**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

Form 10-Q
| þ     | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                                                      |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the Quarterly Period Ended June 30,  2005**                                                                                                                                                                                                |
| o          | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT  OF 1934**                                                                                                                                    |
| ** ** | ** ** | **For the Transition period from                    to                   ** |

 

**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)

**Not Applicable**

(Former name, formeraddress and former fiscal year, if changed since last report)

----

Indicate by check mark whetherthe 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 þ    No o

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ   No o

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.
| Class                          | ** ** | **Outstanding as of August 3, 2005** |
|--------------------------------|------------|-------------------------------------------|
| Common Stock, par  value $.001 |       | 83,764,944 Shares                         |

 

 

----

**IMCLONE SYSTEMS INCORPORATED**

**INDEX**

| **PART I—FINANCIAL  INFORMATION** | ** ** |
|---------------------------------------------|------------|
| Item 1.                                     |       | Financial Statements | 1 |
|                                        |       | Unaudited  Consolidated Balance Sheets—June 30, 2005 and December 31, 2004 | 1 |
|                                        |       | Unaudited Consolidated Statements of Operations—Three  and Six months ended June 30, 2005 and 2004 | 2 |
|                                        |       | Unaudited Consolidated Statement of Stockholders’  Equity and Comprehensive Income—Six months ended June 30, 2005 | 3 |
|                                        |       | Unaudited Consolidated Statements of Cash Flows—Six  months ended June 30, 2005 and 2004 | 4 |
|                                        |       | Notes to Unaudited Consolidated Financial Statements | 5 |
| Item 2.                                     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 29 |
| Item 3.                                     |       | Quantitative and Qualitative Disclosures About Market  Risk | 44 |
| Item 4.                                     |       | Controls and Procedures | 45 |
| **PART II—OTHER INFORMATION**     | ** ** |
| Item  1.                                    |       | Legal  Proceedings | 46 |
| Item 2.                                     |       | Unregistered Sales of Equity Securities and Use of  Proceeds | 51 |
| Item 3.                                     |       | Defaults upon Senior Securities | 51 |
| Item 4.                                     |       | Submission of Matters to a Vote of Security Holders | 51 |
| Item 5.                                     |       | Other  Information | 52 |
| Item 6.                                     |       | Exhibits | 52 |
| Signatures                                  | 56         |

 

i

----

**PART I.   FINANCIAL INFORMATION**

**Item 1.   *Financial Statements***

**IMCLONESYSTEMS INCORPORATED**

**CONSOLIDATEDBALANCE SHEETS**

**(inthousands, except per share and share data)**

**(Unaudited)**
| ** **                                                                                                                                                                                                                                                              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                              | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                                                                         |       |                    |       |                        |       | ** ** |   |
| Cash and cash equivalents                                                                                                                                                                                                                                               |       | $                       | 4,588      |                        |       | $ | 79,321 | ** ** |   |
| Securities available for  sale.                                                                                                                                                                                                                                         |       | 807,281                 |       |                        | 840,451    | ** ** |   |
| Prepaid expenses.                                                                                                                                                                                                                                                       |       | 7,724                   |       |                        | 4,054      | ** ** |   |
| Amounts due from  corporate partners less allowances of $388 and $430 at June 30, 2005 and  December 31, 2004, respectively                                                                                                                                   |       | 51,228                  |       |                        | 69,753     | ** ** |   |
| Inventories                                                                                                                                                                                                                                                             |       | 66,412                  |       |                        | 40,618     | ** ** |   |
| Other current assets.                                                                                                                                                                                                                                                   |       | 29,067                  |       |                        | 28,240     | ** ** |   |
| Total current assets.                                                                                                                                                                                                                                                   |       | 966,300                 |       |                        | 1,062,437  | ** ** |   |
| Property, plant and  equipment, net                                                                                                                                                                                                                                     |       | 380,950                 |       |                        | 339,293    | ** ** |   |
| Deferred financing costs,  net                                                                                                                                                                                                                                          |       | 14,388                  |       |                        | 16,244     | ** ** |   |
| Other assets                                                                                                                                                                                                                                                            |       | 15,674                  |       |                        | 16,802     | ** ** |   |
| Total assets                                                                                                                                                                                                                                                            |       | $                       | 1,377,312  |                        |       | $ | 1,434,776 | ** ** |   |
| **LIABILITES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                           |       |                    |       |                        |       | ** ** |   |
| Current liabilities:                                                                                                                                                                                                                                                    |       |                    |       |                        |       | ** ** |   |
| Accounts payable  (including $4,445 and $2,535 due Bristol-Myers Squibb Company (“BMS”) at  June 30, 2005 and December 31, 2004, respectively)                                                                                                      |       | $                       | 36,260     |                        |       | $ | 38,492 | ** ** |   |
| Accrued expenses  (including $3,948 and $3,187 due BMS at June 30, 2005 and  December 31, 2004, respectively).                                                                                                                                                |       | 43,819                  |       |                        | 61,177     | ** ** |   |
| Litigation settlement                                                                                                                                                                                                                                                   |       | 25,875                  |       |                        | 75,900     | ** ** |   |
| Withholding tax liability.                                                                                                                                                                                                                                              |       | 18,096                  |       |                        | 18,096     | ** ** |   |
| Current portion of  deferred revenue                                                                                                                                                                                                                                    |       | 101,540                 |       |                        | 108,994    | ** ** |   |
| Other current liabilities                                                                                                                                                                                                                                               |       | 1,031                   |       |                        | 1,031      | ** ** |   |
| Total current liabilities                                                                                                                                                                                                                                               |       | 226,621                 |       |                        | 303,690    | ** ** |   |
| Deferred revenue, less  current portion.                                                                                                                                                                                                                                |       | 305,699                 |       |                        | 348,814    | ** ** |   |
| Long-term debt.                                                                                                                                                                                                                                                         |       | 600,000                 |       |                        | 600,000    | ** ** |   |
| Deferred rent, less  current portion                                                                                                                                                                                                                                    |       | 2,107                   |       |                        | 3,434      | ** ** |   |
| Total liabilities                                                                                                                                                                                                                                                       |       | 1,134,427               |       |                        | 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 83,928,849 and 83,250,146 at  June 30, 2005 and December 31, 2004, respectively; outstanding  83,735,591 and 83,056,888 at June 30, 2005 and December 31, 2004,  respectively |       | 84                      |       |                        | 83         | ** ** |   |
| Additional paid-in  capital                                                                                                                                                                                                                                             |       | 725,186                 |       |                        | 712,819    | ** ** |   |
| Accumulated deficit.                                                                                                                                                                                                                                                    |       | (474,104                | )          |                        | (528,955   | ) |   |
| Treasury stock, at cost;  193,258 shares at June 30, 2005 and December 31, 2004                                                                                                                                                                               |       | (4,300                  | )          |                        | (4,300     | ) |   |
| Accumulated other comprehensive loss:                                                                                                                                                                                                                                   |       |                    |       |                        |       |   |   |
| Net unrealized loss on  securities available for sale                                                                                                                                                                                                                   |       | (3,981                  | )          |                        | (809       | ) |   |
| Total stockholders’  equity                                                                                                                                                                                                                                        |       | 242,885                 |       |                        | 178,838    | ** ** |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                         |       | $                       | 1,377,312  |                        |       | $ | 1,434,776 | ** ** |   |

 

See accompanying notes to consolidated financial statements.

1

----

**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTSOF OPERATIONS(in thousands, except per share data)(Unaudited)**
| ** **                                         | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                          |       |                                            |       |                                          |       |   |   |   |   |
| License fees and milestone revenue                 |       | $                                               | 24,491     |                                          | $          | 18,148 |   | $ | 49,025 |   | $ | 85,646 |   |
| Manufacturing revenue                              |       | 7,894                                           |       | 14,796                                        |       | 18,913 |   | 40,300 |   |
| Royalty revenue                                    |       | 41,791                                          |       | 28,460                                        |       | 78,163 |   | 35,605 |   |
| Collaborative agreement revenue                    |       | 18,209                                          |       | 12,364                                        |       | 32,055 |   | 22,381 |   |
| Total revenues                                     |       | 92,385                                          |       | 73,768                                        |       | 178,156 |   | 183,932 |   |
| Operating expenses:                                |       |                                            |       |                                          |       |   |   |   |   |
| Research and development                           |       | 24,433                                          |       | 18,836                                        |       | 45,606 |   | 39,047 |   |
| Clinical and regulatory                            |       | 8,376                                           |       | 6,202                                         |       | 17,774 |   | 13,264 |   |
| Marketing, general and administrative              |       | 16,833                                          |       | 13,577                                        |       | 34,456 |   | 25,205 |   |
| Royalty expense                                    |       | 14,338                                          |       | 7,636                                         |       | 26,904 |   | 9,679 |   |
| Cost of manufacturing revenue                      |       | 1,106                                           |       | 123                                           |       | 1,849 |   | 336 |   |
| Discontinuation of small molecule research program |       | 6,200                                           |       | —                                        |       | 6,200 |   | — |   |
| Other                                              |       | —                                          |       | —                                        |       | — |   | (1,815 | ) |
| Total operating expenses                           |       | 71,286                                          |       | 46,374                                        |       | 132,789 |   | 85,716 |   |
| Operating income                                   |       | 21,099                                          |       | 27,394                                        |       | 45,367 |   | 98,216 |   |
| Other:                                             |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                    |       | (6,793                                          | )          | (2,456                                        | )          | (13,550 | ) | (2,907 | ) |
| Interest expense                                   |       | 1,687                                           |       | 2,837                                         |       | 3,496 |   | 4,514 |   |
| Loss (gain) on sales of securities                 |       | —                                          |       | —                                        |       | 16 |   | (111 | ) |
| Net other                                          |       | (5,106                                          | )          | 381                                           |       | (10,038 | ) | 1,496 |   |
| Income before income taxes                         |       | 26,205                                          |       | 27,013                                        |       | 55,405 |   | 96,720 |   |
| Provision for income taxes                         |       | 174                                             |       | 2,701                                         |       | 554 |   | 9,672 |   |
| Net income                                         |       | $                                               | 26,031     |                                          | $          | 24,312 |   | $ | 54,851 |   | $ | 87,048 |   |
| Income per common share:                           |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                              |       | $                                               | 0.31       |                                          | $          | 0.31 |   | $ | 0.66 |   | $ | 1.14 |   |
| Diluted                                            |       | $                                               | 0.30       |                                          | $          | 0.29 |   | $ | 0.63 |   | $ | 1.02 |   |
| Shares used in  calculation of income per share:   |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                              |       | 83,616                                          |       | 77,373                                        |       | 83,448 |   | 76,316 |   |
| Diluted                                            |       | 92,074                                          |       | 92,888                                        |       | 92,362 |   | 89,620 |   |

 

See accompanying notes to consolidated financial statements.

2

----

**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENTOF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEFor the Six Months Ended June 30, 2005(in thousands, except share data)(Unaudited)**
| ** **                                                                       | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **Deficit**                           | ** ** | **Stock**  | ** ** | **Loss** | ** ** | **Total** | ** ** |
| Balance at  December 31, 2004                                               |       |                     | —     |                  |       |                    | $          | —          |       |         | 83,250,146 |                                  |       | $          | 83         |   |   | $ | 712,819 |   |   | $ | (528,955 | ) |   | $ | (4,300 | ) |   | $ | (809 | ) |   | $ | 178,838 |   |
| Options exercised                                                                |       |                     |       |                  |       |                    |       |            |       | 660,705      |       |                                  | 1          |       |       | 11,869 |   |   |   |   |   |   |   |   |   |   |   | 11,870 |   |
| Issuance of shares  through employee stock purchase plan                    |       |                     |       |                  |       |                    |       |            |       | 17,998       |       |                                  | —     |       |       | 498 |   |   |   |   |   |   |   |   |   |   |   | 498 |   |
| Comprehensive income:                                                            |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                       |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   | 54,851 |   |   |   |   |   |   |   |   | 54,851 |   |
| Other  comprehensive loss                                                        |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized holding  loss arising during the period                          |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   | (3,188 | ) |   | (3,188 | ) |
| Less:  Reclassification adjustment for realized loss included in net income |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   | (16 | ) |   | (16 | ) |
| Total other  comprehensive loss                                                  |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   | (3,172 | ) |   | (3,172 | ) |
| Comprehensive  income                                                            |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   | 51,679 |   |
| Balance at  June 30, 2005.                                                  |       |                     | —     |                  |       |                    | $          | —          |       |         | 83,928,849 |                                  |       | $          | 84         |   |   | $ | 725,186 |   |   | $ | (474,104 | ) |   | $ | (4,300 | ) |   | $ | (3,981 | ) |   | $ | 242,885 |   |

 

See accompanying notes to consolidated financial statements

3

----

**IMCLONESYSTEMS INCORPORATEDCONSOLIDATED STATEMENTSOF CASH FLOWS(in thousands)(Unaudited)**
| ** **                                                                                                                | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| Cash flows from operating activities:                                                                                     |       |                                          |       |   |   |
| Net income                                                                                                                |       | $                                             | 54,851     |   | $ | 87,048 |   |
| Adjustments to reconcile  net income to net cash (used in) provided by operating activities:                              |       |                                          |       |   |   |
| Depreciation and  amortization                                                                                            |       | 6,659                                         |       | 6,379 |   |
| Amortization of  deferred financing costs.                                                                                |       | 1,856                                         |       | 1,329 |   |
| Expense associated  with stock options                                                                                    |       | —                                        |       | 4,339 |   |
| Loss on disposal  of fixed assets                                                                                         |       | 3,880                                         |       | — |   |
| Other.                                                                                                                    |       | 66                                            |       | (1,815 | ) |
| Loss (gain) on  securities available for sale, net                                                                        |       | 16                                            |       | (111 | ) |
| Changes in:                                                                                                               |       |                                          |       |   |   |
| Prepaid expenses                                                                                                          |       | (3,670                                        | )          | (3,137 | ) |
| Amounts due from  corporate partners                                                                                      |       | 18,525                                        |       | (40,883 | ) |
| Inventories                                                                                                               |       | (25,794                                       | )          | (20,351 | ) |
| Other current assets                                                                                                      |       | (827                                          | )          | (7,412 | ) |
| Other assets                                                                                                              |       | 981                                           |       | (393 | ) |
| Accounts payable                                                                                                          |       | (2,232                                        | )          | (1,065 | ) |
| Accrued expenses                                                                                                          |       | (17,358                                       | )          | 24,471 |   |
| Litigation  settlement                                                                                                    |       | (50,025                                       | )          | — |   |
| Withholding tax  liability                                                                                                |       | —                                        |       | (1,074 | ) |
| Other current  liabilities                                                                                                |       | —                                        |       | (3,153 | ) |
| Deferred revenue                                                                                                          |       | (50,569                                       | )          | 164,412 |   |
| Other liabilities                                                                                                         |       | (1,327                                        | )          | 250 |   |
| Net cash (used in)  provided by operating activities                                                                      |       | (64,968                                       | )          | 208,834 |   |
| Cash flows from investing activities:                                                                                     |       |                                          |       |   |   |
| Acquisitions of  property, plant and equipment                                                                            |       | (52,115                                       | )          | (52,274 | ) |
| Purchases of  securities available for sale                                                                               |       | (212,544                                      | )          | (1,576,486 | ) |
| Sales of  securities available for sale                                                                                   |       | 190,309                                       |       | 74,929 |   |
| Maturities of  securities available for sale                                                                              |       | 52,217                                        |       | 942,474 |   |
| Other                                                                                                                     |       | —                                        |       | (8 | ) |
| Net cash used in  investing activities                                                                                    |       | (22,133                                       | )          | (611,365 | ) |
| Cash flows from financing activities:                                                                                     |       |                                          |       |   |   |
| Proceeds from  exercise of stock options                                                                                  |       | 11,870                                        |       | 63,355 |   |
| Proceeds from  issuance of common stock under the employee stock purchase plan                                            |       | 498                                           |       | 393 |   |
| Proceeds from  issuance of 1 3/8% convertible notes                                                                       |       | —                                        |       | 600,000 |   |
| Deferred financing  costs                                                                                                 |       | —                                        |       | (18,409 | ) |
| Other                                                                                                                     |       | —                                        |       | (18 | ) |
| Net cash provided  by financing activities                                                                                |       | 12,368                                        |       | 645,321 |   |
| Net (decrease)  increase in cash and cash equivalents                                                                     |       | (74,733                                       | )          | 242,790 |   |
| Cash and cash  equivalents at beginning of period                                                                         |       | 79,321                                        |       | 30,865 |   |
| Cash and cash  equivalents at end of period                                                                               |       | $                                             | 4,588      |   | $ | 273,655 |   |
| Supplemental cash flow information:                                                                                       |       |                                          |       |   |   |
| Cash paid for:                                                                                                            |       |                                          |       |   |   |
| Interest, net of  amounts capitalized                                                                                     |       | $                                             | 1,639      |   | $ | 6,364 |   |
| Taxes                                                                                                                     |       | $                                             | 1,400      |   | $ | 3,460 |   |
| Non-cash investing and financing activity:                                                                                |       |                                          |       |   |   |
| Change in net  unrealized loss (gain) in securities available-for-sale                                                    |       | $                                             | 3,188      |   | $ | 799 |   |
| Options exercised  in exchange for mature shares of common stock                                                          |       | $                                             | —     |   | $ | 200 |   |
| Conversion of 5 1/2% subordinated convertible notes into  common stock                                                    |       | $                                             | —     |   | $ | 239,997 |   |
| Reclassification  of unamortized deferred financing costs on the 51¤2% subordinated convertible notes to equity |       | $                                             | —     |   | $ | 1,193 |   |

 

See accompanying notes to consolidated financial statements.

4

----

**IMCLONESYSTEMS INCORPORATEDNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)**

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

The accompanying consolidated financial statements ofImClone Systems Incorporated (“ImClone Systems” or the “Company”) as of June 30,2005 and for the three and six months ended June 30, 2005 and 2004 areunaudited. The accompanying unaudited consolidated balance sheets, statementsof operations, statement of stockholders’ equity and comprehensive income andstatements of cash flows have been prepared in accordance with U.S. generallyaccepted accounting principles (“GAAP”) for interim financial information andin conjunction with the rules and regulations of the Securities andExchange Commission (“SEC”). Accordingly, they do not include all of thedisclosures required by GAAP for complete financial statements. The financialstatements reflect all adjustments, consisting only of normal, recurringadjustments, which are in the opinion of management, necessary for a fairpresentation for the interim periods. Management of the Company has made anumber of estimates and assumptions relating to the reporting of assets andliabilities and related revenue and expense accounts and the disclosure ofcontingent assets and liabilities to prepare these consolidated financialstatements in conformity with GAAP. Actual results could differ materially fromthose estimates. These financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2004, as filed with the SEC.

The results of operations for the interim periods arenot necessarily indicative of results to be expected for the entire fiscal yearor any other period. Certain amounts previously reported have been reclassifiedto conform to the current year’s presentation. For example, in the ConsolidatedStatement of Cash Flows, the Company has reclassified master notes and otherinvestments of approximately $286.4 million as of June 30, 2004, from cashand cash equivalents to securities available for sale. In addition, the Companyhas reclassified Collaborative agreement revenue and Royalty expense in 2004 toreflect the reimbursed portion of royalties for agreements that were finalizedin January of 2005.

The Company is a biopharmaceutical company whosemission is to advance oncology care by developing and commercializing aportfolio of targeted treatments designed to address the medical needs of patientswith cancer. A substantial portion of the Company’s efforts and resources aredevoted to research and development conducted on its own behalf and throughcollaborations with corporate partners and academic research and clinicalinstitutions. The Company does not operate separate lines of business orseparate business entities and does not conduct any of its operations outsideof the United States. Accordingly, the Company does not prepare discretefinancial information with respect to separate product areas or by location anddoes not have separately reportable segments.

On February 12, 2004, the United States Food andDrug Administration (“FDA”) approved ERBITUX® (Cetuximab) Injectionfor 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. On June 18, 2004, the FDA approved theCompany’s Chemistry Manufacturing and Controls (CMC) supplemental BiologicsLicense Application (sBLA) for licensure of its manufacturing facility,referred to as BB36.

On December 1, 2003,Swissmedic, the Swiss agency for therapeutic products, approved ERBITUX inSwitzerland for the treatment of patients with colorectal cancer who no longerrespond to standard 

5

----

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. As of June 30, 2005, Merck KGaA has obtainedapproval for ERBITUX in 39 countries, with Hong Kong, South Korea, Colombia andIsrael approving it during the second quarter of 2005.

**Impactof Recent Accounting Pronouncements**

On November 24, 2004 the Financial AccountingStandards 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, “InventoryPricing”, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). Theprovisions of this Statement are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The adoption of thisaccounting pronouncement is not expected to have a material effect on theCompany’s consolidated financial statements.

On December 16, 2004the FASB issued Statement No. 123 (revised 2004),*Share-Based Payment* (“Statement 123R”).This Statement 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. On March 29, 2005, the SEC issued Staff Accounting Bulletin No. 107,*Share-Based Payment,* which summarizes theviews of the staff regarding the interaction between Statement 123R and certainSEC rules and regulations and provides the staff’s views regarding thevaluation of share-based payment arrangements for public companies. Statement123R was originally effective as of the beginning of the first interim orannual reporting period that begins after June 15, 2005. However, on April 14,2005 the SEC announced a new rule that allows companies to implementStatement 123R at the beginning of their first fiscal year, beginning after June 15,2005. As such, the Company will adopt Statement 123R in the first quarter of2006. The adoption of this Statement is expected to have a material effect onthe Company’s consolidated financial statements.

**Stock Based Compensation Plans**

The Company has two types of stock-based compensationplans: a stock option plan and a stock purchase plan. The Company accounts forits stock-based compensation plans in accordance with the provisions of APBOpinion No. 25, and related interpretations including Statement ofFinancial Accounting Standards Board Interpretation No. 44, “Accountingfor Certain Transactions Involving Stock Compensation—An Interpretation of APBOpinion No. 25” (“Interpretation No. 44”). Accordingly, compensationexpense would be recorded on the date of grant of an option to an employee ormember of the Board of Directors (the “Board”) only if the market price of theunderlying stock on the date of grant exceeds the exercise price. Historically,the Company’s stock option grants have been based on the closing market priceof its stock on the date of grant.

6

----

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 weightedaverage assumptions used:
| ** **               | ** ** | **Six Months  Ended June 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------|------------|
| ** **               | ** ** | **2005**                                      | ** ** | **2004** | ** ** |
| Expected life  (years).  |       | 4.31                                          |       | 4.34 |   |
| Risk free  interest rate |       | 3.52                                          | %          | 2.49 | % |
| Expected  volatility     |       | 83.00                                         | %          | 87.00 | % |
| Dividend yield           |       | 0.00                                          | %          | 0.00 | % |

 

Thefollowing table illustrates the effect on net income and net income per commonshare if the compensation cost for the Company’s stock option grants had beendetermined based on the fair value at the grant dates for awards consistentwith the fair value method of Statement of Financial Accounting Standards No. 123“Accounting for Stock-Based Compensation (“SFAS 123”): 
| ** **                                                                                                       | ** ** | **Three Months  Ended June 30,**                            | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                                              | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                       | ** ** | **(in thousands, except per share amounts)** | ** ** |
| Net income as  reported                                                                                          |       | $                                                                     | 26,031     |                                     | $          | 24,312 |   | $ | 54,851 |   | $ | 87,048 |   |
| Add: Stock-based  employee compensation expense included in net income, tax effected                             |       | —                                                                |       | 348                                      |       | — |   | 1,520 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method, tax effected |       | (13,096                                                               | )          | (11,065                                  | )          | (29,045 | ) | (23,908 | ) |
| Pro forma net  income                                                                                            |       | $                                                                     | 12,935     |                                     | $          | 13,595 |   | $ | 25,806 |   | $ | 64,660 |   |
| Net income per  common share:                                                                                    |       |                                                                  |       |                                     |       |   |   |   |   |
| Basic, as reported                                                                                               |       | $                                                                     | 0.31       |                                     | $          | 0.31 |   | $ | 0.66 |   | $ | 1.14 |   |
| Basic, pro forma                                                                                                 |       | $                                                                     | 0.15       |                                     | $          | 0.18 |   | $ | 0.31 |   | $ | 0.85 |   |
| Diluted, as reported                                                                                             |       | $                                                                     | 0.30       |                                     | $          | 0.29 |   | $ | 0.63 |   | $ | 1.02 |   |
| Diluted, pro  forma                                                                                              |       | $                                                                     | 0.15       |                                     | $          | 0.18 |   | $ | 0.31 |   | $ | 0.78 |   |

 

At June 30, 2005 and 2004, there wereapproximately 11,367,000 and 4,921,000, respectively, of potential commonshares excluded from the diluted income per share computation for the threemonths ended June 30, 2005 and 2004 because their inclusion would have hadan anti-dilutive effect. At June 30, 2005 and 2004, there wereapproximately 10,910,000 and 5,619,000, respectively, of potential commonshares excluded from the diluted income per share computation for the sixmonths ended June 30, 2005 and 2004 because their inclusion would have hadan anti-dilutive effect.

The calculation of diluted pro forma income per commonshare for the three and six months ended June 30, 2005 excludes the effectof 6,336,000 potential common shares attributable to the 1 3/8% convertiblenotes because their inclusion would have had an anti-dilutive effect. The proforma effect on net income for the three and six months ended June 30,2005 and 2004 are not necessarily indicative of the pro forma effect on futureperiods’ operating results.

During the first half of2005, the Company granted stock options to purchase 175,000 shares of theCompany’s stock to certain executives hired during this period on theirrespective dates of commencement of employment. These stock options had anexercise price equal to the closing price of the Company’s common stock on thedates of grant and other terms commensurate with options granted under ImClone 

7

----

Systems’2002 Stock Option Plan. Such grants were approved by the Compensation Committeeof the Company’s Board of Directors.

**Comprehensive Income**

The following tablereconciles net income to comprehensive income:
| ** **                                                                        | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                        | ** ** | **2005**                                   | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                        | ** ** | **(in thousands)**                    | ** ** |
| Net income                                                                        |       | $                                          | 26,031     |                                     | $          | 24,312 |   | $ | 54,851 |   | $ | 87,048 |   |
| Other comprehensive  income (loss):                                               |       |                                       |       |                                     |       |   |   |   |   |
| Unrealized holding gain  (loss) arising during the period                         |       | 3,896                                      |       | (765                                     | )          | (3,188 | ) | (799 | ) |
| Less: Reclassification  adjustment for realized (gain) loss included innet income |       | —                                     |       | —                                   |       | 16 |   | (111 | ) |
| Total other  comprehensive income (loss)                                          |       | 3,896                                      |       | (765                                     | )          | (3,172 | ) | (910 | ) |
| Total comprehensive  income                                                       |       | $                                          | 29,927     |                                     | $          | 23,547 |   | $ | 51,679 |   | $ | 86,138 |   |

 

The tax (expense) benefiton the items included in Other comprehensive loss assuming they were recognizedin income would be approximately ($60,000) and $76,000 for the three monthsended June 30, 2005 and 2004, respectively, and $32,000 and $91,000 forthe six months ended June 30, 2005 and 2004, respectively.

**Fair Value of Financial Instruments**

The fair value of theCompany’s 1 3/8% convertible senior notes of $600,000,000 was approximately$492,750,000 at June 30, 2005.

**(2)   Inventories**

Inventoriesare stated at the lower of cost, determined on the first-in-first-out method,or market. Inventories consist of the following:
| ** **                  | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **(in thousands)** | ** ** |
| Raw materials and  supplies |       | $                       | 13,852     |                        |       | $ | 9,536 |   |   |
| Work in process.            |       | 44,197                  |       |                        | 30,082     |   |   |
| Finished goods              |       | 8,363                   |       |                        | 1,000      |   |   |
| Total                       |       | $                       | 66,412     |                        |       | $ | 40,618 |   |   |

 

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, fill and ship previously manufactured bulk inventory whose costshad already been expensed as research and development. Although it is theCompany’s policy to state inventories reflecting full absorption costs, untilthe Company sells all of its existing inventories for which all or a portion ofthe costs were previously expensed, inventories will reflect costs incurred toprocess into finished goods previously expensed raw materials and work inprocess, as well as costs to manufacture inventory subsequent to February 12,2004. As the Company continues to process the inventory that was partiallyproduced and expensed prior to February 13, 2004, the Company willcontinue 

8

----

toreflect in inventory only those incremental costs incurred to complete suchinventory into finished goods.

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

Property, plant andequipment are recorded at cost and consist of the following: 
| ** **                                      | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
| Land                                            |       | $                       | 4,899      |                        |       | $ | 4,899 |   |   |
| Building                                        |       | 67,323                  |       |                        | 67,083     |   |   |
| Leasehold improvements                          |       | 13,660                  |       |                        | 15,518     |   |   |
| Machinery and equipment                         |       | 57,858                  |       |                        | 55,430     |   |   |
| Furniture and fixtures.                         |       | 4,553                   |       |                        | 4,265      |   |   |
| Construction in  progress.                      |       | 291,887                 |       |                        | 248,736    |   |   |
| Total cost.                                     |       | 440,180                 |       |                        | 395,931    |   |   |
| Less accumulated  depreciation and amortization |       | (59,230                 | )          |                        | (56,638    | ) |   |
| Property, plant and  equipment, net.            |       | $                       | 380,950    |                        |       | $ | 339,293 |   |   |

 

The Company is building a multiple productmanufacturing facility (“BB50”) in Branchburg, New Jersey with capacity of upto 110,000 liters (production volume). Management estimates that the 250,000square foot facility will cost approximately $290,000,000. The actual cost ofthe new facility may change depending upon various factors. The Company hasincurred approximately $267,254,000 in conceptual design, engineering,pre-construction, construction and start up costs (which are included inconstruction in progress in the preceding table), excluding capitalizedinterest of approximately $17,239,000, through June 30, 2005. As of June 30,2005, committed purchase orders totaling approximately $190,261,000 have beenplaced with subcontractors for equipment related to this project and$72,297,000 for engineering, procurement, construction management andvalidation costs. Through June 30, 2005, $260,467,000 has been paidrelating to these committed purchase orders. All outstanding committed purchaseorders as of June 30, 2005 require payment in 2005.

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.

**(4)   Contract Services**

On March 17, 2005,the Company entered into a five year multi-product supply agreement (the “Agreement”)with Lonza Biologics PLC (“Lonza”) for the manufacture of biological materialat the 5,000 liter scale. The Company has discretion over which products tomanufacture, which may include later-stage clinical production of the Company’santibodies currently in Phase I clinical testing and those nearing Phase Itesting. The notional value of producing all batches allocated under the Agreementis approximately $68 million, unless terminated earlier. The Agreement providesthat the Company can cancel any batches at any time; however, depending on howmuch notice the Company provides Lonza, the Company could incur a cancellationfee that varies based on timing of the cancellation. This cancellation fee isonly applicable if Lonza does not resell the slots reserved for the cancelledbatches.

9

----

**(5)   WithholdingTax Assets and Liability**

Federal and applicable state tax law requires anemployer to withhold income taxes at the time of an employee’s exercise ofnon-qualified stock options or warrants issued in connection with theperformance of services by the employee. An employer that does not do so isliable for the taxes not withheld if the employee fails to pay his or her taxesfor the year in which the non-qualified stock options or warrants areexercised. In 2000 and prior years, the Company generally did not require thewithholding of federal, state or local income taxes and, in certain years,employment payroll taxes at the time of the exercise of non-qualified stockoptions or warrants. Prior to 1996, the Company did not comply with taxreporting requirements with respect to the exercise of non-qualified stockoptions or warrants.

In January 2003, the New York State Department ofTaxation and Finance (“New York State”) notified the Company that it was liablefor the New York State and City income taxes that were not withheld because oneor more of the Company’s employees who exercised certain non-qualified stockoptions in 1999 and 2000 failed to pay New York State and City income taxes forthose years. On March 13, 2003, the Company entered into a closingagreement with New York State, paying $4,500,000 by March 31, 2003, tosettle the matter. On June 17, 2003, New York State notified the Companythat based on the warrant issue identified below, it was continuing apreviously conducted audit of the Company and was evaluating the terms of theclosing agreement to determine whether or not 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 years1999-2001. The Company had an estimated liability related to this contingencyof $2,815,000 as of December 31, 2003. Therefore the Company haseliminated such liability and has recognized a benefit of $1,815,000 as arecovery in the Consolidated Statements of Operations in the first quarter of2004.

On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to federalincome taxes on the exercise of non-qualified stock options on which income taxwas not properly withheld. Although the IRS has not yet asserted that theCompany is required to make a payment with respect to such failure to withhold,the IRS may assert that such a liability exists, and may further assert thatthe Company is liable for interest and penalties. The Company has determinedthat all but an insignificant amount of the potential liability for withholdingtaxes with respect to exercises of non-qualified stock options in 1999 and 2000is attributable to those amounts related to Dr. Samuel D. Waksal, theCompany’s former Chief Executive Officer. In addition, in the course of theCompany’s investigation into its potential liability in respect of thenon-qualified stock options described above, the Company identified certainwarrants that were granted in 1991 and prior years to then current and formerofficers, directors and advisors that the Company previously treated asnon-compensatory warrants and thus not subject to tax withholding andinformation reporting requirements upon exercise. Accordingly, when exercisedin 2001 and prior years, the Company did not deduct income and payroll taxesupon exercise or report applicable information to the taxing authorities. TheCompany now believes that such treatment was incorrect, and that the exerciseof such warrants by current and former officers of the Company should have beentreated in the same manner for withholding and reporting purposes as theexercise of non-qualified stock options. The Company has informed the relevantauthorities, including the IRS, of this matter and intends to resolve itsliability, in conjunction with its resolution of the matter described above.

The Company has recognized assets at the time ofexercise relating to certain individuals. These assets are based on the factthat individuals are required by law to pay their personal income taxes, whichrelieves the Company of its liability for such withholding taxes, but notinterest and penalties, as well as the Company’s determination that theseindividuals had the means and intention to satisfy their tax liabilities, andlegal claims the Company has against these individuals both during and aftertheir employment with the Company. As of June 30, 2005 and December 31,2004 the Company has recorded $274,000 of withholding tax assets in itsConsolidated Balance Sheets.

10

----

One former officer anddirector to whom warrants were issued and previously treated asnon-compensatory warrants was the Company’s former Chief Executive Officer, Dr. SamuelD. Waksal. The Company has made demands on Dr. Samuel D. Waksal to pay thetaxes associated with the exercise of these warrants and certain non-qualifiedstock options and to indemnify the Company against any liability that it mayincur to taxing authorities in respect of the warrants or non-qualified stockoptions that were previously exercised. The Company determined that subsequentto the Company’s receipt of a “refusal to file” letter from the FDA on December 28,2001, with respect to its rolling Biologics License Application for ERBITUX, Dr. SamuelD. Waksal’s financial condition deteriorated and therefore the recoverabilityof the asset became doubtful. The Company has recorded $18,096,000 ofwithholding tax liability related to exercise of stock options and warrants andfringe benefits in its Consolidated Balance Sheets as of June 30, 2005 andDecember 31, 2004.

**(6)   Income Per Common Share**

Basic income per common share is computed by dividingnet income by the weighted-average number of common shares outstanding duringthe period. Diluted income per common share is computed by dividing net incomeby the weighted-average number of common shares outstanding during the periodincreased to include all additional common shares that would have beenoutstanding assuming potentially dilutive common shares had been issued1) on the exercise of stock options and any proceeds thereof used torepurchase common stock at the average market price during the period and2) on conversion of convertible debt. In addition, in computing thedilutive effect of convertible debt, the numerator is adjusted to add back theafter-tax amount of interest recognized in the period. The number of dilutedpotential common shares for the three and six months ended June 30, 2004has been adjusted to conform to EITF Issue No. 04-8 “The Effect ofContingently Convertible Debt on Diluted Earnings per Share”. However, suchadjustment has not impacted the diluted income per share for the period noted. AtJune 30, 2005 and 2004, there were approximately 11,367,000 and 4,921,000,respectively, of potential common shares excluded from the diluted income pershare computation for the three months ended June 30, 2005 and 2004because their inclusion would have had an anti-dilutive effect. At June 30,2005 and 2004, there were approximately 10,910,000 and 5,619,000, respectively,of potential common shares excluded from the diluted income per sharecomputation for the six months ended June 30, 2005 and 2004 because theirinclusion would have had an anti-dilutive effect.

11

----

Basicand diluted income per common share (EPS) were computed using the following: 
| ** **                                                                 | ** ** | **Three Months  Ended June 30,**                         | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                                           | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                 | ** ** | **(in thousands, except per share data)** | ** ** |
| EPS  Numerator—Basic:                                                 |       |                                                               |       |                                     |       |   |   |   |   |
| Net income                                                                 |       | $                                                                  | 26,031     |                                     | $          | 24,312 |   | $ | 54,851 |   | $ | 87,048 |   |
| EPS  Denominator—Basic:                                               |       |                                                               |       |                                     |       |   |   |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 83,616                                                             |       | 77,373                                   |       | 83,448 |   | 76,316 |   |
| EPS  Numerator—Diluted:                                               |       |                                                               |       |                                     |       |   |   |   |   |
| Net income                                                                 |       | $                                                                  | 26,031     |                                     | $          | 24,312 |   | $ | 54,851 |   | $ | 87,048 |   |
| Adjustment for interest, net of amounts capitalized  and income tax effect |       | 1,676                                                              |       | 2,553                                    |       | 3,461 |   | 4,063 |   |
| Net income, adjusted                                                       |       | $                                                                  | 27,707     |                                     | $          | 26,865 |   | $ | 58,312 |   | $ | 91,111 |   |
| EPS  Denominator—Diluted:                                             |       |                                                               |       |                                     |       |   |   |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 83,616                                                             |       | 77,373                                   |       | 83,448 |   | 76,316 |   |
| Effect of dilutive securities:                                             |       |                                                               |       |                                     |       |   |   |   |   |
| Stock options                                                              |       | 2,122                                                              |       | 8,133                                    |       | 2,578 |   | 7,435 |   |
| Convertible subordinated notes                                             |       | 6,336                                                              |       | 7,382                                    |       | 6,336 |   | 5,869 |   |
| Dilutive potential common shares                                           |       | 8,458                                                              |       | 15,515                                   |       | 8,914 |   | 13,304 |   |
| Weighted-average common shares and dilutive  potential common shares       |       | 92,074                                                             |       | 92,888                                   |       | 92,362 |   | 89,620 |   |
| Basic income per  share                                                    |       | $                                                                  | 0.31       |                                     | $          | 0.31 |   | $ | 0.66 |   | $ | 1.14 |   |
| Diluted income per share                                                   |       | $                                                                  | 0.30       |                                     | $          | 0.29 |   | $ | 0.63 |   | $ | 1.02 |   |

 

**(7)   Taxes**

The Company’s estimatedeffective income tax rate for 2005 is 1.0%, which is less than the federalstatutory rate of 35%. The difference from the statutory rate results from theutilization of fully reserved deferred tax assets, primarily the amortizationof deferred revenue associated with license fees and milestones, which weretaxable in prior periods. As of June 30, 2005 the Company has provided avaluation allowance against its net deferred tax assets because, more likelythan not, its net deferred tax assets will not be realized.

**(8)   Collaborative Agreements**

***(A)*** Merck KGaA

In April 1990, the Company entered into adevelopment and commercialization agreement with Merck KGaA with respect toBEC2 and the recombinant gp75 antigen product candidate. The agreement has beenamended a number of times, most recently in December 1997. The agreementgrants 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. Theagreement also grants Merck KGaA a license, without the right to sublicense, touse, sell, or have sold, but not to make BEC2 within North America inconjunction with the Company. Pursuant to the terms of the agreement theCompany has retained the rights, (1) without the right to sublicense, tomake, have made, use, sell, or have sold BEC2 in North America in conjunctionwith Merck KGaA and (2) with the right to sublicense, to make, have made,use, sell, or have sold gp75 antigen in North America. In return, the Companyhas recognized research support payments totaling $4,700,000 and is notentitled to any further research support payments under the agreement. MerckKGaA is also 

12

----

required to make paymentsof up to $22,500,000, of which $5,000,000 has been received through June 30,2005, based on milestones achieved in the licensed products’ development.  The Company does not anticipate any additionalmilestone payments regarding BEC2. Merck KGaA is also responsible for worldwidecosts of up to DM17,000,000 associated with a multi-site, multinational Phase IIIclinical trial for BEC2 in limited disease small-cell lung carcinoma. Thisexpense level was reached during the fourth quarter of 2000 and all expensesincurred from that point forward are being shared 60% by Merck KGaA and 40% bythe Company. The Company incurred approximately $7,000 and $57,000 in the threemonths ended June 30, 2005 and 2004, respectively, and $29,000 and$129,000 for the six months ended June 30, 2005 and 2004, respectively,associated with this agreement. On June 7, 2004, the Company and MerckKGaA announced that the international, randomized Phase III clinical trial ofthe Companies’ BEC2 cancer vaccine did not meet its primary endpoint ofsurvival. Following the analysis of the Phase III data in small cell lungcancer, the Company and Merck KGaA agreed to discontinue further development ofBEC2.

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 June 30, 2005 in up-front cashfees and early cash payments based on the achievement of defined milestones. Anadditional $30,000,000 has been received through June 30, 2005 based uponthe achievement of further milestones for which Merck KGaA received equity inthe Company. The equity interests underlying the milestone payments were pricedat varying premiums to the then-market price of the common stock depending uponthe timing of the achievement of the respective milestones.

Merck KGaA pays the Company a royalty on sales ofERBITUX outside of the United States and Canada. In August 2001, theCompany and Merck KGaA amended this agreement to provide, among other things,that Merck KGaA may manufacture ERBITUX for supply in its territory and mayutilize a third party to do so upon the Company’s reasonable acceptance. Theamendment further released Merck KGaA from its obligations under the agreementrelating to providing a guaranty under a $30,000,000 credit facility relatingto the build-out of BB36. In addition, the amendment provides that thecompanies have co-exclusive rights to ERBITUX in Japan, including the right tosublicense and Merck KGaA waived its right of first offer in the case of aproposed sublicense by the Company of ERBITUX in the Company’s territory. Inconsideration for the amendment, the Company agreed to a reduction in royalties’payable by Merck KGaA on sales of ERBITUX in Merck KGaA’s territory.

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 replaces previous supplyarrangements. The term sheet provides 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 use reasonableefforts to enter into its own contract manufacturing agreements for supply ofERBITUX and obligates Merck KGaA to reimburse the Company for costs associatedwith transferring technology and any other services requested by Merck KGaArelating to establishing its own manufacturing or contract manufacturingcapacity. Amounts due from Merck KGaA related to these arrangements totaledapproximately $8,680,000 and $8,096,000 at June 30, 2005 and December 31,2004, respectively, and are included in amounts due from corporate partners inthe Consolidated Balance Sheets. The Company recorded collaborative agreementrevenue related to these arrangements in the Consolidated Statements ofOperations totaling approximately $6,660,000 and $1,605,000 for the three monthsended June 30, 2005 and 2004, respectively, and $10,942,000 and $3,767,000for the six months ended June 30, 2005 and 2004, respectively. Of theseamounts, $5,490,000 and $627,000 for the three months ended June 30, 2005and 2004, respectively, and $8,497,000 and $2,171,000 for the six months ended June 30,2005 and 2004, respectively, related to 

13

----

reimbursablecosts associated with supplying ERBITUX to Merck KGaA for use in clinicaltrials. The related manufacturing costs in 2004 and a portion in 2005 of theERBITUX sold to Merck KGaA was produced and expensed prior to February 13,2004 when the related raw materials were purchased and the associated directlabor and overhead was consumed since the Company did not have approval to sellERBITUX. Reimbursable clinical and regulatory expenses were incurred andtotaled approximately $386,000 and $417,000 for the three months ended June 30,2005 and 2004, respectively, and $1,058,000 and $813,000 for the six monthsended June 30, 2005 and 2004, respectively. These amounts have beenrecorded as clinical and regulatory expenses, and also as collaborativeagreement revenue in the Consolidated Statements of Operations. Reimbursablegeneral and administrative expenses and royalty expenses were incurred andtotaled approximately $784,000 and $561,000 for the three months ended June 30,2005 and 2004, respectively and $1,387,000 and $783,000 for the six monthsended June 30, 2005 and 2004, respectively. These amounts have beenrecorded as marketing, general and administrative expenses, royalty expense,and also as collaborative agreement revenue in the Consolidated Statements ofOperations. The Company has a liability due Merck KGaA of approximately$1,929,000, and $2,059,000 as of June 30, 2005 and December 31, 2004,respectively.

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

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

On March 5, 2002, theCompany amended the Commercial Agreement with E.R. Squibb and BMS. Theamendment changed certain economics of the Commercial Agreement and expandedthe clinical and strategic roles of BMS in the ERBITUX development program. Oneof the principal economic changes to the Commercial Agreement is that theCompany received payments of $140,000,000 on March 7, 2002 and $60,000,000on March 5, 2003. Such payments are in lieu of the $300,000,000 milestonepayment the Company would have received upon acceptance by the FDA of theERBITUX BLA under the original terms of the Commercial Agreement. In addition,the Company agreed to resume and has resumed construction of BB50. The terms ofthe Commercial Agreement, as amended on March 5, 2002, are set forth inmore detail below.

14

----

***Commercial Agreement***

*Rights Granted to E.R. Squibb*—Pursuantto the Commercial Agreement, as amended on March 5, 2002, the Companygranted to E.R. Squibb (1) the exclusive right to distribute, and theco-exclusive right to develop and promote (together with the Company) anyprescription pharmaceutical product using the compound ERBITUX (the “product”)in the United States and Canada, (2) the co-exclusive right to develop,distribute and promote (together with the Company and together orco-exclusively with Merck KGaA and its affiliates) the product in Japan, and (3) thenon-exclusive right to use the Company’s registered trademarks for the productin the United States, Canada and Japan (collectively, the “territory”) inconnection with the foregoing. In addition, the Company agreed not to grant anyright or license to any third party, or otherwise permit any third party, todevelop ERBITUX for animal health or any other application outside the humanhealth field without the prior consent of E.R. Squibb (which consent may not beunreasonably withheld).

*Rights Granted to the Company*—Pursuantto the Commercial Agreement, E.R. Squibb has granted to the Company and theCompany’s affiliates a license, without the right to grant sublicenses (otherthan to Merck KGaA and its affiliates for use in Japan and to any third partyfor use outside the territory), to use solely for the purpose of developing,using, manufacturing, promoting, distributing and selling ERBITUX or theproduct, any process, know-how or other invention developed solely by E.R.Squibb or BMS that has general utility in connection with other products orcompounds in addition to ERBITUX or the product (“E.R. Squibb Inventions”).

*Up-Front and Milestone Payments*—TheCommercial Agreement 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 paidon September 19, 2001, $140,000,000 was paid on March 7, 2002,$60,000,000 was paid on March 5, 2003, and $250,000,000 was paid on March 12,2004. An additional $250,000,000 would become payable upon receipt of marketingapproval from the FDA with respect to a second tumor type for ERBITUX. All suchpayments are non-refundable and non-creditable.

*Distribution Fees*—TheCommercial Agreement provides that E.R. Squibb shall pay the Companydistribution fees based on a percentage of “annual net sales” of the product(as defined in the Commercial Agreement) by E.R. Squibb in the United Statesand Canada. The distribution fee is 39% of net sales in the United States andCanada.

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 the Company the amount of such distribution fee, and in theevent of an operating loss, the Company shall credit E.R. Squibb the amount ofsuch distribution fee.

*Development of the Product*—Responsibilitiesassociated with clinical and other ongoing studies are apportioned between theparties as determined by the product development committee described below. TheCommercial Agreement provides for the establishment of clinical developmentplans setting forth the activities to be undertaken by the parties for thepurpose of obtaining marketing approvals, providing market support anddeveloping new indications and formulations of the product. After transition ofresponsibilities for certain clinical and other studies, each party isprimarily responsible for performing the studies designated to it in theclinical development plans. In the United States and Canada, the CommercialAgreement provides that E.R. Squibb is responsible for 100% of the cost of allclinical studies other than those studies undertaken post-launch which are notpursuant to an IND (e.g. Phase IV studies), the cost of which is shared equallybetween E.R. Squibb and ImClone Systems. As between E.R. Squibb and ImCloneSystems, each is responsible for 50% of the costs of all studies in Japan. TheCompany has also agreed, and may agree in the future, to share with E.R.Squibb, on terms other than the foregoing, costs of clinical trials that theCompany believes are not potentially registrational but should be undertakenprior to launch in the United States, Canada or Japan. The Company has incurred$2,459,000 and 

15

----

$3,219,000 pursuant tosuch cost sharing for the three months ended June 30, 2005 and 2004,respectively, and $5,289,000 and $4,721,000 for the six month ended June 30,2005 and 2004, respectively. In addition, to the extent that in 2005 theCompany and BMS exceed the contractual maximum registrational costs forclinical development, the Company has agreed to share such cost with BMS. TheCompany has also incurred $347,000 and $99,000 for the three months ended June 30,2005 and 2004, respectively, and $666,000 and $443,000 for the six months endedJune 30, 2005 and 2004, respectively, related to the agreement withrespect 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 the product has been registered in thatcountry. Pursuant to the terms of the Commercial Agreement, as amended, AndrewG. Bodnar, M.D., J.D., Senior Vice President, Strategy and Medical &External Affairs of BMS, and a member of the Company’s Board of Directors, isentitled to oversee the implementation of the clinical and regulatory plan forERBITUX.

*Distribution and Promotion of theProduct*—Pursuant to the Commercial Agreement, E.R. Squibb hasagreed to use all commercially reasonable efforts to launch, promote and sellthe product in the territory with the objective of maximizing the salespotential of the product and promoting the therapeutic profile and benefits ofthe product in the most commercially beneficial manner. In connection with itsresponsibilities for distribution, marketing and sales of the product in theterritory, E.R. Squibb is performing all relevant functions, including but notlimited to the provision of sales force personnel, marketing, warehousing andphysical 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 maximize the potential commercialopportunities for ERBITUX and to serve as a foundation for the marketing offuture products derived either from within the Company’s pipeline or throughbusiness development opportunities.

*Manufacture and Supply*—TheCommercial Agreement provides that the Company is responsible for themanufacture and supply of all requirements of ERBITUX in bulk form (“API”) forclinical and commercial use in the territory, and that E.R. Squibb willpurchase all of its requirements of API for commercial use from the Company.The Company supplies API for clinical use at the Company’s fully burdenedmanufacturing cost, and supplies API for commercial use at the Company’s fullyburdened manufacturing cost plus a mark-up of 10%. Upon the expiration,termination or assignment of any existing agreements between ImClone Systemsand third party manufacturers, E.R. Squibb will be responsible for processingAPI into the finished form of the product. Sales of ERBITUX to BMS forcommercial use are reflected in the Company’s Consolidated Statements ofOperations as Manufacturing revenue.

*Management*—Theparties 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 

16

----

the annual budgets andmulti-year expense forecasts, and resolving disputes, disagreements anddeadlocks 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 the Company’s representative. The PDCis responsible for, among other things, managing and overseeing the developmentand implementation of the clinical development plans, comparing actual versusbudgeted clinical development and regulatory expenses, and reviewing theprogress of the registrational studies;

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

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

*Right of First Offer*—E.R.Squibb has a right of first offer with respect to the Company’s investigationalKDR monoclonal antibodies (such as 1121B) should the Company decide to enterinto a partnering arrangement with a third party with respect to IMC-KDRantibodies at any time prior to the earlier to occur of September 19, 2006and the first anniversary of the date which is 45 days after any date onwhich BMS’s ownership interest in ImClone Systems is less than 5%. If theCompany decides to enter into a partnering arrangement during such period, theCompany must notify E.R. Squibb. If E.R. Squibb notifies the Company that it isinterested in such an arrangement, the Company will provide its proposed termsto E.R. Squibb and the parties will negotiate in good faith for 90 days toattempt to agree on the terms and conditions of such an arrangement. If theparties do not reach agreement during this period, E.R. Squibb must propose theterms of an arrangement which it is willing to enter into, and if the Companyrejects such terms the Company may enter into an agreement with a third partywith respect to such a partnering arrangement (provided that the terms of anysuch agreement may not be more favorable to the third party than the termsproposed by E.R. Squibb).

*Right of First Negotiation*—Ifat any time during the restricted period (as defined below), the Company isinterested in establishing a partnering relationship with a third partyinvolving certain compounds or products not related to IMC-KDR antibodies, theCompany must notify E.R. Squibb and E.R. Squibb will have 90 days to enterinto a non-binding agreement with the Company with respect to such a partneringrelationship. In the event that E.R. Squibb and ImClone Systems do not enterinto a non-binding agreement, the Company is free to negotiate with third partieswithout further obligation to E.R. Squibb. The “restricted period” means theperiod from September 19, 2001 until the earliest to occur of (1) September 19,2006, (2) a reduction in BMS’s ownership interest in ImClone Systems tobelow 5% for 

17

----

45 consecutive days, (3) atransfer or other disposition of shares of the Company’s common stock by BMS orany of its affiliates such that BMS and its affiliates own or have control overless than 75% of the maximum number of shares of the Company’s common stockowned by BMS and its 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) the Company’s termination of theCommercial Agreement due to a material breach by BMS.

*Restriction on Competing Products*—Duringthe period from the date of the Commercial Agreement until September 19,2008, the parties have agreed not to, directly or indirectly, develop orcommercialize a competing product (defined as a product that has as its onlymechanism of action an antagonism of the EGF receptor) in any country in theterritory. In the event that any party proposes to commercialize a competingproduct or purchases or otherwise takes control of a third party which hasdeveloped or commercialized a competing product, then such party must eitherdivest the competing product within 12 months or offer the other party theright to participate in the commercialization and development of the competingproduct on a 50/50 basis (provided that if the parties cannot reach agreementwith respect to such an agreement, the competing product must be divestedwithin 12 months).

*Ownership—*TheCommercial 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.

*Product Recalls*—IfE.R. Squibb is required by any regulatory authority to recall the product inany country in the territory (or if the JCC determines such a recall to beappropriate), then E.R. Squibb and ImClone Systems shall bear the costs andexpenses associated with such a recall (1) in the United States andCanada, in the proportion of 39% for ImClone Systems and 61% for E.R. Squibband (2) in Japan, in the proportion for which each party is entitled toreceive operating profit or loss (unless, in the territory, the predominantcause for such a recall is the fault of either party, in which case all suchcosts and expenses shall be borne by such party).

*Mandatory Transfer—*Eachof BMS and E.R. Squibb has agreed under the Commercial Agreement that in theevent it sells or otherwise transfers all or substantially all of itspharmaceutical business or pharmaceutical oncology business, it must alsotransfer to the transferee its rights and obligations under the CommercialAgreement.

*Indemnification—*Pursuantto 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.

*Termination—*Unlessearlier 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:

·        by either party, in theevent that the other party materially breaches any of its material obligationsunder the Commercial Agreement and has not cured such breach within60 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.

18

----

***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.

*Voting of Shares*—Duringthe period in which BMS has the right to nominate up to two BMS directors, BMSand its affiliates are required to vote all of their shares in the sameproportion as the votes cast by all of the Company’s other stockholders withrespect to the election or removal of non-BMS directors.

*Committees of the Board of Directors*—Duringthe period in which BMS has the right to nominate up to two BMS directors, BMSalso has the right, subject to certain exceptions and limitations, to have onemember of each committee of the Board be a BMS director.

*Approval Required for CertainActions*—The Company may not take any action that constitutesa prohibited action under the Stockholder Agreement without the consent of theBMS directors, until September 19, 2006 or earlier, if any of thefollowing occurs: (1) a reduction in BMS’s ownership interest to below 5%for 45 consecutive days, (2) a transfer or other disposition of shares ofthe Company’s 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 of the Company’s common stock owned by BMS and its affiliates at anytime after September 19, 2001, (3) an acquisition by a third party ofmore than 35% of the outstanding shares of the Company’s common stock, (4) atermination of the Commercial Agreement by BMS due to significant regulatory orsafety concerns regarding ERBITUX, or (5) a termination of the CommercialAgreement due to a material breach by BMS. Such prohibited actions include (1) issuingadditional shares or securities convertible into shares in excess of 21,473,002shares of the Company’s common stock in the aggregate, subject to certainexceptions; (2) incurring additional indebtedness if the total of (A) theprincipal amount of indebtedness incurred since September 19, 2001 andthen-outstanding, and (B) the net proceeds from the issuance of anyredeemable preferred stock then-outstanding, would exceed the Company’s amountof indebtedness for borrowed money outstanding as of September 19, 2001 bymore than $500 million; (3) acquiring any business if the aggregateconsideration for such acquisition, 

19

----

when taken together withthe aggregate consideration for all other acquisitions consummated during theprevious twelve months, is in excess of 25% of the Company’s aggregate value atthe time the binding 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.

*Limitation on Additional Purchasesof Shares and Other Actions*—Subject to the exceptions setforth below, until September 19, 2006 or, if earlier, the occurrence ofany of (1) an acquisition by a third party of more than 35% of the Company’soutstanding shares, (2) the first anniversary of a reduction in BMS’sownership interest in the Company to below 5% for 45 consecutive days, or (3) theCompany’s 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 the Company’s common stock ortake any of the following actions: (1) encourage any proposal for abusiness combination with the Company’s or an acquisition of our shares; (2) participatein the solicitation of proxies from holders of shares of the Company’s commonstock; (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 the Company’scommon stock; (4) enter into any voting arrangement with respect to sharesof the Company’s common stock; or (5) seek any amendment to or waiver ofthese 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 at a premium of at least25% to the prevailing market price, non-public requests to the Board to amend orwaive 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.

*Option to Purchase Shares in theEvent of Dilution*—BMS Biologics has the right under certaincircumstances to purchase additional shares of common stock from the Company atmarket prices, pursuant to an option granted to BMS by the Company, 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 the Company issues shares of common stockin excess of 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 the Company pursuant to thisoption will terminate on September 19, 2006 or, if earlier, upon theoccurrence of (1) an acquisition by a third party of more than 35% of theoutstanding shares, or (2) the first anniversary of a reduction in BMS’sownership interest in the Company to below 5% for 45 consecutive days.

*Transfers of Shares*—UntilMarch 19, 2005, neither BMS nor any of its affiliates were permitted totransfer any shares of the Company’s common stock or enter into any arrangementthat transfers any of 

20

----

the economic consequencesassociated with the ownership of shares. After March 19, 2005, neither BMSnor any of its affiliates may transfer any shares or enter into any arrangementthat transfers any of the economic consequences associated with the ownershipof shares, except (1) pursuant to registration rights granted to BMS withrespect to the shares, (2) pursuant to Rule 144 under the SecuritiesAct of 1933, as amended or (3) for certain hedging transactions. Any suchtransfer is subject to the following limitations: (1) the transferee maynot acquire beneficial ownership of more than 5% of the then-outstanding sharesof common stock; (2) no more than 10% of the total outstanding shares ofcommon stock may be sold in any one registered underwritten public offering;and (3) neither BMS nor any of its affiliates may transfer shares ofcommon stock (except for registered firm commitment underwritten publicofferings pursuant to the registration rights described below) or enter intohedging transactions in any twelve-month period that would, individually or inthe aggregate, have the effect of reducing the economic exposure of BMS and itsaffiliates by the equivalent of more than 10% of the maximum number of sharesof common stock owned by BMS and its affiliates at any time after September 19,2001. Notwithstanding the foregoing, BMS Biologics may transfer all, but notless than all, of the shares of common stock owned by it to BMS or to E.R.Squibb or another wholly-owned subsidiary of BMS.

*Registration Rights*—TheCompany granted BMS customary registration rights with respect to shares ofcommon stock owned by BMS or any of its affiliates.

Amounts due from BMS related to this agreement totaledapproximately $42,548,000 and $61,621,000 at June 30, 2005 and December 31,2004, respectively, and are included in amounts due from corporate partners inthe Consolidated Balance Sheets. The Company recorded collaborative agreementrevenue related to this agreement in the Consolidated Statements of Operationstotaling approximately $11,548,000 and $10,695,000 for the three months ended June 30,2005 and 2004, respectively, and $21,104,000 and $18,549,000 for the six monthsended June 30, 2005 and 2004, respectively. Of these amounts, $3,385,000and $4,529,000 for the three months ended June 30, 2005 and 2004,respectively, and $5,018,000 and $8,344,000 for the six months ended June 30,2005 and 2004, respectively, related to reimbursable costs associated withsupplying ERBITUX for use in clinical trials associated with this agreement.The majority of the related manufacturing costs in 2004 and a portion in 2005were expensed prior to February 13, 2004 before the Company obtainedapproval to sell ERBITUX or, in the case of contract manufacturing, when suchservices were performed. Reimbursable clinical and regulatory expenses wereincurred and totaled approximately $3,383,000 and $2,565,000 for the threemonths ended June 30, 2005 and 2004, respectively, and $6,871,000 and$5,534,000 for the six months ended June 30, 2005 and 2004, respectively.These amounts have been recorded as clinical and regulatory expenses and alsoas collaborative agreement revenue in the Consolidated Statements ofOperations. Reimbursable marketing and general expenses and royalty expenseswere incurred and totaled approximately $4,780,000 and $3,601,000 for the threemonths ended June 30, 2005 and 2004, respectively, and $9,215,000 and$4,671,000 for the six months ended June 30, 2005 and 2004, respectively.These amounts have been recorded as marketing, general and administrativeexpenses, royalty expense, and also as collaborative agreement revenue in theConsolidated Statements of Operations.

Licensefees and milestone revenue consists of the following:
| ** **                                | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                | ** ** | **(in thousands)**                              | ** ** |
| BMS:                                      |       |                                            |       |                                          |       |   |   |   |   |
| ERBITUX license fee revenue               |       | $                                               | 24,395     |                                          | $          | 18,052 |   | $ | 47,833 |   | $ | 85,396 |   |
| Merck KGaA:                               |       |                                            |       |                                          |       |   |   |   |   |
| ERBITUX and BEC2 license fee revenue      |       | 96                                              |       | 96                                            |       | 1,192 |   | 192 |   |
| Other license fee  revenue                |       | —                                          |       | —                                        |       | — |   | 58 |   |
| Total license fees and  milestone revenue |       | $                                               | 24,491     |                                          | $          | 18,148 |   | $ | 49,025 |   | $ | 85,646 |   |

 

21

----

 

Royaltyrevenue consists of the following:
| ** **            | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **            | ** ** | **(in thousands)**                              | ** ** |
| BMS                   |       | $                                               | 38,132     |                                          | $          | 27,845 |   | $ | 72,113 |   | $ | 34,669 |   |
| Merck KGaA            |       | 3,615                                           |       | 615                                           |       | 6,006 |   | 872 |   |
| Other                 |       | 44                                              |       | —                                        |       | 44 |   | 64 |   |
| Total royalty revenue |       | $                                               | 41,791     |                                          | $          | 28,460 |   | $ | 78,163 |   | $ | 35,605 |   |
|                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Collaborativeagreement revenue from corporate partners consists of the following:
| ** **                             | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                             | ** ** | **(in thousands)**                              | ** ** |
| BMS                                    |       | $                                               | 11,548     |                                          | $          | 10,695 |   | $ | 21,104 |   | $ | 18,549 |   |
| Merck KGaA                             |       | 6,660                                           |       | 1,618                                         |       | 10,942 |   | 3,781 |   |
| Other                                  |       | 1                                               |       | 51                                            |       | 9 |   | 51 |   |
| Total collaborative  agreement revenue |       | $                                               | 18,209     |                                          | $          | 12,364 |   | $ | 32,055 |   | $ | 22,381 |   |
|                                        |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Amountsdue from corporate partners consists of the following:
| ** **                                 | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **(in thousands)**      | ** ** |
| BMS:                                       |       |                    |       |                        |       |   |   |
| ERBITUX                                    |       | $                       | 42,548     |                        |       | $ | 61,621 |   |   |
| Merck KGaA:                                |       |                    |       |                        |       |   |   |
| ERBITUX and BEC2                           |       | 8,680                   |       |                        | 8,132      |   |   |
| Total amounts due from  corporate partners |       | $                       | 51,228     |                        |       | $ | 69,753 |   |   |

 

Deferredrevenue consists of the following:
| ** **                                                                    | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                    | ** ** | **(in thousands)**      | ** ** |
| BMS:                                                                          |       |                    |       |                        |       |   |   |
| ERBITUX commercial agreement                                                  |       | $                       | 402,535    |                        |       | $ | 450,368 |   |   |
| Merck KGaA:                                                                   |       |                    |       |                        |       |   |   |
| ERBITUX development and license agreement                                     |       | 3,000                   |       |                        | 3,111      |   |   |
| Prepayment of ERBITUX supplied for medical affairs  program    |       | —                  |       |                        | 2,544      |   |   |
| Development and commercialization agreement                                   |       | 1,704                   |       |                        | 1,785      |   |   |
| Total deferred revenue                                                        |       | 407,239                 |       |                        | 457,808    |   |   |
| Less: current  portion                                                        |       | (101,540                | )          |                        | (108,994   | ) |   |
| Total long-term  deferred revenue                                             |       | $                       | 305,699    |                        |       | $ | 348,814 |   |   |

 

**(9)   Discontinuationof Small Molecule Program**

On May 11, 2005, theCompany announced a plan to discontinue its small molecule research program.This decision was made after evaluating the Company’s investment in suchprogram against the time horizon before commercial benefits would be realized.  As a result of this decision, the Company has 

22

----

reflectedin the Consolidated Statements of Operations for the three and six months endedJune 30, 2005 approximately $6,200,000 of costs associated with thediscontinuation of this program. Such costs include approximately $2,260,000 ofcosts related to severance for 45 employees that were terminated, $3,880,000 ofcosts related to the write-off of fixed assets used in such program andapproximately $60,000 of contract termination costs related to the cancellationof the lease at the Brooklyn facility where the employees were conducting suchresearch. As of June 30, 2005, the Company has a liability ofapproximately $1,580,000 reflected in Accrued expenses, of which approximately$1,520,000 relates to termination benefits and approximately $60,000 relate tocontract termination expenses. We expect that the disposition of this programwill be finalized by the end of September 2005.

**(10)   Commitments and Contingencies**

Beginning in January 2002, a number of complaintsasserting claims under the federal securities laws against the Company andcertain of the Company’s directors and officers were filed in the U.S. DistrictCourt for the Southern District of New York. Those actions were consolidatedunder the caption Irvine v. ImClone Systems Incorporated, et al., No. 02Civ. 0109 (RO). In the corrected consolidated amended complaint, plaintiffsasserted claims against the Company, its former President and Chief ExecutiveOfficer, Dr. Samuel D. Waksal, its former Chief Scientific Officer andthen-President and Chief Executive Officer, Dr. Harlan W. Waksal, andseveral of the Company’s other present or former officers and directors, forsecurities fraud under sections 10(b) and 20(a) of the SecuritiesExchange Act of 1934 and Securities and Exchange Commission Rule 10b5, onbehalf of a purported class of persons who purchased the Company’s publiclytraded securities between March 27, 2001 and January 25, 2002. Thecomplaint also asserted claims against Dr. Samuel D. Waksal undersection 20A of the Exchange Act on behalf of a separate purportedsub-class of purchasers of the Company’s securities between December 27,2001 and December 28, 2001. The complaint generally alleged that variouspublic statements made by or on behalf of the Company or the other defendantsduring 2001 and early 2002 regarding the prospects for FDA approval of ERBITUXwere false or misleading when made, that the individual defendants wereallegedly 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. The complaint sought to proceed on behalf of the alleged classesdescribed above, sought monetary damages in an unspecified amount and soughtrecovery of plaintiffs’ costs and attorneys’ fees. On January 24, 2005,the Company announced that it had reached an agreement in principle to settlethe consolidated class action for a cash payment of $75 million, a portionof which will 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 escrow.These funds will be held in escrow until such time that the settlement becomesfinal and thereafter will be distributed pursuant to the terms of thesettlement documents. As of August 4, 2005, the Company has received fromits insurers $20.5 million, which was reflected as a receivable in Othercurrent assets, as of June 30, 2005. The amount received from the insurersincludes $8.75 million, less attorneys fees of $875,000 that was paid tothe Company under the derivative settlement discussed below.

Separately, on September 17, 2002, an individualpurchaser of the Company’s common stock filed an action (Flynn v. ImCloneSystems Incorporated, et al., No. 02 Civ 7499 (RO)) on his own behalf inthe U.S. District Court for the Southern District of New York asserting claimsagainst the Company, Dr. Samuel D. Waksal and Dr. Harlan W.Waksal under sections 10(b) and 20(a) of the Exchange Act andSecurities and Exchange Commission Rule 10b-5. This matter wassettled and dismissed with prejudice in a stipulation and order entered on March 21,2005.

23

----

Beginning on January 13, 2002, and continuingthereafter, nine separate purported shareholder derivative actions were filedagainst members of the Company’s board of directors, certain of the Company’spresent and former officers, and the Company, as nominal defendant, advancingclaims based on allegations similar to the allegations in the federalsecurities class action complaints. Four of these derivative cases were filedin the Delaware Court of Chancery and have been consolidated in that courtunder the caption In re ImClone Systems Incorporated Derivative Litigation,Cons. C.A. No. 19341-NC. Three of these derivative actions werefiled in New York State Supreme Court in Manhattan. All of these state courtactions have been stayed in deference to the proceedings in the U.S. DistrictCourt for the Southern District of New York, which have been consolidated underthe caption In re ImClone Systems, Inc. Shareholder Derivative Litigation,Master File No. 02 CV 163 (RO). A supplemental verified consolidatedamended derivative complaint in these consolidated federal actions was filed onAugust 8, 2003. It asserted, purportedly on behalf of the Company, claimsincluding breach of fiduciary duty by certain current and former members of theCompany’s board of directors, among others, based on allegations including thatthey failed to ensure that the Company’s disclosures relating to the regulatoryand marketing prospects for ERBITUX were not misleading and that they failed tomaintain adequate controls and to exercise due care with regard to the Company’sERBITUX application to the FDA. On January 9, 2004, the Company filed amotion to dismiss the complaint due to plaintiffs’ failure to make a pre-suitdemand on the Company’s board of directors to institute suit or to allegegrounds for concluding that such a demand would have been futile. Theindividual defendants filed motions on the same date, both joining in theCompany’s motion and seeking to dismiss the complaint for failure to state aclaim. On January 24, 2005, the Company announced that it had reached anagreement in principle to settle the consolidated derivative action. Theparties entered into a definitive stipulation of settlement on March 14,2005, which was subject to Court approval. On July 29, 2005, the Courtapproved the proposed settlement. As of  August 4,2005, the Company has received $8.75 million from its insurers, which theCompany has contributed toward the settlement of the Irvine securities classaction described above, after deducting $875,000 for Court awarded plaintiffs’attorney’s fees and expenses.

The Company has recorded a receivable totaling$1,277,000 and $1,810,000 as of June 30, 2005 and December 31, 2004,respectively, for the portion of the legal fees related to the above mattersthat the Company believes are recoverable from its insurance carriers. Thisreceivable is included in Other current assets in the Consolidated BalanceSheets. On August 4, 2005, the Company received payment of $1,277,000 fromits insurers.

On October 8, 2003, certain mutual funds that arepast or present common stockholders of BMS filed an action in New York Statecourt against BMS, certain present or former officers and directors of BMS andthe Company asserting that they were misled into purchasing or holding theirshares of BMS common stock as a result of various public statements by BMS andcertain present or former officers or directors of BMS, and that the Companyallegedly aided and abetted certain of these misstatements. The action isstyled FSS Franklin Global Health Care Fund, et al. v. Bristol-Myers SquibbCo., et al., Index No. 603168/03. On June 1, 2005, an agreement tosettle this action was reached. Under the terms of the settlement, BMS agreedto pay the plaintiffs $89 million in exchange for the termination of theplaintiffs’ claims. The Company is not responsible to pay any portion of thesettlement amount and has made no admission of wrongdoing. Pursuant to theterms of the settlement agreement, the action was voluntarily dismissed withprejudice by a stipulation filed on June 16, 2005.

24

----

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 issues in 2001and 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 recent developments in connection with this SECinvestigation.

On August 14, 2002, after the federal grand juryindictment of Dr. Samuel D. Waksal had been issued but before Dr. Samuel D.Waksal’s guilty plea to certain counts of that indictment, the Company filed anaction 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. Samuel D.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 withthe American 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’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. Arbitration hearings are anticipated to occur in 2006.

The Company intends to vigorously defend against theclaims asserted in this matter and to vigorously pursue its counterclaims. TheCompany is unable to predict the outcome of this action at this time. Noreserve has been established in the financial statements because the Companydoes not believe that such a reserve is required to be established at this timeunder Statement of Financial Accounting Standards No. 5 (“FASB 5”).

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 

25

----

local income taxes fromcertain warrant exercises in 1999-2001. The complaint asserts claims forunjust enrichment, common law indemnification, moneys had and received andconstructive trust. On June 18, 2004, Dr. Samuel D. Waksal filed anAnswer to the Company’s Complaint. Fact discovery in this matter is underway.

The IRS has commenced audits of the Company’s incometax and employment tax returns for tax years 1999 through 2001. The Company hasresponded to all requests for information and documents received to date fromthe IRS and is awaiting further requests or action from the IRS.

On March 31, 2003, the Company receivednotification from the SEC that it was conducting an informal inquiry into thesematters and on April 2, 2003, the Company received a request from the SECfor the voluntary production of related documents and information. The Companyis cooperating fully with this SEC inquiry. There have been no developments inconnection with this SEC informal inquiry since April 2003.

On October 28, 2003, a complaint was filed byYeda Research and Development Company Ltd. (“Yeda”) against ImCloneSystems and Aventis Pharmaceuticals, Inc. in the U.S. District Court forthe Southern District of New York (03 CV 8484). This action alleges and seeksthat three individuals associated with Yeda should also be named asco-inventors on U.S. Patent No. 6,217,866. On June 7, 2005, Yedaamended their U.S. complaint to seek sole inventorship of the subject patent.The Company is vigorously defending against the claims asserted in this action.The Company is unable to predict the outcome of this action at the presenttime.

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 Repligen Corporation(“Repligen”) in the U.S. District Court for the District of Massachusetts (04-10884RGS). This action alleges that ERBITUX infringes U.S. Patent No. 4,663,281,which is owned by MIT and exclusively licensed to Repligen. The Company intendsto defend vigorously against claims asserted in this action. Fact discovery isongoing. The Company is unable to predict the outcome of this action at thepresent 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 FASB 5.

The Company is developing a fully human monoclonalantibody, referred to as IMC-11F8, which it intends to commercialize inEurope. The Company believes it has the right to do so under its existingdevelopment and license agreement with Merck KGaA. However, Merck KGaA hasadvised the Company that it believes that IMC-11F8 could be covered underthe development and license agreement with Merck KGaA and that it couldtherefore have the exclusive rights to market IMC-11F8 outside the UnitedStates and Canada and co-exclusive development rights in Japan, for which itwould pay the same royalty as it pays for ERBITUX. See “CorporateCollaborations—Collaborationswith Merck KGaA” in the 

26

----

Company’s Annual Report onForm 10-K for the year ended December 31, 2004. The Company believesthat IMC-11F8 is not covered under the Merck KGaA development and licenseagreement. In agreement with Merck KGaA, the Company has submitted this disputeto binding arbitration through an expedited process outside of the provisionsof the development and license agreement. If successful in the arbitration,Merck KGaA has averred that it is entitled to certain unspecified damages underthe development and license agreement. While the Company intends to vigorouslydefend its position as it relates to IMC-11F8 in arbitration or any otherform of dispute resolution, there can be no assurance that its position willprevail, and it is unable at this time to predict the outcome of theseproceedings. No reserve has been established in the financial statements for theseproceedings because the Company does not believe that such a reserve isrequired to be established at this time under Statement of Financial AccountingStandards No. 5.

The Company has not recognized withholding taxliabilities in respect of exercises of certain warrants by Robert F.Goldhammer, one of the four former officers or directors to whom warrants wereissued and previously treated as non-compensatory warrants. Based on theCompany’s investigation, it believes that, although such warrants were compensatory,such warrants were received by Mr. Goldhammer in connection with theperformance of services by him in his capacity as a director, rather than as anemployee, and, as such, are not subject to tax withholding requirements. Inaddition, in 1999, Mr. Goldhammer erroneously received a portion of astock option grant in the form of incentive stock options, which under federallaw may only be granted to employees. There can be no assurance, however, thatthe taxing authorities will agree with the Company’s position and will notassert that the Company is liable for the failure to withhold income andemployment taxes with respect to the exercise of such warrants and any stockoptions by Mr. Goldhammer. If the Company became liable for the failure towithhold taxes on the exercise of such warrants and any stock options by Mr. Goldhammer,the aggregate potential liability, exclusive of any interest or penalties,would be approximately $8,300,000.

The Company has not recognized accruals for penaltiesand interest that may be imposed with respect to the withholding tax issuespreviously described and other related contingencies, including the periodcovered by the statute of limitations and the Company’s determination ofcertain exercise dates, because it does not believe that losses from suchcontingencies are probable, or in the event that any taxing authority makes aclaim for penalties or interest, the Company believes that it will be able tosettle the total amount asserted (including any liability for taxes) for anamount not in excess of the liability for taxes already accrued with respect tothe relevant withholding tax issue. With respect to the statute of limitationsand the Company’s determination of certain exercise dates, while the Companydoes not believe a loss is probable, there is a potential additional liabilitywith respect to these issues that may be asserted by a taxing authority. Iftaxing authorities assert such issues and prevail related to these withholdingtax issues and other related contingencies, including penalties, the liabilitythat could be imposed by taxing authorities would be substantial. The potentialinterest on the withholding tax liabilities recorded on the ConsolidatedBalance Sheets could be up to a maximum amount of approximately $8,700,000 at June 30,2005. Potential additional withholding tax liability on other relatedcontingencies amounts to approximately $8,000,000, exclusive of any interest orpenalties, and excluding the amount potentially attributable to Mr. Goldhammernoted above.

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 $8,988,000 is outstanding as of June 30,2005. The loan is secured by a leasehold mortgage on the prime lease as well asa collateral assignment of rents by the sublandlord. The loan is payable by thesublandlord 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 inyears 

27

----

sixteen through twenty. Inaddition, the Company paid the owner a consent fee in the amount of $500,000.Effective March 1, 2005, the Company amended the Sublease to add anadditional 6,500 square feet of space upon all the same terms and conditionsset forth in the Sublease. In connection with this amendment, the Company paidan up-front fee of $1,690,000 which is being amortized, as a reduction in leaseexpense, over the respective term of the Sublease. The future minimum leasepayments remaining at June 30, 2005, are approximately $50,035,000 overthe term of the Sublease. The Company is in the process of developing theproperty for occupancy by its Research department in late 2006.

The Company leases its biologics research andcorporate headquarters in New York City. In August 2004, the Companymodified its existing operating lease for its corporate headquarters in NewYork City. The modification extends the term of the lease, which was to expireat December 31, 2004, for an additional ten years for a portion of thepremises and by an additional four years for the space that houses its Researchdepartment. As noted above, the Company plans to move its research departmentto its 325 Spring Street, New York location. The future minimum lease paymentsremaining at June 30, 2005, are approximately $11,212,000 over the term ofthe lease.

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 June 30,2005 are $10,651,000.

In May 2001, theCompany entered into an operating lease for a 4,000 square foot portion of a15,000 square foot building and an adjacent 6,250 square foot building(collectively the “Brooklyn facility”) in Brooklyn, New York. Effective February 1,2005, the Company entered into an additional operating lease for approximately2,269 square feet of a building known as 760 Parkside Avenue in Brooklyn, NewYork. These facilities were used by our Small Molecule program, which theCompany decided in May 2005 to discontinue. The Company has notified thelandlord of its decision to terminate the lease agreements and has accrued atermination payment as of June 30, 2005 of approximately $60,000.

**(11)   Defined Contribution Plan**

All employees of the Company who meet certain minimumage and period of service requirements are eligible to participate in a 401(k) definedcontribution plan. The 401(k) plan allows eligible employees to defer upto 25 percent of their annual compensation, subject to certain limitationsimposed by federal law. The amounts contributed by employees are immediatelyvested and non-forfeitable. Under the 401(k) plan, the Company, atmanagement’s discretion, may match employee contributions and/or makediscretionary contributions. Neither the employee contributions nor voluntarymatching contributions are invested in the Company’s securities. Total expenseincurred by the Company was $499,000 and $136,000 for the three months ended June 30,2005 and 2004, respectively, and $1,011,000 and $304,000 for the six monthsended June 30, 2005 and 2004, respectively.

28

----

**Item 2.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof 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 in this Quarterly Report on Form 10-Q. Thisdiscussion should be read in conjunction with the consolidated financialstatements and the accompanying notes included in our filings with theSecurities and Exchange Commission (“SEC”), including our Annual Report on Form 10-Kfor the year ended December 31, 2004. 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 as well as otherrisks detailed in our filings with the SEC.

**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 United States Food and Drug Agency (“FDA”) 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. ERBITUX binds specifically to epidermal growthfactor receptor (EGFR, HER1, c-ErbB-1) on both normal and tumor cells, andcompetitively inhibits the binding of epidermal growth factor (EGF) and otherligands, such as transforming growth factor-alpha. We are conducting, and insome cases have completed, potential registration studies evaluating ERBITUXfor the treatment of colorectal, head and neck, lung and pancreatic cancers, aswell as other 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. On June 18, 2004 the FDA approved ourChemistry Manufacturing and Controls (CMC) supplemental Biologics LicenseApplication (sBLA) for licensure of our manufacturing facility referred to asBB36.

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. On June 30, 2004 Merck KGaA received marketingapproval by the European Commission to sell ERBITUX for use in combination withirinotecan for the treatment of patients with EGFR-expressing metastaticcolorectal cancer after failure of irinotecan including cytotoxic therapy As ofJune 30, 2005 Merck KGaA has obtained approval for ERBITUX in 39countries, with Hong Kong, South Korea, Colombia and Israel approving it duringthe second quarter of 2005.

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:

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

·       the timing of when we beginto reflect full absorption cost of goods sold on sales of ERBITUX to ourcorporate partners;

·       the timing of recognitionof license fees and milestone revenues;

·       the status of developmentof our various product candidates;

·       whether or not we achievespecified research or commercialization milestones;

29

----

·       legal costs and the outcomeof outstanding legal proceedings and investigations; and

·       the addition or terminationof research programs or funding support and variations in the level of expensesrelated to our proprietary product candidates during any given period.

As a result of oursubstantial investment in research and development, we have incurredsignificant operating losses and have an accumulated deficit of approximately$474 million as of June 30, 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 we havehistorically devoted most of our efforts and resources to research anddevelopment, we expect to devote greater efforts and resources to themanufacturing, marketing, and commercialization of ERBITUX. There is no assurancethat we will be able to continue to successfully manufacture, market orcommercialize ERBITUX or that potential customers will buy ERBITUX. We relyentirely on third party manufacturers for filling and finishing services withrespect to ERBITUX. If our current third party manufacturers or critical rawmaterial suppliers fail to meet our expectations, we cannot be assured that wewill be able to enter into new agreements with other suppliers or third partymanufacturers without an adverse effect on our business.

**OUTLOOK**

We anticipate that our results in 2005 will reflectthe following: Royalty revenue will continue to reflect 39% of BMS’ in-marketnet sales and beginning in the third quarter of 2005 a range of 6.5%–7.5% ofMerck KGaA’s in-market net sales. On April 12, 2005, we issued a pressrelease announcing that we were taking additional time to file a sBLA to seekapproval of ERBITUX for use as a single agent and in combination with radiationin Squamous Cell Carcinoma of the Head and Neck (SCCHN) with the FDA. We hadpreviously announced that we intended to submit a sBLA in the second quarter of2005 and therefore, we were expecting to receive a milestone payment from BMSby the end of 2005. Due to the delay in our sBLA filing with the FDA, we nolonger expect to earn a milestone from BMS in 2005. Therefore, License fees andmilestone revenue in 2005 will include the continuing amortization, based onclinical development spending, of the $650 million received thus far fromBMS. At comparable or slightly increased rates of spending from the currentquarter, amortization of milestones received to date should approximate$100 million in 2005. The selling price to our partners for Manufacturingrevenue in 2005 is approximately one-half of the price in 2004, since the 2004price reflected a significant component of materials sourced from Lonza atsignificantly higher costs than our own manufacturing costs. Collaborativeagreement revenue will continue to include the purchase of ERBITUX for clinicaluse by our partners, as well as reimbursement of certain regulatory andclinical expenses incurred on behalf of ERBITUX, reimbursement for certainmarketing and administrative expenses, and reimbursement for royalty expenseswhich will approximate 4.5% of U.S. in-market net sales, and approximately 1%of net sales outside the U.S.

We estimate that researchand development expenses for the full year of 2005 will range between $110-$115million due to higher than anticipated demand of ERBITUX for clinical use byMerck, based on their most recent inventory supply demand schedule. It shouldbe noted that Collaborative agreement revenue will also increase by a similaramount, to reflect the reimbursement of ERBITUX for clinical supply. Clinicaland regulatory expenses in 2005 are expected to be approximately$45 million for the full year, as we embark on a number of studies insupport of expanded use of ERBITUX as well as Phase I clinical developmentprograms for four pipeline products. Marketing, general and administrativeexpenses should approximate $68 million in 2005. Gross royalty expenses in2005 for ERBITUX will include approximately 12.75% of U.S. in-market net sales;of which approximately 4.5% of U.S. in-market net sales is reimbursed as acomponent of collaborative agreement revenue, resulting in a net royalty burdento ImClone of 8.25% related to U.S. in-market net sales. Cost of manufacturingrevenue will not be fully reflected on our statement of operations until suchtime as all previously expensed ERBITUX has been sold through to our partnersfor either commercial or clinical use. We expect that cost of manufacturing 

30

----

revenuewill continue to reflect incremental costs as we consume inventory that waspartially expensed prior to February 13, 2004. We anticipate that thetransition period until we begin to reflect full absorption costs ofmanufacturing revenue, may take, depending on the demand schedule from ourpartners, approximately two additional quarters. The estimated effective taxrate for 2005 is 1.0%.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

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 the Company’s financial condition or results ofoperations. The Company’s critical accounting policies that require managementto make significant judgments, estimates, and assumptions are set forth below.The development and selection of the critical accounting policies, and therelated disclosure below have been reviewed with the Audit Committee of theCompany’s Board of Directors.

*Revenue Recognition*—Ourrevenues are derived from four primary sources: license fees and milestonepayments, manufacturing revenue, royalty revenue, and collaborative agreementrevenue.

Revenues from license fees and milestone paymentsprimarily consist of up-front license fees and milestone payments receivedunder the Commercial Agreement with BMS and E.R. Squibb, relating to ERBITUX,and milestone payments received under the development and license agreementwith Merck KGaA. We recognize all non-refundable up-front license fees asrevenues in accordance with the guidance provided in the SEC’s Staff AccountingBulletin No. 104. Our most critical application of this policy, to date,relates to the $650,000,000 in license fees received from BMS and E.R. Squibbunder the Commercial Agreement which are being deferred and recognized asrevenue based upon the actual product research and development costs incurredsince September 19, 2001 to date by BMS and E.R. Squibb and ImClone as apercentage of the estimated total of such costs to be incurred over the17 year term of the Commercial Agreement. The estimated total of suchcosts is based on the clinical development budget which establishes jointresponsibilities that will be carried out by both the Company and BMS and E.R.Squibb for certain clinical and other studies. Of the $650,000,000 in paymentsreceived through June 30, 2005, $24,395,000 was recognized as revenue inthe second quarter of 2005 and $247,464,000 from the commencement of theCommercial Agreement in 2001 through June 30, 2005. The methodology usedto recognize deferred revenue involves a number of estimates and judgments, suchas the estimate of total product research and development costs to be incurredunder the Commercial Agreement. Changes in these estimates and judgments canhave a significant effect on the size and timing of revenue recognition. Inaddition, if management had chosen a different methodology to recognize thelicense fee and milestone payments received under the Commercial Agreement, theCompany’s financial position and results of operations could have differedmaterially. For example, if the Company were to recognize the revenues earnedfrom the Commercial Agreement on a straight-line basis over the life of theagreement, the Company would have recognized approximately $10,600,000 and$107,600,000 as revenue for the three months and from the commencement of theCommercial Agreement, respectively, through June 30, 2005. Managementbelieves that the current methodology used to recognize revenues under theCommercial Agreement, which reflects the level of effort consistent with theproduct development activities, is the most appropriate methodology because itreflects the level of expenditure and activity in the period in which it isbeing spent as compared to the total expected expenditure over the life of theCommercial Agreement. This cost to cost approach is systematic and rational, itprovides a factually supportable pattern to track progress, and is reflectiveof the level of effort, which varies over time.

31

----

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

Manufacturing revenue consists of revenue earned onthe sale of ERBITUX to our corporate partners for subsequent commercial sale.The Company recognizes manufacturing revenue when the product is shipped, whichis when our partners take ownership and title has passed, collectibility isreasonably assured, the sales price is fixed and determinable, and there ispersuasive evidence of an agreement. We are contractually obligated to sellERBITUX to BMS at our cost of production plus a 10% markup. We sell bulk inventoryto Merck KGaA at our full absorption cost of production. The sales price forERBITUX to BMS in 2004 reflected the weighted average costs of production forinventory produced by Lonza (which was exhausted in 2004) and at our BB36manufacturing plant. The sales price to our corporate partners for ERBITUX forcommercial distribution in 2005, which is based solely on our costs to producedat our BB36 plant,  is significantly lower (i.e. roughly one-half) thanthe price charged to BMS in 2004 since our unit cost to manufacture ERBITUX issignificantly lower than the cost paid to Lonza for manufacturing ERBITUX. 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.

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 E.R. Squibb and Merck KGaA related toclinical and regulatory studies, ERBITUX provided to them for use in clinicalstudies, reimbursement of a portion of royalty expense and certain marketingand administrative costs. Collaborative agreement revenue is recorded as earnedbased on the performance requirements under the respective contracts.

*Withholding Taxes*—InJanuary 2003, New York State notified the Company that it was liable forthe New York State and City income taxes that were not withheld because one ormore of the Company’s employees who exercised certain non-qualified stockoptions in 1999 and 2000 failed to pay New York State and City income taxes forthose years. On March 13, 2003, the Company entered into a closingagreement with New York State, paying $4,500,000 to settle the matter.Subsequently, the Company became aware of another potential income andemployment tax withholding liability associated with the exercise of certainwarrants granted in the early years of the Company’s existence that were heldby certain former officers, directors and employees. After the Company informedNew York State of the issue relating to the warrants, New York State, in June 2003,notified the Company that it was continuing the previously conducted audit ofthe Company and was evaluating the terms of the closing agreement to determinewhether or not it should be re-opened. On March 31, 2004, the Companyentered into a new closing agreement pursuant to which the Company paid NewYork State an additional $1,000,000 in full 

32

----

satisfaction of all thedeficiencies and determinations of withholding taxes for the years 1999-2001.As a result, we utilized $1,000,000 of the liability of $2,815,000 that wepreviously established for New York withholding taxes on stock options andwarrants exercised and recognized a benefit of $1,815,000 as a recovery in theConsolidated Statements of Operations for the six months ended June 30,2004.

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. Although the IRS hasnot yet asserted that the Company is required to make a payment with respect tosuch failure to withhold, the IRS may assert that such a liability exists, andmay further assert that the Company is liable for interest and penalties. TheIRS has commenced audits of the Company’s income tax and employment tax returnsfor tax years 1999 through 2001. The Company is cooperating fully with the IRSwith respect to these audits, and intends to continue to do so.

The Company has not recognized withholding taxliabilities in respect of exercises of certain warrants by Robert F.Goldhammer, one of the four former officers or directors to whom warrants wereissued and previously treated as non-compensatory warrants. Based on theCompany’s investigation, it believes that, although such warrants werecompensatory, such warrants were received by Mr. Goldhammer in connectionwith the performance of services by him in his capacity as a director, ratherthan as an employee, and, as such, is not subject to tax withholding requirements.In addition, in 1999, Mr. Goldhammer erroneously received a portion of astock option grant in the form of incentive stock options, which under federallaw may only be granted to employees. There can be no assurance, however, thatthe IRS will agree with the Company’s position and will not assert that theCompany is liable for the failure to withhold income and employment taxes withrespect to the exercise of such warrants and any stock options by Mr. Goldhammer.If the Company became liable for the failure to withhold taxes on the exerciseof such warrants and any stock options by Mr. Goldhammer, the aggregatepotential liability, exclusive of any interest or penalties, would beapproximately $8,300,000.

The Company has not recognized accruals for penaltiesand interest that may be imposed with respect to the withholding tax issuespreviously described and other related contingencies, including the periodcovered by the statute of limitations and the Company’s determination ofcertain exercise dates, because it does not believe that losses from suchcontingencies are probable, or in the event that any taxing authority makes aclaim for penalties or interest, the Company believes that it will be able tosettle the total amount asserted (including any liability for taxes) for anamount not in excess of the liability for taxes already accrued with respect tothe relevant withholding tax issue. With respect to the statute of limitationsand the Company’s determination of certain exercise dates, while the Companydoes not believe a loss is probable, there is a potential additional liabilitywith respect to these issues that may be asserted by a taxing authority. Iftaxing authorities assert such issues and prevail related to these withholdingtax issues and other related contingencies, including penalties, the liabilitythat could be imposed by taxing authorities would be substantial. The potentialinterest on the withholding tax liabilities recorded on the ConsolidatedBalance Sheets could be up to a maximum amount of approximately $8,700,000 at June 30,2005. Potential additional withholding tax liability on other relatedcontingencies amounts to approximately $8,000,000, exclusive of any interest orpenalties, and excluding the amount potentially attributable to Mr. Goldhammernoted above.

*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 forcommercial sale and will expense such cost as cost of manufacturing revenue atthe time of sale. However, as we sell our existing inventory that waspreviously expensed, there will be a period of time whereby the Company willreflect manufacturing revenue with minimal cost. The cost of manufacturingrevenue reflected in the Company’s operating expenses in 2004 and through thefirst half of 2005 therefore, does not reflect full absorption cost ofproduction because a portion of the raw 

33

----

materials, labor andoverhead costs incurred to produce the product sold, were previously expensed.Therefore, consistent with 2004, we anticipate that our margin on sales ofERBITUX to our corporate partners will continue to fluctuate from quarter toquarter during 2005. If the Company had capitalized inventory prior toobtaining FDA approval of ERBITUX, the cost basis of the inventory sold wouldbe approximately 90% of manufacturing revenue or a gross margin ofapproximately 10%, depending on the relative level of sales to BMS and MerckKGaA. We expect that cost of manufacturing revenue will continue to reflectincremental costs as we consume inventory that was partially expensed prior to February 13,2004. We anticipate that the transition period until we begin to reflect fullabsorption costs of manufacturing revenue, may take, depending on the demandschedule from our partners, approximately one or two additional quarters.

*Litigation*—TheCompany is currently involved in certain legal proceedings as disclosed in theNotes to the Consolidated Financial Statements. Except for the reservesestablished as of December 31, 2004 relating to settlements of certainlegal proceedings, no additional reserve has been established in our financialstatements because we do not believe that such a reserve is required to beestablished at this time, in accordance with Statement of Financial Standards No. 5.However, if in a future period, events in any such legal proceedings render itprobable that a loss will be incurred, and if such loss is reasonably estimableat that time, we will establish such a reserve. Thus, it is possible that legalproceedings may have a material adverse impact on the operating results forthat period, on our balance sheet or both**.**

*Long-Lived Assets*—Wereview long-lived assets for impairment when events or changes in businessconditions indicate that their full carrying value may not be recovered. Assetsare considered to be impaired and written down to fair value if expectedassociated undiscounted cash flows are less than carrying amounts. Fair valueis generally determined as the present value of the expected associated cashflows. We have built BB36 and are building BB50, and purchased a materiallogistics and warehousing facility and an administrative facility. BB36 isdedicated to the clinical and commercial production of ERBITUX and BB50 will bea multi-use production facility. ERBITUX is currently being produced forclinical studies and commercial sale at BB36. The material logistics andwarehousing facility includes office space, a storage location and samplinglaboratory for ERBITUX. An administrative facility houses the clinical,regulatory, sales, marketing, finance, human resources, project management andMIS departments, as well as certain executive and legal offices and othernecessities. Based on management’s current estimates, we expect to recover thecarrying value of such assets. Changes in regulatory or other businessconditions in the future could change our judgments about the carrying value ofthese facilities, which could result in the recognition of material impairmentlosses.

*IncomeTaxes*—Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards.Significant estimates are required in determining our provision for incometaxes. As of June 30, 2005, the Company continues to reflect a valuationallowance against its total net deferred tax assets because, more likely thannot, its net deferred tax assets will not be realized. Although managementbelieves that the valuation allowance as of June 30, 2005 is appropriate,we expect that as we continue to sell ERBITUX to our corporate partners forcommercial use and earn royalties and income from operations from the expectedcommercial sales of ERBITUX, we will need to revise our conclusions regardingthe realization of our deferred tax assets due to expected changes in overalllevels of pretax earnings. In addition, there may be other factors such aschanges in tax laws and future levels of research and development spending thatmay impact our effective tax rate in the future.

34

----

**RECENTLYISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS**

On November 24, 2004 the Financial AccountingStandards 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, “InventoryPricing”, 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. The adoption of this accountingpronouncement is not expected to have a material effect on the Company’sconsolidated financial statements.

On December 16, 2004the FASB issued Statement No. 123 (revised 2004),*Share-Based Payment* (“Statement 123R”).This Statement 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. On March 29, 2005 the SEC issued Staff Accounting Bulletin No. 107,*Share-Based Payment*, which summarizes theviews of the staff regarding the interaction between Statement 123R and certainSEC rules and regulations and provides the staff’s views regarding thevaluation of share-based payment arrangements for public companies. Statement 123Rwas originally effective as of the beginning of the first interim or annualreporting period that begins after June 15, 2005. However, on April 14,2005 the SEC announced a new rule that allows companies to implementStatement 123R at the beginning of their first fiscal year beginning after June 15,2005. As such, the Company will adopt Statement 123R in the first quarter of2006. The adoption of this Statement is expected to have a material effect onthe Company’s consolidated financial statements.

**RESULTS OF OPERATIONS**

Selectedfinancial and operating data for the three and six months ended June 30,2005 and 2004 are as follows: 
| ** **                          | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **Variance** | ** ** | **2005** | ** ** | **2004** | ** ** | **Variance** | ** ** |
| ** **                          | ** ** | **(in thousands)**                              | ** ** |
| Revenues:                           |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| License fees and  milestone revenue |       | $                                               | 24,491     |                                          | $          | 18,148 |   | $ | 6,343 |   | $ | 49,025 |   | $ | 85,646 |   | $ | (36,621 | ) |
| Manufacturing  revenue              |       | 7,894                                           |       | 14,796                                        |       | (6,902 | ) | 18,913 |   | 40,300 |   | (21,387 | ) |
| Royalty revenue                     |       | 41,791                                          |       | 28,460                                        |       | 13,331 |   | 78,163 |   | 35,605 |   | 42,558 |   |
| Collaborative  agreement revenue    |       | 18,209                                          |       | 12,364                                        |       | 5,845 |   | 32,055 |   | 22,381 |   | 9,674 |   |
| Total revenues                      |       | $                                               | 92,385     |                                          | $          | 73,768 |   | $ | 18,617 |   | $ | 178,156 |   | $ | 183,932 |   | $ | (5,776 | ) |

 
| ** **                                   | ** ** | **Three Months  Ended June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **Variance** | ** ** | **2005** | ** ** | **2004** | ** ** | **Variance** | ** ** |
| Operating  Expenses:                         |       |                                            |       |                                          |       |   |   |   |   |   |   |   |   |
| Research and  development                    |       | $                                               | 24,433     |                                          | $          | 18,836 |   | $ | 5,597 |   | $ | 45,606 |   | $ | 39,047 |   | $ | 6,559 |   |
| Clinical and  regulatory                     |       | 8,376                                           |       | 6,202                                         |       | 2,174 |   | 17,774 |   | 13,264 |   | 4,510 |   |
| Marketing,  general and administrative       |       | 16,833                                          |       | 13,577                                        |       | 3,256 |   | 34,456 |   | 25,206 |   | 9,250 |   |
| Royalty expense                              |       | 14,338                                          |       | 7,636                                         |       | 6,702 |   | 26,904 |   | 9,678 |   | 17,226 |   |
| Cost of  manufacturing revenue               |       | 1,106                                           |       | 123                                           |       | 983 |   | 1,849 |   | 336 |   | 1,513 |   |
| Disposal of small  molecule research program |       | 6,200                                           |       | —                                        |       | 6,200 |   | 6,200 |   | — |   | 6,200 |   |
| Other recovery,  net                         |       | —                                          |       | —                                        |       | — |   | — |   | (1,815 | ) | 1,815 |   |
| Total operating expenses                     |       | $                                               | 71,286     |                                          | $          | 46,374 |   | $ | 24,912 |   | $ | 132,789 |   | $ | 85,716 |   | $ | 47,073 |   |

 

35

----

***Three Months Ended June 30, 2005 and 2004***

**Revenues**

**License Fees and Milestone Revenue**

License fees and milestonerevenue for the three months ended June 30, 2005 of $24,491,000 consistsof the recognition of up-front and milestone payments received under theCommercial Agreement with BMS and E.R. Squibb of $24,395,000 and recognition ofpayments received under the development and license agreements with Merck KGaAof $96,000. The increase of $6,343,000 from the comparable period in 2004 isdue to increases in clinical development spending by BMS and us. License feesand milestone revenue in 2005 will include the continuing amortization, basedon clinical development spending, of the $650 million received thus farfrom BMS. At comparable or slightly increased rates of spending from the firsthalf of 2005, amortization of milestones received to date should approximate$100 million for the full year of 2005.

**Manufacturing Revenue**

Manufacturing revenue forthe three months ended June 30, 2005 of $7,894,000 consists of sales ofERBITUX to our corporate partners for commercial use. The decrease of$6,902,000 from the comparable period in 2004 is mainly due to lower sellingprice in 2005.  In accordance with theCommercial Agreement, we are contractually obligated to sell ERBITUX  to BMS at our cost of production plus a 10%markup. We sell bulk inventory to Merck KGaA at our full absorption cost ofproduction. There were no sales of ERBITUX to Merck KGaA for commercial supplyduring the second quarters of 2005 or 2004. During 2004, the price charged toBMS reflected the weighted average costs of production for inventory previouslyproduced by Lonza and at our BB36 manufacturing plant. During 2004, we sold allinventory produced by Lonza, therefore our costs in 2005 reflect only costsassociated with manufacturing inventory at our BB36 manufacturing facility.Therefore, the sales price to our corporate partners in 2005 is significantlylower than the price we charged our partner in 2004 since our unit cost tomanufacture ERBITUX is significantly lower than the cost paid to Lonza formanufacturing ERBITUX. The continuing level of manufacturing revenue in futureperiods may fluctuate significantly based on market demand, our cost ofproduction, as well as BMS’s required level of safety stock inventory forERBITUX.

**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. The increase of $13,331,000 from thecomparable period in 2004 is primarily due to an increase in royalty receivedfrom BMS of $10,286,000 and an increase in royalty received from Merck in 2005of approximately $3,000,000. Royalty revenue in 2005 will continue to reflect39% of BMS’ net in-market sales and beginning in the third quarter of 2005, arange of 6.5%–7.5%of Merck KGaA’s in-market sales.

**Collaborative Agreement Revenue**

Collaborative agreementrevenue consists primarily of reimbursements from our partners BMS and E.R.Squibb and Merck KGaA under our collaborative agreements. There are certaincategories for which we receive reimbursement from our partners: clinical andregulatory expenses, the cost of ERBITUX supplied to our partners for use inclinical studies, certain marketing and administrative expenses and a portion ofroyalty expense. During the second quarter of 2005, we earned $18,209,000 incollaborative agreement revenue, of which approximately $11,548,000 representsamounts earned from BMS and E.R. Squibb and approximately $6,660,000 representsamounts earned from Merck KGaA, as compared to 

36

----

$12,364,000earned in the comparable period in 2004, of which $10,695,000 was earned fromBMS and E.R. Squibb and $1,618,000 was earned from Merck KGaA. The increase incollaborative agreement revenue of $5,845,000 is principally due to an increasein reimbursement for clinical drugs of approximately $3.7 million and anincrease of approximately $1.8 million in royalty expense reimbursed by ourcorporate partners as a result of higher in-market sales. Collaborativeagreement revenue in 2005 will continue to include the purchase of ERBITUX forclinical use by our partners, as well as reimbursement of certain regulatoryand clinical expenses incurred on behalf of ERBITUX, reimbursement of certainmarketing and administrative expenses and reimbursement for royalty expenses,which will approximate 4.5% of US in-market net sales and approximately 1% ofnet sales outside the U.S.

**Research and Development**

Research and developmentexpenses in the second quarter of 2005 of $24,433,000 increased byapproximately $5,597,000 from the comparable period in 2004. The increase isprimarily due to shipments of ERBITUX to our partners for  clinical studies of approximately $3.4million  and an increase in costsassociated with the development of our non-ERBITUX pipeline. Research anddevelopment expenses include costs associated with our in-house andcollaborative research programs, product and process development expenses,costs to manufacture ERBITUX (until February 12, 2004) and other productcandidates and quality assurance and quality control costs. Research anddevelopment includes costs that are reimbursable from our corporate partners.Approximately $8,875,000 and $5,156,000 of costs representing research anddevelopment expenses for the three months ended June 30, 2005 and 2004,respectively, were reimbursed and included under collaborative agreementrevenue since they represent inventory supplied to our partners for use inclinical studies. We estimate that research and development expenses for thefull year of 2005 will range between $110-$115 million.

**Clinical and Regulatory**

Clinical and regulatoryexpenses in the second quarter of 2005 were $8,376,000, an increase of$2,174,000 from the comparable period in 2004. This increase is due to an increasein expenses associated with payments to third parties for clinical trials ofapproximately $500,000, an increase of approximately $800,000 due BMS forreimbursement of clinical expenses and an increase in salaries and benefits ofapproximately $600,000 as a result of increased headcount and merit increasesthat took effect in January of 2005. Clinical and regulatory expensesconsist of costs to conduct our clinical studies and associated regulatoryactivities. Approximately $3,769,000 and $2,982,000 of the costs included inthis category for the three months ended June 30, 2005 and 2004,respectively, are reflected as revenues under collaborative agreement revenuesince they represent costs that are reimbursable by our corporate partners.Clinical and regulatory expenses in 2005 are expected to be approximately$45 million for the full year, as we embark on a number of studies insupport of expanded use of ERBITUX, as well as Phase I clinical developmentprograms for four pipeline products.

**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 andadministrative expenses in the three months ended June 30, 2005 amountedto $16,833,000, an increase of $3,256,000 or 24.0% from the comparable periodin 2004. This increase is partly due to increases in salaries and benefits ofapproximately $600,000 due to increased headcount and an increase of approximately$3.4 million in professional services fees related to legal, tax consulting and

37

----

marketingprograms, partly offset by decreases in various other categories. Certainexpenses in this category are reimbursable from our corporate partners. Approximately$544,000 and $943,000 of costs representing marketing and general expenses forthe three months ended June 30, 2005 and 2004, respectively, arereimbursed and included in collaborative agreement revenue. Marketing, generaland administrative expenses should approximate $68 million in 2005.

**Cost of Manufacturing Revenue**

Effective February 13,2004, the Company began to capitalize in inventory the costs of manufacturingof ERBITUX for sale and will expense such costs as cost of manufacturingrevenue at the time of commercial sale. However, as we continue to sellinventory that was previously expensed, we will continue to reflect minimumcost of manufacturing revenue since the majority of the cost of such inventoryhas already been expensed in prior periods as research and development expenses.Consistent with 2004, we anticipate that our manufacturing revenue margin onsales of ERBITUX to our corporate partners will continue to fluctuate fromquarter to quarter until such time as we exhaust all inventory whose costs, orpartial costs, was expensed as research and development prior to obtaining FDAapproval for ERBITUX. The costs of manufacturing revenue in the second quarterof 2005 reflects a combination of inventory sold with  costs consisting only of  packaging, filling, labeling and shipping andcertain inventory with partial costs related to batches that were inwork-in-process on February 13, 2004. The costs of manufacturing revenuereflected in the third quarter of 2005 will continue to reflect incrementalcosts as we consume inventory that was partially expensed prior to February 13,2004. We expect that the transition period until we begin to reflect fullabsorption costs of manufacturing revenue, may take, depending on the demandschedule from our partners, approximately two additional quarters.

**Royalty Expense**

Royalty expense of$14,338,000 for the three months ended June 30, 2005 increased by$6,702,000 from the comparable period in 2004. The increase reflects increasesin in-market sales as well as the fact that in the comparable period of 2004,we did not have an expense related to the Centocor license. Royalty expenseconsists of obligations related to certain licensing agreements related toERBITUX. We are obligated to pay royalties of approximately 12.75% of NorthAmerican net sales and a low single digit royalty on sales outside of NorthAmerica, which will increase if sales outside of North America consist ofERBITUX produced in the United States. We receive reimbursements from ourcorporate partners of 4.5% on North American net sales and a minimum of 1% onnet sales outside of North America. After the first quarter of 2006, grossroyalty expense due on North American net sales will decrease to 9.75% and ourreimbursement on such sales will decrease to 2.5%. Approximately $5,020,000 and$3,232,000 of royalty expense is reimbursable by our corporate partners andincluded as collaborative agreement revenue for the three months ended June 30,2005 and 2004, respectively. We expect that royalty expenses in 2005 forERBITUX will continue to reflect the same percentages outlined above.

**Discontinuationof Small Molecule Research Program**

On May 11, 2005, the Company announced a plan todiscontinue its small molecule research program. This decision was made afterevaluating the Company’s investment in such program against the time horizonbefore commercial benefits would be realized.  As a result of this decision, the Company hasreflected in the Consolidated Statements of Operations for the three monthsended June 30, 2005 approximately $6,200,000 of costs associated with thediscontinuation of this program. Such costs include approximately $2,260,000 ofcosts related to severance for 45 employees that were terminated, $3,880,000 ofcosts related to the write-off of fixed assets used in such program andapproximately $60,000 of contract termination costs related to the cancellationof the lease at the Brooklyn facility where the employees were conducting suchresearch.  We expect that the dispositionof this program will be finalized by the end of September 2005.

38

----

**InterestIncome and Interest Expense**

Interest income for the three months ended June 30,2005 amounted to $6,793,000, an increase of approximately $4.3 millionfrom the comparable period in 2004. This increase is attributable to theincrease in the Company’s cash and cash equivalents and our securitiesportfolio primarily as a result of the $600,000,000 of convertible debt issuedin May 2004.

Interest expense for thethree months ended June 30, 2005 amounted to $1,687,000, a decrease ofapproximately $1,150,000. The decrease is mainly due to lower interest ratethan in the comparable period of 2004, partly offset by an increase in debtoutstanding.

**Provision for Income Taxes**

The estimated effectiveincome tax rate used in calculating the full year 2005 is 1.0% as compared tothe federal statutory rate of 35%. The difference from the statutory rateresults from the utilization of fully reserved deferred tax assets, primarilythe amortization of deferred revenue associated with license fees andmilestones, which were taxable in prior periods. At the end of the firstquarter of 2005, we had estimated that our effective income tax rate for 2005to be 1.3%; as a result, our effective tax rate for the second quarter of 2005is 0.7%.

**Net Income**

For the three months endedJune 30, 2005 we had net income of $26,031,000 or $.31 per basic commonshare and $.30 per diluted common share, compared with net income of$24,312,000 or $.31 per basic and $.29 per diluted common share in thecomparable period in 2004. The fluctuation in results was due to the factorsnoted above.

***Six Months Ended June 30, 2005 and 2004***

**Revenues**

**License Fees and Milestone Revenue**

License fees and milestonerevenue for the six months ended June 30, 2005 of $49,025,000 consists ofthe recognition of up-front and milestone payments received under theCommercial Agreement with BMS and E.R. Squibb of $47,833,000 and recognition ofpayments received under the development and license agreements with Merck KGaAof $1,192,000. The decrease of $36,621,000 from the comparable period in 2004is due to the fact that we received a milestone payment from BMS of$250,000,000 in the first quarter of 2004, when we obtained FDA approval ofERBITUX resulting in incremental amortization of deferred revenue of approximately$43 million related to the actual product research and development costsincurred from inception through December 31, 2004 as a percentage of theestimated total costs to be incurred over the term of the Commercial Agreementwith BMS, partly offset by an increase in clinical spend. License fees andmilestone revenue in 2005 will include the continuing amortization, based onclinical development spending, of the $650 million received thus far fromBMS. At comparable or slightly increased rates of spending from the first halfof 2005, amortization of milestones received to date should approximate$100 million for the full year of 2005.

**Manufacturing Revenue**

Manufacturing revenue forthe six months ended June 30, 2005 of $18,913,000 consists of sales ofERBITUX to our corporate partners for commercial use. The decrease of$21,387,000 from the comparable period in 2004 is due to a combination of lowerselling price in 2005 and the absence of the initial stocking purchases by BMSas it was launching the product in the first quarter of 2004.  In accordance with the Commercial Agreement,we are contractually obligated to sell ERBITUX to BMS at 

39

----

our costof production plus a 10% markup. We sell bulk inventory to Merck KGaA at ourfull absorption cost of production. There were no sales of ERBITUX to MerckKGaA for commercial supply during the first half of 2005 or 2004. During 2004,the price charged to BMS reflected the weighted average costs of production forinventory previously produced by Lonza and at our BB36 manufacturing plant.During 2004, we sold all inventory produced by Lonza, therefore our costs in2005 reflect only costs associated with manufacturing inventory at our BB36manufacturing facility. Therefore, the sales price to our corporate partners in2005 is significantly lower than the price we charged our partner in 2004 sinceour unit cost to manufacture ERBITUX is significantly lower than the cost paidto Lonza for manufacturing ERBITUX. The continuing level of manufacturingrevenue in future periods may fluctuate significantly based on market demand,our cost of production, as well as BMS’s required level of safety stockinventory for ERBITUX.

**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. The increase of $42,558,000 from thecomparable period in 2004 is primarily due to an increase in royalty receivedfrom BMS of $37,443,000 and an increase in royalty received from Merck in 2005of approximately $5,134,000. Royalty revenue in 2005 will continue to reflect39% of BMS’ in-market net sales and beginning in the third quarter of 2005, arange of 6.5%–7.5%of Merck KGaA’s in-market net sales.

**Collaborative Agreement Revenue**

Collaborative agreementrevenue consists primarily of reimbursements from our partners BMS and E.R.Squibb and Merck KGaA under our collaborative agreements. There are certaincategories for which we receive reimbursement from our partners: clinical andregulatory expenses, the cost of ERBITUX supplied to our partners for use inclinical studies, certain marketing and administrative expenses and a portionof royalty expense. During the first half of 2005, we earned $32,055,000 incollaborative agreement revenue, of which approximately $21,104,000 representsamounts earned from BMS and E.R. Squibb and approximately $10,942,000represents amounts earned from Merck KGaA, as compared to $22,381,000 earned inthe comparable period in 2004, of which $18,549,000 was earned from BMS andE.R. Squibb and $3,781,000 was earned from Merck KGaA. The increase incollaborative agreement revenue of $9,674,000 is principally due to an increasein  reimbursement for clinical drugs of approximately $3.0 millionand an increase of approximately $5.4 million in royalty expensereimbursed by our corporate partners as a result of higher in-market sales. Collaborativeagreement revenue in 2005 will continue to include the purchase of ERBITUX forclinical use by our partners, as well as reimbursement of certain regulatoryand clinical expenses incurred on behalf of ERBITUX, reimbursement of certainmarketing and administrative expenses and reimbursement for royalty expenses, whichwill approximate 4.5% of US net in-market sales and approximately 1% of netsales outside the U.S.

**Research and Development**

Research and developmentexpenses in the first half of 2005 of $45,606,000 increased by approximately$6,559,000 from the comparable period in 2004. The increase is primarily due toshipments of ERBITUX to our partners for clinical studies of approximately $3.6million  and an increase in costsassociated with the development of our non-ERBITUX pipeline. Research anddevelopment expenses include costs associated with our in-house andcollaborative research programs, product and process development expenses,costs to manufacture ERBITUX (until February 12, 2004) and other product 

40

----

candidatesand quality assurance and quality control costs. Research and developmentincludes costs that are reimbursable from our corporate partners. Approximately$13,515,000 and $10,513,000 of costs representing research and developmentexpenses for the six months ended June 30, 2005 and 2004, respectively,were reimbursed and included under collaborative agreement revenue since theyrepresent inventory supplied to our partners for use in clinical studies. Weestimate that research and development expenses for the full year of 2005 willrange between $110–$115 million.

**Clinical and Regulatory**

Clinical and regulatoryexpenses in the first half of 2005 were $17,774,000, an increase of $4,510,000from the comparable period in 2004. This increase is due to an increase inexpenses associated with payments to third parties for clinical trials of approximately$1.7 million, an increase of approximately $2.0 million due BMS forreimbursement of clinical expenses and an increase in salaries and benefits ofapproximately $1.6 million, partially offset by a decrease ofapproximately $1.3 million of stock option compensation expense. Clinicaland regulatory expenses consist of costs to conduct our clinical studies andassociated regulatory activities. Approximately $7,929,000 and $6,347,000 ofthe costs included in this category for the three months ended June 30,2005 and 2004, respectively, are reflected as revenues under collaborativeagreement revenue since they represent costs that are reimbursable by ourcorporate partners. Clinical and regulatory expenses in 2005 are expected toreach approximately $45 million for the full year, as we embark on anumber of studies in support of expanded use of ERBITUX, as well as Phase Iclinical development programs for four pipeline products.

**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 andadministrative expenses in the six months ended June 30, 2005 amounted to$34,456,000, an increase of $9,250,000 or 37.0% from the comparable period in2004. This increase is partly due to increases in salaries and benefits ofapproximately $3.6 million due to increased headcount and an increase ofapproximately $5.7 million in professional services fees related to legal, taxconsulting and marketing programs. Certain expenses in this category arereimbursable from our corporate partners. Approximately $1,114,000 and$1,366,000 of costs representing marketing and general expenses for the sixmonths ended June 30, 2005 and 2004, respectively, are reimbursed andincluded in collaborative agreement revenue. Marketing, general andadministrative expenses should approximate $68 million in 2005.

**Cost of Manufacturing Revenue**

Effective February 13,2004, the Company began to capitalize in inventory the costs of manufacturingof ERBITUX for sale and will expense such costs as cost of manufacturingrevenue at the time of commercial sale. However, as we continue to sellinventory that was previously expensed, we will continue to reflect minimumcost of manufacturing revenue since the majority of the cost of such inventoryhas already been expensed in prior periods as research and development expenses.Consistent with 2004, we anticipate that our manufacturing revenue margin onsales of ERBITUX to our corporate partners will continue to fluctuate fromquarter to quarter until such time as we exhaust all inventory whose costs wasexpensed as research and development prior to obtaining FDA approval forERBITUX. The costs of manufacturing revenue for the first half of 2005primarily reflects costs associated with packaging, filling, labeling andshipping, with a portion of the inventory shipped during  the last part of the period, reflecting 

41

----

incrementalcosts as we consume inventory that were in work-in-process on February 13,2004. The costs of manufacturing revenue reflected in the third quarter of 2005will continue to reflect incremental costs as we consume inventory that waspartially expensed prior to February 13, 2004.We expect that thetransition period until we begin to reflect full absorption costs ofmanufacturing revenue, may take, depending on the demand schedule from ourpartners, approximately two additional quarters.

**Royalty Expense**

Royalty expense of$26,904,000 for the six months ended June 30, 2005 increased by$17,226,000 from the comparable period in 2004. The increase reflects increasesin in-market sales as well as the fact that in the comparable period of 2004,we did not have an expense related to the Centocor license. Royalty expenseconsists of obligations related to certain licensing agreements related toERBITUX. We are obligated to pay royalties of approximately 12.75% of NorthAmerican net sales and a low single digit royalty on sales outside of NorthAmerica, which will increase if sales outside of North America consist ofERBITUX produced in the United States. We receive reimbursements from ourcorporate partners of 4.5% on North American net sales and a minimum of 1% onnet sales outside of North America. After the first quarter of 2006, grossroyalty expense due on North American net sales will decrease to 9.75% and ourreimbursement on such sales will decrease to 2.5%. Approximately $9,488,000 and$4,103,000 of royalty expense is reimbursable by our corporate partners andincluded as collaborative agreement revenue for the six months ended June 30,2005 and 2004, respectively. We expect that royalty expenses in 2005 forERBITUX will continue to reflect the same percentages outlined above.

**Discontinuation  of Small Molecule Research Program**

On May 11, 2005, theCompany announced a plan to discontinue its small molecule research program.This decision was made after evaluating the Company’s investment in suchprogram against the time horizon before commercial benefits would be realized. Asa result of this decision, the Company has reflected in the ConsolidatedStatements of Operations for the three and six months ended June 30, 2005approximately $6,200,000 of costs associated with the discontinuation of thisprogram. Such costs include approximately $2,260,000 of costs related toseverance for 45 employees that were terminated, $3,880,000 of costs related tothe write-off of fixed assets used in such program and approximately $60,000 ofcontract termination costs related to the cancellation of the lease at theBrooklyn facility where the employees were conducting such research.  We expect that the disposition of this programwill be finalized by the end of September 2005.

**InterestIncome and Interest Expense**

Interest income for the six months ended June 30,2005 amounted to $13,550,000, an increase of approximately $10.6 millionfrom the comparable period in 2004. This increase is attributable to theincrease in the Company’s cash and cash equivalents and our securitiesportfolio primarily as a result of the $600,000,000 of convertible debt issuedin May 2004.

Interest expense for thefirst six months ended June 30, 2005 amounted to $3,496,000, a decrease ofapproximately $1.0 million. The decrease is due to lower interest rate than in the comparable period of 2004,partly offset by an increase in debt outstanding.

**Provision for Income Taxes**

The estimated effectiveincome tax rate used in calculating the full year 2005 is 1.0% as compared tothe federal statutory rate of 35%. The difference from the statutory rateresults from the utilization of fully reserved deferred tax assets, primarilythe amortization of deferred revenue associated with license fees andmilestones, which were taxable in prior periods.

42

----

**Net Income**

For the six months ended June 30,2005 we had net income of $54,851,000 or $.66 per basic common share and $.63per diluted common share, compared with net income of $87,048,000 or $1.14 perbasic and $1.02 per diluted common share in the comparable period in 2004. Thefluctuation in results was due to the factors noted above.

**LIQUIDITY AND CAPITAL RESOURCES**

At June 30, 2005, ourprincipal sources of liquidity consisted of cash and cash equivalents andsecurities available for sale of approximately $812 million. Historically,we have financed our operations through a variety of sources, mostsignificantly through the issuance of public and private equity and convertiblenotes, license fees and milestone payments and reimbursements from ourcorporate partners. Since the approval of ERBITUX on February 12, 2004, webegan to generate royalty revenue and manufacturing revenue from the commercialsale of ERBITUX by our corporate partners and generated income from operationsin 2004 and in the first half of 2005. As we continue to generate income, ourcash flows from operating activities are expected to increase as a source tofund our operations.

***SUMMARY OF CASHFLOWS***
|                                                   |   | **Six Months  Ended June 30,** |    |     |   |
|--------------------------------------------------------|--------|-----------------------------------------------|---------|----------|--------|
|                                                   |   | **2005**                                      |    | **2004** |   | **Variance** |   |
|                                                   |   | **(in thousands)**                       |    |     |   |
| Cash provided by (used  in):                           |   |                                          |    |     |   |   |   |
| Operating  activities.                                 |   | $                                             | (64,968 | )        | $      | 208,834 |   | $(273,802 | ) |
| Investing  activities                                  |   | (22,133                                       | )       | (611,365 | )      | 589,232 |   |
| Financing  activities.                                 |   | 12,368                                        |    | 645,321  |   | (632,953 | ) |
| Net (decrease) increase  in cash and cash equivalents. |   | $                                             | (74,733 | )        | $      | 242,790 |   | $(317,523 | ) |

 

Historically our cash flows from operating activitieshave fluctuated significantly due to the nature of our operations and thetiming of our cash receipts. During the six months ended June 30, 2005, wedid not generate positive cash flows from operations but used approximately $65million of cash in operating activities mainly due to the payment of $50million related to the shareholders lawsuit that we settled in January 2005and approximately $30 million of royalty and other license related payments toGenentech and Centocor related to 2004, for license agreements that wefinalized during January 2005, partially offset by cash generated fromoperations. As we have noted in the past, we expect significant fluctuations inour operating cash flows as we continue to transform from a research anddevelopment company to a commercial operating entity.

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 and amounts used for capitalexpenditures. During the six months ended June 30, 2005, we investedapproximately $22.1 million as compared to the comparable period in2004, in which we invested $611.3 million. In May of 2004, we raised$600 million through the issuance of convertible bonds which we investedin securities. In the first half of 2005, we sold a number of securities andused such proceeds to pay for some operating expenses such as the $50 millionpayment made in the first quarter relating to the securities class actionlitigation. We expect that in 2005, capital spending will range from $100**–**$120million including approximately $30 million of validation andcommissioning costs associated with our multiple product manufacturing facility(“BB50”).

Net cash flows provided by financing activities in thesix months ended June 30, 2005 decreased by approximately $633 millionmainly due to the fact that in 2004, we raised $600 million from theissuance of 

43

----

convertible bonds. Inaddition, this category has also decreased due to a decrease in the amount ofcash generated from the exercise of stock options by employees.

We believe that ourexisting cash and cash equivalents, marketable securities and our cashgenerated from operating activities will provide us with sufficient liquidityto support our operations at least through the third quarter of 2006. We arealso entitled to reimbursement for certain marketing, royalty expense, andresearch and development expenditures and certain other payments, some of whichare payable contingent upon the achievement of research and development andregulatory milestones. There can be no assurance that we will achieve thesemilestones. Our future working capital and capital requirements will dependupon numerous factors, including, but not limited to:

·       progress and cost of ourresearch and development programs, pre-clinical testing and clinical studies;

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

·       our corporate partnersfulfilling their obligations to us;

·       timing and cost of seekingand 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

·       our ability to maintainexisting corporate collaborations and establish new collaborative arrangementswith other companies to provide funding to support these activities.

Thetable below presents our contractual obligations and commercial commitments asof June 30, 2005:
| ** **                           | ** ** | ** **         | ** ** | **Payments due by Year** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------------------------|------------|
| ** **                           | ** ** | **Total**          | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** |
| ** **                           | ** ** | **(in thousands)** | ** ** |
| Long-term debt.                      |       | $                  | 600,000    |                                    | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest on  long-term debt.         |       | 156,750            |       | 5,156                                   |       | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 118,594 |   |
| Operating leases  obligations.  |       | 72,833             |       | 2,509                                   |       | 5,097 |   | 5,162 |   | 4,003 |   | 4,043 |   | 52,019 |   |
| Purchase  obligations.               |       | 7,249              |       | 7,249                                   |       | — |   | — |   | — |   | — |   | — |   |
| Contract services  obligations  |       | 16,380             |       | 7,200                                   |       | 1,620 |   | 1,620 |   | 1,350 |   | 1,620 |   | 2,970 |   |
| Construction  obligations            |       | 2,092              |       | 2,092                                   |       | — |   | — |   | — |   | — |   | — |   |
| Total                                |       | $                  | 855,304    |                                    | $          | 24,206 |   | $ | 14,967 |   | $ | 15,032 |   | $ | 13,603 |   | $ | 13,913 |   | $ | 773,583 |   |

 

**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 3.   *Quantitative andQualitative 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, 

44

----

agency debt and commercialpaper. All such instruments are classified as securities available for sale.Generally, we do not invest in portfolio equity securities, commodities,foreign exchange contracts or use financial derivatives for trading purposes.Our debt security portfolio represents funds held temporarily pending use inour 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. Typically, those witha short-term maturity are fixed-rate; highly liquid debt instruments and thosewith longer-term maturities are highly liquid debt instruments with fixed interestrates or with periodic interest rate adjustments.

Thetable below presents the principal amounts and related weighted averageinterest rates by year of maturity for our investment portfolio as of June 30,2005:
| ** **            | ** ** | **2005**                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|-----------------|------------|
| ** **            | ** ** | **(in thousands, except interest rates)** | ** ** |
| Fixed Rate            |       | $                                         | 74,822     |     | $          | 168,002  |       | $        | 202,400    |     | $          | 100,000                       |       | $         | 55,000     |            |       | $ | 20,000 |   |   | $ | 620,224 |   | $ | 616,258 |   |
| Average Interest Rate |       | 2.26                                      | %          | 2.96     | %          | 3.50     | %          | 3.86     | %          | 4.33     | %          |                          | 4.54       | %         |       | 3.37            | %          |   |   |
| Variable Rate(1)      |       | 167,374                                   |       | —   |       | 10,000   |       | 1,804    |       | —   |       |                          | 11,860     |      |       | 191,038         |       | 191,023 |   |
| Average Interest Rate |       | 3.05                                      | %          | —   |       | 3.00     | %          | 3.39     | %          | —   |       |                          | 3.89       | %         |       | 3.10            | %          |   |   |
|                  |       | $                                         | 242,196    |     | $          | 168,002  |       | $        | 212,400    |     | $          | 101,804                       |       | $         | 55,000     |            |       | $ | 31,860 |   |   | $ | 811,262 |   | $ | 807,281 |   |

----

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

Our outstanding 13¤8%fixed rate convertible senior notes in the principal amount of $600,000,000 dueMay 15, 2024 are convertible into our common stock at a conversion priceof $94.69 per share, subject to certain restrictions as outlined in theindenture agreement. The fair value of fixed interest rate instruments isaffected by changes in interest rates and in the case of the convertible notesby changes in the price of our common stock as well. The fair value of theconvertible senior notes was approximately $492,750,000 at June 30, 2005.

**Item 4.   *Controls and Procedures***

*Disclosure Controlsand Procedures*

Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, hasevaluated the effectiveness of our “disclosure controls and procedures” (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) asof the end of the period covered by this report. Based on such evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that, as ofthe end of the period covered by this report, our disclosure controls andprocedures are effective in recording, processing, summarizing and reporting,on a timely basis, information that we are required to disclose in the reportsthat we file or submit under the Exchange Act.

*Changes In InternalControl Over Financial Reporting*

There has been no change in our internal control overfinancial reporting during the three months ended June 30, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

45

----

**PART II.**

**OTHER INFORMATION**

**Item 1.**                        *Legal Proceedings*

***A.*** Litigation

**1.   Federal Securities Actions**

As previously reported, beginning in January 2002,a number of complaints asserting claims under the federal securities lawsagainst the Company and certain of the Company’s directors and officers werefiled in the U.S. District Court for the Southern District of New York. Thoseactions were consolidated under the caption Irvine v. ImClone SystemsIncorporated, et al., No. 02 Civ. 0109 (RO). In the corrected consolidatedamended complaint plaintiffs asserted claims against the Company, its formerPresident and Chief Executive Officer, Dr. Samuel D. Waksal, its formerChief Scientific Officer and then-President and Chief Executive Officer, Dr. HarlanW. Waksal, and several of the Company’s other present or former officers anddirectors, for securities fraud under sections 10(b) and 20(a) of theSecurities Exchange Act of 1934 and Securities and Exchange Commission Rule 10b-5,on behalf of a purported class of persons who purchased the Company’s publiclytraded securities between March 27, 2001 and January 25, 2002. Thecomplaint also asserted claims against Dr. Samuel D. Waksal undersection 20A of the Exchange Act on behalf of a separate purportedsub-class of purchasers of the Company’s securities between December 27,2001 and December 28, 2001. The complaint generally alleged that variouspublic statements made by or on behalf of the Company or the other defendantsduring 2001 and early 2002 regarding the prospects for FDA approval of ERBITUX®were false or misleading when made, that the individual defendants wereallegedly 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. The complaint sought to proceed on behalf of the alleged classesdescribed above, sought monetary damages in an unspecified amount and soughtrecovery of plaintiffs’ costs and attorneys’ fees. On January 24, 2005,the Company announced that it had reached an agreement in principle to settlethe consolidated class action for a cash payment of $75 million, a portionof which will 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 escrow.These funds will be held in escrow until such time that the settlement becomesfinal and thereafter will be distributed pursuant to the terms of thesettlement documents. As of August 4, 2005, the Company has received fromits insurers $20.5 million, which was reflected as a receivable in Othercurrent assets, as of June 30, 2005. The amount received from the insurersincludes $8.75 milllion, less attorneys fees of $875,000 that was paid to theCompany under the derivative settlement discussed below.

As previously reported,separately, on September 17, 2002, an individual purchaser of the Company’scommon stock filed an action (Flynn v. ImClone Systems Incorporated, et al., No. 02Civ 7499 (RO)) on his own behalf in the U.S. District Court for the SouthernDistrict of New York asserting claims against the Company, Dr. Samuel D.Waksal and Dr. Harlan W. Waksal under sections 10(b) and 20(a) ofthe Exchange Act and Securities and Exchange Commission Rule 10b-5. Thismatter was settled and dismissed with prejudice in a stipulation and orderentered on March 21, 2005.

46

----

**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 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 subjectto Court approval. On July 29, 2005, the Court approved the proposedsettlement. Thereafter, the Company was paid $8.75 million by itsinsurers, which the Company has contributed toward the settlement of the Irvinesecurities class action described above after deducting $875,000 for Courtawarded plaintiffs’ attorney’s fees and expenses.

**3.   Bristol-Myers Action**

As previously reported, onOctober 8, 2003, certain mutual funds that are past or present commonstockholders of BMS filed an action in New York State court against BMS,certain present or former officers and directors of BMS and the Companyasserting that they were misled into purchasing or holding their shares of BMScommon stock as a result of various public statements by BMS and certainpresent or former officers or directors of BMS, and that the Company allegedlyaided and abetted certain of these misstatements. The action is styled FSSFranklin Global Health Care Fund, et al. v. Bristol-Myers Squibb Co., et al.,Index No. 603168/03. On June 1, 2005, an agreement to settle thisaction was reached. Under the terms of the settlement, BMS agreed to pay theplaintiffs $89 million in exchange for the termination of the plaintiffs’claims. The Company is not responsible to pay any portion of the settlementamount and has made no admission of wrongdoing. Pursuant to the settlementagreement, the action was voluntarily dismissed with prejudice by a stipulationfiled on June 16, 2005.

***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 ImClone Systems insiders in 2001. The Company alsoreceived subpoenas and requests for information pertaining to documentretention issues in 2001 and 2002, and to certain communications regardingERBITUX in 2000. On June 19, 2002, the Company received a written “WellsNotice” from the staff of the 

47

----

SEC, indicating that thestaff 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 norecent developments in connection with this SEC investigation.

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 years1999-2001. Therefore, the Company has eliminated the liability of $2,815,000primarily attributable to New York State withholding taxes on stock options andwarrants exercised by Dr. Samuel D. Waksal and has recognized a benefit of$1,815,000 as a recovery in the Consolidated Statements of Operations in thefirst quarter of 2004.

The IRS has commenced audits of the Company’s incometax and employment tax returns for tax years 1999 through 2001. The Company hasresponded to all requests for information and documents received to date fromthe IRS and is awaiting further requests or action from the IRS.

On March 31, 2003, the Company receivednotification from the SEC that it was conducting an informal inquiry into thematters discussed above and on April 2, 2003, the Company received arequest from the SEC for the voluntary production of related documents andinformation. The Company is cooperating fully with this SEC inquiry. There havebeen no developments in connection with this SEC informal inquiry since April 2003.

The Company has not recognized withholding taxliabilities in respect of exercises of certain warrants by Robert F.Goldhammer, one of the four former officers or directors to whom warrants wereissued and previously treated as non-compensatory warrants. Based on theCompany’s investigation, it believes that, although such warrants werecompensatory, such warrants were received by Mr. Goldhammer in connectionwith the performance of services by him in his capacity as a director, ratherthan as an 

48

----

employee, and, as such,are not subject to tax withholding requirements. In addition, in 1999, Mr. Goldhammererroneously received a portion of a stock option grant in the form of incentivestock options, which under federal law may only be granted to employees. Therecan be no assurance, however, that the taxing authorities will agree with theCompany’s position and will not assert that the Company is liable for thefailure to withhold income and employment taxes with respect to the exercise ofsuch warrants and any stock options by Mr. Goldhammer. If the Companybecame liable for the failure to withhold taxes on the exercise of suchwarrants and any stock options by Mr. Goldhammer, the aggregate potentialliability, exclusive of any interest or penalties, would be approximately$8,300,000.

The Company has notrecognized accruals for penalties and interest that may be imposed with respectto the withholding tax issues previously described and other relatedcontingencies, including the period covered by the statute of limitations andthe Company’s determination of certain exercise dates, because it does notbelieve that losses from such contingencies are probable, or in the event thatany taxing authority makes a claim for penalties or interest, the Companybelieves that it will be able to settle the total amount asserted (includingany liability for taxes) for an amount not in excess of the liability for taxesalready accrued with respect to the relevant withholding tax issue. Withrespect to the statute of limitations and the Company’s determination ofcertain exercise dates, while the Company does not believe a loss is probable,there is a potential additional liability with respect to these issues that maybe asserted by a taxing authority. If taxing authorities assert such issues andprevail related to these withholding tax issues and other relatedcontingencies, including penalties, the liability that could be imposed bytaxing authorities would be substantial. The potential interest on thewithholding tax liabilities recorded on the Consolidated Balance Sheets couldbe up to a maximum amount of approximately $8,700,000 at June 30, 2005.Potential additional withholding tax liability on other related contingenciesamounts to approximately $8,000,000, exclusive of any interest or penalties,and excluding the amount potentially attributable to Mr. Goldhammer notedabove.

***C.*** ActionsAgainst Dr. Samuel D. Waksal

As previously reported, on August 14, 2002, afterthe federal grand jury indictment of Dr. Samuel D. Waksal had been issuedbut before Dr. Samuel D. Waksal’s guilty plea to certain counts of thatindictment, the Company filed an action in New York State Supreme Court seekingrecovery of certain compensation, including advancement of certain defensecosts, that the Company had paid to or on behalf of Dr. Samuel D. Waksaland cancellation of certain stock options. That action was styled ImCloneSystems Incorporated v. Samuel D. Waksal, Index No. 02/602996. On July 25,2003, Dr. Samuel D. Waksal filed a Motion to Compel Arbitration seeking tohave all claims in connection with the Company’s action against him resolved inarbitration. By order dated September 19, 2003, the Court granted Dr. SamuelD. 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 claims unspecifieddamages of at least $10 million. The Demand for Arbitration also seeks toresolve the claims that the Company asserted in the New York State SupremeCourt action. On November 7, 2003, the Company filed an Answer andCounterclaims 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 the Companyhad paid to or on behalf of Dr. Samuel D. Waksal. In response, on December 15,2003, Dr. Samuel D. Waksal filed a Reply to Counterclaims. Arbitrationhearings are anticipated to occur in 2006.

The Company intends to vigorously defend against theclaims asserted in this matter and to vigorously pursue its counterclaims. TheCompany is unable to predict the outcome of this action at this time. No 

49

----

reserve has beenestablished in the financial statements because the Company does not believethat such a reserve is required to be established at this time under Statementof Financial Accounting Standards No. 5.

As previously reported, onMarch 10, 2004, the Company commenced a second action against Dr. SamuelD. Waksal in the New York State Supreme Court. That action is styled ImCloneSystems Incorporated v. Samuel D. Waksal, Index No. 04/600643. By thisaction, the Company seeks the return of more than $21 million that theCompany 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. Fact discovery in thismatter is underway.

***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. 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) 0667 165 to add three Yeda employees as inventors.. Also on March 25, 2004,a German action entitled Legal Action was filed in the Munich District Court I,Patent Litigation Division, 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. Additionally, on or about March 25,2005 and March 29, 2005, respectively, Yeda filed legal actions in Austriaand France against both Aventis and ImClone Systems seeking full inventorshipof EP (AU) 0 667 165 and EP (FR) 0 667 165, as well as payment of legal costsand 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 action allegesthat ERBITUX infringes U.S. Patent No. 4,663,281, which is owned by MITand exclusively licensed to Repligen. The Company intends to defend vigorouslyagainst claims asserted in this action. Fact discovery is ongoing. The Companyis 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.

50

----

As previously disclosed,the Company is developing a fully human monoclonal antibody, referred to asIMC-11F8, which it intends to commercialize in Europe. The Company believes ithas the right to do so under its existing development and license agreementwith Merck KGaA. However, Merck KGaA has advised the Company that it believesthat IMC-11F8 could be covered under the development and license agreement withMerck KGaA and that it could therefore have the exclusive rights to marketIMC-11F8 outside the United States and Canada and co-exclusive developmentrights in Japan, for which it would pay the same royalty as it pays for ERBITUX.See “Corporate Collaborations—Collaborations with Merck KGaA” in the Company’sAnnual Report on Form 10-K for theyear ended December 31, 2004. The Company believes that IMC-11F8 isnot covered under the Merck KGaA development and license agreement. Inagreement with Merck KGaA, the Company has submitted this dispute to bindingarbitration through an expedited process outside of the provisions of thedevelopment and license agreement. If successful in the arbitration, Merck KGaAhas averred that it is entitled to certain unspecified damages under thedevelopment and license agreement. While the Company intends to vigorouslydefend its position as it relates to IMC-11F8 in arbitration or any other formof dispute resolution, there can be no assurance that its position willprevail, and it is unable at this time to predict the outcome of theseproceedings. No reserve has been established in the financial statements forthese proceedings because the Company does not believe that such a reserve isrequired to be established at this time under Statement of Financial AccountingStandards No. 5.

**Item 2.**                        *Unregistered Sales of Equity Securities and Use of Proceeds*

Not applicable

**Item 3.**                     *Defaults upon Senior Securities*

Not applicable

**Item4.**                     *Submission of Matters to a Vote of Security Holders*
| (a) |   | The Company held its annual meeting of stockholders  on June 15, 2005 (the “Annual Meeting”).                                                                                                                                                                                                                                 |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) |   | No response is required  to Paragraph (b) because (i) proxies for the meeting were solicited  pursuant to Regulation 14 under the Securities Exchange Act of 1934, as  amended; (ii) there was no solicitation in opposition to those nominees  listed in the proxy statement; and (iii) all such nominees were elected. |
| (c) |   | The matters voted upon  at the Annual Meeting and the results of the voting are set forth below.  Broker non-votes were not applicable.                                                                                                                                                                                                      |

 

(i)            Proposalto approve nominees for the Board of Directors:
| **Name**               | ** ** | ** ** | ** ** | **In Favor** | ** ** | **Withheld** | ** ** |
|------------------------|------------|------------|------------|-------------------|------------|--------------|------------|
| Andrew G. Bodnar       |       | 66,171,382 |       | 6,883,176         |       |
| William W. Crouse      |       | 64,872,605 |       | 8,181,953         |       |
| Vincent T.  DeVita, Jr |       | 66,156,558 |       | 6,898,000         |       |
| John A. Fazio          |       | 64,860,584 |       | 8,193,974         |       |
| Joseph L. Fischer      |       | 64,872,057 |       | 8,182,501         |       |
| David M. Kies          |       | 64,871,785 |       | 8,182,773         |       |
| Daniel S. Lynch        |       | 66,112,944 |       | 6,941,614         |       |
| William R. Miller      |       | 64,847,591 |       | 8,206,967         |       |
| David Sidransky        |       | 66,264,252 |       | 6,790,306         |       |

 

51

----

 

(ii)        Proposalto ratify the appointment by the Board of Directors of KPMG LLP as the Company’sindependent registered public accounting firm for the 2005 fiscal year:
| ** ** | **In Favor** | ** ** | ** ** | ** ** | **Against** | ** ** | ** ** | ** ** | **Abstain** | ** ** |
|------------|--------------|------------|------------|------------|-------------|------------|------------|------------|-------------|------------|
| 67,428,451 |         | 731,985    |       | 4,894,122  |

 

**Item 5.**                        *Other Information*

Not applicable

**Item 6.**                        *Exhibits*
| **Exhibit No.** | ** ** | **Description** | ** ** | **Incorporation 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                                                                                                                                                            |   | S (3.2) |
|            | 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) |

52

----

 
|   | 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)  |   |
|   | 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 4/33 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)     |

53

----

 
|   | 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                                                                                                       |   | W (10.30) |
|   | 10.33 |   |   | Letter Agreement, effective as of April 5,  2005, by and between S. Joseph Tarnowski and ImClone Systems Incorporated                                |   | X (10.1)  |
|   | 31.1  | *      |   | Certification of the Company’s 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.                             |   |      |
|   | 32.1  | *      |   | Certification of the Company’s Chief Executive  Officer and Chief Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002. |   |      |

----

*                    Filedherewith.                                                                                                              

(A)       Previously filed with theCommission; incorporated by reference to Amendment No. 1 to RegistrationStatement on to Form S-1, File No. 33-61234.

(B)        Previously filed with theCommission; incorporated by reference to the Company’s Annual Report 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 fiscalyear 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 quarterended June 30, 1997.

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

(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 fiscalyear 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.

54

----

(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)    Previously filed with theCommission; incorporated by reference to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2004.

(X)       Previously filed with theCommission; incorporated by reference to the Company’s Current Report on Form 8-Kdated April 5, 2005.

(Y)       Previously filed with theCommission; incorporated by reference to the Quarterly Report on Form 10-Qfor the quarter ended March 31, 2005.

55

----

**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                            |   | IMCLONE SYSTEMS INCORPORATED (Registrant) |
|----------------------------|--------|-------------------------------------------|
|                       |   | By:                                       |   | /s/  DANIEL S. LYNCH |
| * *                   |   |                                      |   | Daniel S. Lynch*Chief Executive Officer* |
| Date: August 9,  2005 |   |                                      |   |   |
|                       |   | By:                                       |   | /s/  MICHAEL J. HOWERTON |
| * *                   |   |                                      |   | Michael J.  Howerton*Chief Financial Officer* |
| Date: August 9,  2005 |   |                                      |   |   |

 

56

----