)  (Ongoing)                 |       | Phase III Randomized study of  chemotherapy (FOLFOX or  FOLFIRI) plus Avastin® vs.  ERBITUX vs. Avastin® +  ERBITUX |       | First-Line                                                      |       | 2289           |
| EMR-013 (CRYSTAL)  (Enrollment  Completed)           |       | Phase III Randomized Study of  FOLFIRI +/- ERBITUX                                                                            |       | First-Line                                                      |       | 1220           |
| OPUS (Ongoing)                                       |       | Phase III Randomized Study of  FOLFOX +/- ERBITUX                                                                        |       | First-Line                                                      |       | 300            |
| EMR680 (CAIRO II)  (Ongoing)                         |       | Phase III Randomized Study  (XELOX/Avastin®  +/- ERBITUX)                                                      |       | First-Line                                                      |       | 750            |
| COIN (Clinical Research  Council, UK)  (Ongoing)     |       | Phase III Randomized Study  (FOLFOX [regimen 1] vs.  FOLFOX [regimen 2] vs.  FOLFOX + ERBITUX)                                |       | First-line                                                      |       | 2400           |
| SWOG (Intergroup)  (approved by NCI; to  begin 3Q06) |       | Phase III Study of FOLFIRI +  ERBITUX +/- Avastin®                                                                       |       | Second-line  (previously  treated with  FOLFOX/  Avastin®) |       | 650            |
| BMS-025  (Enrollment Completed)                      |       | Phase III Randomized Study of  ERBITUX vs. Best Supportive Care                                                               |       | Refractory                                                      |       | 572            |
| NCCTG 147 (Intergroup)  (Ongoing)                    |       | Phase III Randomized Study  (FOLFOX +/- ERBITUX)                                                                    |       | Adjuvant                                                        |       | 2300           |
| PETACC-8 (Europe)  (Ongoing)                         |       | Phase II Single Study (Avastin® +  ERBITUX + Irinotecan vs.  Avastin® + ERBITUX)                                    |       | Adjuvant                                                        |       | 2000           |

 

As part of our confirmatory obligation to the FDA inregard to the approval of ERBITUX for colorectal cancer, we initiated a PhaseII study enrolling 60 patients with refractory, EGFR-non-detectable, metastaticcolorectal cancer. This study is designed to estimate the overall response rateand duration obtained with single agent ERBITUX use and is targeted to completeaccrual in 2007.

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In conjunction with ourU.S. partner, BMS, and our partner in the rest of the world, Merck KGaA, wehave opened or expect to open additional studies in colorectal cancer,including randomized studies in first-line, second-line, and refractorysettings for metastatic colorectal cancer, as well as in the adjuvant settinginvolving patients with locoregionally advanced disease following definitivesurgical resection. Upon the approval of ERBITUX for colorectal cancer underthe accelerated approval mechanism, studies BMS-006 and BMS-014were designated as studies in the second-line metastatic setting to confirm theclinical benefit of ERBITUX. BMS-006, which opened for patient enrollmentin May 2003, tests the addition of ERBITUX to irinotecan in patients whohave failed oxaliplatin, 5-fluorouracil, and leucovorin in the first lineof therapy. BMS-006, which is being conducted in collaboration with MerckKGaA, finished patient accrual in February 2006. Preliminary toxicitydata, substantiating the safety of the regimen, was presented at the annualAmerican Society of Clinical Oncology (ASCO) meeting in 2005. Another study,BMS-014, which opened for patient enrollment and treatment in March 2003and which is now currently closed to accrual, tests the addition of ERBITUX andthe combination of oxaliplatin, 5-fluorouracil, and leucovorin (FOLFOX-4)in patients who have failed irinotecan, 5-fluorouracil, and leucovorin. Apooled analysis of the preliminary results of this study was presented at theannual ASCO meeting in 2005. In the pooled analysis, the incidence of thecharacteristic ERBITUX and FOLFOX4 toxicities does not seem to be increased ascompared to the reported incidences in the ERBITUX and Eloxatin packageinserts. Based on our limited investigational experience the combination ofFOLFOX-4 and ERBITUX appears to be a feasible regimen.

EMR-013 (CRYSTAL), arandomized Phase III study that evaluates the merits of adding ERBITUX toirinotecan and infusional 5-fluorouracil (FOLFIRI) as first-line therapyin patients with metastatic disease, completed patient accrual in December 2005.Many other randomized Phase III trials sponsored by either Merck KGaA, ImClone,and/or BMS and/or various national cooperative oncology groups in US and Europeare evaluating the merits of adding ERBITUX to many different chemotherapyregimens plus or minus Avastin® in the first- and second-line metastaticsetting. In addition, BMS-025, a randomized Phase III study of ERBITUXversus best supportive care with a primary survival endpoint, completed patientenrollment in August 2005.

***Head and NeckCancer***

| **Study**                         | ** ** | ** **                                                                                                            | ** ** | **Description**                                                            | ** ** | **Population** | ** ** | **Target  Enrollment** |
|-----------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|----------------|------------|------------------------|
| IMCL-9815  (Completed)            |       | Phase III Randomized  Study (Radiation +/- ERBITUX)                                                         |       | First line                                                                 |       | 424            |
| EMR-016  (Completed)              |       | Phase II Single  Agent Study                                                                                          |       | Recurrent/  Refractory or Metastatic                                       |       | 103            |
| 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)  (Ongoing)      |       | 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            |

 

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The final results of IMCL-9815, our Phase IIIlocally advanced head and neck cancer study, conducted in cooperation withMerck KGaA, that were published in the New England Journal of Medicine inFebruary 2006, demonstrate that ERBITUX, when added to definitiveradiation therapy, significantly improves the duration of both locoregionaldisease control and overall survival.

RTOG 0522, which opened to patient enrollment inNovember 2005, was designed to extend the positive results with ERBITUXreported from study IMCL-9815. In this Phase III study, patients withlocally advanced head and neck cancer are being randomized to treatment witheither radiation plus chemotherapy 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 ClinicalOncology.  In this study, the objectiveresponse rate was significantly higher for the ERBITUX arm (26.3% versus 9.8%).  Both overall survival and progression-freesurvival were numerically higher in patients receiving ERBITUX plus cisplatin,but the study was not adequate to demonstrate clinically relevant differencesin these endpoints. Based on the results of ECOG 5397, as well as nonrandomizedstudies demonstrating the activity of ERBITUX in patients with recurrent andmetastatic head and neck cancer following treatment with platinum-basedregimens, Merck KGaA developed EMR-002, a randomized Phase III study ofcisplatin plus 5-fluorouracil versus cisplatin plus 5-fluorouracilplus ERBITUX.  The study, which wasnearly completely accrued in January 2006, may support registering ERBITUXin this indication in both the US and worldwide.

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 radiation and chemoradiation regimens in many differentsettings of head and neck cancer (e.g. neoadjuvant, adjuvant, metastatic,locoregional).

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***Non-Small Cell LungCancer***

| **Study**                             | ** ** | ** **                                                                                                                                            | ** ** | **Description**                       | ** ** | **Population** | ** ** | **Target  Enrollment** |
|---------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------|------------|------------------------|
| CP02-0452 (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 (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 (Ongoing)                     |       | Phase II single-arm study  (ERBITUX)                                                                                                                  |       | Recurrent or  progressive             |       | 100            |
| EMR-046 (FLEX) (Enrollment Completed) |       | Phase III Cisplatin/Vinorelbine  or Cisplatin/Gemcitabine +/-  ERBITUX                                                                                |       | First line  Stage IIIb or IV          |       | 1100           |
| BMS-099 (Ongoing)                     |       | 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          |       | 140            |
| IMCL-0554 (Initiating)                |       | Phase II  Taxane/Carbo/Avastin®/Erbitux or  Avastin®/ERBITUX                                                                                |       | First line  Stage IIIb or IV          |       | 120            |
| RTOG-0324 (Completed)                 |       | Phase II Radiation +  Taxol/Carbopatin + ERBITUX                                                                                                      |       | First line  Stage IIIa                |       | 84             |
| SWOGSO342 (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, involving 61 evaluable patients with chemotherapy-naïve advancednon-small cell lung cancer, which showed that the addition of ERBITUX tocisplatin and vinorelbine significantly increased tumor response rates (53.3%versus 32.3%) and median survival (8.3 vs. 7.0 months), Merck KGaA began aPhase 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-100 was increased from 300 to 660 patients and the principalendpoint was modified from response rate to progression-free survival, whereasthe size of BMS-099 was decreased from 300 to 140, which met its accrualtarget in 2005.

At ASCO 2005, the Radiation Therapy Oncology Group(RTOG) presented preliminary toxicity and feasibility data on RTOG 0324 whichevaluated the feasibility, safety and efficacy of ERBITUX combined withTaxol/Carboplatin and radiation, in patients with locoregionally-advanced stageIIIa nonsmall lung cancer. The RTOG reported that the regimen was both safe andfeasible; efficacy results are pending. In addition, the Southwest OncologyGroup (SWOG) completed accrual to SWOG 0342, a randomized Phase II study evaluatingcombined therapy with ERBITUX/paclitaxel/carboplatin (combined) versuspaclitaxel/carboplatin followed by ERBITUX (sequential) in patients with stagesIIIb or IV nonsmall cell lung cancer. Both SWOG and RTOG are planningrandomized Phase III studies in advanced and 

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locoregionally advancedpatients, respectively, depending on the results of these aforementioned PhaseIII studies, which are expected to be available in mid-2006.

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,and a wide range of both randomized and nonrandomized Phase I and Phase IIstudies, sponsored by ImClone, BMS, and Merck KGaA, are evaluating ERBITUX incombination with many chemotherapy and chemoradiation regimens in neoadjuvant,adjuvant, locoregionally-advanced, and advanced non-small cell lung cancerdisease settings.

***Pancreatic Cancer***

| **Study**                                                           | ** ** | ** **                                                                                                        | ** ** | **Description**                             | ** ** | **Population** | ** ** | ** ** | **Target  Enrollment** | ** ** |
|---------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|----------------|------------|------------|------------------------|------------|
| SWOG-0205  (Ongoing; enrollment projected to be complete in 1Q2006) |       | Phase III Randomized  Study (ERBITUX + Gemcitabine vs. Gemcitabine)                                          |       | First line Stage IV  Pancreatic Cancer |       | 720            |
| ECOG-8200  (Ongoing)                                                |       | Phase II  Randomized Study of Irinotecan + Docetaxel +/- ERBITUX                                             |       | First line  Stage IV Pancreatic Cancer |       | 92             |
| NCI-6580  (Ongoing)                                                 |       | Phase II  Randomized Study Gemcitabine + Avastin® + ERBITUX or Gemcitabine + Avastin® +  Erlotinib |       | First line  Stage IV Pancreatic Cancer |       | 54-126         |
| IMCL-0555  (Initiating)                                             |       | 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 Groupactivated SWOG-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 has been quite rapid and the accrual is projected to be complete in thefirst quarter of 2006, with top-line data available sometime during the secondhalf of 2006 or the first quarter of 2007. A number of Phase II randomizedstudies sponsored by ImClone and BMS or the NCI cooperative oncology groupshave been or will be initiated in 2006. These studies are designed to evaluatethe merits of adding ERBITUX to various chemotherapy regimens consisting ofeither gemcitabine or irinotecan plus docetaxel, and several of these studieswill evaluate ERBITUX combined with chemotherapy as well as the VEGF inhibitorAvastin®. Further, we, in collaboration with our partners BMS and Merck KGaA,as well as the NCI cooperative oncology groups are evaluating the feasibilityand activity of administering ERBITUX with several other gemcitabine-basedchemotherapy regimens in patients with advanced pancreatic cancer, as well asevaluating the feasibility of administering ERBITUX with chemotherapy and/orradiotherapy in earlier stages of the diseases, particularly in the neoadjuvantand adjuvant settings.

***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, 

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esophagus, stomach, rectum,cervix, endometrium, ovary, bladder, prostate, and breast, as well as pediatricmalignancies. In 2006, ImClone will sponsor a series of multicenter randomizedPhase II studies to evaluate the merits of adding ERBITUX to standard therapyused to treat patients with bladder, prostate, esophageal, and ovarian cancers.

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.

***Safety and Other General Information***

Grade 3¤4 infusionreactions, rarely with fatal outcome (<1 in 1000), occurred in approximately3% (46¤1485)of patients receiving ERBITUX (Cetuximab) therapy, characterized by rapid onsetof airway obstruction (bronchospasm, stridor, hoarseness), urticaria,hypotension, and/or cardiac arrest. Severe infusion reactions require immediateand 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 neck treated withradiation therapy and ERBITUX as compared to none of 212 patients treatedwith radiotherapy alone. ERBITUX in combination with radiation therapy shouldbe used with caution in patients with known coronary artery disease, congestiveheart failure and arrhythmias.

Close monitoring of serum electrolytes, includingserum magnesium, potassium, and calcium during and after Cetuximab therapy isrecommended.

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 (n=796) of ILDreported in patients in head and neck clinical trials with ERBITUX.

In clinical studies of ERBITUX, dermatologictoxicities, including acneform rash, skin drying and fissuring, andinflammatory and infectious sequelae (eg, blepharitis, cheilitis, cellulitis,cyst) were reported. Severe (Grade 3¤4) acneformrash was reported in 17% of 208 patients with head and neck cancer treated withERBITUX plus radiation and in 1% of 103 patients treated with ERBITUX as asingle agent as well as 11% of 774 patients with mCRC treated with ERBITUX. Sunexposure may exacerbate these effects. A related nail disorder, occurring in12% (0.4% Grade 3) of patients, was characterized as a paronychialinflammation.

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.

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 

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locally advanced squamouscell carcinoma of the head and neck. Two of 21 patients died, one as a resultof pneumonia and one of an unknown cause. Four patients discontinued treatmentdue to adverse events. Two of these discontinuations were due to cardiac events(myocardial infarction in one patient and arrhythmia, diminished cardiacoutput, and hypotension in the other patient).

Additional serious adverse events associated withERBITUX in combination with RT in patients with head and neck cancer weremucositis (6%), radiation dermatitis (3%), confusion (2%) and diarrhea (2%).Additional serious adverse events associated with ERBITUX in mCRC clinical trials(N=774) were fever (5%), sepsis (3%), kidney failure (2%), pulmonary embolus(1%), dehydration (5% in patients receiving ERBITUX with irinotecan, 2% inpatients receiving ERBITUX as a single agent), and diarrhea (6% in patientsreceiving ERBITUX with irinotecan, 0.2% in patients receiving ERBITUX as asingle agent).

The overall incidence of late radiation toxicities(any grade) was higher in 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.

The most common adverseevents seen in patients with carcinomas of the head and neck receiving ERBITUXin combination with radiation therapy (n=208) versus radiation alone (n=212)were mucositis-stomatitis (93%/94%), acneform rash (87%/10%), radiationdermatitis (86%/90%), weight loss (84%/72%), xerostomia (72%/71%), dysphagia(65%/63%), asthenia (56%/49%), nausea (49%/37%), constipation (35%/30%) andvomiting (29%/23%). The most common adverse events seen in patients receivingERBITUX as a single agent (n=103) were acneform rash (76%), asthenia (45%),pain (28%), fever (27%) and weight loss (27%). The most common adverse eventsseen in patients receiving ERBITUX with irinotecan (n=354) or ERBITUX as asingle 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 full prescribing information, available at www.ERBITUX.com forimportant safety information relating to ERBITUX, including boxed warnings.

***Human Monoclonal EGFR Inhibitor***

We have developed a fully human monoclonal antibody,referred to as IMC-11F8, which targets the human EGFR. IMC-11F8 isa 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. In pre-clinical human tumor xenograftmodels, IMC-11F8 suppresses the growth of EGFR-positive tumors andenhances the activity of chemotherapeutic drugs when used in combination. Weintend to commercialize this antibody in Europe and potentially elsewhere andwe believe that we have rights to do so under our agreements with BMS and MerckKGaA. However, Merck KGaA has advised us that it believes that IMC-11F8is covered under our existing developmental and license agreement with MerckKGaA and that it could therefore have the exclusive rights to market IMC-11F8outside the United States and Canada and co-exclusive development rights inJapan, for which it would pay the same royalty as it pays for ERBITUX. See “CorporateCollaborations—Collaborations with Merck KGaA” and “Legal Proceedings”. Webelieve that IMC-11F8 is not covered under the Merck KGaA development andlicense agreement. This dispute has been submitted to binding arbitrationthrough an expedited process outside of the provisions of the development andlicense agreement, the results of which we expect in the near future. Ifsuccessful in the arbitration, Merck KGaA averred that it is entitled tocertain unspecified damages under the development and license agreement. Whilewe intend to 

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vigorously defend ourposition as it relates to IMC-11F8 in arbitration, there is no assurancethat our position would prevail and we are unable to predict the outcome ofthese procedings. Commercial rights to this antibody in the U.S. and Canadafall within the scope of our agreement with BMS regarding ERBITUX.

TheCompany received approval to begin Phase I clinical trials of IMC-11F8from the National Institute for Public Health and the Environment (RIVM), theDutch regulatory agency. The first patient began treatment in fourth quarter of2004 in a Phase I clinical trial of patients with solid tumors. The two-centerstudy is being conducted at the Free University in Amsterdam and UtrechtUniversity in Utrecht, and is designed to evaluate the safety and pharmacologyof IMC-11F8 administered weekly or bi-weekly by intravenous infusion. Thepreliminary results of this trial, which is projected to achieve its objectivesand close to patient accrual in the second half of 2006, will be reported atthe ASCO 2006 meeting. Disease-directed developmental trials of 11F8 areprojected to begin in the second half of 2006.

| **Study** | ** ** | ** **                                                                                                  | ** ** | **Description**                        | ** ** | **Population** | ** ** | ** ** | **Target  Enrollment** | ** ** |
|-----------|------------|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------|------------|------------|------------------------|------------|
| CP11-0401 |       | 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,particularly the use of ERBITUX to block the EGFR, is mirrored in our pursuitof what may be another promising approach for the treatment of cancer, theinhibition of angiogenesis. Angiogenesis is the natural process of new bloodvessel growth. VEGF is one of 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 vessels andensures an adequate blood supply to the tumor, enabling the tumor to grow. KDRis a growth factor receptor found almost exclusively on the surface of humanendothelial cells, which are the cells that line all blood vessels. VEGF mustrecognize and bind to this KDR receptor in order to stimulate the endothelialcells to grow and cause new blood vessels to form. We believe that interferencewith the binding of VEGF to the KDR receptor inhibits angiogenesis andpotentially can be used to slow or halt tumor growth. We have identifiedpotential inhibitors collectively known by us as IMC-KDR antibodies.

In 2001, we concluded a Phase I clinical study with achimeric (part human, part mouse) anti-KDR antibody known as IMC-1C11. In2002, we identified several fully human monoclonal anti-KDR antibodies withpotent anti-KDR activity. In 2003, we initiated pre-clinical development of oneof these antibodies, IMC-1121B. We filed an Investigational New DrugApplication (“IND”) for IMC-1121B in July 2004 and initiatedclinical studies assessing its potential for angiogenesis inhibition in cancerpatients during the fourth quarter of 2004. This fully human antibody replacedIMC-1C11 in our development pipeline.

Subjectto further investigation, we believe that such inhibitors could be effective intreating many solid and liquid tumors and may also be useful in treating otherdiseases, such as diabetic retinopathy and age-related macular degenerationthat, like cancer, depend on the growth of new blood vessels.

| **Study** | ** ** | ** **                                                                                      | ** ** | **Description**                        | ** ** | **Population** | ** ** | ** ** | **Target  Enrollment** | ** ** |
|-----------|------------|-------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|----------------|------------|------------|------------------------|------------|
| CP12-0401 |       | Phase I Study of Weekly Anti-Vascular Endothelial  Growth Factor Receptor 2 Monoclonal Antibody |       | In Patients with Advanced Solid Tumors |       | 33             |

 

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In2005, we entered into a Collaboration and License agreement with UCB S.A todevelop CDP-791, consisting of di-fab human monoclonal antibody segmentslinked together by a PEG linker. In a Phase I study in patients with advancedsolid malignancies, CDP-791 did not demonstrate dose-limiting toxicitiesup to doses of 30 mg/kg every 3 weeks, a dose level projected to achievebiologically-relevant concentrations for most of the dosing interval. In August 2005,UCB started a randomized Phase I/II study of CDP-791 pluscarboplatin/paclitaxel in previously untreated patients with advanced non-smallcell lung cancer. In this study, patients are being randomized to treatmentwith either carboplatin/paclitaxel alone or with CDP-791 at 10 or 20mg/kg every 3 weeks. In 2006, we and UCB plan to start disease-directedclinical evaluations of CDP-791.

| **Study**   | ** ** | ** **                                                                                                                    | ** ** | **Description**                                                        | ** ** | **Population** | ** ** | ** ** | **Target  Enrollment** | ** ** |
|-------------|------------|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|----------------|------------|------------|------------------------|------------|
| RPCE05A3166 |       | Phase I/II Randomized Study of Paclitaxel/  Carboplatin administered either alone or combined with CDP-791 at 20 or  30 mg/kg |       | In Patients with Advanced Stage IIIB or IV Non-small  Cell Lung Cancer |       | 120            |

 

***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 (IGF1R) which is expressed in diverse human tumor types. Activation ofIGF1R in cancer cells in preclinical models increases the cells’ ability tosurvive, especially under conditions of chemotherapy or radiotherapy, and italso contributes to cancer cell growth, as well as the development ofresistance to chemotherapeutics, hormones (estrogens and androgens), and signaltransduction inhibitors. IMC-A12 prevents 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 rapidinternalization (removal from the cell surface) of IGF1R, thus furtherinterfering with cancer growth-supporting properties of the receptor.

Followingsuccessful filing of an IND for IMC-A12 in 2005, we began a Phase I study ofthe agent in patients with solid malignancies in December 2005.

| **Study** | ** ** | ** **                                                         | ** ** | **Description**                         | ** ** | **Population** | ** ** | ** ** | **Target  Enrollment** | ** ** |
|-----------|------------|--------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------|------------|------------|------------------------|------------|
| CP13-0501 |       | Phase I Study of  IMC-A12, an Anti-IGFR1 Human Monoclonal Antibody |       | In Patients with  Advanced Solid Tumors |       | 40             |

 

***Monoclonal Antibody to Vascular Endothelial GrowthFactor Receptor-1 (VEGFR1)***

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 VEGFR1-positivetumors, such as breast or colorectal cancer and we are developing therapeuticantibodies against this target for future clinical studies.

We successfully filed anIND for IMC-18F1, a fully human monoclonal antibody to VEGFR1, in December 2005,for which we are beginning a Phase I study in the first half of 2006.

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

PDGFRa is a receptor tyrosine kinasethat is activated by the binding of platelet-derived growth factors. Studieshave shown that PDGFRa is expressed on ovarian,prostate, breast, lung, glial, skin and bone tumors. We have developed afully human antibody, designated IMC-3G3, that effectively blocks the functionof PDGFRaand inhibits the growth of glioblastoma and leiomyosarcoma tumors in animalmodels. We are conducting additional pre-clinical studies to evaluate ifour antibody can also inhibit the growth of other cancers. We expect to file anIND for IMC-3G3 in the first half of 2006 and begin a Phase I trialin the second half of 2006.

**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 toconcentrating on our products in development, we perform ongoing research,including research in each of the areas of our ongoing clinical programs ofgrowth factor blockers, other tumor cell growth inhibitors and angiogenesisinhibitors. We have assembled a scientific staff with expertise in a variety ofdisciplines, including oncology, immunology, molecular and cellular biology,antibody engineering, bioinformatics and protein chemistry. We have centralizedour target identification group into a new Tumor Biology department. Thesescientists have the primary responsibility of identifying new targets andvalidating their role in tumor growth and development. New targets are bothengendered internally and obtained from external partners. Also, we recentlyconcluded an agreement with Caprion Pharmaceuticals and are currentlyvalidating a series of new targets. Additional collaborations of this type areunder consideration. Our primary goal is to identify a number of targetssufficient to support and expand our portfolio beyond our current level. Inaddition to pursuing research programs in-house, we collaborate with academicinstitutions and corporations to support our research and development efforts.

***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 (IGF1R) which is frequentlyover-expressed in diverse human tumor types. Activation of IGF1R in cancercells increases the cells’ ability to survive, especially under conditions ofchemotherapy or radiotherapy, and it also contributes to cancer cell growth. Wehave developed and evaluated an antibody to IGF1R, designated IMC-A12, thatblocks binding of insulin-like growth factor-1 to the receptor, thuspreventing its activation and triggering of survival and growth mechanisms incancer cells. The antibody also causes rapid internalization (removal from thecell surface) of IGF1R, thus further interfering with cancer growth-supportingproperties of the receptor. The IMC-A12 IND was accepted by the FDA and ourPhase I study was initiated and is ongoing.

*Researchon VEGFR-1 inhibitors:*   We areinvestigating the activities of antibodies that block the function of VEGFR-1(*flt-1)*, another receptorto which VEGF binds. Like VEGFR-2, the target of our anti-KDR antibodies,the VEGFR-1 receptor is believed to be involved in blood vesselformation, but recent data suggest that it may function in novel ways unrelatedto angiogenesis. We have discovered that VEGFR-1 is expressed by a numberof human 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 

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models. It is believedthat VEGFR-1 inhibitors could be useful in the treatment of VEGFR1-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 andaccepted. Phase I studies should begin 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 PDGFRa and inhibits the growth of glioblastoma andleiomyosarcoma tumors in animal models. We are conducting additionalpre-clinical studies to evaluate if our antibody can also inhibit the growth ofother cancers. We expect to file an IND for IMC-3G3 early in 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. Current efforts are focused on antibody productionin preparation for clinical development.

*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 exploring 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 a fullyhuman anti-FLT3 antagonist antibody named IMC-EB10. Preclinical studies haveshown 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 therapeutic activityin xenograft models.

***Research on Angiogenesis Inhibitors***

*Researchon VEGFR-2 inhibitors:*   We are continuingto work with an experimental antibody known as DC101 in animal models in orderto support the clinical development of our IMC-KDR monoclonal antibody known asIMC-1121B. DC101 neutralizes the *flk-1*receptor, which is the mouse receptor to VEGF that corresponds to KDR inhumans. Tumor models in mice have shown that DC101 inhibits tumor growth as asingle agent or in combination with chemotherapy or radiation therapy. We filedan IND for IMC-1121B in August 2004 and have since started aclinical Phase I trial to study its potential for angiogenesis inhibition incancer patients.

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*Researchon VE-cadherin inhibitors:*   In another approachto angiogenesis inhibition, we are exploring the therapeutic potential ofantibodies against vascular-specific cadherin (“VE-cadherin”). Cadherins are afamily of cell surface molecules that help organize tissue structures.VE-cadherin is believed to play an important role in angiogenesis by organizingendothelial cells into vascular tubes, which is a necessary step in theformation of new blood vessels. Advanced tumor growth is dependent on theformation 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.

*Research Support forClinical Programs:*   ImClone presently has fiveantibodies in various stages of clinical development—fully human anti EGF,anti-IGFR1, anti-VEGFR2, CDP-791 and anti-VEGFR1. While all these agentsare being assessed clinically as single agents, our research scientists areperforming studies to determine which potential combinations would be mostuseful in future clinical studies. These combinations include chemotherapeuticsmall molecules, signaling inhibitors and selective antibodies.

**CORPORATE COLLABORATIONS**

In addition to ourcollaborations in the research and clinical areas with academic and medicalinstitutions, we have a number of collaborations with other corporations, themost 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, 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 a 

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commercial agreement (the “CommercialAgreement”) with BMS and E.R. Squibb relating to ERBITUX, pursuant to which,among other things, BMS and E.R. Squibb are co-developing and co-promotingERBITUX in the United States and Canada with us, and are co-developing andco-promoting ERBITUX in Japan with us and either together or co-exclusivelywith Merck KGaA.

On March 5, 2002, weamended the Commercial Agreement with E.R. Squibb and BMS. The amendmentchanged certain economics of the Commercial Agreement and expanded the clinicaland strategic roles of BMS in the ERBITUX development program. One of theprincipal economic changes to the Commercial Agreement is that we receivedpayments of $140,000,000 on March 7, 2002 and $60,000,000 on March 5,2003. Such payments are in lieu of the $300,000,000 milestone payment we wouldhave received upon acceptance by the FDA of the ERBITUX BLA under the originalterms of the Commercial Agreement. The terms of the Commercial Agreement, asamended on March 5, 2002, are set forth in more detail below.

**Commercial Agreement**

*RightsGranted 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 and Canada,(2) the co-exclusive right to develop, distribute and promote (togetherwith us and together or co-exclusively with Merck KGaA and its affiliates) theproduct in Japan, and (3) the non-exclusive right to use our registeredtrademarks for the product in the United States, Canada and Japan(collectively, the “territory”) in connection with the foregoing. In addition,we agreed not to grant any right or license to any third party, or otherwisepermit any third party, to develop ERBITUX for animal health or any otherapplication outside the human health field without the prior consent of E.R.Squibb (which consent may not be unreasonably withheld).

*RightsGranted 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-Frontand Milestone Payments—**The*CommercialAgreement provides for up-front and milestone payments by E.R. Squibb to us of$900,000,000 in the aggregate, of which $200,000,000 was paid onSeptember 19, 2001, $140,000,000 was paid on March 7, 2002,$60,000,000 was paid on March 5, 2003 $250,000,000 was paid onMarch 12, 2004 and $250,000,000 is anticipated to be received byMarch 31, 2006. All such payments are non-refundable and non-creditable.

*DistributionFees—**The*Commercial Agreement providesthat E.R. Squibb shall pay us distribution fees based on a percentage of“annual net sales” of the product (as defined in the Commercial Agreement) byE.R. Squibb in the United States and Canada. The distribution fee is 39% of netsales in the United States and Canada. During the year ended December 31,2005, we have recorded royalty revenues of $161,116,000, 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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*Developmentof the Product—**Responsibilities*associated withclinical 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. We have incurred $13,137,000, $9,096,000 and $2,262,000pursuant to such cost sharing for the years ended December 31, 2005, 2004and 2003, respectively. In addition, to the extent that BMS and we, in 2005 and2006, exceed expenditures specified under the annual contractual clinicaldevelopment budget, we have agreed to share such excess with BMS. For the yearended December 31, 2005, we have recorded expenses related to this costsharing agreement of approximately $6,700,000.

We have also incurred $1,434,000, $721,000 and$663,000 related to the agreement with respect to development in Japan for theyears ended December 31, 2005, 2004 and 2003, respectively. Except asotherwise agreed upon by the parties, the Company will own all registrationsfor the 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.

*Distributionand 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 theobjective of maximizing the sales potential of the product and promoting thetherapeutic profile and benefits of the product in the most commerciallybeneficial manner. In connection with its responsibilities for distribution,marketing and sales of the product in the territory, E.R. Squibb is performingall relevant functions, including but not limited to the provision of all salesforce personnel, marketing (including advertising and promotionalexpenditures), 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.

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*Manufactureand Supply—**The*Commercial Agreement providesthat we are responsible for the manufacture and supply of all requirements ofERBITUX in bulk form active pharmaceutical ingredient (“API”) for clinical andcommercial use in the territory, and that E.R. Squibb must purchase all of itsrequirements of API for commercial use from us. We supply API for clinical useat our fully burdened manufacturing or purchase cost, and supply API forcommercial use at our fully burdened manufacturing or purchase cost plus amark-up of 10%. Upon the expiration, termination or assignment of any existingagreements between ImClone Systems and third party manufacturers, E.R. Squibbwill be responsible for processing API into the finished form of the product.

*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 andcommercialization of ERBITUX pursuant to the terms of the Commercial Agreement,approving the annual budgets and multi-year expense forecasts, and resolvingdisputes, 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 andimplementation of the marketing plans, coordinating the sales and commercialsupport efforts of E.R. Squibb and us, and reviewing and approving themarketing and promotional 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.

*Rightof First Offer—**E.R.*Squibb has a right of firstoffer with respect to our investigational IMC-KDR monoclonal antibodies (suchas 1121B) should we decide to enter into a partnering arrangement with a thirdparty with respect to IMC-KDR antibodies at any time prior to the earlier tooccur of September 19, 2006 and the first anniversary of the date which is45 days after any date on which BMS’s ownership interest in ImCloneSystems is less than 5%. If we decide to enter into a partnering arrangementduring 

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such period, we mustnotify E.R. Squibb. If E.R. Squibb notifies us that it is interested in such anarrangement, we will provide proposed terms to E.R. Squibb and the parties willnegotiate in good faith for 90 days to attempt to agree on the terms andconditions of such an arrangement. If the parties do not reach agreement duringthis period, E.R. Squibb must propose the terms of an arrangement which it iswilling to enter into, and if we reject such terms we may enter into anagreement with a third party with respect to such a partnering arrangement(provided that the terms of any such agreement may not be more favorable to thethird party than the terms proposed by E.R. Squibb).

*Rightof First Negotiation—**If*at any time during therestricted period (as defined below), we are interested in establishing apartnering relationship with a third party involving certain compounds orproducts not related to IMC-KDR antibodies, we must notify E.R. Squibb and E.R.Squibb will have 90 days to enter into a non-binding agreement with uswith respect to such a partnering relationship. In the event that E.R. Squibband ImClone Systems do not enter into a non-binding agreement, we are free tonegotiate with third parties without further obligation to E.R. Squibb. The “restrictedperiod” means the period from September 19, 2001 until the earliest tooccur of (1) September 19, 2006, (2) a reduction in BMS’sownership interest in ImClone Systems to below 5% for 45 consecutive days, (3) atransfer or other disposition of shares of our common stock by BMS or any ofits affiliates such that BMS and its affiliates own or have control over lessthan 75% of the maximum number of shares of our common stock owned by BMS andits affiliates at any time after September 19, 2001, (4) anacquisition by a third party of more than 35% of the outstanding shares, (5) atermination of the Commercial Agreement by BMS due to significant regulatory orsafety concerns regarding ERBITUX, or (6) our termination of theCommercial Agreement due to a material breach by BMS.

*Restrictionon Competing Products—**During*the period from the date ofthe Commercial Agreement until September 19, 2008, the parties have agreednot to, directly or indirectly, develop or commercialize a competing product (definedas a product that has as its only mechanism of action an antagonism of theEGFR) in any country in the territory. In the event that any party proposes tocommercialize a competing product or purchases or otherwise takes control of athird party which has developed or commercialized a 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 and theproduct and, except for E.R. Squibb Inventions, all processes, know-how andother inventions relating to the product and developed by either party orjointly by the parties. E.R. Squibb, however, has the right to use all suchdata and information, and all such processes, know-how or other inventions, inorder to fulfill its obligations under the Commercial Agreement.

*ProductRecalls—**If*E.R. Squibb is required by anyregulatory authority to recall the product in any country in the territory (orif the JCC determines such a recall to be appropriate), then E.R. Squibb andImClone Systems shall bear the costs and expenses associated with such a recall(1) in the United States and Canada, in the proportion of 39% for ImCloneSystems and 61% for E.R. Squibb and (2) in Japan, in the proportion forwhich each party is entitled to receive operating profit or loss (unless, inthe territory, the predominant cause for such a recall is the fault of eitherparty, in which case all such costs and expenses shall be borne by such party).

*MandatoryTransfer—**Each*of BMS and E.R. Squibb hasagreed under the Commercial Agreement that in the event it sells or otherwisetransfers 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.

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*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;

·       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.

**Acquisition Agreement**

On October 29, 2001,pursuant to the Acquisition Agreement, BMS Biologics accepted for paymentpursuant to the tender offer 14,392,003 shares of the Company’s common stock ona pro rata basis from all tendering shareholders and those conditionallyexercising stock options.

**Stockholder Agreement**

Pursuant to the Stockholder Agreement, our Board wasincreased from ten to twelve members in October 2001. BMS received theright to nominate two directors to our Board (each a “BMS director”) so long asits 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) we have terminated the Commercial Agreement due to amaterial breach by BMS or (2) BMS’ ownership interest were to remain below5% 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 eightdirectors, BMS has the right to nominate two directors. BMS designated AndrewG. Bodnar, M.D., J.D., BMS’ Senior Vice President, Strategy and Medical &External Affairs, as one of the initial BMS directors. The nomination of Dr. Bodnarwas approved by the Board on November 15, 2001. The other BMS directorposition was initially filled by Peter S. Ringrose, M.A, Ph.D. Dr. Ringroseretired in 2002 from his position of Chief Scientific Officer and President,Pharmaceutical Research Institute at BMS, and also resigned from his directorposition with us. BMS has not yet designated a replacement to fill Dr. Ringrose’svacated Board seat.

*Votingof Shares—**During*the period in which BMS hasthe right to nominate up to two BMS directors, BMS and its affiliates arerequired to vote all of their shares in the same proportion as the votes castby all of our other stockholders with respect to the election or removal ofnon-BMS directors.

*Committeesof 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.

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*ApprovalRequired for Certain Actions—**We*may not take anyaction that constitutes a prohibited action under the Stockholder Agreementwithout the consent of the BMS directors, until September 19, 2006 orearlier, if any of the following occurs: (1) a reduction in BMS’sownership interest to below 5% for 45 consecutive days, (2) a transfer orother disposition of shares of our common stock by BMS or any of its affiliatessuch that BMS and its affiliates own or have control over less than 75% of themaximum number of shares of our common stock owned by BMS and its affiliates atany time after September 19, 2001, (3) an acquisition by a thirdparty of more than 35% of the outstanding shares of our common stock, (4) a terminationof the Commercial Agreement by BMS due to significant regulatory or safetyconcerns regarding ERBITUX, or (5) a termination of the CommercialAgreement due to a material breach by BMS. Such prohibited actions include(1) issuing additional shares or securities convertible into shares in excessof 21,473,002 shares of our common stock in the aggregate, subject to certainexceptions; (2) incurring additional indebtedness if the total of(A) the principal amount of indebtedness incurred since September 19,2001 and then-outstanding, and (B) the net proceeds from the issuance ofany redeemable preferred stock then-outstanding, would exceed our amount ofindebtedness for borrowed money outstanding as of September 19, 2001 bymore than $500 million; (3) acquiring any business if the aggregateconsideration for such acquisition, when taken together with the aggregateconsideration for all other acquisitions consummated during the previous twelvemonths, is in excess of 25% of our aggregate value at the time the bindingagreement relating to such acquisition was entered into; (4) disposing ofall or any substantial portion of our non-cash assets; (5) entering intonon-competition agreements that would be binding on BMS, its affiliates or anyBMS director; (6) taking certain actions that would have a discriminatoryeffect on BMS or any of its affiliates as a stockholder; and (7) issuingcapital stock with more than one vote per share.

*Limitationon Additional Purchases of Shares and Other Actions—**Subject*to theexceptions set forth below, until September 19, 2006 or, if earlier, theoccurrence of any of (1) an acquisition by a third party of more than 35%of our outstanding shares, (2) the first anniversary of a reduction inBMS’s ownership interest in us to below 5% for 45 consecutive days, or(3) our taking a prohibited action under the Stockholder Agreement withoutthe consent of the BMS directors, neither BMS nor any of its affiliates willacquire beneficial ownership of any shares of our common stock or take any ofthe following actions: (1) encourage any proposal for a businesscombination with us or an acquisition of our shares; (2) participate inthe solicitation of proxies from holders of shares of our common stock;(3) form or participate in any “group” (within the meaning of Section 13(d)(3) ofthe Securities Exchange Act of 1934) with respect to shares of our commonstock; (4) enter into any voting arrangement with respect to shares of ourcommon stock; or (5) seek any amendment to or waiver of theserestrictions.

The following are exceptions to the standstillrestrictions described above: (1) BMS Biologics may acquire beneficialownership of shares of our common stock either in the open market or from uspursuant to the option described below, so long as, after giving effect to anysuch acquisition of shares, BMS’ ownership interest would not exceed 19.9%; (2) BMSmay make, subject to certain conditions, a proposal to the Board to acquireshares of our common stock if we provide material non-public information to athird party in connection with, or begin active negotiation of, an acquisitionby a third party of more than 35% of the outstanding shares; (3) BMS mayacquire shares of our common stock if such acquisition has been approved by amajority of the non-BMS directors; and (4) BMS may make, subject tocertain conditions, including that an acquisition of shares be at a premium ofat least 25% to the prevailing market price, non-public requests to the Boardto amend or waive any of the standstill restrictions described above. Certainof the exceptions to the standstill provisions described above will terminateupon the occurrence of: (1) a reduction in BMS’s ownership interest in usto below 5% for 45 consecutive days, (2) a transfer or other dispositionof shares of our common stock by BMS or any of its affiliates such that BMS andits affiliates own or have control over less than 75% of the maximum number ofshares owned by BMS and its affiliates at any time after September 19,2001, (3) a termination of the Commercial Agreement by 

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BMS due to significantregulatory or safety concerns regarding ERBITUX, or (4) a termination ofthe Commercial Agreement by us due to a material breach by BMS.

*Optionto Purchase Shares in the Event of Dilution—**BMS*Biologics has theright under certain circumstances to purchase additional shares of common stockfrom us at market prices, pursuant to an option granted to BMS by us, in theevent that BMS’s ownership interest is diluted (other than by any transfer orother disposition by BMS or any of its affiliates). BMS can exercise this right(1) once per year, (2) if we issue shares of common stock in excessof 10% of the then-outstanding shares in one day, and (3) if BMS’sownership interest is reduced to below 5% or 12.5%. BMS Biologics’ right topurchase additional shares of common stock from us pursuant to this option willterminate on September 19, 2006 or, if earlier, upon the occurrence of (1) anacquisition by a third party of more than 35% of the outstanding shares, or (2) thefirst anniversary of a reduction in BMS’s ownership interest in us to below 5%for 45 consecutive days.

*Transfersof Shares—**Until*March 19, 2005, neitherBMS nor any of its affiliates were permitted to transfer shares of our commonstock or enter into any arrangement that transfers any of the economicconsequences associated with the ownership of shares. After March 19,2005, neither BMS nor any of its affiliates may transfer any shares or enterinto any arrangement that transfers any of the economic consequences associatedwith the ownership of shares, except (1) pursuant to registration rightsgranted to BMS with respect to the shares, (2) pursuant to Rule 144under the Securities 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***

*ERBITUXDevelopment 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 $30,000,000 through December 31,2004 in up-front cash fees and early cash payments based on the achievement ofdefined milestones. An additional $30,000,000 was received through December 31,2005 based upon the achievement of further milestones for which Merck KGaAreceived equity in the Company.

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Thechart below details the equity milestone payments received from Merck KGaAduring the three years ended December 31, 2005:

| **Date**           | ** ** | ** ** | ** ** | **Amount of Milestone** | ** ** | **Common shares  issued to Merck  KGaA** | ** ** | **Price per share** | ** ** |
|--------------------|------------|------------|------------|-----------------------------------|------------|---------------------------------------------------------|------------|-------------------------------|------------|
| May 2003      |       |       | $          | 6,000,000                         |       |                                                    |       | 334,471                       |       |   |   | $ | 17.94 |   |   |
| June 2003     |       |       | $          | 3,000,000                         |       |                                                    |       | 150,007                       |       |   |   | $ | 20.00 |   |   |
| July 2003     |       |       | $          | 3,000,000                         |       |                                                    |       | 92,276                        |       |   |   | $ | 32.51 |   |   |
| July 2003     |       |       | $          | 3,000,000                         |       |                                                    |       | 90,944                        |       |   |   | $ | 32.99 |   |   |
| December 2003 |       |       | $          | 5,000,000                         |       |                                                    |       | 127,199                       |       |   |   | $ | 39.31 |   |   |
| July 2004     |       |       | $          | 5,000,000                         |       |                                                    |       | 58,807                        |       |   |   | $ | 58.18 |   |   |

 

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 us a royalty on sales of ERBITUX outside of the United Statesand Canada. In August 2001, Merck KGaA and we amended this agreement toprovide, among other things, that Merck KGaA may manufacture ERBITUX for supplyin its territory and may utilize a third party to do so upon our reasonableacceptance. The amendment further released Merck KGaA from its obligationsunder the agreement relating to providing a guaranty under a $30,000,000 creditfacility relating to the build-out of BB36. In addition, the amendment providesthat the companies have co-exclusive rights to ERBITUX in Japan, including theright to sublicense and Merck KGaA waived its right of first offer in the caseof a proposed sublicense by us of ERBITUX in our territory. In considerationfor the amendment, we agreed to a reduction in royalties’ payable by Merck KGaAon sales of ERBITUX in Merck KGaA’s territory.

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 June 2003, we agreed to supply a fixedquantity of ERBITUX for use in Merck KGaA’s medical affairs program ondifferent ordering and pricing terms than those provided in the binding termsheet, including prepayment by Merck KGaA for a portion of such supply. We hadrecorded this prepayment as deferred revenue on the Consolidated Balance Sheetuntil such time as the product was shipped to Merck KGaA. During 2004, theCompany shipped some products under this agreement and the remaining quantitywas shipped during 2005.

*BEC2 Research and LicenseAgreement—**Effective*April 1990, weentered into an agreement with Merck KGaA relating to the development andcommercialization of BEC2 and the recombinant gp75 antigen. Under thisagreement:

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

·       wegranted Merck KGaA a license, without the right to sublicense, to use, sell, orhave sold, but not to make, BEC2 within North America in conjunction withImClone Systems;

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·       weretained the rights, (1) without the right to sublicense, to make, havemade, use, sell, or have sold BEC2 in North America in conjunction with MerckKGaA and (2) with the right to sublicense, to make, have made, use, sell,or have sold gp75 antigen in North America;

·       wewere required to give Merck KGaA the opportunity to negotiate a license inNorth America to gp75 antigen before granting such a license to any thirdparty.

In return, MerckKGaA:

·       maderesearch support payments to us totaling $4,700,000;

·       wasrequired to make milestone payments to us of up to $22,500,000, of which$5,000,000 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 ofthe results of various clinical studies involving BEC2 and work relating to therecombinant gp75 antigen, we and Merck KGaA determined to discontinue theirfurther development and terminated the related agreement in 2005.

***UCB S.A.***

In August 2005, weentered into a Collaboration and License Agreement with UCB S.A., a companyregistered in Belgium, for the development and commercialization of CDP-791,UCB’s novel, investigational PEGylated di-Fab antibody targeting VEGFR-2.No upfront or milestone payments are payable under the Agreement. The Agreementprovides that we and UCB S.A will share equally all agreed upon developmentcosts for CDP-791 as well as worldwide profits derived from thecommercialization of CDP-791 in indications jointly pursued by theparties. We will also receive an incremental single-digit royalty on net salesworldwide for such indications. Under certain circumstances, one party may beentitled to pursue (in its territory) an indication independently of the otherparty, which retains the option to join in the development or commercializationat a later stage. We have exclusive commercialization rights to CDP-791in North America, with UCB receiving such rights in Europe, Japan, and the restof the world. We recorded an expense related to this agreement of approximately$2,500,000 for the year ended December 31, 2005.

**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 operatedin accordance with current Good Manufacturing Practices (“cGMP”), which is arequirement for product manufactured for use in clinical studies and forcommercial sale.

Production of ERBITUX in commercial quantitiesrequired the expansion of our manufacturing capabilities and the hiring andtraining of additional personnel. In July 2001, we completed constructionof an 80,000 square foot manufacturing facility, BB36, on our Branchburg, NewJersey campus. BB36 contains three 10,000 liter (production volume) fermentersand is dedicated to the clinical and commercial production of ERBITUX. Theconstruction of BB36 cost a total of approximately $53,000,000, excluding 

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capitalized interest ofapproximately $1,966,000. BB36 was ready for its intended use and was put intooperation in July 2001. In December 2003, Swissmedic approved ERBITUXmanufactured at BB36 for commercial use in Switzerland, in addition to ERBITUXmanufactured at a European contract manufacturing site (Boehringer Ingelheim). OnJune 18, 2004, the FDA granted a license to the BB36 facility for U.S.commercial supply. In May 2005, Team Biologics conducted a routinebiannual cGMP inspection. Additionally, BB36 had a satisfactory cGMP inspectionby the Regierungspräsidium Darmstadt that resulted in a Product Import licensebeing granted to Merck KGaA in April 2003, covering the period November 2003to October 2004. The Regierungspräsidium completed and successfully closeda reinspection of BB36 in July 2005. Another reinspection will bescheduled in approximately two years.

We constructed a 250,000square foot multiple product manufacturing facility (“BB50”) in Branchburg, NewJersey with capacity of up to 110,000 liters (production volume). Mechanicalcompletion of BB50 was reached in the fourth quarter of 2005. This facility hasthree distinct suites capable of producing up to three different productsconcurrently. We also have the ability to produce multiple products at each ofthe three suites. Currently, we have fitted and are validating and commissioningSuite 1 and we plan to fully dedicate this Suite to the production ofERBITUX. We estimate to complete the validation and commissioning of Suite 1by the end of the second quarter of 2006, and begin production of ERBITUX forcommercial use in the second half of 2006. We have fitted Suite 2 withequipment but have not determined when we will begin commissioning andvalidation of this Suite. At this point, Suite 3 remains vacant untilfurther determination of its ultimate use. Management estimates that thisfacility will cost approximately $300,000,000, including approximately$38,000,000 of costs related to the commissioning and validation of Suite 1.This estimate may change depending on various factors, particularly costsestimated to be incurred for external contractors assisting us in thevalidation and commissioning of Suite 1. This estimate does not includecosts associated with the eventual commissioning and validation of Suite 2or the fitting, commissioning and validation of Suite 3. In addition, wewill also spend approximately $10 million in laboratory equipment and incurapproximately $24 million in capitalized interest that is not included in thetotal estimated cost described above. We have incurred approximately$289,258,000 in conceptual design, engineering, pre-construction andconstruction costs, excluding capitalized interest of approximately$20,135,000, through December 31, 2005. As of December 31, 2005,committed purchase orders totaling approximately $197,198,000 have been placedwith subcontractors for equipment related to this project and $72,867,000 forengineering, procurement, construction management and validation costs. ThroughDecember 31, 2005, $260,378,000 has been paid relating to these committedpurchase orders.

***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 $68million, 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.

In September 2000, we entered into a three-yearcommercial manufacturing services agreement with Lonza relating to ERBITUX.This agreement was amended in June 2001, September 2001, and August 2003to include additional services and potentially to extend the term of theagreement. All existing commitments under this agreement were completed duringthe year ended December 31, 2003, but an August 2003 amendment to theagreement allows for potential manufacture of a limited number of 

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additional batches. Thetotal cost for services to be provided under the commercial manufacturingservices agreement was approximately $86,913,000. We incurred costs of$23,189,000 for the year ended December 31, 2003 and $85,022,000 wasincurred from inception through December 31, 2003, for services providedunder the commercial manufacturing services agreement. As of December 31,2004, our commitment to Lonza under this agreement was completed. The entireERBITUX inventory produced by Lonza was consumed in clinical trials and usedfor commercial distribution during 2004.

We rely entirely on athird party manufacturer for filling and finishing services with respect toERBITUX. If our current third party manufacturers or critical raw materialsuppliers fail to meet our expectations, we cannot be assured that we will beable to enter into new agreements with other suppliers or third party manufacturerswithout 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 have exercisedthis 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 the Company’s presence and prominence within the oncology communityand help maximize the market potential for ERBITUX in its approved indications.

We will continue toevaluate future arrangements and opportunities with respect to other productswe may develop in order to optimize our profits and our distribution, marketingand sales capabilities.

**PATENTS AND TRADEMARKS**

***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 anexclusive license from the University of California to an issued United Statespatent for the murine form of ERBITUX, our EGFR antibody product. We believethat this patent’s scope 

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should be its literalclaim scope as well as other antibodies not literally embraced but potentiallycovered under the patent law doctrine of equivalents. Whether or not aparticular antibody is found to be an equivalent to the antibodies literallycovered by the patent can only be determined at the time of a potentialinfringement, and in view of the technical details of the potentiallyinfringing antibody in question. Our licensor of this patent did not obtainpatent protection outside the United States for this antibody.

We are pursuing additional patent protection relatingto the field of EGFR antibodies in the treatment of cancer that may limit theability of third parties to commercialize EGFR antibodies for such use.Specifically, we are pursuing patent protection for the use of EGFR antibodiesin combination with chemotherapy to inhibit tumors or tumor growth. We haveexclusively licensed from Rhone-Poulenc Rorer Pharmaceuticals, now known asSanofi-Aventis, patent applications seeking to cover the therapeutic use ofantibodies to the EGFR in conjunction with anti-neoplastic agents. A U.S.patent, a Canadian patent and a European patent were issued in this family. In December 2002,Opposition Proceedings seeking to revoke the European patent were brought bythe Scripps Research Institute, Amgen Inc., Abgenix, Inc., and YMBiosciences Inc. An Opposition Proceeding is an administrative process,the outcome of which may be that our European patent will be revoked. TheCompany has vigorously defended its position in this matter, which is suspendedpending the outcome of the Yeda matter discussed under Item 3; “LegalProceedings”. We have filed additional patent applications, based in part onour own research, that would cover the use of ERBITUX and other EGFR antibodiesin conjunction with radiation therapy, and the use of ERBITUX and other EGFRinhibitors in refractory patients, either alone or in combination withchemotherapy or radiation therapy. We have also filed patent applications thatinclude claims on the use of conjugated forms of ERBITUX, as well as humanized formsof the antibody and fragments.

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 ERBITUXthat are 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 patentinterference proceedings could result in substantial expense to us andsignificant diversion of efforts by our technical and management personnel. Anadverse determination in any such interference proceedings or in patent litigation,particularly with respect to ERBITUX, to which we may become a party couldsubject us to significant liabilities to third parties or require us to seeklicenses from third parties. If required, the necessary licenses may not beavailable on acceptable financial or other terms or at all. Adversedeterminations in a judicial or 

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administrative proceedingor failure to obtain necessary licenses could prevent us, in whole or in part,from commercializing our products, which could have a material adverse effecton our business, financial condition and results 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 third parties.Defense and prosecution of such patent suits can result in the diversion ofsubstantial financial, management and other resources from our otheractivities. An adverse outcome could subject us to significant liability tothird 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 in a judicial or administrative proceeding or failure to obtainnecessary licenses could prevent us, in whole or in part, from commercializingour products, which could have a material adverse effect on our business,financial condition and results of operations.

***AngiogenesisInhibitors.******  ***With respect to our research oninhibitors to angiogenesis based on the *flk-1 *receptor(VEGFR2), we are the exclusive licensee from Princeton University of a familyof patents and patent applications covering recombinant nucleic acid moleculesthat encode the murine *flk-1*receptor and antibodies to extracellular portions of the receptor and its humanhomolog, KDR. We are also the assignee of a family of patents and patentapplications filed by our scientists generally related toangiogenesis-inhibiting antibodies to receptors that bind VEGF, for examplehuman flt-1 (VEGFR1) and KDR (VEGFR2). One of the patents licensed fromPrinceton University claims the use of *flk-1*receptor antibodies to isolate cells expressing the *flk-1* receptor on their cell surfaces. Additionally,we are a co-owner of a patent application claiming the use of *flk-1*/KDR receptor antibodies toisolate endothelial stem cells that express *flk-1*/KDRon their cell surfaces. At present, we are seeking exclusive rights to thisinvention from the co-owners. We have an exclusive license from the LudwigInstitute for Cancer Research for patent rights pertaining to antibodies thatspecifically 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.

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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 haveobtained an exclusive license from ICOS Corporation to certain patent rightspertaining to VE-cadherin and antibodies thereto for the treatment of cancer inhumans. We are also the assignee of a family of patent applications filed by anemployee related to methods of generating therapeutically valuable antibodiesthat bind VE-cadherins. These two families of patent applications covercadherin molecules that are involved in endothelial cell interactions. Theseinteractions are believed to be involved in angiogenic processes. The subjectpatents and patent applications also cover antibodies that bind to, and affectthe cadherin molecules. Our license from ICOS requires us to pay royaltieson the sale of certain VE-cadherin antibodies.

***Phage Display Technology.******  ***A number ofantibodies that we are developing, including our fully human anti-EGFRmonoclonal antibody IMC-11F8 and our fully human anti-KDR monoclonalantibody IMC-1121B are phage-derived antibodies, which means they aremade using phage technology. Since patents have been issued to biotechnologycompanies that relate to phage-derived antibodies and their manufacture, we maybe required to obtain licenses under these patents before we can commercializecertain phage-derived antibodies. In March 2003, we entered into a licensewith Dyax Corp. (“Dyax”) for certain of Dyax’s patent rights and know-howcovering certain phage display technology and a proprietary phage displaylibrary. This license also includes sublicense or non-enforcement covenant rightsfrom other companies that possess patent and other intellectual property rightsrelating to phage display technology. We believe, though we cannot be certain,that this license will provide us with the freedom to operate in thedevelopment of IMC-11F8 and IMC-1121B as well as certain otherphage-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, Exxon Mobil Corporationfiled a Notice of Opposition against our ERBITUX/cetuximab & antibody designlogo. An Opposition in the U.S. Patent and Trademark Office is anadministrative process, the outcome of which 

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may be the rejection ofthe Company’s federal trademark application. The Company is negotiating withExxon Mobil to resolve this matter.

***Trade Secrets.******  ***With respectto certain aspects of our technology, we rely, and intend to continue to rely,on our confidential trade secrets, unpatented proprietary know-how andcontinuing technological innovation to protect our competitive position. Such aspectsof our technology include methods of isolating and purifying antibodies andother proteins, collections of plasmids in viable host systems, and antibodiesthat are specific for proteins that are of interest to us. We cannot be certainthat others 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.

**GOVERNMENT REGULATION**

The research and development, manufacture andmarketing of human therapeutic and diagnostic products are subject toregulation, primarily by the FDA in the United States and by comparableauthorities in other countries. These national agencies and other federal,state and local entities regulate, among other things, research and developmentactivities (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 productsthat we are developing. Noncompliance with applicable requirements can resultin various adverse consequences, including delay in approval or refusal toapprove product licenses or other applications, suspension or termination of clinicalinvestigations, revocation of approvals previously granted, fines, criminalprosecution, recall or seizure of products, injunctions against shippingproducts and total or partial suspension of production and/or refusal to allowa 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. 

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In addition, we mayencounter regulatory delays or rejections as a result of many factors,including changes in regulatory policy during the period of pre-clinical andclinical 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 typically involvesstudies in a limited patient population to: (1) determine the biologicalor clinical activity of the product for specific, targeted indications; (2) determinedosage tolerance and optimal dosage; and (3) identify possible adverseeffects and safety risks. If Phase II evaluations indicate that a productis effective and has an acceptable benefit-to-risk relationship, Phase IIIstudies may be undertaken to further evaluate clinical efficacy and to furthertest for safety within an expanded patient population. Phase III studiesare often the pivotal studies upon which commercial approval is sought,although earlier Phase studies can sometimes support approval, particularly inthe case of products approved on an accelerated or fast track basis.Phase IV studies, or post-regulatory approval studies, may also berequired to provide additional data on safety or efficacy.

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 exposed toan 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 candidate exposesclinical subjects to an unacceptable health risk. Investigational products usedin clinical 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 and approvalof certain therapeutic biologics such as monoclonal antibodies, cytokines,growth factors, enzymes, interferons and certain proteins. The FDA Center forBiologics Evaluation and Research, or CBER, has responsibility for otherbiologics. Based on this re-distribution of responsibility, we expect that mostof our products will be reviewed by CDER. The NDA or BLA must include asubstantial 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.

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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 work thatmust be done before the application can be approved. The FDA’s review of anapplication 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 inconjuction 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 the pre-market approval application (“PMA”) process. Section 510(k) notificationsmay be filed only for those devices that are “substantially equivalent” to alegally marketed predicate device. If a device is not “substantially equivalent”to a legally marketed predicate device, a PMA must be filed. The pre-marketapproval procedure generally involves more complex and lengthy testing, and alonger review 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 regulatoryrequirements also apply after FDA approval to market under an NDA or BLA. Alongwith the requirement for ongoing adherence to cGMPs these requirements include,among other 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. The FDA alsoenforces the requirements of the Prescription Drug Marketing Act, or PDMA,which, among other things, imposes various requirements in connection with thedistribution of product samples to physicians.

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 (formerly the Health Care 

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Financing Administration),other divisions of the United States Department of Health and Human Services(e.g., the Office of Inspector General), and state and local governments. Forexample, sales and marketing and medical affairs programs must comply with avariety of federal, state and local laws, and regulations and principles, suchas the Medicare-Medicaid Anti-Fraud and Abuse Act, as amended, the False ClaimsAct, also as amended, the privacy provisions of the Health InsurancePortability and Accountability Act, or HIPAA, and the Pharmaceutical Researchand 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 the appropriateauthority (1) in Canada, Australia, New Zealand, Japan, Israel,Switzerland or South Africa, or (2) in the European Union or a country inthe European Economic Area if the drug is marketed in that country or the drugis authorized for general marketing in the European Economic Area. There arespecific FDA regulations that govern this process.

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.

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This focus onpricing has led to other adverse government action, and may lead to otheraction in the future. For example, in December 2003 federal legislationwas enacted to change United States import laws and expand the ability toimport lower priced versions of pharmaceutical products from Canada, wherethere are government price controls. These changes to the import laws will nottake effect unless and until the Secretary of Health and Human Servicescertifies that the changes will lead to substantial savings for consumers andwill not create a public health safety issue. The current Secretary of Healthand Human Services has indicated that there is not a basis to make such acertification at this time. However, it is possible that this Secretary or a subsequentSecretary could make the certification in the future. In addition, legislativeproposals have been made to implement the changes to the import laws withoutany certification, and to broaden permissible imports in other ways. Even ifthe changes to the import laws do not take effect, and other changes are notenacted, imports from Canada and elsewhere may increase due to market andpolitical forces, and the limited enforcement resources of the FDA, the CustomsService, and other government agencies. For example, numerous states andlocalities have proposed programs to facilitate Canadian imports, and at leastone locality has already begun such a program, notwithstanding questions raisedby FDA about the legality of such actions. We expect that pressures on pricingresults 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.

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

**ENVIRONMENTAL AND SAFETY 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 marketfactors. These factors include the availability of patent and other protectionfor technology 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 

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pharmaceutical companiesthat are applying biotechnology to their operations. Many biopharmaceutical andlarge pharmaceutical companies have focused their development efforts in thehuman therapeutics area, including cancer. Many major pharmaceutical companieshave developed or acquired internal biotechnology capabilities or madecommercial arrangements with other biopharmaceutical companies. Further, suchcompanies have substantially greater financial resources and greater access tothe capital markets than we do. These companies, as well as academicinstitutions, governmental agencies and private research organizations, alsocompete with us in recruiting and retaining highly qualified 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 productdevelopment. Various companies are developing or commercializingbiopharmaceutical products that potentially compete directly with ourcommercial product and product candidates. These include areas such as: (1) theuse of biopharmaceutical and pharmaceutical products targeted to the EGFR orantibodies to that receptor to treat cancer; (2) the development ofinhibitors to angiogenesis; and (3) the use of recombinant antigenapproaches to cancer vaccines. Currently there are two small molecule EGFRinhibitors approved by the FDA. OSI Pharmaceuticals, Inc. and Genentech, Inc.received approval from the FDA for TarcevaTM (erlotinib) for the treatment ofpatients with locally advanced or metastatic non-small cell lung cancer (NSCLC)after failure of at least one prior chemotherapy regimen. AstraZenecaPharmaceuticals received approval from the FDA for IRESSA® (gefitinib), a smallmolecule EGFR inhibitor indicated as monotherapy for the treatment of patientswith locally advanced or metastatic non-small cell lung cancer after failure ofboth platinum-based and docetaxel chemotherapies. In addition, several productcandidates are in advanced stages of clinical studies. We are aware of severalcompanies that have potential antibody or other product candidates in clinicaltesting that target the EGFR and therefore may compete with our lead product,ERBITUX. These companies include, but are not limited to: (1) Abgenix, Inc.in collaboration with Amgen, Inc. the most clinically advanced of thesepotential competitors, have stated publicly that they have initiated a rollingBLA for their monoclonal antibody, panitumumab, for refractory colorectalcancer (2) Pfizer, Inc.; (3) GlaxoSmithKline plc; (4) Novartis;(5) Merck KGaA; (6) Wyeth; (7) Medarex; and (8) YMBioscience Inc.

On February 26, 2004, Genentech received FDAapproval for Avastin® for treatment in first line metastatic colorectal cancer.Avastin® 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.

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, 

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safety,reliability, availability, price, patent position, manufacturing capacity andcapability, 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 991 full-time personnel on February 10, 2006, 811 were employed atour New Jersey facilities and 180 were employed at our New York headquarters.Our staff includes 57 persons with PhD’s and 7 with MD’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. RISK FACTORS**

**Risks Relating to Our Business and Other Matters**

**Theoutcome of the review of our strategic alternatives currently being performedby the Company with the assistance of Lazard is uncertain.**

We recently announced thatour Board of Directors has engaged the investment bank Lazard to conduct, inconjunction with management, a full review of the Company’s strategicalternatives to maximize shareholder value. These alternatives could include amerger, sale or strategic alliance. We are proceeding in consultation with ourexisting partners as the process moves forward. It is uncertain whether anyparticular strategic alternative will be pursued or that any transaction willoccur, or on what terms. We do not plan to release additional information aboutthe status of the review of alternatives until a definitive agreement isentered into or the process is otherwise completed.

**Royaltyand manufacturing revenue from sales of ERBITUX represent a substantial portionof our 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 ERBITUX orcompetitive 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

·       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.

**Wedepend on BMS and Merck KGaA to co-promote market and sell ERBITUX. If eitherBMS or Merck KGaA becomes unable to meet its obligations, or we fail toadequately maintain our relationship with these partners, it would negativelyimpact our revenues and 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 the UnitedStates, Canada and Japan, in exchange for which we receive royalty paymentsbased on Merck’s gross profit from ERBITUX sales. These royalty payments fromBMS and Merck represent a significant portion of our current revenues. Inaddition, we receive milestone payments and reimbursements of variousregulatory and clinical expenses as well as 

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certainmarketing and administrative expenses from BMS and Merck. Our reliance on theserelationships creates a number of potential risks, including the risk that wemay be unable to control whether our corporate partners devote sufficientresources to our programs or product. If either BMS or Merck becomes unable tomarket effectively and sell sufficient quantities of ERBITUX, or otherwiseunable to meet its contractual obligations, our revenues would be negativelyimpacted and it would harm our business.

**Weoperate in a highly competitive industry, including in terms of productpricing, that is subject 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 afirst-line treatment for patients with metastatic colorectal cancer) andXeloda® (a chemotherapeutic biopharmaceutical product manufactured by RocheLaboratories, Inc. and also approved by the FDA as a first-line treatmentfor patients with metastatic colorectal cancer). We believe that,notwithstanding the fact that the FDA has approved Avastin®, Xeloda**®**and ERBITUX for the treatment of metastatic colorectal cancer in differentindications, physicians have prescribed Avastin® and Xeloda**®**outside oftheir approved indications and within ERBITUX’s approved indications. We arealso aware 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 combinations 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 significant technological change, and we expect competition toincrease with technical advances. The development of products or processes byour competitors with significant advantages over those that we are seeking todevelop could cause the marketability of our products to stagnate or decline.

**Weare subject to extensive governmental regulation. If we are unable to obtain ormaintain regulatory approvals for our product or product candidates, we willnot be able to 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.

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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.

**Ourrevenues will diminish if our collaborators fail to obtain acceptable prices oradequate reimbursement 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 notprescribe it.

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 initiatives in the United States to continue to putpressure on the pricing of pharmaceutical products. Cost control initiativeswould decrease the price received by our collaborators for any of our productsin the future. Further, cost control initiatives would impair or diminish ourability or incentive, or the ability or incentive of our partners or potentialpartners, to commercialize our other product candidates, and accordingly, our abilityto earn revenues.

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.

**Ourroyalty and collaborative agreement revenues could vary significantly and mayadversely impact 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;

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·       Theinitiation of new collaborative agreements with other companies;

·       Whetherand when collaborative agreement benchmarks and milestones are achieved;

·       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 earnsufficient revenues from ERBITUX, our operating results or financial conditioncould be adversely affected.

**Wewill be required to expend significant resources for research and developmentof our products in development and these products may not be developedsuccessfully, which would adversely affect our prospects for future revenuegrowth and our stock price.**

Our only approved productis ERBITUX while our product candidates are still undergoing clinical trialsand are in the early stages of development. Any successful development of ourproduct candidates is highly uncertain and depends on a number of factors, manyof which are beyond our control. In addition, each of our product candidatesunder development will require significant additional research and developmentresources to be expended prior to their commercialization. Even if we spendsubstantial amounts on research and development, our potential products may notbe developed successfully. If the product candidates on which we have expendedsignificant amounts for research and development are not commercialized, wewill not earn a return on their research and development expenditures, whichwould adversely affect our prospects for future revenue growth and our stockprice.

**Difficultiesor delays 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. is currently our soleprovider of filling and finishing services—the final stage of manufacturing forERBITUX. In addition, we currently manufacture ERBITUX at our BB36manufacturing facility and through Cardinal Health Inc. Any prolongedinterruption in the operations of our or our contractors’ manufacturing andfinishing facilities could result in cancellations of shipments, loss ofproduct in the process of being manufactured, or a shortfall of availableproduct inventory. A number of factors could cause interruptions, including afailure of our or our contractors’ manufacturing and finishing facilities toobtain FDA approval and maintain compliance with current good manufacturingpractice requirements, changes in the FDA’s regulatory requirements orstandards that require modifications to our manufacturing processes, action bythe FDA that results in the halting of production of one or more of ourproducts due to regulatory issues, a contract manufacturer going out of business,natural or other disasters, or other similar factors. Because our manufacturingand finishing processes and those of our contractors are highly complex and aresubject to a lengthy FDA approval process and extensive ongoing regulation,alternative qualified production capacity may not be available on a timelybasis or at all. We may also experience insufficient available capacity tomanufacture existing or new products which could cause shortfalls of availableproduct inventory. Difficulties or delays in our and our contractors’manufacturing and supply of existing or new products could increase our costs,cause us to lose revenue or market share and damage our reputation.

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Although the FDA hasapproved our BB36 manufacturing facilities and the facilities have passedmultiple subsequent inspections, if we are unable to maintain FDA approval forBB36, it may cause shortfalls in our product inventory which would negativelyimpact our revenues and our business.

**Ourmarketing partners may experience pressure to lower the price of ERBITUXbecause of new and/or proposed federal legislation, which would reduce ourroyalty revenue and may harm our business.**

Federal legislationenacted in December 2003 altered the way in which physician administereddrugs covered by Medicare, such as ERBITUX, are reimbursed, generally leadingto lower reimbursement levels. This legislation also added an outpatientprescription drug benefit to Medicare, effective January 2006. Theoutpatient prescription drug benefit is provided primarily through privateentities, which will attempt to negotiate price concessions from pharmaceuticalmanufacturers, including our collaborators. These negotiations may increasepressures to lower pricing for ERBITUX. While the law specifically prohibitsthe United States government from interfering in price negotiations betweenmanufacturers and Medicare drug plan sponsors, some members of Congress arepursuing legislation that would permit the United States government to use itsenormous purchasing power to demand discounts from pharmaceutical companies,thereby creating de facto price controls on prescription drugs, such asERBITUX. In addition, the new law contains triggers for Congressionalconsideration of cost containment measures for Medicare in the event Medicarecost increases exceed a certain level. These cost containment measures couldinclude some sorts of limitations on prescription drug prices that ourcollaborators charge for ERBITUX which would reduce our royalty revenue andharm our business.

**If webecome subject to importation of products from Canada and other countries, itwill affect 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.

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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.

**Wedepend on key employees in a competitive market for skilled personnel, and theloss of the services of any of our key employees would affect our ability todevelop our business.**

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 ofrelationships with leading research institutions and key collaborators, couldbe delayed or curtailed. In addition, we do not maintain “key man” lifeinsurance on any of our employees. As a result, we may be unable to minimizethe negative impact on our business stemming from the loss of a key employee.

**Thelaw or FDA policy 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 clinical data demonstrating safety andeffectiveness exist for the approved conditions of use. The generic applicantin turn need only demonstrate that its product has the same active ingredient(s),dosage form, strength, route of administration, and conditions of use(labeling) as the referenced innovator drug, and that the generic product isabsorbed in the body at the same rate and to the same extent as the referencedinnovator drug (this is known as bioequivalence). In addition, the genericapplication must contain information regarding the manufacturing processes andfacilities that will be used to ensure product quality, and must containcertifications to patents listed with the FDA for the referenced innovatordrug.

There is no suchabbreviated approval process under current law for biological products approvedunder the Public Health Service Act through a BLA, such as monoclonalantibodies, cytokines, growth factors, enzymes, interferons and certain otherproteins. However, various proposals have been made to establish an abbreviatedapproval process to permit approval of generic or follow-on versions of thesetypes of biological 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 drug productsis the subject of ongoing legal challenge. It is thus not clear what thepermitted 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.

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**Risks Relating to Intellectual Property and LegalMatters**

**Protectingour proprietary rights is difficult and costly. If we fail to adequatelyprotect or enforce 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 the technologyor 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 patent protection. We hold patents orlicenses to patents relating to murine antibodies as well as patents andlicenses relating to the therapeutic use of EGFR antibodies. These patentsexpire on various dates, the earliest of which is in 2007. Risks related to ourpatent position with respect to ERBITUX and our product candidates are morefully discussed under “Item 1—Business—Patents and Trademarks”.

**Severallawsuits have been filed against us which may result in litigation that iscostly to defend and the outcome of which is uncertain and may harm ourbusiness.**

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”.

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.

**Ouroperations use hazardous materials, which may lead to environmental liability,and may harm our 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 

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loss ofa permit or other authorization to operate or engage in our ordinary course ofbusiness could materially adversely affect our business.

**Wecould be exposed to material product liability claims that could prevent orinterfere with the commercialization 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 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.

**Risks Relating to our Common Stock**

**Certainprovisions of Delaware law, our charter and bylaws and our stockholder rightsplan could hinder, 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 may discourage any potential acquirer from acquiring more than 15%of our outstanding common stock since, upon this type of acquisition withoutapproval of our Board of Directors, all other common stockholders will have theright to purchase a specified amount of our common stock at a substantialdiscount from market price, thus significantly increasing the acquisition costto a potential acquirer.

*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 only for cause by the affirmative vote of at least amajority of all votes entitled to be cast.

*AdvanceNotice Provisions for Stockholder Nominations and Proposals.**  *Our bylaws require advance writtennotice for stockholders to nominate persons for election as directors at, or tobring other business before, any meeting of stockholders. This bylaw provisionlimits the ability of stockholders to make nominations of persons for electionas directors 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.

*Delaware BusinessCombinations.**  *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 to discouraging athird party from acquiring control of us, the foregoing provisions could impairthe ability of existing stockholders to remove and replace our managementand/or our Board of Directors.

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**Ourstock price is highly volatile. It may be difficult for you to resell ourcommon stock.**

Over the past two years our common stock price hasranged from a high of $86.79 per share to a low of $28.65 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;

·       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

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**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)was effective as of January 1, 1999. From 1999 to 2003 we have addedadditional space on the fifth and eighth floors of approximately 11,786 squarefeet. In August 2004, we modified our existing operating lease to extendthe term of the lease, which was to expire on December 31, 2004, for anadditional ten years (with renewal rights) for a portion of the premises and byan additional three years (with renewal rights) for the space that currentlyhouses our research department. The modification also added additional space onthe fifth and eighth floors of approximately 4,286 square feet in 2004 andgranted us the right to add additional space in the future. We plan to move ourresearch department to our 325 Spring Street, New York location. Our rentexpense was approximately $2,020,000 for the year ended December 31, 2005.

***Brooklyn, New York***

On May 1, 2001, weleased a 4,000 square foot portion of a 15,000 square foot building known as710 Parkside Avenue, Brooklyn, New York and an adjacent 6,250 square footbuilding known as 313-315 Clarkson Avenue, Brooklyn, New York(collectively the “Brooklyn facility”). The term of the lease was for fiveyears with five successive one-year extensions at our option. Effective February 1,2005, the Company entered into a fifteen months operating lease forapproximately 2,269 square feet of a building known as 760 Parkside Avenue inBrooklyn, New York. These facilities were used by our Small Molecule program,which the Company decided in May 2005 to discontinue. The Company hasterminated these lease agreements and has no further obligations to thelandlord. Rent expense in 2005 was approximately $88,000.

***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, 2005, are approximately$48,717,000 over the term of the sublease. In order to induce the sublandlordto enter into the sublease, we made a loan to the sublandlord in the principalamount of a $10,000,000 note receivable, of which $8,800,000 is outstanding asof December 31, 2005. The loan is secured by a leasehold mortgage on theprime lease as well as a collateral assignment of rents by the sublandlord. Theloan is payable by the sublandlord over 20 years and bears 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 $1,690,000. We are currentlydeveloping the property to consolidate our research department into thisfacility. In 2005, we incurred rent expense of approximately $2,381,000 forthis 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 to us of approximately $4,665,000,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 $5,400,000. We currently operate the facilityto develop and manufacture biologics for a portion of our clinical studies.Under certain circumstances, we also may use the facility for the manufacturingof commercial products. In January 1998, we completed the construction andcommissioning of a 1,750 square foot process development center at thisfacility dedicated to manufacturing process optimization for existing productsand the pre-clinical and Phase I development of new biological therapeutics.The cost of this construction activity was approximately $1,730,000.

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

On May 20, 2002, wepurchased a 45,800 square foot warehouse on 6.94 acres of property located at33 ImClone Drive. The purchase price for both land and building wasapproximately $4,515,000. Extensive site work and exterior and interiorrenovations began in late June 2002. The location houses the clinical,regulatory, field operations, marketing, finance, human resources, legal,project management and MIS departments, as well as certain executive officesand other campus amenities. We have incurred approximately $4,486,000, for therenovation and fit-out of this facility. The administrative facility was readyfor its intended use and put in operation in December 2002.

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

In July 2001, wecompleted the construction of our 80,000 square foot manufacturing facility,BB36, adjacent to the pilot facility in Branchburg, New Jersey. BB36 was builton a 5.7 acre parcel of land we purchased in December 1999 forapproximately $700,000. BB36 contains three 10,000 liter (production volume)fermenters and is dedicated to the production of ERBITUX. BB36 was ready forits intended use and put in operation in July 2001. BB36 cost a total ofapproximately $53,000,000, excluding capitalized interest of approximately$1,966,000.

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

We reached mechanicalcompletion of our multiple-product manufacturing facility in the fourth quarterof 2005. The BB50 facility has a capacity of up to 110,000 liters (productionvolume) and three distinct manufacturing suites. The facility was built on a7.12 acre parcel of land that we purchased in July 2000 for approximately$950,000. The cost of this facility, for one fitted, commissioned and validatedsuite, one fitted and a third suite with utilities only, is expected to beapproximately $300,000,000. This estimate does not include costs associatedwith the eventual commissioning and validation of Suite 2 or the fitting,commissioning and validation of Suite 3. In addition, we will also spendapproximately $10 million in laboratory equipment and incur approximately $24million in capitalized interest that is not included in the total estimatedcost described above. We have incurred approximately $289,258,000, excludingcapitalized interest of approximately $20,135,000 through December 31,2005.

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

In September 2000, weentered into a one-year lease for approximately 7,600 square feet of officespace at 41 ImClone Drive. The lease was renewed each year and on September 1,2004 we amended the renewed term of one year to August 31, 2005 andobtained the option to renew for four successive one-year terms, so the leasewill automatically renew each year for up to four additional years, unlessterminated by our notice three months prior to the expiration of that year. Inthe year ended December 31, 2005, we incurred rent expense ofapproximately $103,000 for this lease.

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

In June 2004, weentered into an operating lease for a 54,247 square foot facility located at 59-61ImClone Drive in Branchburg, New Jersey. 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. As of December 31, 2005, we have incurredapproximately $5,400,000 for the Phase I renovation and fit-out of thisfacility. The administrative area of the facility and the laboratories were putin operation in December 2004. We expect to incur an additional estimated$13,000,000 for the Phase 2 renovation of this facility. In the year ended December 31,2005, we incurred rent expense of approximately $617,000 for this lease.

***Corner of ImClone Drive and Chubb Way, Branchburg, NewJersey***

On May 2, 2001, wepurchased a 4.45 acre parcel of land on the corner of ImClone Drive forapproximately $597,000. We are currently using this parcel for our constructionparking and as a material and equipment lay-down area to support ourconstruction at 50 ImClone Drive.

***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, approximately 39,000 square feet ofwhich is warehouse space and approximately 12,000 square feet of which isoffice space. The purchase price for the property, initial improvements andrenovation was approximately $8,100,000. We are currently using this propertyfor warehousing and logistics for our Branchburg campus. Extensive renovationsto the 12,000 square feet of office area were completed in the first quarter of2003 to accommodate the relocation and consolidation of engineering,warehousing, logistics and quality assurance personnel from other campuslocations. Interior renovations included office space, as well as theconstruction of a raw materials sampling laboratory, associatedtemperature-controlled storage locations and the addition of emergency powergeneration.

**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 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 generally alleged that various public statements made by oron behalf of the Company or the other defendants during 2001 and early 2002regarding the prospects for FDA approval of ERBITUX® were false or misleadingwhen made, that the individual defendants were allegedly aware of materialnon-public information regarding the actual prospects for ERBITUX at the timethat they engaged in transactions in the Company’s common stock and thatmembers of the purported 

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stockholderclass suffered damages when the market price of the Company’s common stockdeclined following disclosure of the information that allegedly had not beenpreviously disclosed. The complaint sought to proceed on behalf of the allegedclasses described above, sought monetary damages in an unspecified amount andsought recovery of plaintiffs’ costs and attorneys’ fees. On January 24,2005, the Company announced that it had reached an agreement in principle tosettle the consolidated class action for a cash payment of $75 million, aportion of which would be paid by the Company’s insurers. The parties signed adefinitive stipulation of settlement as of March 9, 2005. As provided forunder the stipulation of settlement, on March 11, 2005, the Company paid$50 million into an escrow account, subject to Court approval of the proposedsettlement. On July 29, 2005 the Court approved the proposed settlement.On August 5, 2005, the Company paid the remaining $25 million into theescrow account, with such funds to be held and distributed pursuant to theterms of the settlement documents. As of December 31, 2005, the Companyhad received from its insurers $20.5 million with respect to these matters, anddoes not anticipate receiving any further such amounts. The foregoing $20.5million includes $8.75 million, less attorneys fees of $875,000, that was paidto the Company under 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 inManhattan. All of these state court actions were stayed in deference to theproceedings in the U.S. District Court for the Southern District of New York,which were consolidated 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 9, 2004, the Company filed a motion to dismiss the complaintdue to plaintiffs’ failure to make a pre-suit demand on the Company’s board ofdirectors to institute suit or to allege grounds for concluding that such ademand would have been futile. The individual defendants filed motions on thesame date, both joining in the Company’s motion and seeking to dismiss thecomplaint for failure to state a claim. On January 24, 2005, the Companyannounced that it had reached an agreement in principle to settle theconsolidated derivative action. The parties entered into a definitive stipulationof settlement on March 14, 2005, which was subject to Court approval. On July 29,2005, the Court approved the proposed settlement. Thereafter, the Company waspaid $8.75 million by its insurers, which the Company has contributedtoward the settlement of the Irvine securities class action described aboveafter deducting $875,000 for Court awarded plaintiffs’ attorney’s fees andexpenses. Following Court approval of the settlement of the consolidatedderivative action, all of the state court derivative actions that had beenpending in Delaware and New York were dismissed with prejudice, with no furtherpayment required by the Company.

***B.***                GovernmentInquiries 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 

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ImClone Systems insidersin 2001. The Company also received subpoenas and requests for informationpertaining to document retention issues in 2001 and 2002, and to certaincommunications regarding ERBITUX in 2000. On June 19, 2002, the Companyreceived a written “Wells Notice” from the staff of the SEC, indicating thatthe staff of the SEC is considering recommending that the SEC bring an actionagainst the Company relating to the Company’s disclosures immediately followingthe receipt of a “refusal to file” letter from the FDA on December 28,2001 for the Company’s BLA for ERBITUX. The Company filed a Wells submission onJuly 12, 2002 in response to the staff’s Wells Notice. There have been nodevelopments in connection 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 $4,500,000 to settle the matter. The Company believes that substantiallyall of 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, Harlan W. Waksal, and the Company’s formerdirector and Chairman of the Board, Robert F. Goldhammer. Again, the Companypromptly informed the IRS, the SEC and the United States Attorney’s Office ofthis issue. The Company also informed New York State of this issue. On June 17,2003, New York State notified the Company that based on this issue, they werecontinuing a previously conducted audit and were evaluating the terms of theclosing agreement to determine whether it should be re-opened. On March 31,2004, the Company entered into a new closing agreement pursuant to which theCompany paid New York State an additional $1,000,000 in full satisfaction ofall the deficiencies and determinations of withholding taxes for the years 1999-2001.Therefore, the Company has eliminated the liability of $2,815,000, which wasaccrued as of December 31, 2003, primarily attributable to New York Statewithholding taxes on stock options and warrants exercised by Dr. Samuel D.Waksal and has recognized a benefit of $1,815,000 as a recovery in theConsolidated Statements of Operations in the first quarter of 2004.

On March 31, 2003, the Company received notificationfrom the SEC that it was conducting an informal inquiry into the mattersdiscussed above and, subsequently, the Company received and responded to arequest from the SEC for the voluntary production of related documents and information.There have been no other requests for documents or information or other developmentsin 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 

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employmenttax audit. The draft report indicated that the IRS, in addition to imposingliability on the Company for taxes not withheld, intended to assert penaltieswith respect to both the failure to withhold on non-qualified stock options andthe failure to report and withhold on the warrants described above. On March 14,2006, the Company reached an agreement in principle with the IRS to resolve theemployment tax audit, which includes the Company’s agreement to the impositionof an accuracy-related penalty under Section 6662 of the Internal RevenueCode. Under this agreement in principle, the Company expects to make a totalpayment of approximately $32,000,000 to the IRS. The Company had previouslyrecorded a withholding tax liability of $18,096,000 and a withholding tax assetof $274,000 in its consolidated Balance Sheet as of December 31, 2004. Basedon the agreement in principle reached with the IRS, the Company has eliminatedthe withholding tax asset of $274,000 and has recorded an additionalwithholding tax liability of $13,904,000, or a total of $32,000,000, in itsconsolidated Balance Sheet as of December 31, 2005. As a result, theCompany has recorded in the fourth quarter of 2005 a net withholding taxexpense of $14,178,000.

***C.***               ActionsAgainst 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 relating toadvancement of legal fees, expenses, interest and indemnification, for which Dr. Samuel D.Waksal claims unspecified damages of at least $10 million. The Demand forArbitration also seeks to resolve the claims that the Company asserted in theNew York State Supreme Court action. On November 7, 2003, the Companyfiled an Answer and Counterclaims by which the Company denied Dr. Samuel D.Waksal’s entitlement to advancement of legal fees, expenses andindemnification, and asserted claims seeking recovery of certain compensation,including stock options, cash payments and advancement of certain defense coststhat the Company had paid to or on behalf of Dr. Samuel D. Waksal. Inresponse, on December 15, 2003, Dr. Samuel D. Waksal filed aReply to Counterclaims.

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. By this action, the Company seeksthe return of more than $21 million that the Company paid to Dr. SamuelD. Waksal, as proceeds from stock option exercises, which the Company allegeshe was expected to pay over to federal, state and local tax authorities insatisfaction of his tax obligations arising from certain exercises between 1999and 2001 of warrants and non-qualified stock options. Specifically, by thisaction, the Company seeks to recover: (a) $4.5 million that theCompany paid to the State of New York in respect of exercises of non-qualifiedstock options and certain warrants in 2000; (b) at least$16.6 million that the Company paid to Samuel D. Waksal in the form ofImClone common stock, in lieu of withholding federal income taxes fromexercises of non-qualified stock options 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.

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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 $1,950,000 in thefourth quarter of 2005.

***D.***               IntellectualProperty 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 actionalleges and seeks that three individuals associated with Yeda should also benamed as co-inventors on U.S. Patent No. 6,217,866. On June 7, 2005,Yeda amended their U.S. complaint to seek sole inventorship of the subjectpatent. On November 4, 2005, the Court denied the Company’s motion forsummary judgment with respect to this matter, as filed with the Court on June 24,2005. The Company is vigorously defending against the claims asserted in thisaction. The Company is unable to predict the outcome of this action at thepresent time.

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 of patent EP (UK) 0 667165 to add three Yeda employees as inventors. Also on March 25, 2004, aGerman action entitled Legal Action was filed in the Munich District Court I,Patent Litigation Division, seeking to add three Yeda employees as inventors onpatent EP (DE) 0 667 165. The Company was not named as a party in these actionsthat relate to the European equivalent of U.S. Patent No. 6,217,866discussed above; accordingly, the Company has intervened in the German and theU.K. actions. On June 29, 2005, Yeda sought to amend their pleadings inthe United Kingdom to seek sole inventorship. A hearing on the validity of thisamendment concluded on January 30, 2006; a determination is forthcoming. Additionally,on or about March 25, 2005 and March 29, 2005, respectively, Yedafiled legal actions in Austria and France against both Aventis and ImCloneSystems seeking full inventorship of EP (AU) 0 667 165 and EP (FR) 0667 165, as well as payment of legal costs and fees.

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. The Company is vigorouslydefending against claims asserted in this action. The parties have filedmotions for summary judgment with respect to this matter. A hearing on thesemotions was held on February 2, 2006; a determination is forthcoming. TheCompany is unable to predict the outcome of this action at the present time.

No reserve has been established in the financialstatements for any of the Yeda or MIT and Repligen actions because the Companydoes not believe that such a reserve is required to be established at this timeunder Statement of Financial Accounting Standards No. 5.

As previously disclosed,the Company is developing a fully human monoclonal antibody, referred to as IMC-11F8,which it intends to commercialize outside the United States and Canada. TheCompany believes it has the right to do so under its existing development andlicense agreement with Merck KGaA. However, Merck KGaA has advised the Companythat it believes that IMC-11F8 is covered under the development andlicense agreement with Merck KGaA and that it could therefore have theexclusive rights to market IMC-11F8 outside the United States and Canadaand co-exclusive development rights in Japan, for which it would pay the sameroyalty as it pays for ERBITUX. See “Corporate Collaborations—Collaborationswith Merck KGaA”. The Company believes that IMC-11F8 is not covered underthe Merck KGaA development and license agreement. In agreement with Merck KGaA,the Company submitted this dispute to binding arbitration through an expeditedprocess outside of the provisions of the development and license agreement. Ifsuccessful in the arbitration, Merck KGaA averred that it is entitled tocertain 

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unspecifieddamages under the development and license agreement. Merck KGaA subsequentlytook the position that the expedited arbitration provision was no longer validand the Company sued Merck KGaA in federal court in the Southern District ofNew York to either enforce the arbitration provisions previously agreed to orto have the court decide the question of whether IMC-11F8 is or is notcovered under the development and license agreement with Merck KGaA. On November 29,2005, the Court granted the Company’s motion to enforce the expeditedarbitration provisions previously agreed to, and subsequently appointed a newarbitrator to hear and decide this dispute. The new arbitrator scheduled ahearing which concluded on March 2, 2006; a binding decision by thearbitrator is expected in the near future. While the Company has vigorouslydefended its position as it relates to IMC-11F8 in arbitration, there canbe no assurance that its position will prevail, and it is unable at this timeto predict the outcome of these proceedings. No reserve has been established inthe financial statements for these proceedings because the Company does notbelieve that such a reserve is required to be established at this time underStatement of Financial Accounting Standards No. 5.

**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.

**MARKET INFORMATION**

Our common stock is traded in the over-the-countermarket and prices are reported on the Nasdaq National Market tier of The NasdaqStock Market (“Nasdaq”) under the symbol “IMCL”.

Thefollowing table sets forth, for the periods indicated, the range of high andlow sale prices for our common stock on the Nasdaq National Market, as reportedby Nasdaq. The quotations shown represent inter-dealer prices withoutadjustment for retail mark-ups, mark-downs or commissions, and may notnecessarily reflect actual transactions.

| ** **                                           | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------------|------------|----------|------------|---------|------------|
| **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 |   |
| **Year ended December 31,  2004**               |       |     |       |    |       |
| First Quarter                                        |       | $        | 50.75      |    | $          | 34.00 |   |
| Second Quarter                                       |       | $        | 85.79      |    | $          | 53.00 |   |
| Third Quarter                                        |       | $        | 86.79      |    | $          | 49.08 |   |
| Fourth Quarter                                       |       | $        | 56.34      |    | $          | 41.20 |   |

 

On March 7, 2006, theclosing price of our common stock as reported by Nasdaq was $37.25.

**STOCKHOLDERS**

As of the close ofbusiness on March 7, 2006, there were approximately 351 holders of recordof our common stock. We estimate that there are approximately 32,370 beneficialowners of our common stock.

**DIVIDENDS**

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

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

We didnot sell any unregistered securities in the years ended December 31, 2005,2004 or 2003. On September 19, 2005, we announced the approval, by ourBoard of Directors, of a stock repurchase program permitting the repurchase ofup to $100 million in aggregate principal amount of outstanding shares of theCompany’s common stock during a two year period. During the fourth quarter of 2005, we executed the following purchases:

| **Period**           | ** ** | ** ** | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased  as Part of Publicly  Announced  Program** | ** ** | **Maximum Dollar  Value of Shares  that May Yet Be  Purchased Under  the Program** | ** ** |
|----------------------|------------|------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------|------------|
| 11/1/2005-11/30/2005 |       |       | 382,354    |                                                 |       |                                             | $          | 30.29                                                                                                        |       |                                                                                                                       |       | 382,354 |   |   |   | $ | 88,418,873 |   |   |
| 12/1/2005-12/31/2005 |       |       | 429,062    |                                                 |       |                                             | $          | 30.92                                                                                                        |       |                                                                                                                       |       | 429,062 |   |   |   | $ | 75,150,749 |   |   |
| Total                |       |       | 811,416    |                                                 |       |                                             | $          | 30.62                                                                                                        |       |                                                                                                                       |       | 811,416 |   |   |   | $ | 75,150,749 |   |   |

 

**SECURITIESAUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**

The information regarding securities authorized forissuance under our equity compensation plans is disclosed in Item 12 “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.”

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**ITEM 6.**                SELECTEDFINANCIAL DATA

Thefollowing selected consolidated financial information for the five years ended December 31,2005 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.

| ** **                                          | ** ** | **2005**                                                           | ** ** | **2004** | ** ** | **         2003         ** | ** ** | **2002** | ** ** | **2001** | ** ** |
|-----------------------------------------------------|------------|--------------------------------------------------------------------|------------|----------|------------|----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **(in thousands, except per share data)** | ** ** |
| Revenues(1)                                         |       | $                                                                  | 383,673    |     | $          | 388,690                                                                                                              |       |     | $          | 80,830   |       |   | $ | 60,005 |   | $ | 50,237 |   |
| Operating  expenses(2)                              |       | 316,894                                                            |       | 263,424  |       |                                                                                                                 | 189,681    |     |       | 214,854  |       | 177,597 |   |
| Net income (loss)                                   |       | 86,496                                                             |       | 113,653  |       |                                                                                                                 | (112,502   | )        |       | (157,949 | )          | (127,607 | ) |
| Basic income  (loss) per common share               |       | $                                                                  | 1.03       |     | $          | 1.43                                                                                                                 |       |     | $          | (1.52    | )          |   | $ | (2.15 | ) | $ | (1.84 | ) |
| Diluted income  (loss) per common share             |       | $                                                                  | 1.01       |     | $          | 1.33                                                                                                                 |       |     | $          | (1.52    | )          |   | $ | (2.15 | ) | $ | (1.84 | ) |
| Total assets                                        |       | $                                                                  | 1,343,415  |     | $          | 1,434,776                                                                                                            |       |     | $          | 381,595  |       |   | $ | 484,506 |   | $ | 487,712 |   |
| Long-term  obligations                              |       | 602,491                                                            |       | 603,434  |       |                                                                                                                 | 242,979    |     |       | 241,972  |       | 242,281 |   |
| Deferred revenue                                    |       | 359,025                                                            |       | 457,808  |       |                                                                                                                 | 337,232    |     |       | 322,504  |       | 203,496 |   |
| Accumulated  deficit                                |       | 442,459                                                            |       | 528,955  |       |                                                                                                                 | 642,608    |     |       | 530,106  |       | 372,157 |   |
| Total stockholders’  equity (deficit)(3)  |       | $                                                                  | 252,404    |     | $          | 178,838                                                                                                              |       |     | $          | (270,593 | )          |   | $ | (185,629 | ) | $ | (31,294 | ) |

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We have paid nodividends.

(1)          Revenues in 2005 and2004 include royalties related to the sales of ERBITUX by our corporatepartners BMS and Merck KGaA and manufacturing revenue related to sales ofERBITUX to BMS for commercial use.

(2)          Operating expenses in2005 include a charge of $14.2 million related to withholding taxes, a chargein 2004 of 55.4 million related to a stockholders’ litigation settlement, and acharge in 2001 of $25.3 million related to withholding taxes.

(3)          In 2005, the Company’sBoard of Directors approved a share repurchase plan permitting the repurchaseof the Company’s common stock up to a total aggregate amount of $100 million.During the fourth quarter of 2005, we purchased 811,416 shares at an averageprice of $30.62 per share for aggregate consideration of approximately $25million.

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

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 lead product, ERBITUX is a first-of-its-kind antibodyapproved by the FDA for use in combination with irinotecan in the treatment ofpatients with EGFR-expressing, metastatic colorectal cancer who are refractoryto irinotecan-based chemotherapy and for use as a single agent in the treatmentof patients with EGFR-expressing, metastatic colorectal cancer who areintolerant to irinotecan-based chemotherapy. ERBITUX binds specifically toepidermal growth factor receptor (EGFR, HER1, c-ErbB-1) on bothnormal and tumor cells, and competitively inhibits the binding of epidermalgrowth factor (EGF) and other ligands, such as transforming growth factor-alpha.We are conducting, and in some cases have completed, clinical studiesevaluating ERBITUX for broader use in colorectal cancer, for the potentialtreatment of head and neck, lung and pancreatic cancers, as well as otherpotential indications.

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 SCCHN and as a single agentin recurrent or metastatic SCCHN where prior platinum-based chemotherapy hasfailed. Please see full prescribing information, available at www.ERBITUX.com,for important safety information 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 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 usein combination with irinotecan for the 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 SCCHN.

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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;

·       theeffect in 2006 of full absorption cost of goods sold on sales of ERBITUX to ourcorporate partners;

·       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 milestones;

·       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 full valuation allowance;

·       legalcosts and the outcome of outstanding legal proceedings and investigations; 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 incurred significantoperating losses and have an accumulated deficit of approximately $442.5million as of December 31, 2005. We anticipate that our accumulateddeficit may continue to decrease in the future as we earn revenues oncommercial sales of ERBITUX and generate net income. Although prior to 2004 wehad devoted most of our efforts and resources to research and development,consistent with 2005, we expect that we will continue to devote greater effortsand resources to the manufacturing, marketing, and commercialization ofERBITUX. There is no assurance that we will be able to continue to successfullymanufacture, market or commercialize ERBITUX or that potential customers willbuy ERBITUX. We rely entirely on third party manufacturers for filling andfinishing services with respect to ERBITUX. If our current third partymanufacturers or critical raw material suppliers fail to meet our expectations,we cannot be assured that we will be able to enter into new agreements withother suppliers or third party manufacturers without an adverse effect on ourbusiness.

**HIGHLIGHTS AND OUTLOOK**

On January 24, 2006, we announced that the Boardof Directors had engaged the investment bank Lazard to conduct, in conjunctionwith management, a full review of the Company’s strategic alternatives tomaximize shareholder value. These alternatives could include a merger, sale orstrategic alliance. The Company is proceeding in consultation with its existingpartners as the process moves forward. The decision to undertake this processfollows a review of the Company’s business, products, assets and currentstrategic position. We believe that we are in a strong financial position, wehave a commercial product in ERBITUX with over $400 million in domesticin-market sales last year—each successive quarter seeing notable salesincreases. In 2006, we expect to launch ERBITUX in a second tumor type and wehope to see mature survival data in a variety of settings that could give thiscompound a significant advantage over potential competition.

We also have a pipeline that includes a number ofclinical-stage therapeutics aimed at some of the more interesting targets inoncology today. We believe that these compounds have the potential to maketremendous progress over the next two years, some reaching Phase III testing ina variety of indications. In addition to our clinical pipeline, we aredeveloping a host of mid- and late-stage pre-clinical compounds that will beginto enter the clinic over this same time frame. Given the foregoing, and inaddition to our strong financial position, manufacturing capabilities,development and commercialization capabilities, we believe that ImClone hasevolved successfully over the past few years. But for us to realize the fullvalue of 

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ERBITUX, our pipeline andother assets, in an increasingly competitive market, we believe that scale is acritical factor. Our current size—combined with the time and resources requiredto realize commercial benefit from our existing pipeline—may limit our abilityto achieve our full potential. For this reason, we feel that it is nowappropriate to initiate a process of exploring ways to enhance shareholdervalue and unlock the potential of our assets.

While it is our intention to execute an appropriatetransaction, we cannot make assurances that any particular alternative will bepursued or that a transaction will occur. To that end, we will continue tooperate as a company in the ordinary course, and we will continue a program ofrobust investment in the future of our products. Because we believe our humancapital—our employees—are an important asset in any eventuality, it is our goalto continue to provide for their development as the company moves forward.

In 2005, we continued to build and provide for thefuture development of our ERBITUX franchise by continuing our clinicalinvestment in a variety of indications, by filing an sBLA to seek approval foruse in head and neck cancer, and by enhancing commercial efforts to broadenpatient access. From a financing perspective, we announced the approval of a share repurchase plan permitting therepurchase of our common stock up to a total aggregate amount of $100 million.During the fourth quarter of 2005, we purchased 811,416 shares at an averageprice of $30.62 per share for aggregate consideration of approximately $25million.

On December 16, 2005, our Board of Directorsapproved the acceleration of vesting of unvested stock options with exerciseprices 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 approximately 2,805,169 shares of our common stock were subject tothis acceleration. As a condition, we required each non-employee director andeach officer of the Company, to agree to refrain from selling, transferring,pledging or otherwise disposing of shares of common stock acquired upon anyexercise of subject stock options until the date on which the exercise wouldhave been permitted under the stock option’s pre-acceleration vesting terms orpursuant to the Company’s change-in-control plan or, if earlier, the officer’slast day of employment with, or director’s last day of service as a directorof, the Company. The decision to accelerate vesting of these stock options,which were “out-of-the money” was made primarily to minimize futurecompensation expense that we would otherwise have been required to recognizepursuant to FAS123R, which we have adopted effective January 1, 2006. Weestimate that the aggregate future expense that will be eliminated as a resultof this acceleration of vesting is approximately $22.5 million in 2006 and $9.5million in 2007.

In 2006, we are continuing to execute a program of focusedinvestments designed to sustain our competitive position in the short-term andensure that we are adequately positioned for sustainable, longer-term growth.Our financial expectations and plans for the year reflect these objectives. Thefollowing guidance has been provided on our expected results for the year:

Royalty revenue in 2006 will continue to reflect 39%of BMS’s net sales and a range of 6.5% - 7.5% of Merck KGaA net sales. Licensefees and milestone revenue in 2006 will include the continuing amortization,based on clinical development spending, of the $650 million received thus farfrom BMS and the final milestone of $250 million from BMS as a result of theapproval of the head and neck sBLA. At the anticipated rates of clinicalspending for 2006, amortization of milestones for the full year, assuming thereceipt of the additional $250 million, should approximate $250 million,including a “catch-up” effect of receipt of this final milestone ofapproximately $115 million. Manufacturing revenue in 2006 will continue toreflect ERBITUX shipped to our partners for commercial use, although no suchproduct was shipped to Merck KGaA in 2005. The price charged for commercialmaterial is based on our actual cost to manufacture the product, plus, in the caseof BMS only, a 10% mark-up on bulk manufacturing costs. The selling price toour partners in 2006 is estimated to be comparable to the price charged in 2005.Collaborative agreement revenue in 2006 will continue to include the purchaseof ERBITUX for clinical 

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use by our partners,reimbursement by our corporate partners of certain regulatory, clinical andmarketing expenses incurred on behalf of ERBITUX, and reimbursement of royaltyexpenses of 4.5% of domestic net sales in accordance with the existing terms ofthe BMS agreement, as well as a low single digit amount from Merck KGaA.

EffectiveJanuary 1, 2006, we have adopted Financial Accounting StandardsBoard (“FASB”) Statement No. 123 (revised 2004), *Share-Based Payment,* which provides that the expense associatedwith share-based payment transactions be recognized in the financialstatements. Based on the implementation of this Statement, we estimate that thetotal expense for stock options in 2006 will be approximately $9.1 million.Such expense will be reflected in eachexpense category where the employee benefits are categorized. Research anddevelopment expenses include costs to support our pre-clinical research effortsas well as development costs (including process scale-up, toxicology andproduction of non-ERBITUX clinical materials) for our pipeline. These costs areexpected to approximate $140 million in 2006, including approximately $2.6million attributable to stock option expense. The increase from 2005 reflectsadditional efforts in support of our non-ERBITUX pipeline, includingthird-party manufacturing costs, costs associated with producing clinicalsupplies of ERBITUX for use by us and our partners (which are reimbursed as acomponent of collaborative agreement revenue), and expansion of basic researchactivities. Clinical and regulatory expenses in 2006 are expected to increasesignificantly as we embark on a number of studies in support of expanded use ofERBITUX as well as later-stage clinical development programs for four pipelineproducts. In addition, we are enhancing our medical affairs programs, andexpanding our regulatory capabilities. As a result, total clinical andregulatory expenses are expected to reach approximately $90 million in 2006,including approximately $1.3 million attributable to stock option expense. Ofcourse, a contractually determined portion of the ERBITUX-related expenses willcontinue to be reimbursed as a component of collaborative agreement revenue. Marketing,general and administrative expenses should approximate $80 million in 2006,including approximately $5.2 million attributable to stock option expense. Theincrease versus 2005 is principally attributable to increased marketing effortsin support of the potential head and neck indication for ERBITUX. Royaltyexpenses in 2006 will continue to include 12.25% of North American net salesthrough the first quarter, with 4.5% of US net sales expected to be reimbursedas a component of collaborative agreement revenue, resulting in a net royaltyburden to us of 7.75%. In subsequent quarters, the gross royalty expense ofdomestic net sales is expected to decline to 9.25%, resulting in a net royaltyburden of 4.75%. In addition, a single-digit percentage of international netsales will also be incurred. Based on our current expectations of purchases byour partners, we expect to begin to reflect full cost of manufacturing revenuein 2006. With respect to the tax rate for 2006, we expect our effective taxrate to be approximately 25%, which does not include the effect of anypotential release of the valuation allowance on deferred tax assets.

**CRITICAL ACCOUNTING POLICIES**

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.     .

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*RevenueRecognition—**Our*revenues are derived from fourprimary 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$650,000,000 in license fees received from BMS under the Commercial Agreementwhich are being deferred and recognized as revenue based upon the actualproduct research and development costs incurred since September 19, 2001to date by BMS and ImClone as a percentage of the estimated total of such coststo be incurred over the 17 year term of the Commercial Agreement. Theestimated total 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 $650,000,000 in paymentsreceived through December 31, 2005, $94,232,000 was recognized as revenuein 2005 and $293,864,000 from the commencement of the Commercial Agreement in2001 through December 31, 2005. The methodology used to recognize deferredrevenue involves a number of estimates and judgments, such as the estimate oftotal product research and development costs to be incurred under theCommercial Agreement. Changes in these estimates and judgments can have asignificant effect on the size and timing of revenue recognition. In addition,if management had chosen a different methodology to recognize the license fee andmilestone payments received under the Commercial Agreement, the Company’sfinancial position and results of operations could have differed materially.For example, if the Company were to recognize the revenues earned from theCommercial Agreement on a straight-line basis over the life of the agreement,the Company would have recognized approximately $42,400,000 and $128,800,000 asrevenue for 2005 and from the commencement of the Commercial Agreement,respectively, through December 31, 2005. Management believes that thecurrent methodology used to recognize revenues under the Commercial Agreement,which reflects the level of effort consistent with the product developmentactivities, is the most appropriate methodology because it reflects the levelof expenditure and activity in the period in which it is being spent ascompared to the total expected expenditure over the life of the CommercialAgreement. This cost to cost approach is systematic and rational, it provides afactually supportable pattern to track progress, and is reflective of the levelof 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.

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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.

*WithholdingTaxes—**In*January 2003, New YorkState notified the Company that it was liable for the New York State and Cityincome taxes that were not withheld because one or more of the Company’semployees who exercised certain non-qualified stock options in 1999 and 2000failed to pay New 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$4,500,000 to settle the matter. Subsequently, the Company became aware ofanother 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.After the Company informed New York State of the issue relating to thewarrants, New York State, in June 2003, notified the Company that it wascontinuing the previously conducted audit of the Company and was evaluating theterms of the closing agreement to determine whether or not 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$1,000,000 in full satisfaction of all the deficiencies and determinations ofwithholding taxes for the years 1999-2001. As a result, we utilized$1,000,000 of the liability of $2,815,000 that we previously established forNew York withholding taxes on stock options and warrants exercised andrecognized a benefit of $1,815,000 as a recovery in the Consolidated Statementsof Operations in 2004.

On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to thefederal income taxes applicable to the above noted issues. On February 8,2006, the Company received a draft of the IRS’s report of its preliminaryfindings which indicated that the IRS, in addition to imposing liability on theCompany for taxes not withheld, intended to assert penalties with respect toboth the failure to withhold on non-qualified stock options and the failure toreport and withhold on the warrants 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, the Company expects to  payapproximately $32,000,000 to the IRS. The Company had previously recorded awithholding tax liability of $18,096,000 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 has eliminatedthe withholding tax asset of $274,000 and has recorded an additionalwithholding tax liability of $13,904,000, or a total of $32,000,000, in itsconsolidated Balance Sheet as of December 31, 2005. As a result, theCompany has recorded in the fourth quarter of 2005 a net withholding taxexpense of $14,178,000.

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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 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 inventorywith partial costs and  in 2006, our costof manufacturing revenue will reflect full absorption costs of production. Aspreviously mentioned, we are obligated to sell ERBITUX to BMS at our costs ofproduction plus a 10% mark-up on bulk and to Merck KGaA at our cost ofproduction. We expect that our quarterly margins on sales of ERBITUX will beginto stabilize in 2006 and reflect an average margin of approximately 10%.

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 beconsidered in evaluating whether the costs to manufacture a product have metthe definition of an asset as stipulated in FASB Concepts Statement No. 6.If applicable, we assess the regulatory and approval process including anyknown constraints and impediments to approval. We also consider the shelf lifeof the product 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.

*Litigation—**The*Company iscurrently involved in certain legal proceedings as disclosed in the notes tothe consolidated financial statements. As of December 31, 2005, 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-LivedAssets—**We*review long-lived assets forimpairment when events or changes in business conditions indicate that theirfull carrying value may not be recovered. Assets are considered to be impairedand written down to fair value if expected associated undiscounted cash flowsare less than carrying amounts. Fair value is generally determined as thepresent value of the expected associated cash flows. As noted under Item 2. “Properties”,we own a number of buildings that are primarily dedicated to the manufacturingof ERBITUX and other clinical products in our pipeline.  Based on management’s current estimates, weexpect to recover the carrying value of such assets. Changes in regulatory orother business conditions in the future could change our judgments about thecarrying value of these facilities, which could result in the recognition ofmaterial impairment losses.

*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. As of December 31, 2005, the Company continuesto reflect a valuation allowance against its total net deferred tax assetsbecause, more likely than not, its net deferred tax assets will not berealized. Although management believes that the valuation allowance as of December 31,2005 is appropriate, we expect that as we continue to sell ERBITUX to ourcorporate partners for commercial use and earn royalties and income fromoperations from the expected commercial sales of ERBITUX, we will need torevise our conclusions regarding the realization of our deferred tax assets dueto expected changes 

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in overall levelsof pretax earnings. In addition, there may be other factors such as changes intax laws and future levels of research and development spending that may impactour effective tax rate in the future.

**RECENTLYISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS**

In 2004 the FASB issued Statement No. 151*, Inventory Costs*, an amendment of ARB No. 43. ThisStatement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing”,to clarify the accounting for abnormal amounts of idle facility expense,freight, handling costs, and wasted material (spoilage). The provisions of thisStatement are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. We will adopt this Statement on January 1,2006 and we  expect that the initialadoption will not have a material effect on the Company’s consolidatedfinancial statements. However, as we finalize the commissioning and validationof our BB50 manufacturing facility and we begin production in the second halfof 2006, the adoption of this Statement may have an impact on the Company’sconsolidated  financial statements.

In 2004 the FASB issuedStatement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). ThisStatement requires that the cost resulting from all share-based paymenttransactions be recognized in the financial statements and establishes fairvalue as the measurement objective in accounting for all share-based paymentarrangements. We will adopt SFAS 123R using the modified prospective basis on January 1,2006. The adoption of this Statement is expected to result in compensationexpense of approximately $9.1 million  in 2006. Our estimate of future stock-based compensation expense isaffected by our stock price, the number of stock-based awards that may begranted in 2006, fluctuation in our valuation assumptions and the related taxeffect. Based on our current calculations, we expect to have a pool of windfalltax benefits in 2006.

**RESULTS OF OPERATIONS**

Selectedfinancial and operating data for the three years ended December 31, 2005,2004 and 2003 are as follows: (in thousands)

| ** **                                 | ** ** | **2005**    | ** **  | **2004**    | ** ** | **2003**    | ** ** | **2005 vs  2004  Variance** | ** **  | **2004 vs.  2003  Variance** | ** ** |
|--------------------------------------------|------------|-------------|-------------|-------------|------------|-------------|------------|----------------------------------|-------------|-----------------------------------|------------|
| Royalty revenue                            |       | $           | 177,440     |        | $          | 106,274     |       | $                                | 575         |                              | $          | 71,166 |   | $ | 105,699 |   |
| License fees and  milestone revenue        |       | 97,239      |        | 129,386     |       | 47,970      |       | (32,147                          | )           | 81,416                            |       |
| Manufacturing  revenue                     |       | 44,090      |        | 99,041      |       | —      |       | (54,951                          | )           | 99,041                            |       |
| Collaborative  agreement revenue           |       | 64,904      |        | 53,989      |       | 32,285      |       | 10,915                           |        | 21,704                            |       |
| **Total revenues**                         | ** ** | **383,673** | ** **  | **388,690** | ** ** | **80,830**  | ** ** | **(5,017**                       | **)**       | **307,860**                       | ** ** |
| Research and  development                  |       | 99,303      |        | 82,658      |       | 121,111     |       | 16,645                           |        | (38,453                           | )          |
| Clinical and  regulatory                   |       | 50,136      |        | 30,254      |       | 30,154      |       | 19,882                           |        | 100                               |       |
| Marketing,  general and administrative     |       | 72,334      |        | 59,800      |       | 41,947      |       | 12,534                           |        | 17,853                            |       |
| Royalty expense                            |       | 58,376      |        | 36,065      |       | —      |       | 22,311                           |        | 36,065                            |       |
| Cost of  manufacturing revenue             |       | 16,367      |        | 1,099       |       | —      |       | 15,268                           |        | 1,099                             |       |
| Litigation  settlement                     |       | —      |        | 55,363      |       | —      |       | (55,363                          | )           | 55,363                            |       |
| Withholding tax  expense (recovery)        |       | 14,178      |        | (1,815      | )          | (3,384      | )          | 15,993                           |        | 1,569                             |       |
| Discontinuation  of small molecule program |       | 6,200       |        | —      |       | —      |       | 6,200                            |        | —                            |       |
| Other                                      |       | —      |        | —      |       | (147        | )          |                             |        | 147                               |       |
| **Total  operating expenses**              | ** ** | **$**       | **316,894** | ** **  | **$**      | **263,424** | ** ** | **$**                            | **189,681** | ** **                        | **$**      | **53,470** | ** ** | **$** | **73,743** | ** ** |

 

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

**Revenues**

**Royalty Revenue**

Royalty revenue consists primarily of royalty paymentsearned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under ouragreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA, we are entitled to royalty payments based on a percentage of grossmargin of Merck KGaA’s sales of ERBITUX outside the United States and Canada.In 2005, our royalty revenue increased by $71,166,000 from 2004 due to anincrease in net sales of ERBITUX . In North America, sales by BMS in 2005amounted to $413.1 million compared to net sales in 2004 of $260.8 million. Outsideof North America, sales of ERBITUX by Merck increased to approximately $265million in 2005 as compared to $100 million in 2004.

Royalty revenue in 2006will continue to reflect 39% of BMS’ net sales and a range of 6.5% - 7.5% ofMerck KGaA’s net sales.

**License Fees and Milestone Revenue**

License fees and milestone revenue in  2005 of $97,239,000 consists of therecognition of up-front license fees and milestone payments received under theCommercial Agreement with BMS of $94,232,000 and recognition of paymentsreceived under the development and license agreements with Merck KGaA of$3,007,000. The decrease of $32,147,000 from 2004 is primarily due to adecrease of approximately $35.5 million in amortization related to theCommercial Agreement with BMS primarily due to the fact that in 2004 wereceived $250,000,000 from BMS when we obtained FDA approval of ERBITUX,resulting in incremental amortization. Such decrease was partially offset by anincrease in amortization related to the Merck KGaA development and licenseagreements of approximately $1.6 million related to the termination of the BEC2and gp75 antigen agreement in the fourth quarter of 2005.

License fees and milestonerevenue in 2006 will include the continuing amortization, based on clinicaldevelopment spending, of the $650 million received thus far from BMS. Inaddition, in 2006, we will also begin to amortize  the final milestone of $250 million from BMSas a result of  the approval of the headand neck sBLA. At the anticipated rates of clinical spending for 2006,amortization of milestones for the full year, including the receipt of theadditional $250 million, should approximate $250 million, including a “catch-up”effect of receipt of this final milestone of approximately $115 million.

**Manufacturing Revenue**

Manufacturing revenue in 2005 of $44,090,000 consistsof sales of ERBITUX to BMS for commercial use. The decrease of $54,951,000 from2004 is mainly due to a lower selling price in 2005. In accordance with theCommercial Agreement, we are contractually obligated to sell ERBITUX to BMS atour cost of production plus a 10% markup on bulk. We sell bulk inventory toMerck KGaA at our full absorption cost of production.  During 2004, the price charged to BMS includedthe costs of inventory produced by Lonza, which is significantly higher thanour cost of production at our BB36 manufacturing plant. During 2004, wedepleted all inventory produced by Lonza, therefore our costs in 2005 reflectonly costs associated with manufacturing inventory at our BB36 manufacturingfacility. The continuing level of manufacturing revenue in future periods mayfluctuate significantly based on market demand, our cost of production, BMS’srequired level of safety stock inventory for ERBITUX and whether Merck KGaAorders ERBITUX for commercial use.

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Manufacturing revenue in2006 will continue to reflect ERBITUX shipped to our partners for commercialuse, although no such product was shipped to Merck in 2005. The selling priceto our partners in 2006 is estimated be comparable to the price charged in2005.

**Collaborative Agreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: clinical and regulatory expenses, the cost of ERBITUXsupplied to our partners for use in clinical studies, certain marketing andadministrative expenses, and a portion of royalty expense. During 2005, weearned $64,904,000 in collaborative agreement revenue, of which approximately $42,859,000represents amounts earned from BMS and approximately $22,000,000 representsamounts earned from Merck KGaA, as compared to $53,989,000 earned in thecomparable period in 2004, of which $38,919,000 was earned from BMS andapproximately $15,000,000 was earned from Merck KGaA. The increase incollaborative agreement revenue of $10.9 million is principally due to anincrease in reimbursement for clinical drugs of approximately $2.9 million andan increase in royalty expense reimbursement of approximately $8.1 million,partly offset by minor decreases in the reimbursement of certain marketing,general and administrative expenses.

Collaborative agreementrevenue in 2006 will continue to include the purchase of ERBITUX for clinicaluse by our partners, reimbursement by our corporate partners of certainregulatory, clinical and marketing expenses incurred on behalf of ERBITUX, andfor royalty expense of 4.5% of North American net sales in accordance with theexisting terms of the BMS agreement and a low single digit amount from MerckKGaA.

**Expenses**

**Research and Development**

Research and development expenses in 2005 of$99,303,000 increased by approximately $16,645,000 or 20% from 2004. Theincrease is primarily due to shipments of ERBITUX to our partners for clinicalstudies of approximately $13.0 million and an increase in costs associated withthe development of our non-ERBITUX pipeline. Research and development expensesinclude costs associated with our in-house and collaborative research programs,product and process development expenses, costs to manufacture ERBITUX (until February 12,2004) and other product candidates and quality assurance and quality controlcosts. Research and development includes costs that are reimbursable from ourcorporate partners. Approximately $27.4 million and $24.5 million of costsrepresenting research and development expenses in 2005 and 2004, respectively,were reimbursed and included under collaborative agreement revenue since theyrepresent inventory supplied to our partners for use in clinical studies.

We expect that researchand development expenses will approximate $140 million in 2006, includingapproximately $2.6 million  attributableto stock option expense. The  increase from2005 reflects additional efforts in support of our non-ERBITUX pipeline,including third-party manufacturing costs, costs associated with producingclinical supplies of ERBITUX for use by us and our partners (which arereimbursed as a component of Collaborative Agreement Revenue), and expansion ofbasic research activities.

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**Clinical andRegulatory**

Clinical and regulatory expenses consist of costs toconduct our clinical studies and associated regulatory activities. Clinical andregulatory expenses in 2005 amounted to $50,136,000, an increase of $19,882,000or 66% from 2004. The increase is primarily due to an increase of $10.5 milliondue BMS for reimbursement of clinical expenses related to ERBITUX, an increaseof approximately $4.2 million in third party clinical trial costs, and anincrease in salaries and benefits of approximately $3.5 million. During 2005,we increased our headcount in our clinical and regulatory department as well asour 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.

Clinical and regulatoryexpenses in 2006 are expected to increase significantly as we embark on anumber of studies in support of expanded use of ERBITUX as well as later-stageclinical development programs for four pipeline products. In addition, we areenhancing our medical affairs programs, and expanding our regulatorycapabilities. As a result, total clinical and regulatory expenses are expectedto reach approximately $90 million in 2006, including approximately $1.3million attributable to stock option expense. A contractually determinedportion of the ERBITUX-related expenses will continue to be reimbursed as acomponent of collaborative agreement revenue.

**Marketing,General and Administrative**

Marketing, general and administrative expenses includemarketing and administrative personnel costs, including related facility costs,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 amounts reimbursable from our corporate partners.

Marketing, general and administrative expenses in 2005amounted to $72,334,000, an increase of $12,534,000 or 21% from 2004. Thisincrease is partly due to increases in salaries and benefits of approximately$6.0 million due to increased headcount and merit increases from the prior yearand an increase 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.Certain expenses in this category are reimbursable from our corporate partners.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.

Marketing, General andAdministrative Expenses should approximate $80 million in 2006, includingapproximately $5.2 million attributable to stock option expense. The increaseversus 2005 is principally attributable to increased marketing efforts insupport of the potential head and neck indication for ERBITUX.

**Royalty Expense**

Royalty expense consists of obligations related tocertain licensing agreements related to ERBITUX. Prior to the thirdquarter of 2005, we were obligated to pay royalties of approximately 12.75% ofNorth American net sales and a single digit royalty on sales outside of NorthAmerica, which will increase if sales outside of North America consist ofERBITUX produced in the United States. Beginning in the third quarter of 2005,gross royalty expense decreased as a percentage of net sales in North Americafrom 12.75% to 12.25%. We receive reimbursements from our corporate partners of4.5% on North 

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American net sales and aminimum of 1% on net sales outside of North America, which is reflected incollaborative agreement revenue.  In2005, we incurred royalty expense of $58.4 million as compared to $36.1 millionin 2004, an increase of $22.3 million, or 62%. The increase is primarilyassociated with the increase in North American net sales, which consisted of$413.1 million in 2005 as compared to $260.8 million in 2004. Approximately$20.8 million and $12.7 million of royalty expense was reimbursable by ourcorporate partners and included as collaborative agreement revenue in 2005 and2004, respectively.

Royalty expenses in 2006will continue to include 12.25% of domestic in-market sales through the firstquarter, with 4.5% of domestic in-market sales expected to be reimbursed as acomponent of collaborative agreement revenue, resulting in a net royalty burdento ImClone of 7.75%. In subsequent quarters, the gross royalty expense ofdomestic net sales is expected to decline to 9.25%, resulting in a net royaltyburden of 4.75%. In addition, a single-digit percentage of international netsales is also expected to be incurred.

**Cost of Manufacturing 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 primarilyconsisted of shipping and storage charges. In 2005, we continued to sellinventory that was previously expensed as well as inventory that was partiallyexpensed, since there was inventory in process on the date that we received FDAapproval of ERBITUX. In the fourth quarter of 2005, we sold substantially allthe inventory with partial costs and in 2006, our cost of manufacturing revenuewill reflect full absorption costs of production. As previously mentioned, weare obligated to sell ERBITUX to BMS at our costs of production plus a 10%mark-up on bulk and to Merck KGaA at our cost of production. We expect that ourquarterly margins on sales of ERBITUX will begin to stabilize in 2006 andreflect an average margin of approximately 10%.

**Discontinuationof Small 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 $6,200,000 ofcosts associated with the discontinuation of this program. Such costs includeapproximately $2,200,000 of costs related to severance for 45 employees thatwere terminated, approximately $3,700,000 of costs related to the write-off offixed assets used in such program and approximately $60,000 of contracttermination costs related to the cancellation of the lease at the Brooklynfacility where the employees were conducting such research and approximately$280,000 of other shutdown expenses. The disposition of this program issubstantially complete and the majority of the termination benefits was paid asof December 31, 2005.

**Witholding Tax Expense (Recovery)**

The increase of$15,993,000 is due to the fact that, in the fourth quarter of 2005, we recordeda net withholding tax expense of $14,178,000 as a result of reaching anagreement in principle with the IRS to resolve a pending withholding taxmatter. The agreement in principle reached with the IRS provides for theimposition of an accuracy-related penalty under Section 6662 of theInternal Revenue Code, which increased the estimated withholding tax liabilityfrom $18.1 million as previously recorded in our Balance Sheet as of December 31,2004 to a total of approximately $32.0 million. In 2004, we recorded a recoveryof withholding tax of $1,815,000 because we reversed a liability that wassettled at an amount less than originally estimated.

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**InterestIncome and Interest Expense**

Interest income in 2005 amounted to $27,877,000, anincrease of  $13,828,000 or 98% from thecomparable period in 2004. This increase is attributable to increases ininterest rates from the comparable period in 2004 as well as a higher averagecash and securities balance during 2005 as compared with 2004, as a result ofreceiving $600,000,000 from the issuance of convertible debt in May 2004and receiving $250 million from BMS in March of 2004.

Interest expense in 2005amounted to $6,569,000, a decrease of $1,863,000 or 22% from 2004. The decrease is due to lower interest ratethan in the comparable period of 2004, partly offset by an increase in debtoutstanding.

**Provision for Income 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 of$14,178,000 recorded in the fourth quarter of 2005 as a result of reaching atentative agreement with the IRS to resolve an employment tax matter that hadbeen outstanding since 2003. The difference from the statutory rate of 35% isdue to the utilization of fully reserved deferred tax assets, primarily theamortization of deferred revenue associated with license fees and milestones,which were taxable in prior periods. A reconciliation of the statutory federalincome tax rate to the effective income tax rate for each period is included inthe notes to the consolidated financial statements. We expect our 2006effective tax rate to be approximately 25%, which does not include the effectof any potential release of the valuation allowance on deferred tax assets.

**Net Income**

We had net income of$86,496,000 or $1.03 per basic common share and $1.01 per diluted common sharefor the year ended December 31, 2005, compared with net income of$113,653,000 or $1.43 per basic common share and $1.33 per diluted common sharefor the year ended December 31, 2004. The fluctuation in results was dueto the factors noted above.

***Years Ended December 31, 2004 and 2003***

**Revenues**

**License Fees and Milestone Revenue**

License fees and milestonerevenue in 2004 of $129,386,000 consists of recognition of up-front andmilestone payments received under the Commercial Agreement with BMS of$128,943,000, recognition of payments received under development and licenseagreements with Merck KGaA of $385,000 and license fees from GlaxoSmithKlineplc. of $58,000. The increase of $81,416,000 in license fees and milestonerevenue from the comparable period in 2003 is due to an increase in revenuerecognized under the Commercial Agreement with BMS primarily as a result of the$250,000,000 received in the first quarter of 2004, when we obtained FDAapproval of ERBITUX and due to increases in clinical development spending byBMS and ImClone.

**Manufacturing Revenue**

Manufacturing revenue of$99,041,000 in 2004 consists of sales of ERBITUX to our corporate partners forcommercial use. In accordance with the Commercial Agreement, we arecontractually obligated to sell ERBITUX to BMS at our cost of production plus a10% markup on bulk. We sell bulk 

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inventoryto Merck KGaA at our full absorption cost of production. There were no sales ofERBITUX to Merck KGaA during 2004. The selling price for ERBITUX to ourcorporate partners is based on the full absorption costs of productionincurred, which during 2004 reflected the weighted average costs of productionfor inventory previously produced by Lonza and at our BB36 manufacturing plant.During 2004, we sold all inventory produced by Lonza.

**Royalty Revenue**

Royalty revenue consistsprimarily of royalty payments earned on the sale of ERBITUX by our partners,BMS and Merck KGaA. Under our agreement with BMS, we are entitled to royaltypayments equal to 39% of BMS’s net sales of ERBITUX in the United States andCanada. Under our agreement with Merck KGaA, we are entitled to royaltypayments based on a percentage of gross margin of Merck KGaA’s sales of ERBITUXoutside the United States and Canada. During 2004, we earned royalties from BMSof $101,703,000 on net sales of ERBITUX of approximately $260.8 millionand royalties from Merck KGaA of $4,314,000 on net sales of ERBITUX ofapproximately $100.0 million.

**Collaborative Agreement Revenue**

Collaborative agreementrevenue consists primarily of reimbursements from our partners BMS and MerckKGaA under our collaborative agreements. There are certain categories for whichwe receive reimbursement from our partners: clinical and regulatory expenses,the cost of ERBITUX supplied to our partners for use in clinical studies,certain marketing and administrative expenses and a portion of royalty expense.During 2004, we earned $53,989,000 in collaborative agreement revenue of which$38,919,000 represents amounts earned from BMS and $15,018,000 representsamounts earned from Merck KGaA, as compared to $32,285,000 earned in thecomparable period in 2003, of which $20,668,000 was earned from BMS and$11,617,000 was earned from Merck KGaA. The increase in collaborative agreementrevenue of $21,704,000 in 2004 is principally due to royalty expense reimbursedby our corporate partners of approximately $12,738,000, and an increase in drugshipments to our partners of approximately $9,300,000, partly offset by adecrease in clinical and regulatory reimbursement.

**Research and Development**

Research and development expenses in 2004 and 2003were $82,658,000 and $121,111,000, respectively, a decrease of $38,453,000, or32.0%. 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 (prior to any approval that we may obtain of a productcandidate for commercial sale) and quality assurance and quality control costs.Research and development include costs that are reimbursable from our corporatepartners. Approximately $24,508,000 and $15,232,000 of costs representingresearch and development expenses for the years ended December 31, 2004and 2003, respectively, were reimbursed and included under collaborativeagreement revenue since they represent inventory supplied to our partners foruse in clinical studies.

The decrease in researchand development expenses of $38,453,000 in 2004 was primarily attributable to adecrease of approximately $23,200,000 related to costs incurred in connectionwith the manufacturing of ERBITUX by Lonza, a contract manufacturer, and adecrease of approximately $28,000,000 reflecting the capitalization ofinventory costs subsequent to February 12, 2004. These decreases werepartially offset by an increase in salaries and benefits of approximately$12,200,000 due to a significant increase in headcount from the comparableperiod in 2003 and an overall increase in salary and benefit expenses.

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**Clinical and Regulatory**

Clinical and regulatoryexpenses in 2004 and 2003 were $30,254,000 and $30,154,000, respectively, anincrease of $100,000 in 2004. Clinical and regulatory expenses consist of coststo conduct our clinical studies and associated regulatory activities. During2004, there was an increase in salaries and benefits and other employee relatedexpenses of approximately $3,300,000 due to increases in headcount, partiallyoffset by a decrease in cost incurred related to contract clinical services ofapproximately $3,200,000. Approximately $13,858,000 and $15,071,000 of thecosts included in this category for the years ended December 31, 2004 and2003, respectively, are reflected as revenues under collaborative agreementrevenue since they represent costs that are reimbursable by our corporatepartners.

**Marketing,General and Administrative**

Marketing, general and administrative expenses includemarketing and administrative personnel costs, including related facility costs,additional costs to develop internal marketing and field operations capabilitiesand expenses associated with applying for patent protection for our technologyand products. Marketing, general and administrative expenses also includeamounts reimbursable from our corporate partners.

Marketing, general andadministrative expenses in 2004 amounted to $59,800,000, an increase of$17,853,000 or 43.0% from the comparable period in 2003. This increase ispartly due to increases in personnel costs of approximately $10,900,000 due toincreased headcount and marketing expenses incurred to support thecommercialization of ERBITUX and an increase of approximately $12,200,000 inprofessional services fees related to legal, consulting and marketing researchand marketing conventions, offset by a charge of approximately $5,000,000 in 2003related to a termination agreement with a former officer of the Company. Someexpenses in this category are reimbursable from our corporate partners.Approximately $2,880,000 and $1,980,000 of costs representing marketing andgeneral expenses for the years ended December 31, 2004 and 2003,respectively, were reimbursed and included in collaborative agreement revenue.    Inorder to increase our presence and prominence within the oncology community andto help maximize the market potential for ERBITUX in its approved indications,we established a sales force of oncology sales professionals during the fourthquarter of 2004.

**Cost of Manufacturing Revenue**

Effective February 13,2004, the Company began to capitalize in inventory the costs of manufacturingof ERBITUX for commercial sale and will expense such costs as cost ofmanufacturing revenue at the time of sale. However, as we have been selling ourexisting inventory that was previously expensed, there has been a period oftime in which the Company reflected minimum cost of manufacturing revenue sincethe majority of the cost of such inventory was expensed in prior periods asresearch and development expenses. Cost of manufacturing revenue for 2004 ofapproximately $1.1 million reflects primarily fill and finish costs.

**Royalty Expense**

Royalty expense of$36,065,000 for the year ended December 31, 2004 consists of obligationsrelated to certain licensing agreements related to ERBITUX. Approximately$12,700,000 of royalty expense is reimbursed by our corporate partners andincluded as collaborative agreement revenue for the year ended December 31,2004. In January 2005, we finalized and signed license agreements withGenentech and Centocor, Inc. for the rights to patents covering variousaspects of antibody technology and certain use of epidermal growth factorreceptor (EGFR) antibodies. For ERBITUX use in combination with anti-neoplasticagents, ImClone Systems’ gross royalty expense for all licenses, includingGenentech, Centocor, Aventis and the University of California, is approximately12.75 % of North American sales. We receive 

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reimbursementsfor a portion of these royalty expenses, resulting in a net royalty expense ofapproximately 8.25%. After the first quarter of 2006, gross royalty expensewill decrease to 9.75% and net royalty expense will decrease to 7.25%. ForERBITUX monotherapy use, gross and net royalty expenses will be reduced byapproximately 1% because certain licenses are not applicable. Fourth-quarter2004 royalty expenses include charges of approximately $3.9 millionrequired to bring estimated royalty expenses recorded through the first ninemonths of 2004 in line with actual obligations.

**Litigation Settlement**

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. The complaint generally allegedthat various public statements made by or on behalf of the Company or the otherdefendants during 2001 and early 2002 regarding the prospects for FDA approvalof ERBITUX were false or misleading when made, that the individual defendantswere allegedly aware of material non-public information regarding the actualprospects for ERBITUX at the time that they engaged in transactions in theCompany’s common stock and that members of the purported stockholder classsuffered damages when the market price of the Company’s common stock declinedfollowing disclosure of the information that allegedly had not been previouslydisclosed. 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.

On January 24, 2005,we reached an agreement in principle to settle the consolidated class actiondescribed above for a cash payment of $75.0 million, a portion of whichwill be paid by our insurers. The settlement is subject to the negotiation andexecution of definitive settlement documents and to Court approval. The Companyanticipates that a hearing to consider approval of the settlement will be heldin late April or early May 2005. We also reached an agreement inprinciple to settle the consolidated derivative action described above. Underthe settlement, the Company will be paid $8.75 million by its insurers,which the Company intends to contribute toward the settlement of the Irvinesecurities class action described above after deducting amounts awarded by theCourt in the derivative action for plaintiffs’ attorney’s fees and expenses inthat action, which the Company has agreed not to oppose in an amount up to$875,000. The proposed settlement is subject to negotiation and execution ofdefinitive settlement documents, the approval and consummation of thesettlement of the Irvine class action and Court approval. As a result, we haverecorded in our Consolidated Balance Sheets at December 31, 2004 asLitigation settlement, a liability of $75.9 million and a receivable fromour insurers of approximately $20.5 million, included in Other currentassets. Net expense of $55.4 million, recorded in the fourth quarter of2004, is reflected in the Consolidated Statement of Operations as Litigationsettlement.

**Witholding Tax Expense (Recovery)**

The amount for the year December 31,2004 of $1,815,000 consists of the reversal of a liability related towithholding taxes that was settled at an amount less than was originallyestimated. The recovery in the comparable period of 2003 of $3,384,000 is dueto a recovery of a previous write-down related to a withholding tax matterattributable to a former executive of the Company.

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**Interest Income and Interest Expense**

Interest income was $14,049,000 for the year endedDecember 31, 2004 compared with $4,121,000 in the comparable period in2003, an increase of $9,928,000. This increase is attributable to the increasein the Company’s cash and cash equivalents and our securities portfolioprimarily as a result of the receipt of $250,000,000 in March of 2004 andthe $600,000,000 of convertible debt issued in May 2004.

Interest expense was$8,432,000 and $8,881,000 for the year ended December 31, 2004 and 2003,respectively, a decrease of $449,000 or 5.0%. The decrease in interest expenseis primarily attributable to the fact that the Company’s cost of borrowingdecreased with the issuance of $600 million of 13¤8%convertible debt in May of 2004, compared to the $240 million of 51¤2%convertible debt outstanding in the comparable period of 2003.

**Provision forIncome Taxes**

The effective tax rate forthe year ended December 31, 2004 amounted to approximately 13% which islower than the amount previously indicated in our 2004 third quarter filing.The primary reason for the decline in the effective rate is due to the factthat the Company was able to utilize approximately $32.0 million of netoperating losses that were previously believed to be limited based on aprevious analysis conducted under Section 382 of the Internal Revenue Codeof 1986. During the fourth quarter of 2004, we hired an external firm toconduct a study under Section 382 in order to verify if we had anylimitations under this Section of the Code. Based on the results of suchstudy, we learned that we do not have a limitation under Section 382, aspreviously believed. Therefore, we have utilized all available net operatinglosses in 2004 which has resulted in a lower actual effective rate thanpreviously calculated in the third quarter of 2004. The effective tax rate in2004 was also impacted by a $55.4 million litigation settlement expensetaken in the fourth quarter of 2004. The difference from the statutory rate of35% is due to the utilization of net operating losses, tax credit carryforwardsand state taxes. A reconciliation of the statutory federal income tax rate tothe effective income tax rate for each period is included in the notes to theconsolidated financial statements.

**Net Income (Loss)**

We had net income of$113,653,000, or $1.43 per basic common share and $1.33 per diluted commonshare for the year ended December 31, 2004, compared with a net loss of$112,502,000, or $1.52 per basic and diluted common share in the comparableperiod in 2003. The fluctuation in results was due to the factors noted above.

**LIQUIDITY AND CAPITAL RESOURCES**

At December 31, 2005,our principal sources of liquidity consisted of cash and cash equivalents andsecurities available for sale of approximately $756.4 million.Historically, we have financed our operations through a variety of sources,most significantly through the issuance of public and private equity andconvertible notes, license fees and milestone payments and reimbursements fromour corporate partners. Since the approval of ERBITUX on February 12,2004, we began to generate royalty revenue and manufacturing revenue from thecommercial sale of ERBITUX by our corporate partners and generated income fromoperations in 2004 and 2005. As we continue to generate income, our cash flowsfrom operating activities are expected to increase as a source to fund ouroperations. Therefore, we anticipate that our future financial condition andour future operating performance will continue to experience significantchanges and that past performance will not likely be indicative of our futureperformance.

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**SUMMARY OF CASHFLOWS**

| ** **                                            | ** ** | **Years Ended December 31,** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|--------------|------------|
| ** **                                            | ** ** | **2005**                                    | ** ** | **2004**     | ** ** | **2003** | ** ** | **2005 vs. 2004** | ** ** | **2004 vs. 2003** | ** ** |
| ** **                                            | ** ** | **(Thousands of dollars)**        | ** ** |
| Cash (used in) provided  by :                         | ** ** | ** **                                  | ** ** | ** **   | ** ** | ** ** | ** ** |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Operating  activities                                 |       | $                                           | (64,592    | )            | $          | 255,657 |   | $ | (93,385 | ) |   | $ | (320,249 | ) |   |   | $ | 349,042 |   |   |
| Investing  activities                                 |       | (5,053                                      | )          | (872,249     | )          | 37,580 |   |   | 867,196 |   |   |   | (909,829 | ) |   |
| Financing  activities                                 |       | (6,273                                      | )          | 665,048      |       | 25,650 |   |   | (671,321 | ) |   |   | 639,398 |   |   |
| Net (decrease) increase  in cash and cash equivalents |       | $                                           | (75,918    | )            | $          | 48,456 |   | $ | (30,155 | ) |   | $ | (124,374 | ) |   |   | $ | 78,611 |   |   |

 

Historically our cash flows from operating activitieshave fluctuated significantly due to the nature of our operations and thetiming of our cash receipts. During the year ended December 31, 2005, weused approximately $65 million in cash for operating activities, as compared tonet cash provided by operating activities in 2004 of $256 million. Thefluctuation in operating cash flows is due to the fact that in 2005 we paid$55.4 million in net litigation expense related to the securities class actionsettled in January 2005, and approximately $30 million of royalty paymentsto Genentech and Centocor related to 2004 for license agreements that wefinalized during January 2005. These uses of cash from operations werepartially offset by cash generated from operations due to increased royaltyincome in 2005 as a result of higher in-market net sales of ERBITUX by ourpartners BMS and Merck KGaA. In 2004, we generated cash flows from operatingactivities of approximately $256 million, mainly due to receipt of a milestonepayment of $250 million from BMS as a result of the FDA’s approval of ERBITUXin the first quarter of 2004. As we continue to earn revenues and operatingincome from the sale of ERBITUX, we expect that our operating cash flows willcontinue to experience significant fluctuations from prior period results.

Our primary sources and uses of cash under investingactivities consist of purchases and sales activity in our investment portfolio,which we manage based on our liquidity needs, possible business developmenttransactions and amounts used for capital expenditures. During the year ended December 31,2005, we used net cash from investing activities of $5 million comprised ofapproximately $84 million in acquisition of fixed assets, primarily related tothe construction of our BB50 manufacturing facility, offset by net proceedsfrom the sale and maturity of securities in our investment portfolio of $79million. In 2004, we used $872.2 million from investing activities mainlydue to the fact that in 2004 we had net purchases of approximately $766 millionin investment securities for our portfolio, which we classified as securitiesavailable for sale and we spent approximately $106 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 million of senior convertible notes in the second quarter of 2004 and fromthe $250 million milestone payment received from BMS in March 2004.

Net cash flows used in financing activities in 2005amounted to $6.3 million due to the purchase of 811,416 shares of our commonstock at an average price of $30.62 per share for aggregate consideration ofapproximately $25 million, offset by proceeds from the exercise of stockoptions by employees of approximately $18 million. In 2004, we generatedapproximately $665.0 million in net cash from cash financing activitiesprimarily as a result of the issuance of the $600 million in senior convertiblenotes and also as a result of proceeds of $78 million from employees exerciseof stock options.

We believe that ourexisting cash and cash equivalents and marketable securities and our cashprovided by operating activities will provide us with sufficient liquidity tosupport our operations at least through the first quarter of 2007. We are alsoentitled to reimbursement for certain marketing, royalty expense, and researchand development expenditures and certain other payments, some of which arepayable contingent upon the achievement of research and development andregulatory milestones. There 

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can beno assurance that we will achieve these milestones. Our future working capitaland capital requirements will depend upon numerous factors, including, but notlimited to:

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

·       theamount and timing of revenues earned from the commercial sale of ERBITUX;

·       our corporate partnersfulfilling their obligations to us;

·       timingand cost of seeking and obtaining additional regulatory approvals;

·       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.

Belowis a table that presents our contractual obligations and commercial commitmentsas of December 31, 2005: (in thousands)

| ** **                          | ** ** | **Payments due by Year(1)** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | **Total**                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** |
| Long-term debt(2)                   |       | $                           | 600,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest on  long-term debt         |       | 151,594                     |       | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 110,344 |   |
| Operating leases                    |       | 71,026                      |       | 5,064 |   | 5,358 |   | 4,200 |   | 4,315 |   | 4,078 |   | 48,011 |   |
| Purchase  obligations               |       | 4,269                       |       | 4,269 |   | — |   | — |   | — |   | — |   | — |   |
| Contract services  obligations      |       | 13,050                      |       | 5,220 |   | 1,620 |   | 1,350 |   | 1,620 |   | 3,240 |   | — |   |
| Construction  commitments           |       | 9,687                       |       | 9,687 |   | — |   | — |   | — |   | — |   | — |   |
| Total contractual cash  obligations |       | $                           | 849,626    |   | $ | 32,490 |   | $ | 15,228 |   | $ | 13,800 |   | $ | 14,185 |   | $ | 15,568 |   | $ | 758,355 |   |

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*(1)**         *Amounts in the above table do not includemilestone-type payments payable by us under collaborative agreements.

*(2)**         *On May 15 of 2009, 2014 and 2019, orupon the occurrence of certain designated events, holders may require theCompany to repurchase the notes at a repurchase price equal to 100% of theprincipal amount 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.

**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-backedsecurities, agency debt and commercial paper. All such instruments areclassified as securities available for sale. Generally, we do not invest inportfolio equity securities, commodities, foreign exchange contracts or usefinancial derivatives for trading purposes. Our debt security portfoliorepresents funds 

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held temporarily pendinguse in our business and operations. We manage these funds accordingly. We seekreasonable assuredness of the safety of principal and market liquidity byinvesting in investment grade fixed income securities while at the same timeseeking to achieve a favorable rate of return. Our market risk exposureconsists principally of exposure to changes in interest rates. Our holdings arealso exposed to the risks of changes in the credit quality of issuers. Weinvest in securities that have a range of maturity dates.

Thetable below presents the principal amounts and related weighted averageinterest rates by year of maturity for our investment portfolio as of December 31,2005: (in thousands, except interest rates)

| ** **             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** | **Total** | ** ** | **Fair Value** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|---------------------|------------|
| Fixed Rate             |       | $        | 155,000    |     | $          | 202,400  |       | $        | 100,000    |     | $          | 55,000                        |       | $         | 20,000     |                |       | $ | — |   |   | $ | 532,400 |   |   | $ | 523,512 |   |   |
| Average Interest  Rate |       | 2.98     | %          | 3.49     | %          | 3.86     | %          | 4.33     | %          | 4.54     | %          |                          | —     |      |       | 3.54                | %          |   |   |   |   |
| Variable Rate          |       | —   |       | 10,000   | (1)        | 1,803    | (1)        | —   |       | 10,000   | (1)        |                          | 207,911    | (1)       |       | 229,714             |       |   | 229,461 |   |   |
| Average Interest  Rate |       | —   |       | 4.00     | %          | 4.85     | %          | —   |       | 4.00     | %          |                          | 4.29       | %         |       | 4.27                | %          |   |   |   |   |
|                   |       | $        | 155,000    |     | $          | 212,400  |       | $        | 101,803    |     | $          | 55,000                        |       | $         | 30,000     |                |       | $ | 207,911 |   |   | $ | 762,114 |   |   | $ | 752,973 |   |   |

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*(1)**            **Theseholdings primarily consist of U.S. corporate and foreign corporate floatingrate notes. Interest on the securities is adjusted monthly, quarterly orsemi-annually, depending on the instrument, using prevailing interest rates.These holdings are highly liquid and we consider the potential for loss ofprincipal to be minimal.*

Our outstanding 13¤8%fixed rate convertible senior notes in the principal amount of $600,000,000 dueMay 15, 2024 are convertible into our common stock at a conversion priceof $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 $502,500,000 at December 31,2005.

**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 interim Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of our “disclosure controls andprocedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))as of the end of the period covered by this report. Based on such evaluation,our interim Chief Executive Officer and Chief Financial Officer have concludedthat, as of the end of the period covered by this report, our disclosurecontrols and procedures are effective in recording, processing, summarizing andreporting, on a timely basis, information that we are required to disclose inthe reports that we file or submit 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 and 

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with the participation ofour management, including our interim Chief Executive Officer and ChiefFinancial Officer, we conducted an evaluation of the effectiveness of ourinternal control over financial reporting based on the framework in *Internal Control—Integrated Framework*issued by the Committee of Sponsoring Organizations of the Commission. Based onour evaluation under the framework in*Internal Control—Integrated Framework*, our management concluded thatour internal control over financial reporting was effective as of December 31,2005.

KPMG LLP, an independentregistered public accounting firm, has audited the consolidated financialstatements included in this Annual Report on Form 10-K and, as part oftheir 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 change in our internal control overfinancial reporting during our fourth fiscal quarter of 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

**TheBoard 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, 2005, 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 anunderstanding of internal control over financial reporting, evaluatingmanagement’s assessment, testing and evaluating the design and operatingeffectiveness of internal control, and performing such other procedures as weconsidered necessary in the circumstances. We believe that our audit provides areasonable basis 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 maydeteriorate.

In our opinion, management’s assessment that ImCloneSystems Incorporated maintained effective internal control over financialreporting as of December 31, 2005, 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 31,2005, 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 have audited, inaccordance with the standards of the Public Company Accounting Oversight Board(United States), the consolidated balance sheets of ImClone SystemsIncorporated and subsidiary as of December 31, 2005 and 2004, and therelated consolidated statements of operations, stockholders’ equity (deficit)and comprehensive income (loss), and cash flows for each of the years in thethree-year period ended December 31, 2005, and our report dated March 15,  2006 expressed an unqualified opinion onthose consolidated financial statements.
|                       | /s/ KPMG LLP |   |
|-----------------------|--------------|--------|
| Princeton, New Jersey |         |
| March 15, 2006   |         |

 

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**ITEM 9B.**       OTHERINFORMATION.

Not Applicable.

**PART III**

**ITEM 10.**         DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT

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 2006 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 2006 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 2006 Annual Meeting ofStockholders.

**ITEM 13.**         CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS

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 2006 Annual Meeting ofStockholders.

**ITEM 14.**         PRINCIPALACCOUNTANT FEES AND SERVICES

The information required by Item 14 is incorporatedinto Part III of this Annual Report on Form 10-K by referenceto our definitive Proxy Statement for the 2006 Annual Meeting of Stockholders.

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**PART IV**

**ITEM15.**         EXHIBITS AND FINANCIALSTATEMENT 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                                                                                                                               |       | D(3.1)          |
| 3.2              |       | Amendment dated  June 4, 1999 to the Company’s Certificate of Incorporation, as amended                                                                                                      |       | H(3.1A)         |
| 3.3              |       | Amendment dated  June 12, 2000 to the Company’s Certificate of Incorporation, as amended                                                                                                     |       | K(3.1A)         |
| 3.4              |       | Amendment dated  August 9, 2002 to the Company’s Certificate of Incorporation, as amended                                                                                                    |       | Q(3.1C)         |
| 3.5              |       | Amended and Restated  By-Laws of the Company                                                                                                                                                           |       | Z(3.1)          |
| 4.1              |       | Rights Agreement dated  as of February 15, 2002 between the Company and EquiServe Trust Company,  N.A., as Rights Agent                                                                           |       | M(99.2)         |
| 4.2              |       | Stockholder Agreement,  dated as of September 19, 2001, among Bristol-Myers Squibb Company,  Bristol-Myers Squibb Biologics Company and the Company                                               |       | L(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                                            |       | V(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 |       | V(4.6)          |
| 10.1             |       | Company’s 1986 Employee  Incentive Stock Option Plan, including form of Incentive Stock Option  Agreement                                                                                         |       | A(10.1)         |
| 10.2             |       | Company’s 1986  Non-qualified Stock Option Plan, including form of Non-qualified Stock Option  Agreement                                                                                          |       | A(10.2)         |
| 10.3             |       | 1996 Incentive Stock  Option Plan, as amended                                                                                                                                                          |       | O(99.1)         |
| 10.4             |       | 1996 Non-Qualified Stock  Option Plan, as amended                                                                                                                                                      |       | O(99.2)         |
| 10.5             |       | ImClone Systems  Incorporated 1998 Non-Qualified Stock Option Plan, as amended                                                                                                                         |       | O(99.2)         |
| 10.6             |       | ImClone Systems  Incorporated 2002 Stock Option Plan                                                                                                                                                   |       | Q(99.8)         |
| 10.7             |       | ImClone Systems  Incorporated 1998 Employee Stock Purchase Plan                                                                                                                                        |       | I(99.4)         |
| 10.8             |       | Option Agreement, dated  as of September 1, 1998, between the Company and Ron Martell                                                                                                             |       | F(99.3)         |
| 10.9             |       | Option Agreement, dated  as of January 4, 1999, between the Company and S. Joseph Tarnowski                                                                                                       |       | J(99.4)         |
| 10.10            |       | License Agreement  between the Company and the Regents of the University of California dated  April 9, 1993                                                                                       |       | B(10.48)        |

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| 10.11 |   | Collaboration and  License Agreement between the Company and the Cancer Research Campaign  Technology, Ltd., signed April 4, 1994, with an effective date of  April 1, 1994                                                                                                                                      |   | B(10.50)   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|
| 10.12 |   | License Agreement between the Company and  Rhone-Poulenc Rorer dated June 13, 1994                                                                                                                                                                                                                                    |   | C(10.56)   |
| 10.13 |   | Development and License  Agreement between the Company and Merck KGaA dated December 14, 1998                                                                                                                                                                                                                         |   | E(10.70)   |
| 10.14 |   | Lease dated as of  December 15, 1998 for the Company’s premises at 180 Varick Street,  New York, New York                                                                                                                                                                                                   |   | G(10.69)   |
| 10.15 |   | Amendment dated  March 2, 1999 to Development and License Agreement between the Company  and Merck KGaA                                                                                                                                                                                                               |   | G(10.71)   |
| 10.16 |   | Acquisition Agreement  dated as of September 19, 2001, among the Company, Bristol-Myers Squibb  Company and Bristol-Myers Squibb Biologics Company                                                                                                                                                                    |   | L(99.D1)   |
| 10.17 |   | 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.                                                                                                                                 |   | L(99.D3)   |
| 10.20 |   | Employment Agreement,  dated as of March 19, 2004, between the Company and Daniel S. Lynch                                                                                                                                                                                                                            |   | U(10.1)    |
| 10.21 |   | Agreement of Sublease  dated October 5, 2001, by and between 325 Spring Street LLC and the  Company                                                                                                                                                                                                              |   | O(10.86)   |
| 10.22 |   | 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                                                                                                                                                                            |   | O(10.86.1) |
| 10.23 |   | 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.                                                                                                              |   | N(99.2)    |
| 10.24 |   | Amendment, dated as of  August 16, 2001 to the Development and License Agreement between the  Company and Merck KGaA                                                                                                                                                                                                  |   | P  (10.88) |
| 10.25 |   | 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                                                                                                                                    |   | Q(10.92)   |
| 10.26 |   | 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 |   | R(10.930)  |
| 10.27 |   | Modifications Agreement  dated as of December 15, 2000 by an between 180 Varick Street  Corporation and the Company                                                                                                                                                                                                   |   | S(10.94)   |
| 10.28 |   | 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                                                                                                                                                              |   | V(10.28)   |
| 10.29 |   | ImClone Systems  Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                        |   | T(A.C)     |

85

----

 
| 10.30  |   | Supply Agreement between  the Company and Lonza Biologics PLC dated March 17, 2005                                                                                                                                        |   | Y(10.30) |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
| 10.31  |   | ImClone Systems  Incorporated Senior Executive Severance Plan                                                                                                                                                                  |   | W(10.29) |
| 10.32* |   | ImClone Systems  Incorporated Change in Control Plan, as amended                                                                                                                                                               |   |     |
| 10.33  |   | Letter Agreement, effective as of April 5,  2005, by and between S. Joseph Tarnowski and ImClone Systems  Incorporated                                                                                               |   | X(10.1)  |
| 10.34  |   | 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 |   | AA       |
| 10.35  |   | Collaboration and  License Agreement between the Company and UCB S.A. dated August 15,  2005. Confidential Treatment has been requested for a portion of this Exhibit                                                     |   | CC       |
| 10.36  |   | Approval by Board of  Directors of certain compensation related matters and Company stock  repurchase program                                                                                                                  |   | BB       |
| 10.37  |   | ImClone Systems  Incorporated 2005 Inducement Stock Option Plan                                                                                                                                                                |   | DD(10.1) |
| 10.38  |   | Terms of accelerated  Company stock options and form of lock-up agreement                                                                                                                                                      |   | EE(10.1) |
| 10.39  |   | ImClone Systems  Incorporated 2006-2008 Retention Plan                                                                                                                                                                         |   | FF(10.1) |
| 10.40* |   | ImClone Systems  Incorporated Transition Severance Plan                                                                                                                                                                        |   |     |
| 12.1*  |   | Calculation of Ratio of  Earnings to Fixed Charges                                                                                                                                                                             |   |     |
| 21.1*  |   | Subsidiaries of the  Company                                                                                                                                                                                                   |   |     |
| 23.1*  |   | Consent of KPMG LLP,  Independent Accountants                                                                                                                                                                                  |   |     |
| 31.1*  |   | Certification of the  Company’s Interim Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                          |   |     |
| 31.2*  |   | Certification of the  Company’s Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                  |   |     |
| 32*    |   | Certification of the  Company’s Interim Chief Executive Officer and Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                              |   |     |

----

*                    Filedherewith.

(A)                    Previouslyfiled with the Commission; incorporated by reference to Amendment No. 1 toRegistration Statement on to Form S-1, File No. 33-61234.

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

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

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

86

----

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

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

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

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

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

(J)                        Previouslyfiled with the Commission; incorporated by reference to the Company’sRegistration Statement on Form S-8; File No. 333-30172.

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

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

(M)                  Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated February 19, 2002.

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

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

(P)                      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.

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

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

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

(T)                     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.

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

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

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

87

----

(X)                    Previouslyfiled with the Commission; incorporated by reference to the Company’s CurrentReport on Form 8-K dated April 5, 2005.

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

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

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

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

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

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

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

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

88

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Report to be signed on its behalf bythe undersigned, thereunto duly authorized.

|                            | IMCLONE  SYSTEMS INCORPORATED |
|----------------------------|-------------------------------|
| Date: March 16,  2006 | By:                           | /s/ JOSEPH L. FISCHER |
|                       |                          | Joseph L. Fischer*Interim Chief Executive Officer* |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this Report hasbeen signed below by the following persons on behalf of the Registrant and inthe capacities and on the date indicated.

|                                  | **Name** | ** **                                         | ** ** |                     | **Title** | ** ** | ** ** |  | **Date** | ** ** |
|----------------------------------|----------|----------------------------------------------------|------------|---------------------|-----------|------------|------------|--|----------|------------|
| /s/ JOSEPH  L. FISCHER      |     | Interim Chief  Executive Officer and               |       | March 16, 2006 |
| Joseph  L. Fischer               |     | Director (Principal  Executive Officer)            |       |                |
| /s/ MICHAEL  J. HOWERTON    |     | Chief Financial  Officer (Principal Financial      |       | March 16, 2006 |
| Michael  J. Howerton             |     | Officer)                                           |       |                |
| /s/ ANA  I. STANCIC         |     | Vice President,  Controller and Chief              |       | March 16, 2006 |
| Ana  I. Stancic                  |     | Accounting Officer  (Principal Accounting Officer) |       |                |
| /s/ ANDREW  G. BODNAR       |     | Director                                           |       | March 16, 2006 |
| Andrew  G. Bodnar                |     |                                               |       |                |
| /s/ WILLIAM  W. CROUSE      |     | Director                                           |       | March 16, 2006 |
| William  W. Crouse               |     |                                               |       |                |
| /s/ VINCENT  T. DEVITA, JR. |     | Director                                           |       | March 16, 2006 |
| Vincent  T. DeVita, Jr.     |     |                                               |       |                |
| /s/ JOHN  A. FAZIO          |     | Director                                           |       | March 16, 2006 |
| John  A. Fazio                   |     |                                               |       |                |
| /s/ DAVID  M. KIES          |     | Director                                           |       | March 16, 2006 |
| David  M. Kies                   |     |                                               |       |                |
| /s/ WILLIAM  R. MILLER      |     | Director                                           |       | March 16, 2006 |
| William  R. Miller               |     |                                               |       |                |
| /s/ DAVID  SIDRANSKY        |     | Director                                           |       | March 16, 2006 |
| David Sidransky                  |     |                                               |       |                |

 

 

89

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**INDEXTO FINANCIAL STATEMENTS**

| **Audited Financial Statements:**                                                                                                                                    |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
| Report of Independent  Registered Public Accounting Firm                                                                                                             |   | F-2    |   |
| Consolidated Balance Sheets at  December 31, 2005 and 2004                                                                                                 |   | F-3    |   |
| Consolidated Statements of  Operations for the Years Ended December 31, 2005, 2004 and 2003                                                                |   | F-4    |   |
| Consolidated Statements of  Stockholders’ Equity (Deficit) and Comprehensive Income (Loss) for the  Years Ended December 31, 2005, 2004 and 2003 |   | F-5    |   |
| Consolidated Statements of  Cash Flows for the Years Ended December 31, 2005, 2004 and 2003                                                                |   | F-6    |   |
| Notes to Consolidated Financial Statements                                                                                                                           |   | F-7    |   |

 

F-1

----

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

**TheBoard 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 31,2005 and 2004, and the results of their operations and their cash flows foreach of the years in the three-year period ended December 31, 2005, inconformity with U.S. generally accepted accounting principles.

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 31,2005, 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 15, 2006 expressed an unqualifiedopinion on management’s assessment of, and the effective operation of, internalcontrol over financial reporting.

|                        | */s/*KPMG LLP | * * |
|------------------------|---------------|----------|
| Princeton, New  Jersey |          |
| March 15,  2006   |          |

 

F-2

----

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

| ** **                                                                                                                                                                                                                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                      |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                      |       |                        | $          | 3,403                       |       |   |   | $ | 79,321 |   |   |
| Securities available  for sale                                                                                                                                                                                                                  |       |                        | 752,973    |                        |       |   | 840,451 |   |   |
| Prepaid expenses                                                                                                                                                                                                                                |       |                        | 3,766      |                        |       |   | 4,054 |   |   |
| Amounts due from  corporate partners less allowances of $0 and $430 at December 31, 2005  and 2004, respectively                                                                                                                           |       |                        | 59,271     |                        |       |   | 69,753 |   |   |
| Inventories                                                                                                                                                                                                                                     |       |                        | 81,394     |                        |       |   | 40,618 |   |   |
| Other current  assets                                                                                                                                                                                                                           |       |                        | 8,311      |                        |       |   | 28,240 |   |   |
| Total current  assets                                                                                                                                                                                                                           |       |                        | 909,118    |                        |       |   | 1,062,437 |   |   |
| Property, plant  and equipment, net                                                                                                                                                                                                             |       |                        | 406,595    |                        |       |   | 339,293 |   |   |
| Patent costs, net                                                                                                                                                                                                                               |       |                        | 872        |                        |       |   | 1,321 |   |   |
| Deferred financing  costs, net                                                                                                                                                                                                                  |       |                        | 12,531     |                        |       |   | 16,244 |   |   |
| Note receivable,  less current portion                                                                                                                                                                                                          |       |                        | 8,313      |                        |       |   | 8,763 |   |   |
| Other assets                                                                                                                                                                                                                                    |       |                        | 5,986      |                        |       |   | 6,718 |   |   |
| Total assets                                                                                                                                                                                                                                    |       |                        | $          | 1,343,415                   |       |   |   | $ | 1,434,776 |   |   |
| **LIABILITES AND STOCKHOLDERS’  EQUITY**                                                                                                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                                                                                                                            |       |                        |       |                        |       |   |   |   |   |
| Accounts payable  (including $4,610 and $2,535 due Bristol-Myers Squibb Company (“BMS”) at  December 31, 2005 and 2004, respectively)                                                                                            |       |                        | $          | 35,530                      |       |   |   | $ | 38,492 |   |   |
| Accrued expenses  (including $11,427 and $3,187 due BMS at December 31,  2005 and 2004, respectively)                                                                                                                                      |       |                        | 60,934     |                        |       |   | 61,177 |   |   |
| Litigation settlement                                                                                                                                                                                                                           |       |                        | —     |                        |       |   | 75,900 |   |   |
| Withholding tax  liability                                                                                                                                                                                                                      |       |                        | 32,000     |                        |       |   | 18,096 |   |   |
| Current portion of  deferred revenue                                                                                                                                                                                                            |       |                        | 112,624    |                        |       |   | 108,994 |   |   |
| Other current  liabilities                                                                                                                                                                                                                      |       |                        | 1,031      |                        |       |   | 1,031 |   |   |
| Total current  liabilities                                                                                                                                                                                                                      |       |                        | 242,119    |                        |       |   | 303,690 |   |   |
| Deferred revenue,  less current portion                                                                                                                                                                                                         |       |                        | 246,401    |                        |       |   | 348,814 |   |   |
| Long-term debt                                                                                                                                                                                                                                  |       |                        | 600,000    |                        |       |   | 600,000 |   |   |
| Deferred rent,  less current portion                                                                                                                                                                                                            |       |                        | 2,491      |                        |       |   | 3,434 |   |   |
| Total liabilities                                                                                                                                                                                                                               |       |                        | 1,091,011  |                        |       |   | 1,255,938 |   |   |
| Commitments and contingencies                                                                                                                                                                                                                   |       |                        |       |                        |       |   |   |   |   |
| 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,  $.001 par value; authorized 200,000,000 shares; issued 84,412,408 and  83,250,146 at December 31, 2005 and 2004, respectively; outstanding  83,407,734 and 83,056,888 at December 31, 2005 and 2004, respectively |       |                        | 84         |                        |       |   | 83 |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                     |       |                        | 733,069    |                        |       |   | 712,819 |   |   |
| Accumulated  deficit                                                                                                                                                                                                                            |       |                        | (442,459   | )                           |       |   | (528,955 | ) |   |
| Treasury stock, at  cost; 1,004,674 and 193,258 shares at December 31, 2005 and 2004,  respectively                                                                                                                                        |       |                        | (29,149    | )                           |       |   | (4,300 | ) |   |
| Accumulated other  comprehensive loss:                                                                                                                                                                                                          |       |                        |       |                        |       |   |   |   |   |
| Net unrealized  loss on securities available for sale                                                                                                                                                                                           |       |                        | (9,141     | )                           |       |   | (809 | ) |   |
| Total  stockholders’ equity                                                                                                                                                                                                                |       |                        | 252,404    |                        |       |   | 178,838 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                                                |       |                        | $          | 1,343,415                   |       |   |   | $ | 1,434,776 |   |   |

 

See accompanying notes to consolidated financial statements.

F-3

----

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

| ** **                                              | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                              | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Revenues:                                               |       |                                       |       |   |   |   |   |
| Royalty revenue                                         |       | $                                          | 177,440    |   | $ | 106,274 |   | $ | 575 |   |
| License fees and milestone revenue                      |       | 97,239                                     |       | 129,386 |   | 47,970 |   |
| Manufacturing revenue                                   |       | 44,090                                     |       | 99,041 |   | — |   |
| Collaborative agreement revenue                         |       | 64,904                                     |       | 53,989 |   | 32,285 |   |
| Total revenues                                          |       | 383,673                                    |       | 388,690 |   | 80,830 |   |
| Operating  expenses:                                    |       |                                       |       |   |   |   |   |
| Research and development                                |       | 99,303                                     |       | 82,658 |   | 121,111 |   |
| Clinical and regulatory                                 |       | 50,136                                     |       | 30,254 |   | 30,154 |   |
| Marketing, general and administrative                   |       | 72,334                                     |       | 59,800 |   | 41,947 |   |
| Royalty expense                                         |       | 58,376                                     |       | 36,065 |   | — |   |
| Litigation  settlement                                  |       | —                                     |       | 55,363 |   | — |   |
| Cost of  manufacturing revenue                          |       | 16,367                                     |       | 1,099 |   | — |   |
| Discontinuation  of small molecule research program     |       | 6,200                                      |       | — |   | — |   |
| Withholding tax  expense (recovery)                     |       | 14,178                                     |       | (1,815 | ) | (3,384 | ) |
| Other, net                                              |       | —                                     |       | — |   | (147 | ) |
| Total operating expenses                                |       | 316,894                                    |       | 263,424 |   | 189,681 |   |
| Operating income (loss)                                 |       | 66,779                                     |       | 125,266 |   | (108,851 | ) |
| Other (income)  expense:                                |       |                                       |       |   |   |   |   |
| Interest income                                         |       | (27,877                                    | )          | (14,049 | ) | (4,121 | ) |
| Interest expense                                        |       | 6,569                                      |       | 8,432 |   | 8,881 |   |
| Loss (gain) on sale of securities, net                  |       | 13                                         |       | (131 | ) | (1,600 | ) |
| Other (income) expense                                  |       | (21,295                                    | )          | (5,748 | ) | 3,160 |   |
| Income (loss) before income taxes                       |       | 88,074                                     |       | 131,014 |   | (112,011 | ) |
| Provision for income taxes                              |       | 1,578                                      |       | 17,361 |   | 491 |   |
| Net income (loss)                                       |       | $                                          | 86,496     |   | $ | 113,653 |   | $ | (112,502 | ) |
| Income (loss) per  common share:                        |       |                                       |       |   |   |   |   |
| Basic                                                   |       | $                                          | 1.03       |   | $ | 1.43 |   | $ | (1.52 | ) |
| Diluted                                                 |       | $                                          | 1.01       |   | $ | 1.33 |   | $ | (1.52 | ) |
| Shares used in  calculation of income (loss) per share: |       |                                       |       |   |   |   |   |
| Basic                                                   |       | 83,582                                     |       | 79,500 |   | 74,250 |   |
| Diluted                                                 |       | 92,183                                     |       | 91,193 |   | 74,250 |   |

 

See accompanying notes to consolidated financial statements

F-4

----

**IMCLONE SYSTEMSINCORPORATED**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)**

**AND COMPREHENSIVE INCOME(LOSS)**

**Years EndedDecember 31, 2005, 2004 and 2003**

**(in thousands, exceptshare data)**

| ** **                                                                    | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive  Income** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                                                    | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **Deficit**                                   | ** ** | **Stock**  | ** ** | **(Loss)** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2002                                            |       |                     | —     |                  |       |                    | $          | —          |       |         | 73,839,536 |                                          |       | $          | 74         |   |   |   | $ | 346,952 |   |   |   | $ | (530,106 | ) |   |   | $ | (4,100 | ) |   |   | $ | 1,551 |   |   | $ | (185,629 | ) |
| Options exercised                                                             |       |                     |       |                  |       |                    |       |            |       | 633,078      |       |                                          | —     |       |       |   | 7,151 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 7,151 |   |
| Issuance of shares  through employee stock purchase   plan                    |       |                     |       |                  |       |                    |       |            |       | 28,606       |       |                                          | —     |       |       |   | 685 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 685 |   |
| Compensation  related to options granted to non-employees                |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   | 851 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 851 |   |
| Issuance of shares  to Merck KGaA                                             |       |                     |       |                  |       |                    |       |            |       | 794,897      |       |                                          | 1          |       |       |   | 19,999 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 20,000 |   |
| Repayment of note  from former officer                                        |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   | 93 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 93 |   |
| Comprehensive loss:                                                           |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                      |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   | (112,502 | ) |   |   |   |   |   |   |   |   |   | (112,502 | ) |
| Other comprehensive loss:                                                     |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on  marketable securities arising during the period |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 358 |   |   | 358 |   |
| Less:  Reclassification adjustment for realized gain included in net income   |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 1,600 |   |   | 1,600 |   |
| Total other  comprehensive loss                                               |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (1,242 | ) |   | (1,242 | ) |
| Comprehensive loss                                                            |       |                     |       |                  |       |                    |       |            |       |         |       |                                          |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (113,744 | ) |
| 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 modifications 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 |   |

 

See accompanying notes to consolidated financial statements

F-5

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**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTSOF CASH FLOWS(in thousands)**

| ** **                                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                                |       |                                       |       |   |   |   |   |
| Net income (loss)                                                                                    |       | $                                          | 86,496     |   | $ | 113,653 |   | $ | (112,502 | ) |
| Adjustments to reconcile net income (loss) to net  cash (used in)  provided by operating activities: |       |                                       |       |   |   |   |   |
| Depreciation and  amortization                                                                       |       | 13,227                                     |       | 13,062 |   | 11,478 |   |
| Amortization of deferred  financing costs                                                            |       | 3,713                                      |       | 3,107 |   | 1,709 |   |
| Expense associated with  stock options                                                               |       | —                                     |       | 4,448 |   | 851 |   |
| Realized tax benefit from  stock options                                                             |       | 1,675                                      |       | 9,982 |   | — |   |
| Loss on disposal of fixed  assets                                                                    |       | 3,668                                      |       | 1 |   | 30 |   |
| Recovery of withholding  tax asset                                                                   |       | —                                     |       | (1,815 | ) | (3,384 | ) |
| Loss (gain) on securities  available for sale, net                                                   |       | 13                                         |       | (131 | ) | (1,600 | ) |
| Other                                                                                                |       | 438                                        |       | — |   | (783 | ) |
| Changes in:                                                                                          |       |                                       |       |   |   |   |   |
| Prepaid expenses                                                                                     |       | 288                                        |       | (426 | ) | (509 | ) |
| Amounts due from  corporate partners                                                                 |       | 10,482                                     |       | (60,774 | ) | 3,384 |   |
| Inventories                                                                                          |       | (40,776                                    | )          | (40,618 | ) | — |   |
| Other current assets                                                                                 |       | 19,929                                     |       | (24,625 | ) | 18,920 |   |
| Other assets                                                                                         |       | 1,182                                      |       | (5,824 | ) | 352 |   |
| Accounts payable                                                                                     |       | (2,962                                     | )          | 9,770 |   | 5,005 |   |
| Other current liabilities                                                                            |       | —                                     |       | (3,369 | ) | (42 | ) |
| Accrued expenses                                                                                     |       | (243                                       | )          | 43,320 |   | (17,600 | ) |
| Withholding tax liability                                                                            |       | 13,904                                     |       | (1,076 | ) | (14,440 | ) |
| Litigation settlement                                                                                |       | (75,900                                    | )          | 75,900 |   | — |   |
| Deferred rent, less  current portion                                                                 |       | (943                                       | )          | 496 |   | 1,018 |   |
| Deferred revenue                                                                                     |       | (98,783                                    | )          | 120,576 |   | 14,728 |   |
| Net cash (used in)  provided by operating activities                                                 |       | (64,592                                    | )          | 255,657 |   | (93,385 | ) |
| Cash flows from investing activities:                                                                |       |                                       |       |   |   |   |   |
| Acquisitions of property,  plant and equipment                                                       |       | (84,263                                    | )          | (106,286 | ) | (73,693 | ) |
| Purchases of securities  available for sale                                                          |       | (574,072                                   | )          | (3,457,174 | ) | (198,691 | ) |
| Proceeds from sale of  securities available for sale                                                 |       | 575,598                                    |       | 1,967,058 |   | 206,834 |   |
| Proceeds from maturities  of securities available for sale                                           |       | 77,607                                     |       | 724,161 |   | 103,366 |   |
| Other                                                                                                |       | 77                                         |       | (8 | ) | (236 | ) |
| Net cash (used in)  provided by investing activities                                                 |       | (5,053                                     | )          | (872,249 | ) | 37,580 |   |
| Cash flows from financing activities:                                                                |       |                                       |       |   |   |   |   |
| Proceeds from exercise of  stock options                                                             |       | 17,644                                     |       | 77,860 |   | 7,151 |   |
| Proceeds from issuance of  common stock under the employee stock purchase plan                       |       | 932                                        |       | 802 |   | 685 |   |
| 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 |   | 20,000 |   |
| Other                                                                                                |       | —                                     |       | (55 | ) | (2,186 | ) |
| Net cash (used in)  provided by financing activities                                                 |       | (6,273                                     | )          | 665,048 |   | 25,650 |   |
| Net (decrease) increase  in cash and cash equivalents                                                |       | (75,918                                    | )          | 48,456 |   | (30,155 | ) |
| Cash and cash  equivalents at beginning of period                                                    |       | 79,321                                     |       | 30,865 |   | 61,020 |   |
| Cash and cash equivalents  at end of period                                                          |       | $                                          | 3,403      |   | $ | 79,321 |   | $ | 30,865 |   |

 

See accompanying notes to consolidated financial statements.

F-6

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**IMCLONE SYSTEMS INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(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 January 24, 2006, the Company announced thatthe Board of Directors had engaged the investment bank Lazard to conduct, inconjunction with management, a full review of the Company’s strategicalternatives to maximize shareholder value. These alternatives could include amerger, sale or strategic alliance. The Company is proceeding in consultationwith its existing partners as the process moves forward. There can be noassurances, however, that any particular strategic alternative will be pursuedor that any transaction will occur, or on what terms.

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 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 incombination with irinotecan for the treatment of patients with EGFR-expressingmetastatic colorectal cancer after failure of irinotecan including cytotoxictherapy. On December 22, 2005, Swissmedic approved ERBITUX in Switzerlandin combination with radiation in the treatment of patients with previouslyuntreated, advanced squamous cell carcinoma of the head and neck.

The Company believes that its existing cash and cashequivalents and marketable securities and its cash provided from operatingactivities will provide it with sufficient liquidity to support the Company’soperations at least through the first quarter of 2007. The Company is alsoentitled to reimbursement for 

F-7

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

certain marketing andresearch and development expenditures and certain other payments, some of whichare payable contingent upon the achievement of research and development orregulatory milestones. There can be no assurance that the Company will achievethese milestones.

The Company reliesentirely on a third party manufacturer 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**

***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.

***Cash Equivalents***

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

***Investments in Securities***

The Company classifies itsinvestments in debt and marketable equity securities as available-for-sale. TheCompany invests primarily in asset-backed securities, government agencies andcorporate 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 our portfolio is belowits carrying value, we evaluate whether we have the intent and ability toretain our investment for a period of time sufficient to allow for recovery inthe market value of the investment. In making a determination of whether animpairment is other-than-temporary we consider a number of factors, includingthe liquidity position and credit worthiness of the issuer of such securities. Adecline in the market value of any available-for-sale security below cost thatis deemed to be other than temporary results in a reduction in carrying amountto fair value. The impairment is charged to “other (income) expense” and a newcost basis for the security is established. Dividend and interest income arerecognized when earned.

***Inventories***

Inventories are stated atthe lower of cost or market. Cost is determined on the first-in-first-out(FIFO) basis. Our policy is to capitalize inventory costs associated with ourproducts when, based on management’s judgment, future economic benefit isexpected to be realized. Our accounting policy addresses the attributes thatshould be considered in evaluating whether the costs to manufacture a producthave met the definition of an asset as stipulated in FASB Concepts Statement No. 6.If applicable, we assess the regulatory and approval process including anyknown constraints and impediments to 

F-8

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

approval.We also consider the shelf life of the product in relation to the expectedtimeline for approval. We review our inventory for excess or obsolete inventoryand write down obsolete or otherwise unmarketable inventory to its estimatednet realizable value.

***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 years; machinery andequipment 3 to 8 years; furniture and fixtures 8 years.

Patent and patent application costs that have beencapitalized are amortized on a straight-line basis over their respectiveexpected useful lives, up to a 15-year period. Gross patent costs were$2,080,000 and $2,625,000 at December 31, 2005 and 2004, respectively.Accumulated amortization was $1,208,000 and $1,304,000 at December 31,2005 and 2004, respectively. Amortization expense was $161,000, $169,000 and$182,000 for the three years ended December 31, 2005, 2004 and 2003,respectively. Amortization expense is estimated to be approximately $108,000for each of the next five years. For the years ended December 31, 2005,2004 and 2003 the Company had net patent write-offs of $288,000, $0, and$154,000, respectively reflected in Marketing, general and administrativeexpenses on the Consolidated Statement 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.

***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 $1,193,000 were reclassified to stockholders’ equity.

***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 Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables” (“EITF 00-21”). Non-refundable fees received uponentering into license and other collaborative agreements where the Company hascontinuing involvement are recorded as deferred revenue and recognized over theestimated service period. Payments received under the Commercial Agreement arebeing deferred and recognized as revenue based on the percentage of actualproduct research and development costs incurred to date by 

F-9

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

both BMS and the Companyto the estimated total of such costs to be incurred over the term of theagreement. Non-refundable milestone payments, which represent the achievementof a significant 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.

Pursuant to the guidance in Emerging Issues Task Force(“EITF”) Issue No. 99-19, “Reporting Revenue Gross as a Principalversus Net as an Agent,” and No. 01-14, Income StatementCharacterization of Reimbursements Received for “Out-of-Pocket” ExpensesIncurred, the Company characterizes reimbursements received for research anddevelopment, clinical and regulatory, royalty expense and marketing andadministrative expenses incurred as collaborative agreement revenue in theConsolidated Statements of Operations. In analyzing whether to categorizereimbursed expenses from our corporate partners as a) the gross amount billedor b) the net amount retained, the Company has analyzed the relevant facts andcircumstances related to these expenses and considered the factors, asspecified in the EITF Issues noted above. These expenses, which are associatedwith ERBITUX, are broader than would ordinarily result in our central ongoingoperations. These expenses have been incurred as a result of entering into thecollaborative agreements that the Company has in place with its partners. Inassessing whether revenue should be reported gross or net, the Companyconsidered various factors, among them: (1) the Company is the primaryobligor 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 (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 and 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.

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 Statement of Cash Flows as operatingactivities.

F-10

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

***Foreign Currency Transactions***

Gains and losses from foreigncurrency 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 $26,000 and$26,000 for the years ended December 31, 2004 and 2003, respectively.Gains and losses from foreign currency transactions are included as a componentof operating expenses.

***Stock-Based Compensation Plans***

The Company has two types of stock-based compensationplans: stock option plans and a stock purchase plan. The Company accounts forits stock-based compensation plans in accordance with the provisions of APB No. 25,and related interpretations including Statement of Financial AccountingStandards Board Interpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation—An Interpretation of APB Opinion No. 25”.Accordingly, compensation expense would be recorded on the date of grant of anoption to an employee or member of the Board of Directors only if the marketprice of the underlying stock on the date of grant exceeds the exercise price.During the three years ended December 31, 2005, the exercise price of theCompany’s original stock option grants was the closing market price of itsstock on the date of grant.

Thefair value of stock options was estimated using the Black-Scholesoption-pricing model. The Black-Scholes model considers a number of variables,including the exercise price and the expected life of the option, the currentprice of the common stock, the expected volatility and the dividend yield ofthe underlying common stock, and the risk-free interest rate during theexpected term of the option. The following table summarizes the weighted averageassumptions used:

| ** **               | ** ** | **Year Ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Expected life  (years)   |       | 4.49                                       |       | 4.47 |   | 4.00 |   |
| Risk free  interest rate |       | 3.62                                       | %          | 2.63 | % | 2.28 | % |
| Volatility factor        |       | 82.92                                      | %          | 85.42 | % | 87.18 | % |
| Dividend yield           |       | 0                                          | %          | 0 | % | 0 | % |

 

Changes in assumptions used could have a materialeffect upon the pro-forma results.

The following table illustrates the effect on netincome (loss) and net income (loss) per share if the compensation cost for theCompany’s stock option grants had been determined based on the fair value atthe grant dates for awards consistent with the fair value method of Statementof Financial Accounting Standards No. 123 “Accounting for Stock-BasedCompensation (“SFAS 123”). The stock-based employee compensation expensedetermined under the fair value based method was calculated using the gradedvesting attribution approach.

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

| ** **                                                                                                       | ** ** | **Year Ended December 31,**                            | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                                              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income  (loss), as reported                                                                                  |       | $                                                                     | 86,496     |   | $ | 113,653 |   | $ | (112,502 | ) |
| Add: Stock-based  employee compensation expense included in net income (loss), tax effected                      |       | —                                                                |       | 1,759 |   | 128 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value based  method, tax effected |       | (89,365                                                               | )          | (46,283 | ) | (39,055 | ) |
| Pro forma net income (loss)                                                                                      |       | $                                                                     | (2,869     | ) | $ | 69,129 |   | $ | (151,429 | ) |
| Net income (loss) per  common share:                                                                             |       |                                                                  |       |   |   |   |   |
| Basic, as reported                                                                                               |       | $                                                                     | 1.03       |   | $ | 1.43 |   | $ | (1.52 | ) |
| Basic, pro forma                                                                                                 |       | $                                                                     | (0.03      | ) | $ | 0.87 |   | $ | (2.04 | ) |
| Diluted, as  reported                                                                                            |       | $                                                                     | 1.01       |   | $ | 1.33 |   | $ | (1.52 | ) |
| Diluted, pro forma                                                                                               |       | $                                                                     | (0.03      | ) | $ | 0.85 |   | $ | (2.04 | ) |

 

For the years ended 2005,2004, and 2003 there were approximately 19,552,000, 3,487,000 and 19,231,000,respectively, of potential common shares excluded from the pro forma dilutedincome per share computation because their inclusion would have had ananti-dilutive effect. The potential common shares excluded from the computationconsist of anti-dilutive stock options for all periods and shares related tothe 13¤8%convertible notes and 51¤2%convertible notes for the years ended December 31, 2005 and December 31,2003, respectively. The pro forma effect on the net income (loss) for the yearsended December 31, 2005, 2004 and 2003 is not necessarily indicative ofthe pro forma effect on future years’ operating results. Pro-forma stock basedcompensation expense in 2005 includes expenses associated with the acceleratedvesting of options in the fourth quarter of 2005. See Note 11 for furtherdetails.

***Research and Development and Clinical and Regulatory***

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 facility. Prior to the receipt of approval of ERBITUX for commercial saleon February 12, 2004, the Company had expensed all costs associated withthe production of ERBITUX to research and development expense. 

***Interest***

Interest costs areexpensed as incurred, except to the extent such interest is related toconstruction in progress, in which case interest is capitalized. Interest costscapitalized for the years ended December 31, 2005, 2004 and 2003 were$5,394,000, $6,087,000, and $6,059,000, respectively. Interest expense includesthe amortization of deferred financing costs associated with the Company’s 13¤8% convertible senior notes, and the 51¤2% convertible subordinated notes until their redemption in June 2004. 

***Income Taxes***

Income taxes are accountedfor under the asset and liability method. Deferred tax assets and liabilitiesare recognized for the future tax consequences attributable to differencesbetween the financial statement 

F-12

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

carryingamounts of existing assets and liabilities and their respective tax bases andoperating loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect of a change in tax rates on deferred taxassets and liabilities is recognized in income or expense in the period thatincludes the enactment date of the rate change.

***Use of Estimates***

Management of the Companyhas made a number of estimates and assumptions relating to the reporting of assetsand liabilities and related revenue and expense accounts and the disclosure ofcontingent assets and liabilities to prepare these consolidated financialstatements in conformity with U.S. generally accepted accounting principles.Actual results could differ materially from those estimates.

***Income (Loss) Per Common Share***

Basic income (loss) percommon share is computed by dividing net income (loss) by the weighted-averagenumber of common shares outstanding during the period. Diluted income (loss)per common share is computed by dividing net income (loss) by theweighted-average number of common shares outstanding during the periodincreased to include all additional common shares that would have beenoutstanding assuming potentially dilutive common shares had been issued 1) onthe exercise of stock options and any proceeds thereof used to repurchasecommon stock at the average market price during the period and 2) on conversionof convertible debt. In addition, in computing the dilutive effect of convertibledebt, the numerator is adjusted to add back the after-tax amount of interestrecognized in the period. 

***Comprehensive Income (Loss)***

Comprehensive income(loss) consists of net income (loss) and net unrealized gains (losses) onsecurities and is presented in the Consolidated Statements of Stockholders’Equity (Deficit). The tax benefit on the items included in Other comprehensiveincome (loss), assuming they were recognized in income, would be approximately$108,000, $148,000 and $5,000 for the years ended December 31, 2005, 2004and 2003, respectively.

***Reclassification***

Certain amounts previouslyreported have been reclassified to conform to the current year’s presentation. 

***Impact of Recent Accounting Pronouncements***

In 2004, the Financial Accounting Standards Board(FASB) issued FASB Statement No. 151*, Inventory Costs*,an amendment of ARB No. 43. This Statement amends the guidance in ARB No. 43,Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amountsof idle facility expense, freight, handling costs, and wasted material(spoilage). The provisions of this Statement are effective for inventory costsincurred during fiscal years beginning after June 15, 2005. We will adoptthis Statement on January 1, 2006 and we expect that the initial adoptionwill not have a material effect on the Company’s consolidated financialstatements. However, as we finalize the commissioning and validation of ourBB50 manufacturing facility and we begin production in the second half of 2006,the adoption of this Statement may have an impact on the Company’s consolidatedfinancial statements.

F-13

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

In 2004, the FASB issuedStatement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”). ThisStatement requires that the cost resulting from all share-based payment transactionsbe recognized in the financial statements and establishes fair value as themeasurement objective in accounting for all share-based payment arrangements.We will adopt SFAS 123R using the modified prospective basis on January 1,2006. The adoption of this Statement is expected to result in compensationexpense of approximately $9.1 million in 2006 (unaudited). Our estimate offuture stock-based compensation expense is affected by our stock price, thenumber of stock-based awards that may be granted in 2006, fluctuation in ourvaluation assumptions and the related tax effect. Based on our currentcalculations, we expect to have a pool of windfall tax benefits in 2006.

**(3)**   SecuritiesAvailable for Sale

Thesecurities available for sale by major security type at December 31, 2005and 2004 were as follows: (in thousands)

| **December 31,  2005:**         | ** ** | ** ** | ** ** | **Amortized Cost** | ** ** | **Gross  Unrealized  Holding Gains** | ** ** | **Gross  Unrealized  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 |   |

 

| **December 31, 2004:** | ** ** | ** ** | ** ** | **Amortized Cost** | ** ** | **Gross  Unrealized  Holding Gains** | ** ** | **Gross  Unrealized  Holding Losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------|------------|------------|------------|-------------------------|------------|-------------------------------------------|------------|--------------------------------------------|------------|---------------------|------------|
| Asset-backed  securities         |       |       | $          | 534,355                 |       |                                      |       | $                                          | 196        |                |       |   | $ | (1,251 | ) |   | $ | 533,300 |   |
| U.S. corporate  debt             |       |       | 55,271     |                    |       |                                      | 194        |                                       |       |                | (7         | ) |   | 55,458 |   |
| Foreign corporate  debt          |       |       | 13,614     |                    |       |                                      | 47         |                                       |       |                | (7         | ) |   | 13,654 |   |
| Auction rate  securities         |       |       | 238,020    |                    |       |                                      | 19         |                                       |       |                | —     |   |   | 238,039 |   |
|                             |       |       | $          | 841,260                 |       |                                      |       | $                                          | 456        |                |       |   | $ | (1,265 | ) |   | $ | 840,451 |   |

 

Unrealizedloss positions for which other-than-temporary impairments have not beenrecognized at December 31, 2005 and 2004, is summarized below (in thousands):

| ** **                       | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**              | ** ** |
|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|
| **December 31, 2005:** | ** ** | ** **                             | ** ** | **Fair  Value**                         | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  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 | ) |   |
|                                  |            |                                        |            |                                         |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-14

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

 

| ** **                       | ** ** | **Less Than 12 Months** | ** ** | **12 Months or Greater** | ** ** | **Total**              | ** ** |
|----------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|------------------------|------------|
| **December 31, 2004:** | ** ** | ** **                             | ** ** | **Fair  Value**                         | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** | **Fair  Value** | ** ** | **Unrealized  Losses** | ** ** |
| Asset-backed  securities         |       | $                                      | 378,840    |                                    |       | $                      | (1,251     | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 378,840 |   |   | $ | (1,251 | ) |   |
| U.S. corporate  debt             |       | 12,995                                 |       |                                    | (7         | )                      |       |   | — |   |   |   | — |   |   | 12,995 |   |   | (7 | ) |   |
| Foreign corporate  debt          |       | 3,659                                  |       |                                    | (7         | )                      |       |   | — |   |   |   | — |   |   | 3,659 |   |   | (7 | ) |   |
| Total                            |       | $                                      | 395,494    |                                    |       | $                      | (1,265     | ) |   |   | $ | — |   |   |   | $ | — |   |   | $ | 395,494 |   |   | $ | (1,265 | ) |   |
|                                  |            |                                        |            |                                         |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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 we have the ability and intent to hold these investments untilrecovery of fair value, which may be maturity, we do not consider theseinvestments to be other-than-temporarily impaired as of December 31, 2005.

Maturitiesof debt securities classified as available for sale were as follows at December 31,2005: (in thousands)

| ** **           | ** ** | **Amortized  Cost** | ** ** | **Fair  Value** | ** ** |
|----------------------|------------|---------------------|------------|-----------------|------------|
| 2006                 |       | $                   | 155,000    |            | $          | 153,130 |   |
| 2007                 |       | 212,400             |       | 208,506         |       |
| 2008                 |       | 101,803             |       | 99,790          |       |
| 2009                 |       | 55,000              |       | 54,076          |       |
| 2010                 |       | 30,000              |       | 29,565          |       |
| 2011 and  thereafter |       | 207,911             |       | 207,906         |       |
|                 |       | $                   | 762,114    |            | $          | 752,973 |   |

 

Gross realized gainsincluded in income in the years ended December 31, 2005, 2004 and 2003were $3,000, $142,000 and $1,612,000, respectively, and gross realized lossesincluded in income in the years ended December 31, 2005, 2004 and 2003were $16,000, $11,000 and $12,000, respectively**.** These gains and losses were determined on a specificidentification basis. Interest on certain securities is adjusted monthly,quarterly or semi-annually, depending on the instrument, using prevailinginterest rates. These holdings are highly liquid and we consider the potentialfor loss of principal to be minimal. All holdings are denominated in U.S.currency.

**(4)**   Inventories

Inventoriesconsist of the following: (in thousands)

| ** **                  | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                  | ** ** | **2005**              | ** ** | **2004**              | ** ** |
| Raw materials and  supplies |       |                  | $          | 22,664                |       |   |   | $ | 9,536 |   |   |
| Work in process             |       |                  | 49,149     |                  |       |   | 30,082 |   |   |
| Finished goods              |       |                  | 9,581      |                  |       |   | 1,000 |   |   |
| Total                       |       |                  | $          | 81,394                |       |   |   | $ | 40,618 |   |   |

 

 

F-15

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

Prior to receipt ofapproval of ERBITUX for commercial sale on February 12, 2004, the Companyhad expensed all costs associated with the production of ERBITUX to researchand development expense. Effective February 13, 2004, the Company began tocapitalize the cost of manufacturing ERBITUX as inventories, including the costto label, package and ship previously manufactured bulk inventory whose costshad already been expensed as research and development. In 2005, we continued tosell inventory that was previously expensed as well as inventory that waspartially expensed, since there was inventory in process on the date that wereceived FDA approval of ERBITUX. In the fourth quarter of 2005 we soldsubstantitally all the inventory with partial costs and in 2006, our cost ofmanufacturing revenue will reflect full absorption costs of production.

**(5)**   Property, Plant andEquipment

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

| ** **                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Land                                            |       |                        | $          | 4,899                       |       |   |   | $ | 4,899 |   |   |
| Building                                        |       |                        | 67,597     |                        |       |   | 67,083 |   |   |
| Leasehold improvements                          |       |                        | 13,969     |                        |       |   | 15,518 |   |   |
| Machinery and equipment                         |       |                        | 62,806     |                        |       |   | 55,430 |   |   |
| Furniture and fixtures                          |       |                        | 4,596      |                        |       |   | 4,265 |   |   |
| Construction in progress                        |       |                        | 318,446    |                        |       |   | 248,736 |   |   |
| Total cost                                      |       |                        | 472,313    |                        |       |   | 395,931 |   |   |
| Less accumulated  depreciation and amortization |       |                        | (65,718    | )                           |       |   | (56,638 | ) |   |
| Property, plant and equipment, net              |       |                        | $          | 406,595                     |       |   |   | $ | 339,293 |   |   |

 

The Company constructed a 250,000 square foot multipleproduct manufacturing facility (“BB50”) in Branchburg, New Jersey with capacityof up to 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. Currently,we have fitted and are validating and commissioning Suite 1 and we plan tofully dedicate this Suite to the production of ERBITUX. We estimate tocomplete the validation and commissioning of Suite 1 by the end of thesecond quarter of 2006, and begin production of ERBITUX for commercial use inthe second half of 2006. We have fitted Suite 2 with equipment but havenot determined when we will begin commissioning and validation of this Suite. Atthis point, Suite 3 remains vacant until further determination of itsultimate use. Management estimates that this facility will cost approximately$300,000,000, including approximately $38 million of costs related to thecommissioning and validation of Suite 1. This estimate may changedepending on various factors, particularly costs estimated to be incurred forexternal contractors assisting us in the validation and commissioning of Suite 1.This estimate does not include costs associated with the eventual commissioningand validation of Suite 2 or the fitting, commissioning and validation of Suite 3.In addition, we will also spend approximately $10 million in laboratoryequipment and incur approximately $24 million of capitalized interest that isnot included in the total estimated cost described above. We have incurredapproximately $289,258,000 in conceptual design, engineering, pre-constructionand construction costs, excluding capitalized interest of approximately$20,135,000, through December 31, 2005. As of December 31, 2005,committed purchase orders totaling approximately $197,198,000 have been placedwith subcontractors for equipment related to this project and $72,867,000 forengineering, procurement, construction management 

F-16

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

and validation costs.Through December 31, 2005, $260,378,000 has been paid relating to thesecommitted purchase orders. All outstanding committed purchase orders as of December 31,2005 require payment in 2006.

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)**   Accrued Expenses

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

| ** **                                  | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Salaries and employee  benefits             |       |                        | $          | 18,976                      |       |   |   | $ | 12,119 |   |   |
| Research and development  contract services |       |                        | 20,540     |                        |       |   | 5,721 |   |   |
| License fee and royalty  expense            |       |                        | 16,397     |                        |       |   | 34,603 |   |   |
| Other                                       |       |                        | 5,021      |                        |       |   | 8,734 |   |   |
|                                        |       |                        | $          | 60,934                      |       |   |   | $ | 61,177 |   |   |

 

**(7)**   WithholdingTax Assets and Liability

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 $4,500,000 to settle the matter. The Company believes that substantiallyall of 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, Harlan W. Waksal, and the Company’s formerdirector and Chairman of the Board, Robert F. Goldhammer. Again, the Companypromptly informed the IRS, the SEC and the United States Attorney’s Office ofthis issue. The Company also informed New York State of this issue. On June 17,2003, New York State notified the Company that based on this issue, they werecontinuing a previously conducted audit and were evaluating the terms of theclosing agreement to determine whether it should be re-opened.

F-17

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

On March 31, 2004, the Company entered into a newclosing agreement pursuant to which the Company paid New York State anadditional $1,000,000 in full satisfaction of all the deficiencies anddeterminations of withholding taxes for the years 1999-2001. Therefore,the Company has eliminated the liability of $2,815,000, which was accrued as ofDecember 31, 2003, primarily attributable to New York State withholdingtaxes on stock options and warrants exercised by Dr. Samuel D. Waksal andhas recognized a benefit of $1,815,000 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 the IRS in 2003, the IRS commencedaudits of the Company’s income tax and employment tax returns for the years 1999-2001.The Company has cooperated in full with this audit and has responded to allrequests for information and documents received from the IRS. On February 8,2006, the Company received a draft of the IRS’s report of its preliminaryfindings with respect to the employment tax audit. The draft report indicatedthat the IRS, in addition to imposing liability on the Company for taxes notwithheld, intended to assert penalties with respect to both the failure towithhold on non-qualified stock options and the failure to report and withholdon the warrants 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 expects to make a total payment ofapproximately $32,000,000 to the IRS. The Company had previously recorded awithholding tax liability of $18,096,000 and a withholding tax asset of$274,000 in its consolidated Balance Sheet as of December 31, 2005 and2004. Based on the agreement in principle reached with the IRS, the Company haseliminated the withholding tax asset of $274,000 and has recorded an additionalwithholding tax liability of $13,904,000 in its consolidated Balance Sheet asof December 31, 2005. As a result, the Company has recorded in the fourthquarter of 2005 a net withholding tax expense of $14,178,000.

The Company has recognizedassets at the time of exercise relating to certain individuals based on thefact that individuals are required by law to pay their personal income taxes,which relieves the Company of its liability for such withholding taxes. In2003, the Company recognized the recovery of the previous write-down of thewithholding tax asset and the elimination of the withholding tax liability of$3,384,000 attributable to the exercise of warrants by the Company’s formerGeneral Counsel, John B. Landes, because Mr. Landes has represented to theCompany that he has paid the taxes associated with this liability.

**(8)**   Long-Term Debt

The Company’s long termdebt was $600,000,000 at December 31, 2005 and 2004.

In May 2004, the Company completed a privateplacement of $600,000,000 in convertible senior notes due 2024. The notes bearinterest 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 ofapproximately $94.69 per share, subject to adjustment, before 

F-18

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

the close of business onthe business day immediately prior to May 15, 2024, subject to priorredemption or repurchase of the notes, only under the following circumstances: (1) onor prior 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 certain designatedevents, holders may require the Company to repurchase the notes at a repurchaseprice equal to 100% of the principal amount of the notes plus accrued andunpaid interest.. The notes are unsubordinated unsecured debt and will rank ona parity with all of the Company’s other existing and future unsubordinatedunsecured debt and prior to all of the Company’s existing and futuresubordinated debt. Deferred financing costs of approximately $18,600,000associated with the issuance of this debt are being amortized over five years.

In June 2004, theCompany redeemed all of the outstanding 51¤2 % convertiblesubordinated notes due 2005. All of the outstanding notes which amounted to$239,986,000 were converted, by June 17, 2004, into 4,356,000 shares ofthe Company’s common stock. At the time of redemption there was $1,193,000 ofunamortized deferred financing cost which was recorded against additionalpaid-in capital.

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

**(9)**   Income (Loss) PerCommon Share

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

| ** **                                                                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| EPS Numerator—Basic:                                                  |       |                                       |       |   |   |   |   |
| Net income (loss)                                                          |       | $                                          | 86,496     |   | $ | 113,653 |   | $ | (112,502 | ) |
| EPS Denominator—Basic:                                                |       |                                       |       |   |   |   |   |
| Weighted-average  number of shares of common stock outstanding             |       | 83,582                                     |       | 79,500 |   | 74,250 |   |
| EPS Numerator—Diluted:                                                |       |                                       |       |   |   |   |   |
| Net income (loss)                                                          |       | $                                          | 86,496     |   | $ | 113,653 |   | $ | (112,502 | ) |
| Adjustment for interest,  net of amounts capitalized and income tax effect |       | 6,484                                      |       | 7,315 |   | — |   |
| Net income (loss),  adjusted                                               |       | $                                          | 92,980     |   | $ | 120,968 |   | $ | (112,502 | ) |
| EPS Denominator—Diluted:                                              |       |                                       |       |   |   |   |   |
| Weighted-average  number of shares of common stock outstanding             |       | 83,582                                     |       | 79,500 |   | 74,250 |   |
| Effect of dilutive  securities:                                            |       |                                       |       |   |   |   |   |
| Stock options                                                              |       | 2,265                                      |       | 5,589 |   | — |   |
| Convertible subordinated  notes                                            |       | 6,336                                      |       | 6,104 |   | — |   |
| Dilutive potential  common shares                                          |       | 8,601                                      |       | 11,693 |   | — |   |
| Weighted-average  common shares and dilutive potential common shares       |       | 92,183                                     |       | 91,193 |   | 74,250 |   |
| Basic income (loss) per  share                                             |       | $                                          | 1.03       |   | $ | 1.43 |   | $ | (1.52 | ) |
| Diluted income (loss)  per share                                           |       | $                                          | 1.01       |   | $ | 1.33 |   | $ | (1.52 | ) |

 

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

For the year ended December 31, 2004, potentiallydiluted common shares applicable to the 51¤2% convertiblenotes that were converted during 2004 have been weighted and included for theperiod the convertible securities were outstanding prior to conversion. Thedilutive 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.

Potentially dilutivecommon shares are not included in the diluted loss per share computation forthe year ended December 31, 2003, since the Company recognized a net lossfor this period and including potentially dilutive common shares in the dilutedloss per share computation when there is a net loss will result in ananti-dilutive per share amount. For the years ended December 31, 2005,2004, and 2003, there were an aggregate of 8,277,000, 2,333,000 and 19,231,000,respectively, potential common shares, excluded from the diluted loss per sharecomputation because their inclusion would have had an anti-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:

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

·       wegranted Merck KGaA a license, without the right to sublicense, to use, sell, orhave sold, but not to make, BEC2 within North America in conjunction withImClone Systems;

·       weretained the rights, (1) without the right to sublicense, to make, havemade, use, sell, or have sold BEC2 in North America in conjunction with MerckKGaA and (2) with the right to sublicense, to make, have made, use, sell,or

·       havesold gp75 antigen in North America;

·       wewere required to give Merck KGaA the opportunity to negotiate a license inNorth America to gp75 antigen before granting such a license to any thirdparty.

In return, MerckKGaA:

·       maderesearch support payments to us totaling $4,700,000;

·       wasrequired to make milestone payments to us of up to $22,500,000, of which$5,000,000 was received through December 31, 2005 based on milestones achievedin 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 

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

contract. The Companyincurred expenses of approximately $19,000, $333,000 and $765,000 for the yearsended December 31, 2005, 2004 and 2003, respectively, related to thiscontract.

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 has received $30,000,000 through December 31, 2005 in up-frontcash fees and early cash payments based on the achievement of defined milestones.An additional $30,000,000 has been received through December 31, 2005based upon the achievement of further milestones for which Merck KGaA receivedequity in the Company. All amounts received in 2004 and 2003 were recorded asequity transactions.

The chart below detailsthe equity milestone payments received from Merck KGaA during the three yearsended December 31, 2005:

| **Date**           | ** ** | ** ** | ** ** | **Amount of Milestone** | ** ** | **Number of common  shares issued to  Merck KGaA** | ** ** | **Price per share** | ** ** |
|--------------------|------------|------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------|------------|
| May 2003      |       |       | $          | 6,000,000                         |       |                                                                        |       | 334,471                       |       |   |   | $ | 17.94 |   |   |
| June 2003     |       |       | $          | 3,000,000                         |       |                                                                        |       | 150,007                       |       |   |   | $ | 20.00 |   |   |
| July 2003     |       |       | $          | 3,000,000                         |       |                                                                        |       | 92,276                        |       |   |   | $ | 32.51 |   |   |
| July 2003     |       |       | $          | 3,000,000                         |       |                                                                        |       | 90,944                        |       |   |   | $ | 32.99 |   |   |
| December 2003 |       |       | $          | 5,000,000                         |       |                                                                        |       | 127,199                       |       |   |   | $ | 39.31 |   |   |
| July 2004     |       |       | $          | 5,000,000                         |       |                                                                        |       | 58,807                        |       |   |   | $ | 58.18 |   |   |

 

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 of ERBITUX outside of theUnited States and Canada. In August 2001, the Company and Merck KGaAamended 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 the Company’s reasonable acceptance. The amendment furtherreleased Merck KGaA from its obligations under the agreement relating toproviding a guaranty under a $30,000,000 credit facility relating to thebuild-out of BB36. In addition, the amendment provides that the companies haveco-exclusive rights to ERBITUX in Japan, including the right to sublicense andMerck KGaA waived its right of first offer in the case of a proposed sublicenseby the Company of ERBITUX in the Company’s territory. In consideration for theamendment, the Company agreed to a reduction in royalties’ payable by MerckKGaA on sales of ERBITUX in Merck KGaA’s territory.

In September 2002,the Company entered into a binding term sheet, effective as of April 15,2002, for the supply of ERBITUX to Merck KGaA, which replaced previous supplyarrangements. The term sheet provided for Merck KGaA to purchase bulk andfinished ERBITUX ordered from the Company during the term of the December 1998development and license agreement at a price equal to the Company’s fullyloaded cost of goods. The term sheet also provided for Merck KGaA to usereasonable efforts to enter into its own contract manufacturing agreements forsupply of ERBITUX and obligates Merck KGaA to reimburse the Company for costsassociated with transferring technology and any other services requested byMerck KGaA relating to establishing its own manufacturing or contractmanufacturing capacity. Amounts due from Merck KGaA related to thesearrangements totaled approximately $7,768,000 and $8,096,000 at December 31,2005 and 2004, respectively, and are included in amounts due from corporate 

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

partnersin the Consolidated Balance Sheets. The related manufacturing costs in 2004 anda portion in 2005 of the ERBITUX sold to Merck KGaA was produced and expensedprior to February 13, 2004 when the related raw materials were purchasedand the associated direct labor and overhead was consumed since the Company didnot have approval to sell ERBITUX. The Company has a liability due Merck KGaAof approximately $2,532,000, and $2,059,000 as of December 31, 2005 and2004, respectively.

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

On September 19, 2001, the Company entered intoan acquisition 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 the Company’s common stock for $70.00per share, net to the seller in cash. In connection with the AcquisitionAgreement, the Company entered into a stockholder agreement with BMS and BMSBiologics, dated as of September 19, 2001 (the “Stockholder Agreement”),pursuant to which all parties agreed to various arrangements regarding therespective rights and obligations of each party with respect to, among otherthings, the ownership of shares of the Company’s common stock by BMS and BMSBiologics. Concurrent with the execution of the Acquisition Agreement and theStockholder Agreement, the Company entered into the Commercial Agreement withBMS and E.R. Squibb, relating to ERBITUX, pursuant to which, among otherthings, BMS and E.R. Squibb are co-developing and co-promoting ERBITUX inthe United States and Canada with the Company, and are 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. The amendmentchanged certain economics of the Commercial Agreement and expanded the clinicaland strategic roles of BMS in the ERBITUX development program. One of theprincipal economic changes to the Commercial Agreement is that the Companyreceived payments of $140,000,000 on March 7, 2002 and $60,000,000 on March 5,2003. Such payments are in lieu of the $300,000,000 milestone payment theCompany would have received upon acceptance by the FDA of the ERBITUX BLA underthe original terms of the Commercial Agreement. In addition, the Company agreedto resume and has resumed construction of BB50. The terms of the CommercialAgreement, as amended on March 5, 2002, are set forth in more detailbelow.

***Commercial Agreement***

*RightsGranted to E.R. Squibb—**Pursuant* to the CommercialAgreement, as amended on March 5, 2002, the Company granted to E.R. Squibb(1) the exclusive right to distribute, and the co-exclusive right todevelop and promote (together with the Company) 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 the Company and together or co-exclusively with Merck KGaA andits affiliates) the product in Japan, and (3) the non-exclusive right touse the Company’s registered trademarks for the product in the United States,Canada and Japan (collectively, the “territory”) in connection with theforegoing. In addition, the Company agreed not to grant any right or license toany third party, or otherwise permit any third party, to develop ERBITUX foranimal health or any other application outside the human health field withoutthe prior consent of E.R. Squibb (which consent may not be unreasonablywithheld).

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

*RightsGranted to the Company—Pursuant*to the CommercialAgreement, E.R. Squibb has granted to the Company and the Company’s affiliatesa license, 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-Frontand Milestone Payments—The* Commercial Agreementprovides for up-front and milestone payments by E.R. Squibb to us of$900,000,000 in the aggregate, of which $200,000,000 was paid on September 19,2001, $140,000,000 was paid on March 7, 2002, $60,000,000 was paid on March 5,2003,  $250,000,000, was paid on March 12,2004, and  $250,000,000 is expected to bereceived by March 31, 2006 as a result of obtaining FDA approval on March 1,2006 of ERBITUX for use in the treatment of squamous cell carcinoma of the headand neck.

*DistributionFees—The* Commercial Agreement provides that E.R.Squibb shall pay the Company distribution fees based on a percentage of “annualnet sales” of the product (as defined in the Commercial Agreement) by E.R.Squibb in the United States and Canada. The distribution fee is 39% of netsales in the United States and Canada. The Commercial Agreement also providesthat the distribution fees for the sale of the product in Japan by E.R. Squibbor ImClone Systems shall be equal to 50% of operating profit or loss withrespect to such sales for any calendar month. In the event of an operating profit,E.R. Squibb shall pay the Company the amount of such distribution fee, and inthe event of an operating loss, the Company shall credit E.R. Squibb the amountof such distribution fee.

*Developmentof the Product—Responsibilities* associated withclinical 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 ofresponsibilities for certain clinical and other studies, each party is primarilyresponsible for performing the studies designated to it in the clinicaldevelopment plans. In the United States and Canada, the Commercial Agreementprovides that E.R. Squibb is responsible for 100% of the cost of all clinicalstudies other than those studies undertaken post-launch which are not pursuantto an IND (e.g. Phase IV studies), the cost of which is shared equally betweenE.R. Squibb and ImClone Systems. As between E.R. Squibb and ImClone Systems,each is responsible for 50% of the costs of all studies in Japan. The Companyhas also agreed, and may agree in the future, to share with E.R. Squibb, onterms other than the foregoing, costs of clinical trials that the Companybelieves are not potentially registrational but should be undertaken prior tolaunch in the United States, Canada or Japan. The Company has incurred$13,137,000 and $9,096,000 and $2,262,000 pursuant to such cost sharing for theyears ended December 31, 2005, 2004 and 2003, respectively. In addition,to the extent that in 2005 and 2006 the Company and BMS exceed the contractualmaximum registrational costs for clinical development, the Company has agreedto share such cost with BMS. For the year ended December 31, 2005, theCompany has recorded expenses of $6,719,000 related to this agreement. TheCompany has also incurred $1,434,000, $721,000 and $663,000 for the years endedDecember 31, 2005, 2004 and 2003, respectively, related to the agreementwith respect to development in Japan. Except as otherwise agreed upon by theparties, the Company will own all registrations for the product and isprimarily responsible for the regulatory activities leading to registration ineach country. E.R. Squibb will be primarily responsible for the regulatoryactivities in each country after 

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

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 the Company’s Boardof Directors, is entitled to oversee the implementation of the clinical andregulatory plan for ERBITUX.

*Distributionand 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 theobjective of maximizing the sales potential of the product and promoting thetherapeutic profile and benefits of the product in the most commerciallybeneficial manner. In connection with its responsibilities for distribution,marketing and sales of the product in the territory, E.R. Squibb is performingall relevant functions, including but not limited to the provision of salesforce 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 Company established a sales force to maximizethe potential commercial opportunities for ERBITUX and to serve as a foundationfor the marketing of future products derived either from within the Company’spipeline or through business development opportunities.

*Manufactureand Supply—The* Commercial Agreement provides that theCompany is responsible for the manufacture and supply of all requirements ofERBITUX in bulk form (“API”) for clinical and commercial use in the territory,and that E.R. Squibb will purchase all of its requirements of API forcommercial use from the Company. The Company supplies API for clinical use atthe Company’s fully burdened manufacturing cost, and supplies API forcommercial use at the Company’s fully burdened manufacturing cost plus amark-up of 10%. Upon the expiration, termination or assignment of any existingagreements between ImClone Systems and third party manufacturers, E.R. Squibbwill be responsible for processing API into the finished form of the product.Sales of ERBITUX to BMS for commercial use are reflected in the Company’sConsolidated Statements of Operations as Manufacturing revenue.

*Management—The*parties have formed the following committees for purposes of managing theirrelationship and their respective rights and obligations under the CommercialAgreement:

·       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 

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

chaired by the Company’srepresentative. The PDC is responsible for, among other things, managing andoverseeing the development and implementation of the clinical developmentplans, comparing actual versus budgeted clinical development and regulatoryexpenses, and reviewing the progress 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 responsible for,among other things, overseeing and coordinating the manufacturing and supply ofAPI and the product, and formulating and directing the manufacturing strategyfor the 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.

*Rightof First Offer—E.R.* Squibb has a right of first offerwith respect to the Company’s investigational KDR monoclonal antibodies (suchas 1121B) should the Company decide to enter into a partnering arrangement witha third party with respect to IMC-KDR antibodies at any time prior to theearlier to occur of September 19, 2006 and the first anniversary of thedate which is 45 days after any date on which BMS’s ownership interest inImClone Systems is less than 5%. If the Company decides to enter into apartnering arrangement during such period, the Company must notify E.R. Squibb.If E.R. Squibb notifies the Company that it is interested in such anarrangement, the Company will provide its proposed terms to E.R. Squibb and theparties will negotiate in good faith for 90 days to attempt to agree onthe terms and conditions of such an arrangement. If the parties do not reachagreement during this period, E.R. Squibb must propose the terms of anarrangement which it is willing to enter into, and if the Company rejects suchterms the Company may enter into an agreement with a third party with respectto such a partnering arrangement (provided that the terms of any such agreementmay not be more favorable to the third party than the terms proposed by E.R.Squibb).

*Rightof First Negotiation—If* at any time during therestricted period (as defined below), the Company is interested in establishinga partnering relationship with a third party involving certain compounds orproducts not related to IMC-KDR antibodies, the Company must notify E.R. Squibband E.R. Squibb will have 90 days to enter into a non-binding agreement withthe Company with respect to such a partnering relationship. In the event thatE.R. Squibb and ImClone Systems do not enter into a non-binding agreement, theCompany is free to negotiate with third parties without further obligation toE.R. Squibb. The “restricted period” means the period from September 19,2001 until the earliest to occur of 

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

(1) September 19,2006, (2) a reduction in BMS’s ownership interest in ImClone Systems tobelow 5% for 45 consecutive days, (3) a transfer or other disposition ofshares of the Company’s common stock by BMS or any of its affiliates such thatBMS and its affiliates own or have control over less than 75% of the maximumnumber of shares of the Company’s common stock owned by BMS and its affiliatesat any time after September 19, 2001, (4) an acquisition by a thirdparty of more than 35% of the outstanding shares, (5) a termination of theCommercial Agreement by BMS due to significant regulatory or safety concernsregarding ERBITUX, or (6) the Company’s termination of the CommercialAgreement due to a material breach by BMS.

*Restrictionon Competing Products—During* the period from the dateof the Commercial Agreement until September 19, 2008, the parties haveagreed not to, directly or indirectly, develop or commercialize a competingproduct (defined as a product that has as its only mechanism of action anantagonism of the EGFR) in any country in the territory. In the event that anyparty proposes to commercialize a competing product or purchases or otherwisetakes control of a third party which has developed or commercialized acompeting product, then such party must either divest the competing productwithin 12 months or offer the other party the right to participate in thecommercialization and development of the competing product on a 50/50 basis(provided that if the parties cannot reach agreement with respect to such anagreement, the competing product must be divested within 12 months).

*Ownership—The*Commercial Agreement provides that the Company owns all data and informationconcerning ERBITUX and the product and (except for the E.R. Squibb Inventions)all processes, know-how and other inventions relating to the product anddeveloped by either party or jointly by the parties. E.R. Squibb, however, hasthe right to use all such data and information, and all such processes,know-how or other inventions, in order to fulfill its obligations under theCommercial Agreement.

*ProductRecalls—If* E.R. Squibb is required by any regulatoryauthority to recall the product in any country in the territory (or if the JCCdetermines such a recall to be appropriate), then E.R. Squibb and ImCloneSystems shall bear the costs and expenses associated with such a recall (1) inthe United States and Canada, in the proportion of 39% for ImClone Systems and61% for E.R. Squibb and (2) in Japan, in the proportion for which eachparty is entitled to receive operating profit or loss (unless, in theterritory, the predominant cause for such a recall is the fault of eitherparty, in which case all such costs and expenses shall be borne by such party).

*MandatoryTransfer—Each* of BMS and E.R. Squibb has agreed underthe Commercial Agreement that in the event it sells or otherwise transfers allor substantially 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 the Commercial 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.

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

*Termination—Unless*earlier terminated pursuant to the termination rights discussed below, theCommercial Agreement expires with regard to the product in each country in theterritory on the later of September 19, 2018 and the date on which thesale of the product ceases to be covered by a validly issued or pending patentin such country. 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;

·       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.

***Acquisition Agreement***

On October 29, 2001,pursuant to the Acquisition Agreement, BMS Biologics accepted for paymentpursuant to the tender offer 14,392,003 shares of the Company’s common stock ona pro rata basis from all tendering shareholders and those conditionallyexercising stock options.

***Stockholder Agreement***

Pursuant to the Stockholder Agreement, the Company’sBoard was increased from ten to twelve members in October 2001. BMSreceived the right to nominate two directors to the Company’s Board (each a “BMSdirector”) so long as its ownership interest in ImClone Systems is 12.5% orgreater. If BMS’ ownership interest is 5% or greater but less than 12.5%, BMSwill have the right to nominate one BMS director, and if BMS’ ownershipinterest is less than 5%, BMS will have no right to nominate a BMS director. Ifthe size of the Board is increased to a number greater than twelve, the numberof BMS directors would be increased, subject to rounding, such that the numberof BMS directors is proportionate to the lesser of BMS’ then-current ownershipinterest and 19.9%. Notwithstanding the foregoing, BMS will have no right tonominate any BMS directors if (1) the Company has terminated theCommercial Agreement due to a material breach by BMS or (2) BMS’ ownershipinterest were to remain below 5% for 45 consecutive days.

Based on the number of shares of common stock acquiredpursuant to the tender offer, BMS has the right to nominate two directors. BMSdesignated Andrew G. Bodnar, M.D., J.D., BMS’ Senior Vice President, Strategyand Medical & External Affairs, as one of the initial BMS directors.The nomination of Dr. Bodnar was approved by the Board on November 15,2001. The other BMS director position was initially filled by Peter S.Ringrose, M.A, and Ph.D. Dr. Ringrose retired in 2002 from his position ofChief Scientific Officer and President, Pharmaceutical Research Institute atBMS, and also resigned from his director position with the Company. BMS has notyet designated a replacement to fill Dr. Ringrose’s vacated Board seat.

*Votingof Shares—During* the period in which BMS has the rightto nominate up to two BMS directors, BMS and its affiliates are required tovote all of their shares in the same proportion as the votes cast by all of theCompany’s other stockholders with respect to the election or removal of non-BMSdirectors.

*Committeesof the Board of Directors—During* the period in whichBMS has the right to nominate up to two BMS directors, BMS also has the right,subject to certain exceptions and limitations, to have one member of eachcommittee of the Board be a BMS director.

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

*ApprovalRequired for Certain Actions—The* Company may not takeany action that constitutes a prohibited action under the Stockholder Agreementwithout the consent of the BMS directors, until September 19, 2006 orearlier, if any of the following occurs: (1) a reduction in BMS’sownership interest to below 5% for 45 consecutive days, (2) a transfer orother disposition of shares of the Company’s common stock by BMS or any of itsaffiliates such that BMS and its affiliates own or have control over less than75% of the maximum number of shares of the Company’s common stock owned by BMSand its affiliates at any time after September 19, 2001, (3) anacquisition by a third party of more than 35% of the outstanding shares of theCompany’s common stock, (4) a termination of the Commercial Agreement byBMS due to significant regulatory or safety concerns regarding ERBITUX, or (5) atermination of the Commercial Agreement due to a material breach by BMS. Suchprohibited actions include (1) issuing additional shares or securitiesconvertible into shares in excess of 21,473,002 shares of the Company’s commonstock in the aggregate, subject to certain exceptions; (2) incurringadditional indebtedness if the total of (A) the principal amount ofindebtedness incurred since September 19, 2001 and then-outstanding, and (B) thenet proceeds from the issuance of any redeemable preferred stockthen-outstanding, would exceed the Company’s amount of indebtedness forborrowed money outstanding as of September 19, 2001 by more than$500 million; (3) acquiring any business if the aggregateconsideration for such acquisition, when taken together with the aggregateconsideration for all other acquisitions consummated during the previous twelvemonths, is in excess of 25% of the Company’s aggregate value at the time thebinding agreement relating to such acquisition was entered into; (4) disposingof all or any substantial portion of the Company’s non-cash assets; (5) enteringinto non-competition agreements that would be binding on BMS, its affiliates orany BMS director; (6) taking certain actions that would have adiscriminatory effect on BMS or any of its affiliates as a stockholder; and (7) issuingcapital stock with more than one vote per share.

*Limitationon Additional Purchases of Shares and Other Actions—Subject*to the exceptions set forth below, until September 19, 2006 or, ifearlier, the occurrence of any of (1) an acquisition by a third party ofmore than 35% of the Company’s outstanding shares, (2) the firstanniversary of a reduction in BMS’s ownership interest in the Company to below5% for 45 consecutive days, or (3) the Company’s taking a prohibitedaction under the Stockholder Agreement without the consent of the BMS directors,neither BMS nor any of its affiliates will acquire beneficial ownership of anyshares of the Company’s common stock or take any of the following actions: (1) encourageany proposal for a business combination with the Company’s or an acquisition ofour shares; (2) participate in the solicitation of proxies from holders ofshares of the Company’s common stock; (3) form or participate in any “group”(within the meaning of Section 13(d)(3) of the Securities ExchangeAct of 1934) with respect to shares of the Company’s common stock; (4) enterinto any voting arrangement with****respect toshares of the Company’s common stock; or (5) seek any amendment to orwaiver of these restrictions.

The following are exceptions to the standstillrestrictions described above: (1) BMS Biologics may acquire beneficialownership of shares of the Company’s common stock either in the open market orfrom the Company pursuant to the option described below, so long as, aftergiving effect to any such acquisition of shares, BMS’ ownership interest wouldnot exceed 19.9%; (2) BMS may make, subject to certain conditions, aproposal to the Board to acquire shares of the Company’s common stock if theCompany provides material non-public information to a third party in connectionwith, or begins active negotiation of, an acquisition by a third party of morethan 35% of the outstanding shares; (3) BMS may acquire shares of theCompany’s common stock if such acquisition has been approved by a majority ofthe non-BMS directors; and (4) BMS may make, subject to certainconditions, including that an acquisition of shares be 

F-29

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

at a premium of at least25% to the prevailing market price, non-public requests to the Board to amendor waive any of the standstill restrictions described above. Certain of theexceptions to the standstill provisions described above will terminate upon theoccurrence of: (1) a reduction in BMS’s ownership interest in the Companyto below 5% for 45 consecutive days, (2) a transfer or other dispositionof shares of the Company’s common stock by BMS or any of its affiliates suchthat BMS and its affiliates own or have control over less than 75% of themaximum number of shares owned by BMS and its affiliates at any time after September 19,2001, (3) a termination of the Commercial Agreement by BMS due tosignificant regulatory or safety concerns regarding ERBITUX, or (4) atermination of the Commercial Agreement by the Company due to a material breachby BMS.

*Optionto Purchase Shares in the Event of Dilution—BMS* Biologicshas the right under certain circumstances to purchase additional shares ofcommon stock from the Company at market prices, pursuant to an option grantedto BMS by the Company, in the event that BMS’s ownership interest is diluted(other than by any transfer or other disposition by BMS or any of itsaffiliates). BMS can exercise this right (1) once per year, (2) ifthe Company issues shares of common stock in excess of 10% of thethen-outstanding shares in one day, and (3) if BMS’s ownership interest isreduced to below 5% or 12.5%. BMS Biologics’ right to purchase additionalshares of common stock from the Company pursuant to this option will terminateon September 19, 2006 or, if earlier, upon the occurrence of (1) anacquisition by a third party of more than 35% of the outstanding shares, or (2) thefirst anniversary of a reduction in BMS’s ownership interest in the Company tobelow 5% for 45 consecutive days.

*Transfersof Shares—Until* March 19, 2005, neither BMS norany of its affiliates were permitted to transfer any shares of the Company’scommon stock or enter into any arrangement that transfers any of the economicconsequences associated with the ownership of shares. After March 19,2005, neither BMS nor any of its affiliates may transfer any shares or enterinto any arrangement that transfers any of the economic consequences associatedwith the ownership of shares, except (1) pursuant to registration rightsgranted to BMS with respect to the shares, (2) pursuant to Rule 144under the Securities 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.

*RegistrationRights—The* Company granted BMS customary registrationrights with respect to shares of common stock owned by BMS or any of itsaffiliates.

F-30

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

Amounts due from BMSrelated to this agreement totaled approximately $51,503,000 and $61,621,000 at December 31,2005 and 2004, respectively, and are included in amounts due from corporatepartners in the Consolidated Balance Sheets.

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

In August 2005, the Company entered into aCollaboration and License Agreement with UCB S.A., a company registered inBelgium, for the development and commercialization of CDP-791, UCB’snovel, investigational PEGylated di-Fab antibody targeting the vascular endothelialgrowth factor receptor-2 (“VEGFR-2”). No upfront or milestonepayments are payable under the Agreement. The Agreement provides that theCompany and UCB S.A will share equally all agreed upon development costs forCDP-791 as well as worldwide profits derived from the commercializationof CDP-791 in indications jointly pursued by the parties. The Companywill also receive an incremental single-digit royalty on net sales worldwidefor such indications. Under certain circumstances, one party may be entitled topursue (in its territory) an indication independently of the other party, whichretains the option to join in the development or commercialization at a laterstage. The Company has exclusive commercialization rights to CDP-791 inNorth America, with UCB receiving such rights in Europe, Japan, and the rest ofthe world. The Company recorded expenses related to this agreement  of approximately $2,500,000 in the yearended  December 31, 2005.

Royaltyrevenue consists of the following: (in thousands)

| ** **             | ** ** | **Year Ended December 31,** | ** ** |
|------------------------|------------|--------------------------------------------|------------|
| ** **             | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| BMS                    |       | $                                          | 161,116    |   | $ | 101,703 |   | $ | — |   |
| Merck KGaA             |       | 16,229                                     |       | 4,314 |   | 18 |   |
| Other                  |       | 95                                         |       | 257 |   | 557 |   |
| Total royalty  revenue |       | $                                          | 177,440    |   | $ | 106,274 |   | $ | 575 |   |

 

Licensefees and milestone revenue consists of the following: (in thousands)

| ** **                                | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| BMS:                                      |       |                                       |       |   |   |   |   |
| ERBITUX license fee revenue               |       | $                                          | 94,232     |   | $ | 128,943 |   | $ | 47,527 |   |
| Merck KGaA:                               |       |                                       |       |   |   |   |   |
| ERBITUX and BEC2 license fee revenue      |       | 3,007                                      |       | 385 |   | 385 |   |
| Other license fee  revenue                |       | —                                     |       | 58 |   | 58 |   |
| Total license  fees and milestone revenue |       | $                                          | 97,239     |   | $ | 129,386 |   | $ | 47,970 |   |

 

F-31

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

Collaborativeagreement revenue from corporate partners consists of the following: (inthousands)

| ** **                                    | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| BMS:                                          |       |                                       |       |   |   |   |   |
| ERBITUX supplied for clinical trials          |       | $                                          | 8,926      |   | $ | 13,062 |   | $ | 5,820 |   |
| ERBITUX clinical and regulatory expenses      |       | 13,748                                     |       | 12,105 |   | 13,329 |   |
| ERBITUX marketing, general and administrative |       | 1,594                                      |       | 2,017 |   | 1,519 |   |
| ERBITUX royalty expenses                      |       | 18,591                                     |       | 11,735 |   | — |   |
| Total BMS                                     |       | 42,859                                     |       | 38,919 |   | 20,668 |   |
| Merck KGaA:                                   |       |                                       |       |   |   |   |   |
| ERBITUX supplied for clinical trials          |       | 18,455                                     |       | 11,446 |   | 9,412 |   |
| ERBITUX clinical and regulatory expenses      |       | 928                                        |       | 1,753 |   | 1,742 |   |
| ERBITUX marketing, general and administrative |       | 358                                        |       | 774 |   | 421 |   |
| ERBITUX royalty expenses                      |       | 2,292                                      |       | 1,003 |   | — |   |
| BEC2 expenses                                 |       | —                                     |       | 42 |   | 42 |   |
| Total Merck KGaA                              |       | 22,033                                     |       | 15,018 |   | 11,617 |   |
| Other                                         |       | 12                                         |       | 52 |   | — |   |
| Total  collaborative agreement revenue        |       | $                                          | 64,904     |   | $ | 53,989 |   | $ | 32,285 |   |

 

Amountsdue from corporate partners in the table below are net of allowance for doubtfulaccounts in 2005, 2004 and 2003 of $0, $430 and $0, respectively. The allowanceof $430 from 2004 was written-off in 2005. There were no write-offs in 2004 or2003 and no additions to the allowance in 2005 or 2003. All amounts includingthe table below are in thousands:

| ** **                                 | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| BMS:                                       |       |                        |       |                        |       |   |   |   |   |
| ERBITUX                                    |       |                        | $          | 51,503                      |       |   |   | $ | 61,621 |   |   |
| Merck KGaA:                                |       |                        |       |                        |       |   |   |   |   |
| ERBITUX and BEC2                           |       |                        | 7,768      |                        |       |   | 8,132 |   |   |
| Total amounts due  from corporate partners |       |                        | $          | 59,271                      |       |   |   | $ | 69,753 |   |   |

 

Deferredrevenue consists of the following: (in thousands)

| ** **                                                   | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| BMS:                                                         |       |                        |       |                        |       |   |   |   |   |
| ERBITUX commercial  agreement                                |       |                        | $          | 356,136                     |       |   |   | $ | 450,368 |   |   |
| Merck KGaA:                                                  |       |                        |       |                        |       |   |   |   |   |
| ERBITUX development and  license agreement                   |       |                        | 2,889      |                        |       |   | 3,111 |   |   |
| Prepayment of ERBITUX  supplied for medical affairs  program |       |                        | —     |                        |       |   | 2,544 |   |   |
| BEC2 development and  commercialization agreement            |       |                        | —     |                        |       |   | 1,785 |   |   |
| Total deferred revenue                                       |       |                        | 359,025    |                        |       |   | 457,808 |   |   |
| Less: current portion                                        |       |                        | (112,624   | )                           |       |   | (108,994 | ) |   |
| Total long-term deferred revenue                             |       |                        | $          | 246,401                     |       |   |   | $ | 348,814 |   |   |

 

F-32

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

The Company earnedmanufacturing revenue of $44,090,000 and $99,041,000 related to sales ofERBITUX to BMS for commercial use for the years ended December 31, 2005and 2004, respectively.

**(11)   Stockholder’ Equity**

***(a)   CommonStock***

In June 2002, thestockholders approved the amendment of the Company’s certificate ofincorporation to increase the total number of shares of common stock theCompany is authorized to issue from 120,000,000 shares to 200,000,000 shares.

***(b)   Stockholder Rights Plan***

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’sability to protect stockholders against, among other things, unsolicitedattempts to acquire control of the Company which do not offer an adequate priceto all of the Company’s stockholders or are otherwise not in the best interestsof the Company 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 15%or more of the Company’s outstanding common stock, or (ii) 10 businessdays following the commencement of a tender offer or exchange offer by anyperson which would, if consummated, result in such person acquiring ownershipof 15% or more of the Company’s outstanding common stock, (collectively an “AcquiringPerson”).

In such event, each right holder will have the rightto receive the number of shares of common stock having a then-current marketvalue equal to two times the aggregate exercise price of such rights. If theCompany were to enter into certain business combination or dispositiontransactions with an Acquiring Person, each right holder will have the right toreceive shares of common stock of the acquiring company having a value equal totwo times the aggregate exercise price of the rights.

The Company may redeemthese rights in whole at a price of $.001 per right. The rights expire on February 15,2012.

***(c)   StockRepurchase Program***

On September 19, 2005the Company announced the approval by the Board of Directors of a stockrepurchase program permitting the repurchase of up to $100 million in aggregateprincipal amount of outstanding shares of the Company’s common stock during atwo year period. The stock repurchase program is to be employed for generalcorporate purposes, including to offset dilution resulting from future grantsof stock options or other dilutive incentive compensation granted to the Company’semployees and directors. Stock repurchases under this program may be madethrough open market or privately negotiated transactions at such times and insuch amounts as the Company deems appropriate, based on a variety of factorssuch as price, corporate and regulatory requirements and overall market 

F-33

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

conditions.The stock repurchase program may be limited or terminated at any time withoutprior notice. As of December 31, 2005 the Company has repurchased 811,416shares at an average price of $30.62 per share for aggregate consideration ofapproximately $25 million.

***(d)   StockOptions***

***Stock Option Plans***

In February 1986, the Company adopted and theshareholders thereafter approved an Incentive Stock Option Plan and aNon-Qualified Stock Option Plan (the “86 Plans”). Options may no longer begranted under the 86 Plans pursuant to the terms of the 86 Plans. In February 1996,the Company’s Board of Directors adopted and the shareholders thereafterapproved an additional Incentive Stock Option Plan and Non-Qualified StockOption Plan (the “96 Plans”). In May 1998, the Company’s Board ofDirectors adopted an additional Non-Qualified Stock Option Plan (the “98 Plan”),which shareholders were not required to approve. On June 11, 2002, theshareholders approved and the Company adopted the 2002 Stock Option Plan (the “02Plan”). Effective with the adoption of the 02 Plan, the Company will not awardnew grants from the 96 Plans or the 98 Plan. The 02 Plan provides for thegranting of both incentive stock options and non-qualified stock options topurchase, subject to adjustment under the plan, 3,300,000 shares of the Company’scommon stock to employees, directors, consultants and advisors of the Company.Any common stock subject to an option which is cancelled, forfeited or expiresprior to exercise whether such option was granted under this plan or the 96Plans or the 98 Plan, shall again become available for grant under the 02 Plan.Options granted under the 02 Plan generally vest over one to four year periodsand unless earlier terminated, expire ten years from the date of grant. Optionsgranted under the 02 Plan become fully vested and exercisable upon theoccurrence of a change in control, as defined. Incentive stock options grantedunder the 02 Plan may not exceed 825,000 shares of common stock, may not begranted at a price less than the fair market value of the stock at the date ofgrant and may not be granted to non-employees. In September 2003, theshareholders approved an amendment to the 02 Plan that increased themaximum total number of shares of common stock currently available for grant ofoptions under the plan from 3,300,000 shares to 6,600,000 shares, and increasedthe number of shares of common stock with respect to which incentive stockoptions may be granted under the plan from 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. In the event a change in control triggers the acceleration ofvesting of stock option awards, the Company would be required to recognizecompensation expense, in accordance with Interpretation No. 44, for thoseoptions that would have otherwise expired un-exercisable pursuant to theoriginal terms.

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 NASDAQ Marketplace Rule 4350(i)(1)(A)(iv). TheInducement Plan permits 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.

F-34

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

Combined, the 86 Plans, the 96 Plans, as amended, the98 Plan, as amended, and the 02 Plan, as amended, and the Inducement Planprovide as of December 31, 2005 for the granting of options to purchase upto 34,500,000 shares of common stock to employees, directors, consultants andadvisors of the Company. Incentive stock options may not be granted at a priceless than the fair market value of the stock at the date of grant and may notbe granted to non-employees. Options under all the plans, unless earlier terminated,expire ten years from the date of grant. Options granted under these plansgenerally vest over one-to-four-year periods. At December 31, 2005,options to purchase 12,619,193 shares of common stock were outstanding and1,548,982 shares were available for grant.

Asummary of stock option activity follows:

| ** **                         | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** |
|------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|
| Balance at  December 31, 2002 |       | 13,513,133                 |       |                                                       | $          | 29.16 |   |   |
| Granted                            |       | 2,418,400                  |       |                                                       | 31.55      |   |   |
| Exercised                          |       | (633,078                   | )          |                                                       | 11.30      |   |   |
| Canceled                           |       | (423,899                   | )          |                                                       | 30.89      |   |   |
| Balance at December 31, 2003  |       | 14,874,556                 |       |                                                       | 30.27      |   |   |
| Granted                            |       | 2,798,393                  |       |                                                       | 50.89      |   |   |
| Exercised                          |       | (3,522,003                 | )          |                                                       | 22.16      |   |   |
| Canceled                           |       | (217,948                   | )          |                                                       | 39.27      |   |   |
| Balance at December 31, 2004  |       | 13,932,998                 |       |                                                       | 36.33      |   |   |
| Granted                            |       | 976,550                    |       |                                                       | 39.83      |   |   |
| Exercised                          |       | (1,128,642                 | )          |                                                       | 15.63      |   |   |
| Canceled                           |       | (1,161,713                 | )          |                                                       | 47.91      |   |   |
| Balance at  December 31, 2005 |       | 12,619,193                 |       |                                                       | $          | 37.38 |   |   |

 

Thefollowing table summarizes information concerning stock options outstanding at December 31,2005:

| **Range of  Exercise Price** | ** ** | ** ** | ** ** | **Number  Outstanding  at 12/31/05** | ** ** | **Weighted  Average  Remaining  Contractual  Term (years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable  at 12/31/05** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|----------------------------------------|------------|------------|------------|-------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------------------|------------|----------------------------------------|------------|
| $2.38-11.91                            |       | 1,397,611  |       |                                      | 5.79       |                                                             |       |                                   | $          | 7.95                                      |       |                                   | 1,251,960  |   |   | $ | 7.79 |   |   |
| 12.34-28.19                            |       | 1,374,788  |       |                                      | 4.70       |                                                             |       |                                   | 18.29      |                                      |       | 1,307,420                              |       |   | 18.42 |   |   |
| 28.63-31.81                            |       | 1,404,881  |       |                                      | 5.99       |                                                             |       |                                   | 30.62      |                                      |       | 1,209,981                              |       |   | 30.62 |   |   |
| 31.85-38.91                            |       | 1,516,370  |       |                                      | 6.69       |                                                             |       |                                   | 36.01      |                                      |       | 1,448,256                              |       |   | 36.18 |   |   |
| 39.00-42.81                            |       | 1,374,346  |       |                                      | 7.72       |                                                             |       |                                   | 40.40      |                                      |       | 1,374,346                              |       |   | 40.40 |   |   |
| 42.87-46.12                            |       | 1,613,404  |       |                                      | 8.62       |                                                             |       |                                   | 44.48      |                                      |       | 1,613,404                              |       |   | 44.48 |   |   |
| 46.15-49.80                            |       | 724,571    |       |                                      | 7.19       |                                                             |       |                                   | 47.47      |                                      |       | 724,571                                |       |   | 47.47 |   |   |
| 49.84-50.01                            |       | 2,050,333  |       |                                      | 5.71       |                                                             |       |                                   | 50.01      |                                      |       | 2,050,333                              |       |   | 50.01 |   |   |
| 50.94-84.02                            |       | 1,162,889  |       |                                      | 7.21       |                                                             |       |                                   | 63.30      |                                      |       | 1,162,889                              |       |   | 63.30 |   |   |
|                                   |       | 12,619,193 |       |                                      | 6.57       |                                                             |       |                                   | $          | 37.38                                     |       |                                   | 12,143,160 |   |   | $ | 37.97 |   |   |

 

F-35

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

In September 2001,and in connection with the Board of Directors’ approval of certain employmentthe Company granted options to purchase, in the aggregate, 2,450,000 shares ofits common 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 provide 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 areachieved. 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 thathave been held by the option holders for at least six months. During the yearended December 31, 2004, 4,008 shares of common stock were delivered tothe Company in payment of the aggregate exercise price and related to incometax withheld associated with the exercise of stock options to purchase anaggregate of 19,044 shares of common stock. The 4,008 shares delivered to theCompany had a value of approximately $200,000 determined by multiplying theclosing price of the common stock on the date of deliver for the number ofshares presented for payment. These shares are included as treasury stock inthe consolidated balance sheet 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, $2,420,000 and $722,000in the years ended December 31, 2005, 2004 and 2003, respectively. At December 31,2005, options to purchase 34,500 shares of the Company’s common stock relatedto all grants of options to Scientific Advisory Board members and outsideconsultants were vested and outstanding. All of these options were eitherexercised or cancelled as of February 16, 2006.

During the years ended December 31,2005, 2004 and 2003, the Company granted options to non-employee members of itsBoard of Directors to purchase approximately 255,000, 352,000 and 429,000shares, respectively, of its common stock. During the year ended December 31,2003, the options granted to the Board of Directors were modified such that theoriginal quarterly vesting of the options was accelerated to a daily vesting.Due to this modification, the Company recorded approximately $129,000 ofcompensation expense during the year ended December 31, 2003. During 2004,the Company recognized compensation expense of $2,028,000 associated with themodification of stock options for a number of terminated employees.

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

***SFAS No. 123 Disclosures***

Thefollowing table summarizes the weighted average fair value per share of stockoptions granted to employees and directors during the years ended December 31,2005, 2004 and 2003:

| ** **                                           | ** ** | **Option plans** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **2005**              | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                           | ** ** | **Shares**            | ** ** | **$** | ** ** | **Shares** | ** ** | **$** | ** ** | **Shares(1)** | ** ** | **$** | ** ** |
| Exercise price  equals market value at date of grant |       | 976,550               |       | $ | 25.34 |   | 2,798,393 |   | $ | 33.21 |   | 2,373,400 |   | $ | 19.95 |   |
|                                                      |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)          Does not include 45,000shares in 2003 under options granted to certain Scientific Advisory Boardmembers and outside consultants. The fair value of these grants has beenrecorded as compensation expense as prescribed by SFAS No. 123 and EITF 96-18“Accounting for equity instruments that are issued to other than employees foracquiring, or in conjunction with selling, goods or services”.

On December 16, 2005,the Company’s Board of Directors approved the acceleration of vesting ofunvested stock options with exercise prices equal to or greater than $33.44 pershare outstanding as of December 16, 2005 that had been previously awardedto Company employees and other eligible participants, including officers andnon-employee directors. Options to purchase approximately 2,805,169 shares ofthe Company’s common stock were subject to this acceleration. Of this amount,approximately 163,750 options are held by non-employee directors, with aweighted average exercise price of $45.00 per share, and 628,347 options areheld by officers of the Company with a weighted average exercise price of$44.32 per share. The Board required each non-employee director and, as acondition to continued employment, each officer of the Company, to agree torefrain from selling, transferring, pledging or otherwise disposing of sharesof Company common stock acquired upon any exercise of subject stock options(other than sales by such persons to fund the exercise price or to satisfyminimum statutory withholding on such exercise, each in accordance with theapplicable Plan and the Company’s existing policies and procedures) until thedate on which the exercise would have been permitted under the stock option’spre-acceleration vesting terms or pursuant to the Company’s Change-in-ControlPlan or, if earlier, the officer’s last day of employment with, or director’slast day of service as a director of, the Company. The decision to acceleratevesting of these stock options, which were “out-of-the-money” was madeprimarily to minimize future compensation expense that the Company wouldotherwise have been required to recognize in its Consolidated Statements ofOperations pursuant to FAS123R, which the Company will adopt beginning 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.

***(e) Employee Stock Purchase Plan***

In April 1998,the Company’s Board of Directors adopted the ImClone Systems Incorporated 1998Employee Stock Purchase Plan (the “ESPP”), subject to shareholders’ approval,which was received in May 1998. The ESPP, as amended, allows eligibleemployees to purchase shares of the Company’s common stock through payrolldeductions at the end of quarterly purchase periods. To be eligible, anindividual must be an employee, work more than 20 hours per week for atleast five months per calendar year and not own greater than 5% of the Company’scommon stock. Pursuant to the ESPP, the Company has reserved 1,000,000 sharesof common stock for issuance. Prior to the first day of each quarterly purchaseperiod, each eligible employee may elect to participate in the ESPP. Theparticipant is granted an 

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

option to purchase a number of shares of common stockdetermined by dividing each participant’s contribution accumulated prior to thelast day of the quarterly period by the purchase price. The participant has theability to withdraw from the ESPP until the second-to-last day of the quarterlypurchase period. The purchase price is equal to 85% of the market price pershare on the last day of each quarterly purchase period. An employee maypurchase stock from the accumulation of payroll deductions up to the lesser of15% of such employee’s compensation or $25,000 in aggregate purchase price, peryear. Participating employees have purchased 33,620 shares of common stock atan aggregate price of $932,000 for the year ended December 31, 2005,16,751 shares of common stock at an aggregate price of $802,000 for the yearended December 31, 2004, and 28,606 shares of common stock at an aggregatepurchase price of $685,000 for the year ended December 31, 2003. As of December 31,2005, 816,605 shares were available for future purchases. No compensationexpense has been recorded in connection with the ESPP. Pro forma compensationexpense of $164,000, $141,000 and $121,000 related to the discount given toemployees is included in the pro forma operating results disclosed inNote 2 for the years ended December 31, 2005, 2004 and 2003,respectively.

**(12)   Income Taxes**

Totalincome taxes for the years ended December 31, 2005, 2004 and 2003 were asfollows: (in thousands)

| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                          |       |     |       |     |       |     |       |
| Federal                           |       | $        | 861        |     | $          | 5,947    |       | $ | — |   |
| State and local                   |       | 717      |       | 11,414   |       | 491      |       |
| Total provision for  income taxes |       | $        | 1,578      |     | $          | 17,361   |       | $ | 491 |   |

 

The Company recorded as increases to additionalpaid-in capital $1,675,000 and $9,982,000 of tax benefit from the exercise ofstock options for the years ended December 31, 2005 and 2004,respectively. As a result of legislation in New Jersey passed in 2002 an AlternativeMinimum Assessment (AMA) tax is computed and may be applicable. This AMA taximpacted the Company’s tax provision for the years ended December 31, 2005and 2003.

Reconciliations between the total tax provision andthe tax provision based on the federal statutory rate are presented below: (inthousands)

| ** **                                                | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Pre-tax income  (loss)                                    |       | $        | 88,074     |     | $          | 131,014  |       | $ | (112,011 | ) |
| Tax provision  (benefit) at federal statutory rate of 35% |       | 30,826   |       | 45,855   |       | (39,204  | )          |
| State and local  income taxes (net of federal benefit)    |       | 338      |       | 8,005    |       | 491      |       |
| Change in  valuation allowance                            |       | (28,418  | )          | (33,023  | )          | 39,204   |       |
| Research and  development credits                         |       | (4,331   | )          | (3,585   | )          | —   |       |
| Non Deductible  expenses                                  |       | 3,163    |       | 109      |       | —   |       |
| Provision for income  taxes                               |       | $        | 1,578      |     | $          | 17,361   |       | $ | 491 |   |

 

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

Thetax effects of temporary differences that give rise to significant portions ofthe gross deferred tax assets and gross deferred tax liabilities at December 31,2005, and 2004, are presented below: (in thousands)

| ** **                                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Gross deferred tax  assets:                                          |       |     |       |     |       |
| Research and development credit carryforwards and  other credits     |       | $        | 77,012     |     | $          | 53,128 |   |
| Compensation relating to the issuance of stock  options and warrants |       | 894      |       | 2,567    |       |
| Net operating loss carryforwards                                     |       | 173,096  |       | 151,481  |       |
| Deferred revenue                                                     |       | 142,135  |       | 185,616  |       |
| Withholding tax liability                                            |       | 9,422    |       | 7,226    |       |
| Litigation settlement                                                |       | —   |       | 22,447   |       |
| Capital loss carryforward                                            |       | 3,761    |       | —   |       |
| Other                                                                |       | 10,470   |       | 8,188    |       |
| Total gross deferred tax assets                                      |       | 416,790  |       | 430,653  |       |
| Less valuation allowance                                             |       | (415,510 | )          | (430,091 | )          |
| Net deferred tax assets                                              |       | 1,280    |       | 562      |       |
| Gross deferred  tax liabilities:                                     |       |     |       |     |       |
| Other                                                                |       | 1,280    |       | 562      |       |
| Net deferred tax  asset                                              |       | $        | —     |     | $          | — |   |

 

The Company has established a valuation allowancebecause, more likely than not, its gross deferred tax assets will not berealized. The net change in the total valuation allowance for the years ended December 31,2005 and 2004 were decreases of $14,581,000 and $2,741,000, respectively.Approximately $203,239,000 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, 2005, the Company had netoperating loss carryforwards for federal and certain state income tax purposesof approximately $441,000,000, which expire at various dates from 2008 through2025. At December 31, 2005, the Company had research credit carryforwardsfor federal purposes of approximately $53,400,000 and for New Jersey statepurposes of approximately $20,000,000. These credits expire at various datesfrom 2007 through 2025. The American Jobs Creation Act of 2004 provides for atax deduction up to 9% (when fully phased in) of qualified productionactivities income. Due to taxable income limitations, the deduction does notyet provide any benefit to the Company. The Company will continue to evaluatethe benefit of the deduction.

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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 to discontinue its small molecule researchprogram. This decision was made after evaluating the Company’s investment insuch program against the time horizon before commercial benefits would berealized. As a result of this decision, the Company has reflected in theConsolidated Statements of Operations for the year ended December 31, 2005approximately $6,200,000 of costs associated with the discontinuation of thisprogram. Such costs include approximately $2,189,000 of costs related toseverance for 45 employees that were terminated, $3,668,000 of costs related tothe write-off of fixed assets used in such program (shown net of $227,000 fromthe subsequent sale of equipment that was previously written off as part ofthis discontinuance), approximately $60,000 of contract termination costsrelated to the cancellation of the lease at the Brooklyn facility where theemployees were conducting such research and approximately $282,000 of othershutdown expenses. The disposition of this program is substantially complete. Thetable below displays a reconciliation of the activity to the liability relatedto the small molecule discontinuance from June 30, 2005 through December 31,2005 (in thousands):

| ** **                 | ** ** | **June 30, 2005** | ** ** | **Payments** | ** ** | **Adjustments** | ** ** | **December 31, 2005** | ** ** |
|----------------------------|------------|-----------------------------|------------|--------------|------------|-----------------|------------|---------------------------------|------------|
| Termination  benefits      |       |                        | $          | 1,520        |       |            |       | $                               | (1,452     | ) |   |   | $ | (56 | ) |   |   | $ | 12 |   |   |
| Contract  termination cots |       |                        | 60         |         |       |            | (60        | )                               |       |   | — |   |   |   | — |   |   |
|                       |       |                        | $          | 1,580        |       |            |       | $                               | (1,512     | ) |   |   | $ | (56 | ) |   |   | $ | 12 |   |   |

 

**(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 10b5, on behalf of a purportedclass of persons who purchased the Company’s publicly traded securities betweenMarch 27, 2001 and January 25, 2002. The complaint also assertedclaims against Dr. Samuel D. Waksal under section 20A of the ExchangeAct on behalf of a separate purported sub-class of purchasers of the Company’ssecurities between December 27, 2001 and December 28, 2001. Thecomplaint generally alleged that various public statements made by or on behalfof the Company or the other defendants during 2001 and early 2002 regarding theprospects for FDA approval of ERBITUX were false or misleading when made, thatthe individual defendants were allegedly aware of material non-publicinformation regarding the actual prospects for ERBITUX at the time that theyengaged in transactions in the Company’s common stock and that members of thepurported stockholder class suffered damages when the market price of the Company’scommon stock declined following disclosure of the information that allegedlyhad not been previously disclosed. The complaint sought to proceed on behalf ofthe alleged classes described above, sought monetary damages in an unspecifiedamount and sought recovery of plaintiffs’ costs and attorneys’ fees. On January 24,2005, the Company announced that it had reached an agreement in principle tosettle the consolidated class action for a cash payment of $75 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 

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

settlement, a liability of$75.9  million and a receivable from ourinsurers of approximately $20.5 million, included in Other assets. Net expenseof $55.4 million was recorded in the fourth quarter of 2004 and reflected inthe Consolidated Statement of Operations as Litigation settlement. The partiessigned a definitive stipulation of settlement as of March 9, 2005. Asprovided for under the stipulation of settlement, on March 11, 2005, theCompany paid $50 million into an escrow account, subject to Court approval ofthe proposed settlement. On July 29, 2005 the Court approved the proposedsettlement. On August 5, 2005, the Company paid the remaining $25 millioninto the escrow account, with such funds to be held in and distributed pursuantto the terms of the settlement. As of December 31, 2005, the Companyhas collected from its insurers all of the outstanding receivable amounting to$20.5 million, which was reflected as a receivable in Other current assets, asof December 31, 2004. The amount received from the insurers includes $8.75million, less attorneys fees of $875,000, that was paid to the Company underthe derivative settlement discussed below.

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 including that they failed to ensure thatthe Company’s disclosures relating to the regulatory and marketing prospectsfor ERBITUX were not misleading and that they failed to maintain adequatecontrols and to exercise due care with regard to the Company’s ERBITUXapplication to the FDA. On January 9, 2004, the Company filed a motion todismiss the complaint due to plaintiffs’ failure to make a pre-suit demand onthe Company’s board of directors to institute suit or to allege grounds forconcluding that such a demand would have been futile. The individual defendantsfiled motions on the same date, both joining in the Company’s motion andseeking to dismiss the complaint for failure to state a claim. On January 24,2005, the Company announced that it had reached an agreement in principle tosettle the consolidated derivative action. The parties entered into adefinitive stipulation of settlement on March 14, 2005, which was approvedby the Court on July 29, 2005. In August 2005, the Company received$8.75 million from its insurers, which was contributed toward the settlement ofthe Irvine securities class action described above, after deducting $875,000for Court 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.

The Company received subpoenas and requests forinformation in connection with an investigation by the SEC relating to thecircumstances surrounding the disclosure of the FDA “refusal to file” letterdated December 28, 2001, and trading in the Company’s securities bycertain ImClone Systems insiders in 2001. The Company also received subpoenasand requests for information pertaining to document retention 

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

issues in 2001 and 2002,and to certain communications regarding ERBITUX in 2000. On June 19, 2002,the Company received a written “Wells Notice” from the staff of the SEC,indicating that the staff of the SEC is considering recommending that the SECbring an action against the Company relating to the Company’s disclosuresimmediately following the receipt of a “refusal to file” letter from the FDA onDecember 28, 2001 for the Company’s BLA for ERBITUX. The Company filed aWells submission on July 12, 2002 in response to the staff’s Wells Notice.There have been no developments in connection with this SEC investigation sinceFebruary 2003.

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 asserts 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 claimsunspecified damages of at least $10 million. The Demand for Arbitrationalso seeks to resolve the claims that the Company asserted in the New YorkState Supreme Court action. On November 7, 2003, the Company filed anAnswer and Counterclaims by which the Company denied Dr. Samuel D. Waksal’sentitlement to advancement of legal fees, expenses and indemnification, andasserted claims seeking recovery of certain compensation, including stockoptions, cash payments and advancement of certain defense costs that theCompany had paid to or on behalf of Dr. Samuel D. Waksal. Inresponse, on December 15, 2003, Dr. Samuel D. Waksal filed a Reply toCounterclaims.

On March 10, 2004, the Company commenced a secondaction against Dr. Samuel D. Waksal in the New York State Supreme Court.That action is styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No. 04/600643.By this action, the Company seeks the return of more than $21 million thatthe Company paid to Dr. Samuel D. Waksal, as proceeds from stock optionexercises, which the Company alleges he was expected to pay over to federal,state and local tax authorities in satisfaction of his tax obligations arisingfrom certain exercises between 1999 and 2001 of warrants and non-qualifiedstock options. Specifically, by this action, the Company seeks to recover: (a) $4.5 millionthat the Company paid to the State of New York in respect of exercises ofnon-qualified stock options and certain warrants in 2000; (b) at least$16.6 million that the Company paid to Samuel D. Waksal in the form ofImClone common stock, in lieu of withholding federal income taxes fromexercises of non-qualified stock options 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. 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 includes the payment of directorand officer legal fee expense 

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

indemnification by theCompany, for which the Company paid $1,950,000 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 by YedaResearch and Development Company Ltd. (“Yeda”) against ImClone Systems andAventis Pharmaceuticals, Inc. in the U.S. District Court for the SouthernDistrict of New York (03 CV 8484). This action alleges and seeks that threeindividuals associated with Yeda should also be named as co-inventors on U.S.Patent No. 6,217,866. On June 7, 2005, Yeda amended their U.S.complaint to seek sole inventorship of the subject patent. On November 4,2005, the Court denied the Company’s motion for summary judgment with respectto this matter, as filed with the Court on June 24, 2005. The Company isvigorously defending against the claims asserted in this action. The Company isunable to predict the outcome of this action at the present time.

On March 25, 2004, an action was filed in theUnited Kingdom Patent Office entitled Referrer’s Statement requesting transferof co-ownership and amendment of patent EP (UK) 0 667 165 to add three Yedaemployees as inventors. Also on March 25, 2004, a German action entitledLegal Action was filed in the Munich District Court I, Patent LitigationDivision, seeking to add three Yeda employees as inventors on patent EP (DE) 0667 165. The Company was not named as a party in these actions that relate tothe European equivalent of U.S. Patent No. 6,217,866 discussed above;accordingly, the Company has intervened in the German and the U.K. actions. On June 29,2005, Yeda sought to amend their pleadings in the United Kingdom to seek soleinventorship. 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.

On May 4, 2004, a complaint was filed against theCompany by Massachusetts Institute of Technology (“MIT”) and RepligenCorporation (“Repligen”) in the U.S. District Court for the District ofMassachusetts (04-10884 RGS). This action alleges that ERBITUX infringes U.S.Patent No. 4,663,281, which is owned by MIT and exclusively licensed toRepligen. The Company is vigorously defending against claims asserted in thisaction. The parties have filed motions for summary judgment with respect tothis matter. A hearing on these motions was held on February 2, 2006; adetermination is forthcoming. The Company is unable to predict the outcome ofthis action at the present time.

No reserve has been established in the financialstatements for any of the Yeda or MIT and Repligen actions because the Companydoes not believe that such a reserve is required to be established at this timeunder Statement of Financial Accounting Standards No. 5.

The Company is developinga fully human monoclonal antibody, referred to as IMC-11F8, which it intends tocommercialize outside the United States and Canada. The Company believes it hasthe right to do so under its existing development and license agreement withMerck KGaA. However, Merck KGaA has advised the Company that it believes thatIMC-11F8 is covered under the development and license agreement with Merck KGaAand that it could therefore have the exclusive rights to market IMC-11F8outside the United States and Canada and co-exclusive development rights inJapan, for which it would pay the same royalty as it pays for ERBITUX. TheCompany believes that IMC-11F8 is not covered under the Merck KGaA developmentand license agreement. In agreement with Merck KGaA, the Company submitted thisdispute to binding arbitration through an expedited process outside of theprovisions of the development and license agreement. If successful in thearbitration, Merck KGaA averred that it is entitled 

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

tocertain unspecified damages under the development and license agreement. MerckKGaA subsequently took the position that the expedited arbitration provisionwas no longer valid and the Company sued Merck KGaA in federal court in theSouthern District of New York to either enforce the arbitration provisionspreviously agreed to or to have the court decide the question of whetherIMC-11F8 is or is not covered under the development and license agreement withMerck KGaA. On November 29, 2005, the Court granted the Company’s motionto enforce the expedited arbitration provisions previously agreed to, andsubsequently appointed a new arbitrator to hear and decide this dispute. Thenew arbitrator  scheduled a hearing whichwas concluded on March 2, 2006; a binding decision by the arbitrator isexpected in the near future. While the Company has vigorously defended itsposition as it relates to IMC-11F8 in arbitration, there can be no assurancethat its position will prevail, and it is unable at this time to predict theoutcome of these proceedings. No reserve has been established in the financialstatements for these proceedings because the Company does not believe that sucha reserve is required to be established at this time under Statement ofFinancial Accounting Standards No. 5.

**(15)   Commitments**

***Leases***

The Company leases office, operating and laboratoryspace under various operating lease agreements. The effects of scheduled andspecified rent increases or any “rent holidays” are recognized on astraight-line basis over the lease term. Rent expense was approximately$5,210,000, $3,748,000 and $3,421,000 for the years ended December 31,2005, 2004 and 2003, respectively.

In October 2001, the Company entered into asublease (the “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 22 years, followed by two five-year renewaloption periods. In order to induce the sublandlord to enter into the Sublease,the Company made a loan to the sublandlord in the principal amount of a$10,000,000 note receivable, of which $8,800,000 is outstanding as ofDecember 31, 2005. The loan is secured by a leasehold mortgage on theprime lease as well as a collateral assignment of rents by the sublandlord. Theloan is payable by the sublandlord over 20 years and bears 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 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 $1,690,000 which is beingamortized, as a reduction in lease expense, over the respective term of theSublease. The future minimum lease payments remaining at December 31,2005, are approximately $48,717,000. The Company is in the process ofdeveloping the property for occupancy by its research department.

The Company leases its research and corporateheadquarters in New York City. In August 2004, the Company modified itsexisting operating lease for its corporate headquarters in New York City. Themodification extends the term of the lease, which was to expire atDecember 31, 2004, for an additional ten years for a portion of thepremises and by an additional three years with renewal rights for the spacethat houses its research department. As noted above, the Company plans to moveits research department to its 325 Spring Street, New York location. The futureminimum lease payments remaining at December 31, 2005, are approximately$10,296,000.

F-44

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

In June 2004, the Company entered into anoperating lease for a building located at 59-61 ImClone Drive inBranchburg, New Jersey. The building contains approximately 54,247 square feetof floor area. The lease expires on December 31, 2020 with no option torenew or extend beyond such date. The future minimum lease payments at December 31,2005, are approximately $10,375,000.

In August 2005, the Company entered into anoperating lease for a portion of a building located at 41A ImClone Drive inBranchburg, New Jersey. The Company is leasing approximately 10,704 square feetof floor area. The lease expires on August 31, 2010, with two options torenew for five additional years each. The future minimum lease payments at December 31,2005, are approximately $500,000.

In May 2001, the Company entered into anoperating lease for a 4,000 square foot portion of a 15,000 square footbuilding and an adjacent 6,250 square foot building (collectively the “Brooklynfacility”) in Brooklyn, New York. Effective February 1, 2005, theCompany entered into an additional operating lease for approximately 2,269square feet of a building known as 760 Parkside Avenue in Brooklyn, New York.These facilities were used by our Small Molecule research department, which theCompany decided to discontinue in May 2005. The Company has terminatedthese lease agreements and has no further obligations to the landlord.

Futureminimum lease payments under the operating leases noted above are as follows:(in thousands)

| **Year ending December 31,** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|------------|------------|
| 2006                                        |       | $          | 5,064      |       |
| 2007                                        |       | 5,358      |       |
| 2008                                        |       | 4,200      |       |
| 2009                                        |       | 4,315      |       |
| 2010                                        |       | 4,078      |       |
| 2011 and thereafter                         |       | 48,011     |       |
|                                        |       | $          | 71,026     |       |

 

***Employment Agreements***

In September 2001 the Company entered intothree-year employment agreements with its then-President and Chief ExecutiveOfficer, Dr. Samuel D. Waksal, and then-Chief Operating Officer, Dr. HarlanW. Waksal. The employment agreements provided for stated base salaries, minimumbonuses and benefits aggregating $3,765,000 annually. Dr. Samuel D. Waksalresigned and entered into a separation agreement with the Company in May 2002and Dr. Harlan W. Waksal was appointed President and Chief ExecutiveOfficer. Dr. Harlan W. Waksal resigned from the position of President andChief Executive Officer and was named the Company’s Chief Scientific Officer inApril 2003. On July 18, 2003, Dr. Harlan W. Waksal provided theCompany with notice of his termination effective July 22, 2003 inconnection with his employment agreement. Pursuant to his employment agreementwith the Company, Dr. Harlan W. Waksal received a lump sum paymenttotaling approximately $4,424,000 and is entitled to receive for definedperiods of time the continuation of certain benefits including health care andlife insurance coverage through July 2006, with an estimated cost of$38,000. The related expense of $4,462,000 is included in marketing, generaland administrative expenses in the Consolidated Statements of Operations forthe year ended December 31, 2003. In addition, all outstanding stockoptions held by Dr. Harlan W. Waksal, comprising options to purchase1,000,000 shares of common stock of the Company 

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

at a per share exerciseprice of $50.01 that were granted on September 19, 2001, were deemedamended such that the 666,666 options that remained unvested as of the date ofhis resignation vested immediately on that date. The amended stock optionawards can be exercised at any time until the end of the term of such awards.No compensation expense attributable to the stock options was recorded becausethe change in terms is in accordance with the terms of the original award andalso because the fair market value of the Company’s common stock was below the$50.01 exercise price on the date the option award was amended. In December 2005,in connection with a settlement agreement, (described in Note 14) Dr. SamuelD. Waksal returned to the Company 416,667 of stock options that were previouslyissued him. Such options were cancelled as of December 31, 2005.

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 will be 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.

***Contract Services***

In September 2000, the Company entered into athree-year commercial manufacturing services agreement with Lonza Biologics PLC(“Lonza”) relating to ERBITUX. This agreement was amended in June 2001, September 2001,and August 2003 to include additional services and potentially to extendthe term of the agreement. The total cost for services to be provided under thecommercial manufacturing services agreement was approximately $86,913,000. TheCompany did not incur any costs during 2005 and 2004 and had incurred costs of$23,189,000 for the year ended December 31, 2003, and $85,022,000 wasincurred from inception through December 31, 2005, for services providedunder the commercial manufacturing services agreement. All existing commitmentsunder this agreement were completed during the year ended December 31,2003, but an August 2003 amendment to the agreement allows for potentialmanufacture of a limited number of additional batches.

On January 2, 2002, the Company executed a letterof intent with Lonza to enter into a long-term supply agreement. The long-termsupply agreement would have applied to a large scale manufacturing facilitythat Lonza was constructing, which would have been able to produce ERBITUX in20,000-liter batches. The Company paid Lonza $3,250,000 upon execution of****the letter of intent for the exclusive right to negotiate along-term supply agreement for a portion of the facility’s manufacturingcapacity. In September 2002, the Company wrote-off the deposit as a chargeto marketing, general and administrative expenses, because the exclusivenegotiation period ended on September 30, 2002. In light of the assistancethe Company provided to BMS with respect to preserving and then relinquishingthe manufacturing 

F-46

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

capacity described above,BMS paid the Company $3,250,000 in April 2003 and this amount isrecognized as a reduction to marketing, general and administrative expenses inthe year ended December 31, 2003.

On March 17, 2005,the Company entered into a five year multi-product supply agreement with Lonzafor the manufacture of biological material at the 5,000 liter scale. TheCompany has discretion over which products to manufacture, which may includelater-stage clinical production of the Company’s antibodies currently in PhaseI clinical testing and those nearing Phase I testing. The value of producingall batches allocated under the Agreement is approximately $68 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, our EGFR antibody product. The Companyhas exclusively licensed from Rhone-Poulenc Rorer Pharmaceuticals, now known asAventis, patent applications seeking to cover the therapeutic use of antibodiesto the EGFR in conjunction with anti-neoplastic agents. The agreements with theUniversity of California and Aventis require the Company to pay royalties onsales of ERBITUX that are covered by these licenses. The Company has licenseagreements with Genentech for rights to patents covering certain use ofepidermal growth factor receptor antibodies and with both Genentech andCentocor for rights to patents covering various aspects of antibody technology.Our agreements with both Genentech and Centocor require us to pay royalties onthe sale of ERBITUX that are covered by these licenses. For ERBITUX use incombination with anti-neoplastic agents, royalty expense for all licenses,including Genentech, Centocor, Aventis and the University of California, isapproximately 12.25% of in-market net sales of ERBITUX by our corporate partnerin North America. The Company receives reimbursements, which is included incollaborative agreement revenue, for a portion of these royalty expensesresulting in a net royalty expense of approximately 7.75%. After the first quarterof 2006, gross royalty expense will decrease to approximately 9.25% and netroyalty expense will decrease to approximately 4.75%. For ERBITUX monotherapyuse, gross and net royalty expenses will be reduced by approximately 1% becausecertain licenses are not applicable.

**(16)   Employee Benefit Plans**

***Defined Contribution 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 $1,878,000,$580,000 and $392,000 for the years ended December 31, 2005, 2004 and2003, respectively.

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

***Change in Control Plan***

During 2004, the Board of Directors of the Companyadopted a Change in Control Plan to maintain the focus of certain key employeesof the Company on the business, mitigate the distractions that could be causedif the Company were to become the target of an acquisition strategy, andprovide certain benefits to the covered employees if a change in control of theCompany (as such term is defined in the plan) occurs and/or the employee’semployment is terminated in connection with such change in control. Participantsin the Change in Control Plan are determined by the Compensation Committee.

In the event of a Change in Control, all equity-basedcompensation awards held by the plan participants will vest in full (unless theCompensation Committee determines that the participants’ awards will besubstituted for equity awards in the surviving entity of equivalent economicvalue) and any deferred compensation of participants will becomenonforfeitable. In addition, if a participant in the Change in Control Plan isterminated in connection with a change in control by the Company without causeor by the participant for good reason (as such terms are defined in the plan),the Company will pay to the participant a cash payment equal to the participant’searned but unpaid base salary and bonus, unreimbursed expenses, any otheraccrued obligations, a pro rata bonus based on target bonus for the year oftermination, and a multiple of base salary and bonus (with the multiplierranging from 0.5 to three based on the tier assigned to the participant underthe plan).

In connection with atermination described in the preceding sentence, if the participant signs a waiverand release of claims against the Company, each participant will vest in fullin all long-term incentive arrangements he or she has with the Company and beentitled to continued health coverage for six to 18 months (based on theparticipant’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 Code and the aggregate parachute payment exceeds the safe harbor amountby ten percent or more, the plan provides that the Company shall pay to theparticipant a tax gross-up payment such that after payment by the participantof all federal, state and local excise, income, employment, Medicare and othertaxes resulting from the payment of the parachute payments and the tax gross-uppayments, the participant retains an after-tax amount equal to the amount thathe or she would have retained in the absence of the parachute excise tax.

***Severance Plans***

The Compensation Committee of the Board of Directorsapproved on February 10, 2005 a Senior Executive Severance Plan (the “Plan”)to enhance the predictability of treatment for executives at the level of VicePresident, Senior Vice President and Executive Vice President whose employmentwith the Company is terminated by the Company without cause (as such concept isexplained in the Plan).

As a condition to receipt of benefits under the Plan,a participating employee must sign an agreement and general release in a formacceptable to the Plan administrator under which the participant agrees tocertain confidentiality and non-solicitation provisions for a period of oneyear following his or her employment termination date, agrees to certainnon-competition provisions for the duration of the employee’s receipt ofseverance pay, and releases and discharges the Company and related entities (aswell as any third party for whom the employee provides services on the Company’sbehalf) from any and all 

F-48

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

claims and liabilitiesrelating to the employee’s employment with the Company or the termination ofthe employee’s employment. Receipt of benefits under the Plan is alsocontingent upon the employee’s continued employment through the employmenttermination date designated by the Company. The severance amounts payable to anemployee under the Plan will be reduced, dollar-for-dollar, by the amount ofany other termination payments paid or payable to the employee under any otherplan, program or law (excluding any right to exercise stock options, anyunemployment benefits payable in accordance with state law and payment foraccrued but unused vacation).

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 involuntarytermination of his or her employment by the Company without cause and,following any change in control of the Company, upon his or her voluntarytermination of employment for good reason. The severance plan’s duration is 18months.

***Retention Plan***

On January 18, 2006,the Compensation Committee of the Board of Directors (“Compensation Committee”),approved a Retention Plan, effective as of January 1, 2006, forperformance periods ending December 31, 2007 and****December 31,2008 (each, a “Performance Period”). The Plan is intended to reward employeesfor achieving specified performance goals over specified performance periods. Specifically,the Compensation Committee approved the share performance criteria that will beused to determine cash bonus awards under the Retention Plan, and the terms ofthe individual awards to eligible employees under the Retention Plan for eachof the two Performance Periods. Cash awards under the Retention Plan willdepend on the performance of the Company’s common stock against specifiedtargets, generally measured by comparing the Company’s share price at thebeginning of the Performance Period to the Company’s share price at theconclusion of the Performance Period, in each case based on a 30-dayaverage. In particular, at the end of an applicable Performance Period, thepercentage of the cash award earned (if any) and, correspondingly, the amountof the actual award payouts to an employee for such Performance Period will be (i) equalto the employee’s target award opportunity, (ii) greater than the targetaward opportunity (but in no event more than 150% of the target awardopportunity), or (iii) zero, in each case directly corresponding to actualCompany common stock performance at the conclusion of the Performance Periodcompared to the beginning of the Performance Period. No bonuses will be payablein respect of a Performance Period if the Company’s share price at theconclusion of the Performance Period 

F-49

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

is lessthan the share price at the beginning of the Performance Period. The Company’sshare price at the beginning of the Performance Periods was calculated to be$32.99. Special measurement dates and payment conditions apply in the event ofa change in control of the Company occurring during the Performance Period.

***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)   SupplementalCash Flow Information and Non-cash Investing and Financing Activities:**(in thousands)

| ** **                                                                                                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Cash paid for:                                                                                                                                  |       |                                       |       |   |   |   |   |
| Interest, net of  amounts capitalized of $5,394, $6,087 and $6,059 for the years ended  December 31, 2005, 2004 and 2003, respectively     |       | $                                          | 2,856      |   | $ | 8,729 |   | $ | 7,460 |   |
| Taxes                                                                                                                                           |       | $                                          | 1,400      |   | $ | 6,167 |   | $ | 550 |   |
| Non-cash  investing and financing activities:                                                                                                   |       |                                       |       |   |   |   |   |
| Change in net  unrealized (loss) gain in securities available-for-sale                                                                          |       | $                                          | (8,345     | ) | $ | (987 | ) | $ | 358 |   |
| 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 |   | — |   |

 

**(18)   FairValue of Financial Instruments**

The carrying amounts ofcash and cash equivalents, receivables from corporate partners, accountspayable, and other current liabilities at December 31, 2005 and 2004approximate fair value because maturities are less than one year in duration.The fair value of the 13¤8%convertible senior notes of $600,000,000 was approximately $502,500,000 and$555,750,000 at December 31, 2005 and 2004, respectively, based on theirquoted market price.  See Note 3 for thefair value disclosures of securities available for sale.

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

**(19)   Separation Agreements**

During 2004 the Companyentered into separation agreements with six employees. The total severance paidin relation to these agreements was $330,000. In addition, some of these peoplewere entitled to continue to vest in their stock options and as a result theCompany recorded a stock compensation charge of $2,028,000. There were nosignificant separation agreements entered into in 2005.

**(20)   QuarterlyFinancial Data (Unaudited)**

The tables below summarizethe Company’s unaudited quarterly operating results for 2005 and 2004 (inthousands, except per share data):~~  ~~

| ** **                                                     | ** ** | **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 |   |   |

 

| ** **                                                            | ** ** | **Three months ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **March 31,  2004**         | ** ** | **June 30,  2004** | ** ** | **September 30,  2004** | ** ** | **December 31,  2004** | ** ** |
| Revenues                                                              |       | $                                | 110,164    |   | $ | 73,768 |   |   | $ | 97,461 |   |   |   | $ | 107,297 |   |   |
| Net income (loss)                                                     |       | $                                | 62,736     |   | $ | 24,312 |   |   | $ | 39,783 |   |   |   | $ | (13,178 | ) |   |
| Basic net income  (loss) per share allocable to common stockholders   |       | $                                | 0.83       |   | $ | 0.31 |   |   | $ | 0.48 |   |   |   | $ | (0.16 | ) |   |
| Diluted net income  (loss) per share allocable to common stockholders |       | $                                | 0.76       |   | $ | 0.29 |   |   | $ | 0.44 |   |   |   | $ | (0.16 | ) |   |

 

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