**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

----

**Form 10-Q**

| **x**                                                                                              | **QUARTERLY REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|----------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|
| **For the Quarterly Period Ended March 31,  2006**                                            |
| **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 |   | (IRS Employer  Identification No.) |
| organization)                                     |   |                               |
| **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 whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or forsuch shorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past90 days. Yes x     No o

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

| Large accelerated filer x |   | Accelerated filer o |   | Non-accelerated filer o |
|---------------------------|--------|---------------------|--------|------------------------------|

 

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

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

| Class                         | ** ** | **Outstanding as of May 1, 2006** |
|-------------------------------|------------|----------------------------------------|
| Common Stock, par value $.001 |       | 84,040,433 Shares                      |

 

 

----

**IMCLONE SYSTEMSINCORPORATED**

**INDEX**

| PART I—FINANCIAL  INFORMATION |   |                                                                                                                                |
|-----------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------|
| Item  1.                                |   | Financial  Statements                                                                                                               |   | 1 |
|                                    |   | Unaudited  Consolidated Balance Sheets—March 31, 2006 and December 31, 2005                                          |   | 1 |
|                                    |   | Unaudited Consolidated Statements of Income—Three  months ended March 31, 2006 and 2005                              |   | 2 |
|                                    |   | Unaudited Consolidated Statement of Stockholders’  Equity and Comprehensive Income—Three months ended March 31, 2006 |   | 3 |
|                                    |   | Unaudited Consolidated Statements of Cash Flows—Three  months ended March 31, 2006 and 2005                          |   | 4 |
|                                    |   | Notes to Unaudited Consolidated Financial Statements                                                                                |   | 5 |
| Item 2.                                 |   | Management’s Discussion and Analysis of Financial  Condition and Results of Operations                                    |   | 32 |
| 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 1A.                                |   | Risk  Factors                                                                                                                       |   | 48 |
| Item 2.                                 |   | Unregistered Sales of Equity Securities and Uses of  Proceeds                                                                       |   | 48 |
| Item 3.                                 |   | Defaults upon Senior Securities                                                                                                     |   | 48 |
| Item 4.                                 |   | Submission of Matters to a Vote of Security Holders                                                                                 |   | 48 |
| Item  5.                                |   | Other  Information                                                                                                                  |   | 48 |
| Item 6.                                 |   | Exhibits                                                                                                                            |   | 48 |
| Signatures                              |   | 53                                                                                                                                  |

 

i

----

**PART I. FINANCIAL INFORMATION**

**Item1.        *FinancialStatements***

**IMCLONE SYSTEMSINCORPORATED**

**CONSOLIDATEDBALANCE SHEETS(in thousands, except per share and share data)**

**(Unaudited)**

| ** **                                                                                                                                                                                                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                                                                | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| **ASSETS**                                                                                                                                                                                                                                                                | ** ** | ** **         | ** ** |                  | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                                                                           |       |               |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                                                                                                                                                |       | $                  | 275,861    |                  |       | $ | 3,403 |   |   |
| Securities  available for sale                                                                                                                                                                                                                                            |       | 714,838            |       |                  | 752,973    |   |   |
| Prepaid expenses                                                                                                                                                                                                                                                          |       | 1,876              |       |                  | 3,766      |   |   |
| Amounts due from  corporate partners                                                                                                                                                                                                                                      |       | 70,359             |       |                  | 59,271     |   |   |
| Inventories                                                                                                                                                                                                                                                               |       | 75,072             |       |                  | 81,394     |   |   |
| Deferred income  taxes                                                                                                                                                                                                                                                    |       | 21,600             |       |                  | —     |   |   |
| Other current  assets                                                                                                                                                                                                                                                     |       | 8,216              |       |                  | 8,311      |   |   |
| Total current  assets                                                                                                                                                                                                                                                     |       | 1,167,822          |       |                  | 909,118    |   |   |
| Property, plant  and equipment, net                                                                                                                                                                                                                                       |       | 419,970            |       |                  | 406,595    |   |   |
| Deferred financing  costs, net                                                                                                                                                                                                                                            |       | 11,603             |       |                  | 12,531     |   |   |
| Deferred income  taxes, net                                                                                                                                                                                                                                               |       | 98,400             |       |                  | —     |   |   |
| Other assets                                                                                                                                                                                                                                                              |       | 14,710             |       |                  | 15,171     |   |   |
| Total assets                                                                                                                                                                                                                                                              |       | $                  | 1,712,505  |                  |       | $ | 1,343,415 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                            | ** ** | ** **         | ** ** |                  | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                                                                                                      |       |               |       |                  |       |   |   |
| Accounts payable  (including $3,824 and $4,610 due Bristol-Myers Squibb Company (“BMS”) at  March 31, 2006 and December 31, 2005, respectively)                                                                                                       |       | $                  | 19,545     |                  |       | $ | 35,530 |   |   |
| Accrued expenses  (including $14,465 and $11,427 due BMS at March 31, 2006 and  December 31, 2005, respectively)                                                                                                                                                |       | 64,466             |       |                  | 60,934     |   |   |
| Withholding tax  liability                                                                                                                                                                                                                                                |       | 32,000             |       |                  | 32,000     |   |   |
| Current portion of  deferred revenue                                                                                                                                                                                                                                      |       | 160,548            |       |                  | 112,624    |   |   |
| Other current  liabilities                                                                                                                                                                                                                                                |       | 3,094              |       |                  | 1,031      |   |   |
| Total current  liabilities                                                                                                                                                                                                                                                |       | 279,653            |       |                  | 242,119    |   |   |
| Deferred revenue,  less current portion                                                                                                                                                                                                                                   |       | 304,074            |       |                  | 246,401    |   |   |
| Long-term debt                                                                                                                                                                                                                                                            |       | 600,000            |       |                  | 600,000    |   |   |
| Share based  compensation                                                                                                                                                                                                                                                 |       | 325                |       |                  | —     |   |   |
| Deferred income  taxes                                                                                                                                                                                                                                                    |       | 793                |       |                  | —     |   |   |
| Deferred rent,  less current portion                                                                                                                                                                                                                                      |       | 2,668              |       |                  | 2,491      |   |   |
| Total liabilities                                                                                                                                                                                                                                                         |       | 1,187,513          |       |                  | 1,091,011  |   |   |
| 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 85,005,747 and  84,412,408 at March 31, 2006 and December 31, 2005, respectively;  outstanding 84,001,073 and 83,407,734 at March 31, 2006 and  December 31, 2005, respectively |       | 85                 |       |                  | 84         |   |   |
| Additional paid-in  capital                                                                                                                                                                                                                                               |       | 777,398            |       |                  | 733,069    |   |   |
| Accumulated  deficit                                                                                                                                                                                                                                                      |       | (212,868           | )          |                  | (442,459   | ) |   |
| Treasury stock, at  cost 1,004,674 at March 31, 2006 and December 31, 2005,  respectively                                                                                                                                                                       |       | (29,149            | )          |                  | (29,149    | ) |   |
| Accumulated other  comprehensive loss:                                                                                                                                                                                                                                    |       |               |       |                  |       |   |   |
| Net unrealized loss on  securities available for sale                                                                                                                                                                                                                     |       | (10,474            | )          |                  | (9,141     | ) |   |
| Total stockholders’  equity                                                                                                                                                                                                                                          |       | 524,992            |       |                  | 252,404    |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                           |       | $                  | 1,712,505  |                  |       | $ | 1,343,415 |   |   |

 

See accompanying notes to consolidated financial statements.

1

----

**IMCLONE SYSTEMSINCORPORATED**

**CONSOLIDATEDSTATEMENTS OF INCOME(in thousands, except per share data)**

**(Unaudited)**

| ** **                                              | ** ** | **Three Months  Ended March 31,** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenues:                                               |       |                                             |       |   |   |
| Royalty revenue                                         |       | $                                                | 60,270     |   | $ | 36,372 |   |
| License fees and milestone revenue                      |       | 144,403                                          |       | 24,534 |   |
| Manufacturing revenue                                   |       | 19,349                                           |       | 11,019 |   |
| Collaborative agreement revenue                         |       | 21,109                                           |       | 13,846 |   |
| Total revenues                                          |       | 245,131                                          |       | 85,771 |   |
| Operating  expenses:                                    |       |                                             |       |   |   |
| Research and development                                |       | 32,993                                           |       | 21,173 |   |
| Clinical and regulatory                                 |       | 15,081                                           |       | 9,398 |   |
| Marketing, general and administrative                   |       | 18,001                                           |       | 17,623 |   |
| Royalty expense                                         |       | 20,066                                           |       | 12,566 |   |
| Cost of manufacturing revenue                           |       | 15,402                                           |       | 743 |   |
| Total operating expenses                                |       | 101,543                                          |       | 61,503 |   |
| Operating income                                        |       | 143,588                                          |       | 24,268 |   |
| Other:                                                  |       |                                             |       |   |   |
| Interest income                                         |       | (7,164                                           | )          | (6,757 | ) |
| Interest expense                                        |       | 1,462                                            |       | 1,809 |   |
| Loss on sale of securities                              |       | —                                           |       | 16 |   |
| Other, net                                              |       | (5,702                                           | )          | (4,932 | ) |
| Income before income taxes                              |       | 149,290                                          |       | 29,200 |   |
| Income tax (benefit) provision                          |       | (80,301                                          | )          | 380 |   |
| Net income                                              |       | $                                                | 229,591    |   | $ | 28,820 |   |
| Income per common  share:                               |       |                                             |       |   |   |
| Basic                                                   |       | $                                                | 2.75       |   | $ | 0.35 |   |
| Diluted                                                 |       | $                                                | 2.51       |   | $ | 0.33 |   |
| Shares used in  calculation of income per common share: |       |                                             |       |   |   |
| Basic                                                   |       | 83,624                                           |       | 83,278 |   |
| Diluted                                                 |       | 91,817                                           |       | 92,648 |   |

 

See accompanying notes to consolidated financial statements.

2

----

**IMCLONE SYSTEMSINCORPORATEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEFor the Three Months Ended March 31, 2006**

**(in thousands, exceptshare data)**

**(Unaudited)**

| ** **                                                                  | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** | ** **      | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|----------------|------------|-------------------|------------|------------|------------|-----------------|------------|------------|------------|
| ** **                                                                  | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** | ** **        | ** ** | ** ** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | ** **               | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | **Additional** | ** ** | ** **        | ** ** | ** ** | ** ** | **Other ** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury**   | ** ** | **Comprehensive** | ** ** | ** ** | ** ** |
| ** **                                                                  | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**  | ** ** | **Amount**      | ** ** | **Capital**    | ** ** | **Deficit**       | ** ** | **Stock**  | ** ** | **Loss**        | ** ** | **Total**  | ** ** |
| Balance at December 31, 2005                                      |       | —                   |       | $                     | —     |        | 84,412,408 |            |       | $              | 84         |              |       |       | $          | 733,069         |       |       |       | $ | (442,459 | ) |   | $ | (29,149 | ) |   | $ | (9,141 | ) |   | $ | 252,404 |   |
| Options exercised                                                           |       |                     |       |                  |       | 584,529     |       |            | 1          |           |       |              | 10,612     |       |       |            |       |       |       |   |   |   |   |   |   | 10,613 |   |
| Issuance of shares through employee stock purchase  plan               |       |                     |       |                  |       | 8,810       |       |            | —     |           |       |              | 255        |       |       |            |       |       |       |   |   |   |   |   |   | 255 |   |
| Share based compensation expense                                            |       |                     |       |                  |       |        |       |            |       |           |       |              | 1,861      |       |       |            |       |       |       |   |   |   |   |   |   | 1,861 |   |
| Tax benefit of stock options                                                |       |                     |       |                  |       |        |       |            |       |           |       |              | 31,601     |       |       |            |       |       |       |   |   |   |   |   |   | 31,601 |   |
| Comprehensive income:                                                       |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            |       |       |       |   |   |   |   |   |   |   |   |
| Net income                                                                  |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            | 229,591    |       |       |   |   |   |   |   |   | 229,591 |   |
| Other comprehensive loss:                                                   |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            |       |       |       |   |   |   |   |   |   |   |   |
| Unrealized loss on marketable securities arising  during the period    |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            |       |       |       |   |   |   | (1,333 | ) |   | (1,333 | ) |
| Less: Reclassification adjustment for realized loss  included in net income |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            |       |       |       |   |   |   | — |   |   | — |   |
| Total other comprehensive loss                                              |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            |       |       |       |   |   |   | (1,333 | ) |   | (1,333 | ) |
| Comprehensive  income                                                       |       |                     |       |                  |       |        |       |            |       |           |       |              |       |       |       |            |       |       |       |   |   |   |   |   |   | 228,258 |   |
| Balance at  March 31, 2006                                             |       | —                   |       | $                     | —     |        | 85,005,747 |            |       | $              | 85         |              |       |       | $          | 777,398         |       |       |       | $ | (212,868 | ) |   | $ | (29,149 | ) |   | $ | (10,474 | ) |   | $ | 524,992 |   |

 

See accompanying notes to consolidated financial statements.

3

----

**IMCLONESYSTEMS INCORPORATED**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(Unaudited)**

| ** **                                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                        |       |                                             |       |   |   |
| Net income                                                                                   |       | $                                                | 229,591    |   | $ | 28,820 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                                               |       | 3,069                                            |       | 3,182 |   |
| Amortization of  deferred financing costs                                                    |       | 927                                              |       | 928 |   |
| Share based  compensation                                                                    |       | 1,861                                            |       | — |   |
| Tax benefit from  share based compensation                                                   |       | (31,601                                          | )          | — |   |
| Loss on securities  available for sale, net                                                  |       | —                                           |       | 16 |   |
| Deferred income  taxes                                                                       |       | (119,207                                         | )          | — |   |
| Changes in:                                                                                  |       |                                             |       |   |   |
| Prepaid expenses                                                                             |       | 1,890                                            |       | 1,547 |   |
| Amounts due from  corporate partners                                                         |       | (11,088                                          | )          | 22,712 |   |
| Inventories                                                                                  |       | 6,322                                            |       | (14,713 | ) |
| Other current  assets                                                                        |       | 97                                               |       | (204 | ) |
| Other assets                                                                                 |       | 430                                              |       | 729 |   |
| Accounts payable                                                                             |       | (15,985                                          | )          | (12,467 | ) |
| Accrued expenses                                                                             |       | 35,133                                           |       | (24,995 | ) |
| Litigation  settlement                                                                       |       | —                                           |       | (50,025 | ) |
| Share based  compensation                                                                    |       | 325                                              |       | — |   |
| Other current  liabilities                                                                   |       | 2,063                                            |       | 2,063 |   |
| Deferred revenue                                                                             |       | 105,597                                          |       | (26,078 | ) |
| Deferred rent,  less current portion                                                         |       | 177                                              |       | (1,519 | ) |
| Net cash provided  by (used in) operating activities                                         |       | 209,601                                          |       | (70,004 | ) |
| Cash flows from investing activities:                                                        |       |                                             |       |   |   |
| Acquisitions of  property, plant and equipment                                               |       | (16,414                                          | )          | (24,898 | ) |
| Purchases of  securities available for sale                                                  |       | (101,923                                         | )          | (186,449 | ) |
| Proceeds from sale  of securities available for sale                                         |       | 133,250                                          |       | 159,584 |   |
| Proceeds from  maturities of securities available for sale                                   |       | 5,475                                            |       | 52,217 |   |
| Net cash provided  by investing activities                                                   |       | 20,388                                           |       | 454 |   |
| Cash flows from financing activities:                                                        |       |                                             |       |   |   |
| Proceeds from  exercise of stock options                                                     |       | 10,613                                           |       | 6,377 |   |
| Proceeds from  issuance of common stock under the employee stock purchase plan               |       | 255                                              |       | 240 |   |
| Tax benefit from  share based compensation                                                   |       | 31,601                                           |       | — |   |
| Net cash provided  by financing activities                                                   |       | 42,469                                           |       | 6,617 |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | 272,458                                          |       | (62,933 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 3,403                                            |       | 79,321 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                                | 275,861    |   | $ | 16,388 |   |
| Supplemental cash flow information:                                                          |       |                                             |       |   |   |
| Cash paid for:                                                                               |       |                                             |       |   |   |
| Income taxes                                                                                 |       | $                                                | 7          |   | $ | 200 |   |
| Non-cash investing and financing activity:                                                   |       |                                             |       |   |   |
| Change in net  unrealized loss in securities available-for-sale                              |       | $                                                | 1,333      |   | $ | 7,084 |   |

 

See accompanying notes to consolidated financial statements.

4

----

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

**(1)   Business Overview and Basis of Presentation**

The accompanying consolidated financial statements ofImClone Systems Incorporated (“ImClone Systems” or the “Company”) as of March 31,2006 and for the three months ended March 31, 2006 and 2005 are unaudited.The accompanying unaudited consolidated balance sheets, statements of income,statement of stockholders’ equity and comprehensive income and statements ofcash flows have been prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”) for interim financial information and inconjunction with the rules and regulations of the Securities and ExchangeCommission (“SEC”). Accordingly, they do not include all of the disclosuresrequired by GAAP for complete financial statements. The financial statementsreflect all adjustments, consisting only of normal, recurring adjustments,which are in the opinion of management, necessary for a fair presentation forthe interim periods. Management of the Company has made a number of estimatesand assumptions relating to the reporting of assets and liabilities and relatedrevenue and expense accounts and the disclosure of contingent assets andliabilities to prepare these consolidated financial statements in conformitywith GAAP. Actual results could differ materially from those estimates. Thesefinancial statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the fiscal year ended December 31,2005, 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.

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 ofpatients with cancer. A substantial portion of the Company’s efforts andresources is devoted to research and development conducted on its own behalfand through collaborations with corporate partners and academic research andclinical institutions. The Company does not operate separate lines of businessor separate business entities and does not conduct any of its operationsoutside of the United States. Accordingly, the Company does not preparediscrete financial information with respect to separate product areas or bylocation and does not have separately reportable segments.

On January 24, 2006, the Company announced thatthe Board of Directors had engaged the investment bank Lazard to conduct, inconjunction with management, a full review of the Company’s strategicalternatives to maximize shareholder value. These alternatives could include amerger, sale or strategic alliance. There can be no assurances, however, thatany particular strategic alternative will be pursued or that any transactionwill occur, or on what terms.

On February 12, 2004, the United States Food andDrug Administration (“FDA”) approved ERBITUX® (Cetuximab) Injection for use incombination with irinotecan in the treatment of patients with EGFR-expressing,metastatic colorectal cancer who are refractory to irinotecan-basedchemotherapy and for use as a single agent in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are intolerant toirinotecan-based chemotherapy. In September 2005, Health Canada approvedthe use of ERBITUX for use in combination with irinotecan for the treatment ofEGFR-expressing metastatic colorectal carcinoma in patients who are refractoryto other irinotecan-based chemotherapy regimens and for use as a single agentfor the treatment of EGFR expressing, metastatic colorectal carcinoma in patientswho are intolerant to irinotecan-based chemotherapy. On March 1, 2006, theFDA approved ERBITUX for use in combination with radiation therapy for thetreatment of locally or 

5

----

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

regionally advancedsquamous cell carcinoma of the head and neck (“SCCHN”) and as a single agent inrecurrent or metastatic SCCHN where prior platinum-based chemotherapy hasfailed. Reference full prescribing information, available at www.ERBITUX.com,for important safety information relating to ERBITUX, including boxed warnings.

On December 1, 2003,Swissmedic, the Swiss agency for therapeutic products, approved ERBITUX inSwitzerland for the treatment of patients with colorectal cancer who no longerrespond to standard chemotherapy treatment with irinotecan. Merck KGaA licensedthe right to market ERBITUX outside the United States and Canada from theCompany in 1998. In Japan, Merck KGaA has marketing rights to ERBITUX, whichare co-exclusive to the co-development rights of the Company and BMS. On June 30,2004, Merck KGaA received marketing approval by the European Commission to sellERBITUX for use in combination with irinotecan for the treatment of patientswith EGFR-expressing metastatic colorectal cancer after failure of irinotecanincluding cytotoxic therapy. On December 22, 2005, Swissmedic approvedERBITUX in Switzerland in combination with radiation in the treatment ofpatients with previously untreated, advanced SCCHN. On April 3, 2006,Merck KGaA was granted marketing authorization by the European Commission toextend the use of ERBITUX, in combination with radiotherapy, to the treatmentof patients with locally advanced SCCHN.

**Impact of RecentAccounting Pronouncements**

**Share-BasedCompensation Plans**

Effective January 1, 2006, the Company adoptedthe provisions of Financial Accounting Standards Board Statement (“FASB”) No. 123(revised 2004), Share-Based Payment (“SFAS 123R”) using the modifiedprospective transition method. Under this method prior periods are not revisedfor comparative purposes and the Company recognizes compensation cost using afair-value based method for all share-based payments granted after December 31,2005, plus any awards granted to employees prior to December 31, 2005 thatremain unvested at that time. Prior to January 1, 2006, the Company accountedfor its share-based compensation plans in accordance with the provisions ofAccounting Principles Board (“APB”) Opinion No. 25. “Accounting for StockIssued to Employees”, and related interpretations including Statement ofFinancial Accounting Standards Board Interpretation No. 44, “Accountingfor Certain Transactions Involving Stock Compensation—An Interpretation of APBOpinion No. 25”. On November 10, 2005, the FASB issued FASB StaffPosition No. FAS 123(R)-3, “Transition Election Related to Accountingfor Tax Effects of Share-Based Payment Awards.” The Company has elected toadopt the alternative transition method provided in this FASB Staff Positionfor purposes of calculating the pool of excess tax benefits available to absorbtax deficiencies recognized subsequent to the adoption of SFAS 123R.

The Company has threetypes of share-based compensation plans: stock option plans, an employee stockpurchase plan and effective as of January 1, 2006, a retention plan.

***Stock Option Plans***

In February 1986, the Company adopted and theshareholders thereafter approved an Incentive Stock Option Plan and aNon-Qualified Stock Option Plan (the “86 Plans”). Options may no longer begranted under the 86 Plans pursuant to the terms of the 86 Plans. In February 1996,the Company’s Board of Directors adopted and the shareholders thereafterapproved an additional Incentive Stock Option Plan 

6

----

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

and Non-Qualified StockOption Plan (the “96 Plans”). In May 1998, the Company’s Board ofDirectors adopted an additional Non-Qualified Stock Option Plan (the “98 Plan”),which shareholders were not required to approve. On June 11, 2002, theshareholders approved and the Company adopted the 2002 Stock Option Plan (the “02Plan”). Effective with the adoption of the 02 Plan, the Company will not awardnew grants from the 96 Plans or the 98 Plan. The 02 Plan provides for thegranting of both incentive stock options and non-qualified stock options topurchase, subject to adjustment under the plan, 3,300,000 shares of the Company’scommon stock to employees, directors, consultants and advisors of the Company.Any common stock subject to an option which is cancelled, forfeited or expiresprior to exercise, whether such option was granted under this plan or the 96Plans or the 98 Plan, shall again become available for grant under the 02 Plan.Options granted under the 02 Plan become fully vested and exercisable uponthe occurrence of a change in control, as defined. Incentive stock optionsgranted under the 02 Plan may not exceed 825,000 shares of common stock, may notbe granted at a price less than the fair market value of the stock at the dateof grant and may not be granted to non-employees. In September 2003,the shareholders approved an amendment to the 02 Plan that increased themaximum total number of shares of common stock currently available for grant ofoptions under the plan from 3,300,000 shares to 6,600,000 shares, and increasedthe number of shares of common stock with respect to which incentive stockoptions may be granted under the plan from 825,000 shares to 1,650,000shares.

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

On October 17, 2005, the Compensation Committeeof the Board of Directors approved the adoption of a stock option plan for thesole purpose of making one-time grants of stock options to newly hired keyemployees who have not previously been employees or directors of the Company asan inducement to such persons entering into employment with the Company (the “InducementPlan”), in accordance with NASDAQ Marketplace Rule 4350(i)(1)(A)(iv). TheInducement Plan permits the Company to issue up to a total of 600,000 “inducement”options to eligible participants to purchase shares of common stock of theCompany on terms and conditions set forth therein and in individual awardagreements under the Inducement Plan, in each case on terms commensurate withoptions granted under the 02 Plan.

Combined, the 86 Plans, the 96 Plans, as amended, the98 Plan, as amended, and the 02 Plan, as amended, and the Inducement Plan (the “StockOptions Plans”) provide as of March 31, 2006 for the granting of optionsto purchase up to 34,500,000 shares of common stock to employees, directors,consultants and advisors of the Company. Incentive stock options may notbe granted at a price less than the fair market value of the stock at the dateof grant and may not be granted to non-employees. Options under all theplans, unless earlier terminated, expire ten years from the date of grant.Options granted under these plans generally vest over one-to-four-year periods.

On December 16, 2005,the Company’s Board of Directors approved the acceleration of vesting ofunvested stock options with exercise prices equal to or greater than $33.44 pershare outstanding as of December 16, 2005 that had been previously awardedto Company employees and other eligible participants, including officers andnon-employee directors. Options to purchase approximately 2,805,169 shares ofthe Company’s common stock were subject to this acceleration. Of this amount,approximately 163,750 options are held by non-employee directors, with aweighted average exercise price of $45.00 per share, and 628,347 options areheld by officers of the Company with a weighted average exercise price of 

7

----

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

$44.32per share. The Board required each non-employee director and, as a condition tocontinued employment, each officer of the Company, to agree to refrain fromselling, transferring, pledging or otherwise disposing of shares of Companycommon stock acquired upon any exercise of subject stock options (other thansales by such persons to fund the exercise price or to satisfy minimumstatutory withholding on such exercise, each in accordance with the applicablePlan and the Company’s existing policies and procedures) until the date onwhich the exercise would have been permitted under the stock option’spre-acceleration vesting terms or pursuant to the Company’s Change-in-ControlPlan or, if earlier, the officer’s last day of employment with, or director’slast day of service as a director of, the Company. The decision to acceleratevesting of these stock options, which were “out-of-the-money”, was madeprimarily to minimize future compensation expense that the Company wouldotherwise have been required to recognize in its Consolidated Statements ofIncome pursuant to SFAS 123R, which the Company adopted on January 1,2006. The Company estimates that the aggregate future expense that will beeliminated as a result of this acceleration of vesting is approximately $22.5million in 2006 and $9.5 million in 2007.

***Employee Stock Purchase Plan***

In April 1998, theCompany’s Board of Directors adopted the ImClone Systems Incorporated 1998Employee Stock Purchase Plan (the “ESPP”), subject to shareholders’ approval,which was received in May 1998. The ESPP, as amended, allows eligibleemployees to purchase shares of the Company’s common stock through payrolldeductions at the end of quarterly purchase periods. To be eligible, anindividual must be an employee, work more than 20 hours per week for atleast five months per calendar year and not own greater than 5% of the Company’scommon stock. Pursuant to the ESPP, the Company has reserved 1,000,000 sharesof common stock for issuance. Prior to the first day of each quarterly purchaseperiod, each eligible employee may elect to participate in the ESPP. Theparticipant is granted an option to purchase a number of shares of common stockdetermined by dividing each participant’s contribution accumulated prior to thelast day of the quarterly period by the purchase price. The participant has theability to withdraw from the ESPP until the second-to-last day of the quarterlypurchase period. The purchase price is equal to 85% of the market price pershare on the last day of each quarterly purchase period. An employee may purchasestock from the accumulation of payroll deductions up to the lesser of 15% ofsuch employee’s compensation or $25,000 in aggregate purchase price, per year.

***Retention Plan***

In January 2006, the Compensation Committee ofthe Board of Directors approved a Retention Plan, effective as of January 1,2006, for performance periods ending December 31, 2007 and****December 31, 2008 (each, a “Performance Period”). ThePlan is intended to reward employees for achieving specified performance goalsover specified performance periods. Specifically, the Compensation Committeeapproved the share performance criteria that will be used to determine cashbonus awards under the Retention Plan, and the terms of the individual awardsto eligible employees under the Retention Plan for each of the two PerformancePeriods. Cash awards under the Retention Plan will depend on the performance ofthe Company’s common stock against specified targets, generally measured bycomparing the Company’s share price at the beginning of the Performance Periodto the Company’s share price at the conclusion of the Performance Period, ineach case based on a 30-day average. In particular, at the end of anapplicable Performance Period, the percentage of the cash award earned (if any)and, correspondingly, 

8

----

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

the amount of the actualaward payouts to an employee for such Performance Period will be (i) equalto the employee’s target award opportunity, (ii) greater than the targetaward opportunity (but in no event more than 150% of the target awardopportunity), or (iii) zero, in each case directly corresponding to actualCompany common stock performance at the conclusion of the Performance Periodcompared to the beginning of the Performance Period. No awards will be payablein respect of a Performance Period if the Company’s share price at theconclusion of the Performance Period is less than the share price at thebeginning of the Performance Period. The Company’s share price at the beginningof the Performance Periods was calculated to be $32.99. Special measurementdates and payment conditions apply in the event of a change in control of theCompany occurring during a Performance Period. The Company has determined thatawards granted under this plan should be classified as liability awards.

Thefollowing table summarizes the effect of compensation cost arising fromshare-based payment arrangements on the income statement for the Company’sStock Option Plans, the ESPP and the Retention Plan:

| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                | ** ** | ** **                       | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** |
| Research and  development              |       | $                                | 515,000    |   |   | $ | — |   |   |
| Clinical and  regulatory               |       | 318,000                          |       |   | — |   |   |
| Marketing,  general and administrative |       | 1,058,000                        |       |   | — |   |   |
| Total                                  |       | $                                | 1,891,000  |   |   | $ | — |   |   |
|                                        |            |                                  |            |  |  |  |  |  |  |  |  |

 

In addition, the Company capitalized, during the threemonths ended March 31, 2006, $169,000 as part of the cost ofinventory and $126,000 in property, plant and equipment.

As a result of adopting SFAS 123R, the Company’sincome before income taxes and net income for the three months ended March 31,2006 was $1,891,000 and $1,651,000 lower, respectively, than if it hadcontinued to account for share-based compensation in accordance with theprovisions of APB Opinion 25. Basic and diluted income per share for the threemonths ended March 31, 2006, would have been $2.77 and $2.53, respectively,if the Company had not adopted SFAS 123R, compared to reported basic anddiluted income per share of $2.75 and $2.51, respectively. In addition, for thethree months ended March 31, 2006, the adoption of SFAS 123R resultedin net cash provided by operating activities being lower and net cash providedby financing activities being higher by approximately $31,601,000.

Prior to the adoption ofSFAS 123R, all tax benefits for deductions resulting from the exercise of stockoptions were presented as operating cash flows on the Consolidated Statement ofCash Flows. Upon adoption of SFAS 123R, cash flows resulting from the taxbenefits of tax deductions will be classified as financing cash flows.

***Determining Fair Value***

*Valuationand Amortization Method:**  *Thefair value of stock options granted under the Company’s Stock Option Plans andthe ESPP is estimated using the Black-Scholes option pricing model. The fairvalue of stock options granted after January 1, 2006 is amortized on astraight-line basis. The fair value of stock options granted before January 1,2006 is amortized using the graded vesting attribution approach. Compensationexpense is amortized over the requisite service periods of the awards, whichare generally 

9

----

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

the vesting periods. Thefair value of awards granted under the Retention Plan were calculated using aMonte-Carlo simulation pricing model. The fair value of these awards is beingamortized based on the proportionate amount of the requisite service periodthat has been rendered to date for each respective performance period.

*ExpectedTerm:**  *Theexpected term of an employee share option is the period of time for which theoption is expected to be outstanding. The Company has made a determination ofexpected term by analyzing employees’ historical exercise experience andpost-vesting employment termination behavior from its history of grants andexercises in the Company’s option database. The historical pattern of optionexercises has been analyzed in an effort to determine if there were anydiscernable patterns of activity based on certain demographic characteristicssuch as employees’ length of service, salary and job level.

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

*Risk-FreeInterest Rate:*   The risk-free interest rate usedin the Black-Scholes option pricing model is based on the implied yieldavailable on U.S. Treasury zero-coupon issues with a remaining term equal tothe expected term used. The risk free rate used in the  Monte-Carlo valuation model is based on theimplied yield in effect at the time of grant from the constant maturitytreasury yield curve over the contractual terms of the award.

*Dividends:**  *Cash dividends have never been declared on theCompany’s common stock and the Company has no present intention to declare cashdividends in the foreseeable future. Consequently, an expected dividend yieldof zero was used in both the Black-Scholes and Monte-Carlo valuation models.

*Forfeiture:**  *The Company uses historical data to estimate pre-vestingoption forfeitures. Share-based compensation expense is recorded only for thoseawards that are expected to vest. The Company’s pre-vesting forfeiture rateused was 7%.

Thefollowing assumptions were used to estimate the fair value of options grantedunder the Company’s Stock Option Plans for the three months ended March 31, 2006 and 2005:

| ** **               | ** ** | **Stock Options**           | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **Three Months Ended** | ** ** |
| ** **               | ** ** | **March 31,  2006**         | ** ** | **March 31,  2005** | ** ** |
| Expected term  (years)   |       | 4.50-5.72                        |       |   | 4.17 |   |   |
| Expected  volatility     |       | 42.70                            | %          |   | 83.48 | % |   |
| Risk-free  interest rate |       | 4.31-4.35                        | %          |   | 3.49 | % |   |
| Expected dividend yield  |       | 0                                | %          |   | 0 | % |   |

 

The assumptions used inthe Monte-Carlo simulation modeling to estimate the fair value of awards underthe Retention Plan were: expected volatility of 42.5%, risk free interest rateranging from 4.34% to 

10

----

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

4.38%and expected dividend yield of 0%. The fair value of the Company’s ESPP awardswas calculated using the intrinsic value of the common stock purchased on March 31,2006 based on the fact that the Company’s offering period is three months andthe ESPP does not contain a look-back provision.

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

Stock option activity for the three months ended March 31,2006 is summarized as follows:

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term (Years)** | ** ** | **Aggregate  Intrinsic Value  (in thousands)** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | 12,619,193                 |       |                                                       | $          | 37.38                                                            |       |                                                     |       |   |   |   |   |   |   |   |
| Granted                                |       | 1,217,267                  |       |                                                       | 34.58      |                                                             |       |                                                     |       |   |   |   |   |   |   |
| Exercised                              |       | (584,529                   | )          |                                                       | 18.16      |                                                             |       |                                                     |       |   |   |   |   |   |   |
| Forfeitures                            |       | (579,103                   | )          |                                                       | 47.41      |                                                             |       |                                                     |       |   |   |   |   |   |   |
| Outstanding at  March 31, 2006    |       | 12,672,828                 |       |                                                       | $          | 37.54                                                            |       |                                                     |       | 6.67 |   |   |   | $ | 53,666 |   |   |
| Vested and  expected to vest           |       | 12,514,020                 |       |                                                       | $          | 37.59                                                            |       |                                                     |       | 6.59 |   |   |   | $ | 53,482 |   |   |
| Exercisable at  March 31, 2006    |       | 11,161,616                 |       |                                                       | $          | 38.30                                                            |       |                                                     |       | 6.30 |   |   |   | $ | 49,786 |   |   |

 

The weighted average fair value of options grantedduring the three months ended March 31, 2006 and 2005 was $15.20 and$27.50, respectively. The aggregate intrinsic value of options outstanding at March 31,2006 is calculated as the difference between the exercise price of theunderlying options and the market price of the Company’s common stock for the3,810,577 shares that had exercise prices that were lower than the $34.02market price of our common stock at March 31, 2006. The total intrinsicvalue of options exercised during the three months ended March 31, 2006and 2005 was $10,055,000 and $8,052,000, respectively, determined as of thedate of exercise.

The Company recognized for the three months ended March 31,2006 approximately $1,571,000 in share-based compensation expense, net ofamounts capitalized, for stock options granted under the Company’s Stock OptionPlans. As of March 31, 2006, there was $16,971,000 of total unrecognizedcompensation cost related to non-vested share-based compensation arrangementsgranted under the Company’s Stock Option Plans. This amount assumes the Company’sexpected forfeiture rate. That cost is expected to be recognized over aweighted average period of 2.4 years. The Company utilizes newly issued sharesto satisfy the exercise of stock options.

11

----

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

Upon issuance of theawards, the grant date fair value for the Retention Plan was approximately $1.9million and $1.8 million for the performance periods ending December 31,2007 and December 31, 2008, respectively. The combined fair value of theRetention Plan awards that were cancelled during the period was approximately$194,000. The combined grant date fair value of the Retention Plan awardsoutstanding at March 31, 2006 was approximately $3.5 million. The aggregateintrinsic value of the awards outstanding at March 31, 2006, all of whichare not vested, is $6,832,000 which is calculated based on the percentage thatthe 30 day average closing stock price preceding March 31, 2006 exceededthe trigger price of $32.99. The aggregate intrinsic value of the awards vestedand expected to vest at March 31, 2006 is $6,018,000. The weighted averageremaining contractual term for both the awards outstanding and the awards thatare vested and expected to vest at March 31, 2006 is 2.25 years.

The Company recognizedapproximately $281,000 in share-based compensation expense, net of amountscapitalized, for the Retention Plan for the three months ended March 31,2006. As of March 31, 2006, there was $2,751,000 of total unrecognizedcompensation cost related to non-vested share-based compensation arrangementsgranted under the Retention Plan. This amount assumes the Company’s expectedforfeiture rate. The costs associated with the awards are expected to berecognized over the Performance Periods.

During the three monthsended March 31, 2006, the Company granted 8,810 shares for the ESPP for atotal of 192,205 shares that have been issued under the plan and recognizedapproximately $39,000 in share-based compensation expense, net of amountscapitalized. The Company utilizes newly issued shares to satisfy the issuanceof shares under the ESPP.

12

----

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

***Comparable Disclosures***

Thefollowing table illustrates the pro forma effect on the Company’s net incomeand net income per share as if the Company had adopted the fair value basedmethod of accounting for stock-based compensation under Statement of FinancialAccounting Standards No. 123 “*Accounting for Stock-BasedCompensation*” for the three months ended March 31, 2005. Seethe assumptions disclosed previously in this note that were used to estimatethe fair value of options granted under the stock option plans for the threemonths ended March 31, 2005.

| **(In thousands, except per share amounts)**                                                            | ** ** | ** ** | ** ** | **Three Months Ended  March 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------------------------|------------|
| **Net income**                                                                                                                   |       |       |       |                                                   |       |
| Net income, as  reported                                                                                                         |       |       | $          | 28,820                                                 |       |   |
| Add: Stock-based  employee compensation expense included in net income, tax effected                                             |       |       | —     |                                                   |       |
| Deduct: Total  share-based employee compensation expense determined under fair value method  for all awards, net of income taxes |       |       | (15,949    | )                                                      |       |
| Pro forma net  income                                                                                                            |       |       | $          | 12,871                                                 |       |   |
| **Net  income per share**                                                                                                        |       |       |       |                                                   |       |
| Basic—as reported                                                                                                           |       |       | $          | 0.35                                                   |       |   |
| Basic—pro forma                                                                                                             |       |       | $          | 0.15                                                   |       |   |
| Diluted—as reported                                                                                                         |       |       | $          | 0.33                                                   |       |   |
| Diluted—pro forma                                                                                                           |       |       | $          | 0.15                                                   |       |   |

 

The calculation of dilutedpro forma income per common share for the three months ended March 31,2005 excludes the effect of the 13¤8% convertiblenotes because their inclusion would have had an anti-dilutive effect.

**Comprehensive Income**

**Thefollowing table reconciles net income to comprehensive income: (in thousands)**

| ** **                                                                  | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net income                                                                  |       | $                                                | 229,591    |   | $ | 28,820 |   |
| Other comprehensive  loss:                                                  |       |                                             |       |   |   |
| Unrealized loss  on marketable securities during the period                 |       | (1,333                                           | )          | (7,084 | ) |
| Less:  Reclassification adjustment for realized loss included in net income |       | —                                           |       | (16 | ) |
| Total other  comprehensive loss                                             |       | (1,333                                           | )          | (7,068 | ) |
| Total comprehensive  income                                                 |       | $                                                | 228,258    |   | $ | 21,752 |   |

 

The tax benefit on theitems included in other comprehensive loss assuming they were recognized inincome would be approximately $173,000 and $92,000 for the three months ended March 31,2006 and 2005, respectively.

13

----

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

**Fair Value of Financial Instruments**

Thefair value of the Company’s 13¤8% convertiblesenior notes of $600,000,000 was approximately $523,476,000 and $502,500,000 atMarch 31, 2006 and December 31, 2005, respectively, based on theirquoted market price.

**(2)   Inventories**

Inventories are stated atthe lower of cost, determined on the first-in-first-out method, or market.Inventories consist of the following: (in thousands)

| ** **                  | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Raw materials and  supplies |       |                     | $          | 21,636                      |       |   |   | $ | 22,664 |   |   |
| Work in process             |       |                     | 48,324     |                        |       |   | 49,149 |   |   |
| Finished goods              |       |                     | 5,112      |                        |       |   | 9,581 |   |   |
| Total                       |       |                     | $          | 75,072                      |       |   |   | $ | 81,394 |   |   |

 

Prior to receipt ofapproval of ERBITUX for commercial sale on February 12, 2004, the Companyhad expensed all costs associated with the production of ERBITUX to researchand development expense. Effective February 13, 2004, the Company began tocapitalize the cost of manufacturing ERBITUX as inventories, including the costto label, package and ship previously manufactured bulk inventory whose costshad already been expensed as research and development. It has takenapproximately two years for the Company to sell all of the inventory withpartial or minimal cost and in the first quarter of 2006, the Company sold theremaining batches of ERBITUX with partial cost.

**(3)**   Property, Plant andEquipment

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

| ** **                                      | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Land                                            |       | $                        | 4,899      |                        |       | $ | 4,899 |   |   |
| Building                                        |       | 67,836                   |       |                        | 67,597     |   |   |
| Leasehold  improvements                         |       | 13,961                   |       |                        | 13,969     |   |   |
| Machinery and  equipment                        |       | 64,482                   |       |                        | 62,806     |   |   |
| Furniture and  fixtures                         |       | 4,694                    |       |                        | 4,596      |   |   |
| Construction in  progress                       |       | 332,855                  |       |                        | 318,446    |   |   |
| Total cost                                      |       | 488,727                  |       |                        | 472,313    |   |   |
| Less accumulated  depreciation and amortization |       | (68,757                  | )          |                        | (65,718    | ) |   |
| Property, plant  and equipment, net             |       | $                        | 419,970    |                        |       | $ | 406,595 |   |   |

 

The Company constructed a250,000 square foot multiple product manufacturing facility (“BB50”) inBranchburg, New Jersey with capacity of up to 110,000 liters (productionvolume). Mechanical completion of BB50 was reached in the fourth quarter of2005. This facility has three distinct suites capable of producing up to threedifferent products concurrently. In addition, each of the three suites has thecapability of producing multiple products. Currently, the Company has fittedout and is validating and commissioning Suite 1. This Suite isplanned to be utilized for the production of ERBITUX. The validation andcommissioning of Suite 1 is estimated to be completed by May of 2006.Suite 2 has been 

14

----

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

fittedwith equipment but it has not been determined when commissioning and validationof this Suite will begin. At this point, Suite 3 remains vacant untilfurther determination of its ultimate use. Management estimates that thisfacility will cost approximately $300,000,000, including approximately $38million of costs related to the commissioning and validation of Suite 1.This estimate may change depending on various factors, particularly costsestimated to be incurred for external contractors assisting us in thevalidation and commissioning of Suite 1. This estimate does not includecosts associated with the eventual commissioning and validation of Suite 2or the fitting out, commissioning and validation of Suite 3. In addition,the Company will spend approximately $10 million in laboratory equipment andincur approximately $24 million of capitalized interest that is not included inthe total estimated cost described above. The Company has incurredapproximately $299,092,000 in conceptual design, engineering, pre-constructionand construction costs, excluding capitalized interest of approximately$21,654,000 through March 31, 2006. As of March 31, 2006, committedpurchase orders totaling approximately $198,384,000 have been placed withsubcontractors for equipment related to this project and $72,278,000 forengineering, procurement, construction management and validation costs. ThroughMarch 31, 2006, $267,108,000 has been paid relating to these committedpurchase orders. All outstanding committed purchase orders as of March 31,2006 require payment in 2006.

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

**(4)**   Withholding TaxAssets and Liability

On March 13, 2003,the Company initiated discussions with the Internal Revenue Service (the “IRS”)relating to federal income taxes not withheld because one or more of theCompany’s employees who exercised certain non-qualified stock options in 1999and 2000 failed to pay federal income taxes for those years. Subsequently, theCompany became aware of another potential income and employment tax withholdingliability associated with the exercise of certain warrants granted in the earlyyears of the Company’s existence that were held by certain former officers,directors and employees. After disclosure to the IRS in 2003, the IRS commencedaudits of the Company’s income tax and employment tax returns for the years 1999-2001.On February 8, 2006, the Company received a draft of the IRS’s report ofits preliminary findings which indicated that the IRS, in addition to imposingliability on the Company for taxes not withheld, intended to assert penaltieswith respect to both the failure to withhold on non-qualified stock options andthe failure to report and withhold on the warrants described above. On March 14,2006, the Company reached an agreement in principle with the IRS to resolve theemployment tax audit, which includes the Company’s agreement to the impositionof an accuracy-related penalty under Section 6662 of the Internal RevenueCode. Under this agreement, the Company’s liability to the IRS was calculatedto be approximately $32,000,000. The Company had previously recorded awithholding tax liability of $18,096,000 and a withholding tax asset of$274,000 in its consolidated Balance Sheet as of December 31, 2004. Basedon the agreement in principle reached with the IRS, the Company eliminated thewithholding tax asset of $274,000 and recorded an additional withholding taxliability of $13,904,000, or a total of $32,000,000, in its consolidatedBalance Sheet as of December 31, 2005. As a result, the Company recordedin the fourth quarter of 2005 a net withholding tax expense of $14,178,000. On April 19,2006, the Company signed an agreement with the IRS to resolve the employmenttax audit. 

15

----

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

Pursuantto such agreement the Company paid $28,655,509 to the IRS on April 21,2006 and on April 28, 2006 the Company paid the IRS $3,080,789 consistingof interest.

On March 31, 2003,the Company received notification from the SEC that it was conducting aninformal inquiry into the matters discussed above and, subsequently, theCompany received and responded to a request from the SEC for the voluntaryproduction of related documents and information. There have been no otherrequests for documents or information or other developments in connection withthis SEC informal inquiry since April 2003.

**(5)**   Income Per CommonShare

Basic income per commonshare is computed by dividing net income by the weighted-average number ofcommon shares outstanding during the period. Diluted income per common share iscomputed by dividing net income by the weighted-average number of common sharesoutstanding during the period increased to include all additional common sharesthat would have been outstanding assuming potentially dilutive common shareequivalents had been issued. Dilutive common share equivalents include 1) thedilutive effect of in-the-money shares, which is calculated based on theaverage share price for each period using the treasury stock method. Under thetreasury stock method, the exercise price of a share, the average amount ofcompensation cost, if any, for future service that the Company has not yetrecognized, and the amount of benefits that would be recorded in additionalpaid-in capital, if any, when the share is exercised, are assumed to be used torepurchase shares in the current period and 2) the conversion of convertibledebt which is done on an “if-converted” basis. 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. For the three monthsended March 31, 2006 and 2005, there were an aggregate of 8,510,704 and6,528,301, respectively, potential common shares, excluded from the dilutedincome per share computation because their inclusion would have had ananti-dilutive effect.

16

----

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

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

| ** **                                                                 | ** ** | **Three Months  Ended March 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| EPS Numerator—Basic:                                                  |       |                                             |       |   |   |
| Net income                                                                 |       | $                                                | 229,591    |   | $ | 28,820 |   |
| EPS Denominator—Basic:                                                |       |                                             |       |   |   |
| Weighted-average number of shares of common stock  outstanding             |       | 83,624                                           |       | 83,278 |   |
| EPS Numerator—Diluted:                                                |       |                                             |       |   |   |
| Net income                                                                 |       | $                                                | 229,591    |   | $ | 28,820 |   |
| Adjustment for interest, net of amounts capitalized  and income tax effect |       | 1,274                                            |       | 1,785 |   |
| Net income, adjusted                                                       |       | $                                                | 230,865    |   | $ | 30,605 |   |
| EPS Denominator—Diluted:                                              |       |                                             |       |   |   |
| Weighted-average number of shares of common stock  outstanding             |       | 83,624                                           |       | 83,278 |   |
| Effect of  dilutive securities:                                            |       |                                             |       |   |   |
| Stock options                                                              |       | 1,857                                            |       | 3,034 |   |
| Convertible subordinated notes                                             |       | 6,336                                            |       | 6,336 |   |
| Dilutive potential common shares                                           |       | 8,193                                            |       | 9,370 |   |
| Weighted-average common shares and dilutive  potential common shares       |       | 91,817                                           |       | 92,648 |   |
| Basic income per  common share                                             |       | $                                                | 2.75       |   | $ | 0.35 |   |
| Diluted income per  common share                                           |       | $                                                | 2.51       |   | $ | 0.33 |   |

 

**(6)**   Taxes

The Company’s estimatedannual effective income tax rate for 2006 is approximately 13% which excludesthe effect of the partial release of our valuation allowance described below. Inthe first quarter of 2006, the Company released a portion of its valuationallowance against our total deferred tax assets because we determined, based onrevised expectations of our projected future earnings, that it is more likelythan not that we will realize the benefit of these deferred tax assets, whichamounted to approximately $99.5 million. Our conclusion to release a portion ofour valuation allowance against our deferred tax assets is supported by severalevents that transpired during the first quarter of 2006. In addition toobtaining approval from the FDA for ERBITUX in a second indication in March of2006, the in-market sales for ERBITUX during this period exceeded ourexpectations and have continued to show strong growth in the marketplace. Mostimportantly, a potential competitor released certain clinical data on theircompeting product, which gave us the ability to further understand thecompetitive threats posed by this potential product. Therefore, our decision issupported by a combination of better than expected in-market sales that webelieve will be sustainable in the future coupled with the ability to furtherrefine our future financial projections and assumptions related to ourcompetition. The financial projections supporting our conclusion to release aportion of our valuation allowance contain significant assumptions based oncurrent facts about our market share and our competitive landscape. If suchassumptions were to differ significantly, it may have a material impact onour ability to realize our deferred tax assets. The projected tax rate for 2006is less than the federal statutory rate of 35%, mainly due to the utilizationof fully reserved deferred tax assets.

17

----

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

**(7)**   CollaborativeAgreements

***(a) Merck KGaA***

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

•     we granted Merck KGaA alicense, with the right to sublicense, to make, have made, use, sell, or havesold BEC2 and gp75 antigen outside North America;

•     we granted Merck KGaA alicense, without the right to sublicense, to use, sell, or have sold, but notto make, BEC2 within North America in conjunction with ImClone Systems;

•     we retained the rights, (1) withoutthe right to sublicense, to make, have made, use, sell, or have sold BEC2 inNorth America in conjunction with Merck KGaA and (2) with the right tosublicense, to make, have made, use, sell, or

•     have sold gp75 antigen inNorth America;

•     we were required to giveMerck KGaA the opportunity to negotiate a license in North America to gp75antigen before granting such a license to any third party.

Inreturn, Merck KGaA:

•     made research supportpayments to us totaling $4,700,000;

•     was required to makemilestone payments to us of up to $22,500,000, of which $5,000,000 was receivedthrough March 31, 2006 based on milestones achieved in the productdevelopment of BEC2;

•     was required to make royaltypayments to us on all sales of the licensed products outside North America, ifany, with a portion of the earlier funding received under the agreement beingcreditable against the amount of royalties due.

Following an analysis ofthe results of various clinical studies involving BEC2 and work on therecombinant gp75 antigen, the Company and Merck KGaA determined to discontinuetheir further development and terminated the related agreement in the fourthquarter of 2005. Approximately $1.6 million of deferred revenue related to thisagreement was recorded as revenue upon the cancellation of the contract. TheCompany incurred expenses of $0 and approximately $21,000 for the three monthsended March 31, 2006 and 2005 respectively related to this contract.

In December 1998, theCompany entered into a development and license agreement with Merck KGaA withrespect to ERBITUX. In exchange for granting Merck KGaA exclusive rights tomarket ERBITUX outside of the United States and Canada and co-exclusivedevelopment rights in Japan, the Company has received $30,000,000 through March 31,2006 in up-front cash fees and early cash payments based on the achievement ofdefined milestones. An additional $30,000,000 has been received through March 31,2006 based upon the achievement of further milestones for which Merck KGaAreceived equity in the Company. The equity interests underlying the milestonepayments were priced at varying premiums to the then-market price of the commonstock depending upon the timing of the achievement of the respectivemilestones.

Merck KGaA pays theCompany a royalty on its sales of ERBITUX outside of the United States andCanada. In August 2001, the Company and Merck KGaA amended this agreementto provide, among other things, that Merck KGaA may manufacture ERBITUXfor supply in its territory and may utilize a third party to do so uponthe Company’s reasonable acceptance. The amendment further released Merck KGaAfrom its obligations under the agreement relating to providing a guaranty undera $30,000,000 

18

----

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

creditfacility relating to the build-out of BB36. In addition, the amendment providesthat the companies have co-exclusive rights to ERBITUX in Japan, including theright to sublicense and Merck KGaA waived its right of first offer in the caseof a proposed sublicense by the Company of ERBITUX in the Company’s territory.In consideration for the amendment, the Company agreed to a reduction inroyalties’ 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 replaced previous supplyarrangements. The term sheet provided for Merck KGaA to purchase bulk andfinished ERBITUX ordered from the Company during the term of the December 1998development and license agreement at a price equal to the Company’s fullyloaded cost of goods. The term sheet also provided for Merck KGaA to usereasonable efforts to enter into its own contract manufacturing agreements forsupply of ERBITUX and obligates Merck KGaA to reimburse the Company for costsassociated with transferring technology and any other services requested byMerck KGaA relating to establishing its own manufacturing or contract manufacturingcapacity. Amounts due from Merck KGaA related to these arrangements totaledapproximately $12,507,000 and $7,768,000 at March 31, 2006 and December 31,2005, respectively, and are included in amounts due from corporate partners inthe Consolidated Balance Sheets. The Company has a liability due Merck KGaA of$0 and approximately $2,532,000 as of March 31, 2006 and December 31,2005, respectively.

***(b) Bristol-MyersSquibb Company***

On September 19,2001, the Company entered into an acquisition agreement (the “AcquisitionAgreement”) with BMS and Bristol-Myers Squibb Biologics Company, a Delawarecorporation (“BMS Biologics”), which is a wholly-owned subsidiary of BMS,providing for the tender offer by BMS Biologics to purchase up to 14,392,003shares of the Company’s common stock for $70.00 per share, net to the seller incash. In connection with the Acquisition Agreement, the Company entered into astockholder agreement with BMS and BMS Biologics, dated as of September 19,2001 (the “Stockholder Agreement”), pursuant to which all parties agreed tovarious arrangements regarding the respective rights and obligations of eachparty with respect to, among other things, the ownership of shares of theCompany’s common stock by BMS and BMS Biologics. Concurrent with the executionof the Acquisition Agreement and the Stockholder Agreement, the Company enteredinto the Commercial Agreement with BMS and E.R. Squibb, relating toERBITUX, pursuant to which, among other things, BMS and E.R. Squibb are co-developingand co-promoting ERBITUX in the United States and Canada with the Company, andare co-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. The terms ofthe Commercial Agreement, as amended on March 5, 2002, are set forth inmore detail below.

***CommercialAgreement***

*Rights Granted to E.R.Squibb—**Pursuant* to the CommercialAgreement, as amended on March 5, 2002, the Company granted to E.R. Squibb(1) the exclusive right to distribute, and the co-exclusive right 

19

----

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

to develop andpromote (together with the Company) any prescription pharmaceutical productusing the compound ERBITUX (the “product”) in the United States and Canada, (2) theco-exclusive right to develop, distribute and promote (together with theCompany and together or co-exclusively with Merck KGaA and its affiliates) theproduct in Japan, and (3) the non-exclusive right to use the Company’s registeredtrademarks for the product in the United States, Canada and Japan(collectively, the “territory”) in connection with the foregoing. In addition,the Company agreed not to grant any right or license to any third party, orotherwise permit any third party, to develop ERBITUX for animal health or anyother application outside the human health field without the prior consent ofE.R. Squibb (which consent may not be unreasonably withheld).

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

*Up-Front and MilestonePayments—**The*Commercial Agreement providesfor up-front and milestone payments by E.R. Squibb to the Company of$900,000,000 in the aggregate, of which $200,000,000 was paid on September 19,2001, $140,000,000 was paid on March 7, 2002, $60,000,000 was paid on March 5,2003, $250,000,000 was paid on March 12, 2004, and $250,000,000 was paidon March 31, 2006. All such payments are non-refundable andnon-creditable.

*Distribution Fees—**The*CommercialAgreement provides that E.R. Squibb shall pay the Company distribution feesbased on a percentage of “annual net sales” of the product (as defined in theCommercial Agreement) by E.R. Squibb in the United States and Canada. Thedistribution fee is 39% of net sales in the United States and Canada. TheCommercial Agreement also provides that the distribution fees for the sale ofthe product in Japan by E.R. Squibb or ImClone Systems shall be equal to 50% ofoperating profit or loss with respect to such sales for any calendar month. Inthe event of an operating profit, E.R. Squibb shall pay the Company the amountof such distribution fee, and in the event of an operating loss, the Companyshall credit E.R. Squibb the amount of such distribution fee.

*Development of the Product—**Responsibilities*associatedwith clinical and other ongoing studies are apportioned between the parties asdetermined by the product development committee described below. The CommercialAgreement provides for the establishment of clinical development plans settingforth the activities to be undertaken by the parties for the purpose ofobtaining marketing approvals, providing market support and developing newindications and formulations of the product. After transition 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. In addition, to theextent that in 2005 and 2006 the Company and BMS exceed the contractual maximumregistrational costs for clinical development, the 

20

----

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

Company has agreedto share such cost with BMS. The Company has recorded expenses of$6,921,000 and $2,830,000 pursuant to such cost sharing agreements for thethree months ended March 31, 2006 and 2005, respectively. The Company hasalso incurred $531,000 and $319,000 for the three months ended March 31,2006 and 2005, respectively, related to the agreement with respect todevelopment in Japan. Except as otherwise agreed upon by the parties, theCompany will own all registrations for the product and is primarily responsiblefor the regulatory activities leading to registration in each country. E.R.Squibb will be primarily responsible for the regulatory activities in eachcountry after the product has been registered in that country. Pursuant to theterms of the Commercial Agreement, as amended, Andrew G. Bodnar, M.D., J.D.,Senior Vice President, Strategy and Medical & External Affairs of BMS,and a member of the Company’s Board of Directors, is entitled to oversee the implementationof the clinical and regulatory plan for ERBITUX.

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

However, the Company hasthe right, at its election and sole expense, to co-promote with E.R. Squibb theproduct in the territory. Pursuant to this co-promotion option, which theCompany has exercised, the Company is entitled on and after April 11, 2002(at the Company’s sole expense) to have the Company’s field organizationparticipate in the promotion of the product consistent with the marketing planagreed upon by the parties, provided that E.R. Squibb retains the exclusiverights to sell and distribute the product. Except for the Company’s expensesincurred pursuant to the co-promotion option, E.R. Squibb is responsible for100% of the distribution, sales and marketing costs in the United States andCanada, and as between E.R. Squibb and ImClone Systems, each is responsible for50% of the distribution, sales, marketing costs and other related costs andexpenses in Japan. The Company has an established sales force to maximize thepotential commercial opportunities for ERBITUX and to serve as a foundation forthe marketing of future products derived either from within the Company’spipeline or through business development opportunities.

*Manufacture and Supply—**The*CommercialAgreement provides that the Company is responsible for the manufacture andsupply of all requirements of ERBITUX in bulk form (“API”) for clinicaland commercial use in the territory, and that E.R. Squibb will purchase all ofits requirements of API for commercial use from the Company. The Companysupplies API for clinical use at the Company’s fully burdened manufacturingcost, and supplies API for commercial use at the Company’s fully burdenedmanufacturing cost plus a mark-up of 10%. Upon the expiration, termination orassignment of any existing agreements between ImClone Systems and third partymanufacturers, E.R. Squibb will be responsible for processing API into thefinished form of the product. Sales of ERBITUX to BMS for commercial useare reflected in the Company’s Consolidated Statements of Operations asManufacturing revenue.

21

----

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

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

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

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

•     aJoint Commercialization Committee (the “JCC”), which consists of members ofsenior management of each party with clinical experience and expertise inmarketing and sales. The JCC is chaired by a representative of BMS. TheJCC is responsible 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 aright of first offer with respect to the Company’s investigational KDRmonoclonal antibodies (such as IMC-1121B) should the Company decide toenter into 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 on whichBMS’s ownership interest in ImClone Systems is less than 5%. If the Companydecides to enter into a partnering arrangement during such period, the Companymust 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 

22

----

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

conditions of such anarrangement. If the parties do not reach agreement during this period, E.R.Squibb must propose the terms of an arrangement which it is willing to enterinto, and if the Company rejects such terms the Company may enter into anagreement with a third party with respect to such a partnering arrangement(provided that the terms of any such agreement may not be more favorableto the third party than the terms proposed by E.R. Squibb).

*Rightof First Negotiation—**If*at any time during therestricted period (as defined below), the Company is interested in establishinga partnering relationship with a third party involving certain compounds orproducts not related to IMC-KDR antibodies, the Company must notify E.R. Squibband E.R. Squibb will have 90 days to enter into a non-binding agreementwith the Company with respect to such a partnering relationship. In the eventthat E.R. Squibb and ImClone Systems do not enter into a non-binding agreement,the Company is free to negotiate with third parties without further obligationto E.R. Squibb. The “restricted period” means the period from September 19,2001 until the earliest to occur of (1) September 19, 2006, (2) areduction in BMS’s ownership interest in ImClone Systems to below 5% for 45consecutive days, (3) a transfer or other disposition of shares of theCompany’s common stock by BMS or any of its affiliates such that BMS and itsaffiliates 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, (4) an acquisition by a third party ofmore than 35% of the outstanding shares, (5) a termination of theCommercial Agreement by BMS due to significant regulatory or safety concernsregarding ERBITUX, or (6) the Company’s termination of the CommercialAgreement due to a material breach by BMS.

*Restrictionon Competing Products—**During*the period from the date ofthe Commercial Agreement until September 19, 2008, the parties have agreednot to, directly or indirectly, develop or commercialize a competing product(defined as a product that has as its only mechanism of action an antagonism ofthe EGFR) in any country in the territory. In the event that any party proposesto commercialize a competing product or purchases or otherwise takes control ofa third party which has developed or commercialized a competing product, thensuch party must either divest the competing product within 12 months oroffer the other party the right to participate in the commercialization anddevelopment of the competing product on a 50/50 basis (provided that if theparties cannot reach agreement with respect to such an agreement, the competingproduct must be divested within 12 months).

*Ownership—**The*CommercialAgreement provides that the Company owns all data and information concerningERBITUX and the product and (except for the E.R. Squibb Inventions) allprocesses, know-how and other inventions relating to the product and developedby either party or jointly by the parties. E.R. Squibb, however, has the rightto use all such data and information, and all such processes, know-how or otherinventions, in order to fulfill its obligations under the Commercial Agreement.

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

23

----

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

*MandatoryTransfer—**Each*of BMS and E.R. Squibb hasagreed under the Commercial Agreement that in the event it sells or otherwisetransfers all or substantially all of its pharmaceutical business orpharmaceutical oncology business, it must also transfer to the transferee itsrights and obligations under the Commercial Agreement.

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

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

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

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

***Acquisition Agreement***

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

***Stockholder Agreement***

Pursuant to the Stockholder Agreement, 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 thenumber of BMS directors is proportionate to the lesser of BMS’ then-currentownership interest and 19.9%. Notwithstanding the foregoing, BMS will have noright to nominate 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 

24

----

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

director position with theCompany. BMS has not yet designated a replacement to fill Dr. Ringrose’svacated Board seat.

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

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

*ApprovalRequired for Certain Actions—**The*Company may nottake any action that constitutes a prohibited action under the StockholderAgreement without the consent of the BMS directors, until September 19,2006 or earlier, if any of the following occurs: (1) a reduction in BMS’sownership interest to below 5% for 45 consecutive days, (2) a transfer orother disposition of shares of the Company’s common stock by BMS or any of itsaffiliates such that BMS and its affiliates own or have control over less than75% of the maximum number of shares of the Company’s common stock owned by BMSand its affiliates at any time after September 19, 2001, (3) anacquisition by a third party of more than 35% of the outstanding shares of theCompany’s common stock, (4) a termination of the Commercial Agreement byBMS due to significant regulatory or safety concerns regarding ERBITUX, or (5) atermination of the Commercial Agreement due to a material breach by BMS. Suchprohibited actions include (1) issuing additional shares or securitiesconvertible into shares in excess of 21,473,002 shares of the Company’s commonstock in the aggregate, subject to certain exceptions; (2) incurringadditional indebtedness if the total of (A) the principal amount ofindebtedness incurred since September 19, 2001 and then-outstanding, and (B) thenet proceeds from the issuance of any redeemable preferred stockthen-outstanding, would exceed the Company’s amount of indebtedness forborrowed money outstanding as of September 19, 2001 by more than$500 million; (3) acquiring any business if the aggregateconsideration for such acquisition, when taken together with the aggregateconsideration for all other acquisitions consummated during the previous twelvemonths, is in excess of 25% of the Company’s aggregate value at the time thebinding agreement relating to such acquisition was entered into; (4) disposingof all or any substantial portion of the Company’s non-cash assets; (5) enteringinto non-competition agreements that would be binding on BMS, its affiliates orany BMS director; (6) taking certain actions that would have adiscriminatory effect on BMS or any of its affiliates as a stockholder; and (7) issuingcapital stock with more than one vote per share.

*Limitationon Additional Purchases of Shares and Other Actions—**Subject*to theexceptions set forth below, until September 19, 2006 or, if earlier, theoccurrence of any of (1) an acquisition by a third party of more than 35%of the Company’s outstanding shares, (2) the first anniversary of areduction in BMS’s ownership interest in the Company to below 5% for 45consecutive days, or (3) the Company’s taking a prohibited action underthe Stockholder Agreement without the consent of the BMS directors, neither BMSnor any of its affiliates will acquire beneficial ownership of any shares ofthe Company’s common stock or take any of the following actions: (1) encourageany proposal for a business combination with the Company’s or an acquisition ofour shares; (2) participate in the solicitation of proxies from holders ofshares of the Company’s common stock; (3) form or participate in any “group”(within the meaning of Section 13(d)(3) of the Securities ExchangeAct of 1934) with respect to shares of the Company’s common 

25

----

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

stock; (4) enter intoany voting arrangement with****respect toshares of the Company’s common stock; or (5) seek any amendment to orwaiver of these restrictions.

The following are exceptions to the standstillrestrictions described above: (1) BMS Biologics may acquirebeneficial ownership of shares of the Company’s common stock either in the openmarket or from the Company pursuant to the option described below, so long as,after giving effect to any such acquisition of shares, BMS’ ownership interestwould not exceed 19.9%; (2) BMS may make, subject to certainconditions, a proposal to the Board to acquire shares of the Company’s commonstock if the Company provides material non-public information to a third partyin connection with, or begins active negotiation of, an acquisition by a thirdparty of more than 35% of the outstanding shares; (3) BMS may acquireshares of the Company’s common stock if such acquisition has been approved by amajority of the non-BMS directors; and (4) BMS may make, subject tocertain conditions, including that an acquisition of shares be at a premium ofat least 25% to the prevailing market price, non-public requests to the Boardto amend or waive any of the standstill restrictions described above. Certainof the exceptions to the standstill provisions described above will terminateupon the occurrence of: (1) a reduction in BMS’s ownership interest in theCompany to below 5% for 45 consecutive days, (2) a transfer or otherdisposition of shares of the Company’s common stock by BMS or any of itsaffiliates such that BMS and its affiliates own or have control over less than75% of the maximum number of shares owned by BMS and its affiliates at any timeafter September 19, 2001, (3) a termination of the CommercialAgreement by BMS due to significant regulatory or safety concerns regardingERBITUX, or (4) a termination of the Commercial Agreement by the Companydue to a material breach by BMS.

*Optionto Purchase Shares in the Event of Dilution—**BMS*Biologics has theright under certain circumstances to purchase additional shares of common stockfrom the Company at market prices, pursuant to an option granted to BMS by theCompany, in the event that BMS’s ownership interest is diluted (other than byany transfer or other disposition by BMS or any of its affiliates). BMS canexercise this right (1) once per year, (2) if the Company issuesshares of common stock in excess of 10% of the then-outstanding shares in oneday, and (3) if BMS’s ownership interest is reduced to below 5% or 12.5%.BMS Biologics’ right to purchase additional shares of common stock from theCompany pursuant to this option will terminate on September 19, 2006 or,if earlier, upon the occurrence of (1) an acquisition by a third party ofmore than 35% of the outstanding shares, or (2) the first anniversary of areduction in BMS’s ownership interest in the Company to below 5% for 45consecutive days.

*Transfersof Shares—**Until*March 19, 2005, neitherBMS nor any of its affiliates were permitted to transfer any shares of the Company’scommon stock or enter into any arrangement that transfers any of the economicconsequences associated with the ownership of shares. After March 19,2005, neither BMS nor any of its affiliates may transfer any shares orenter into any arrangement that transfers any of the economic consequencesassociated with the ownership of shares, except (1) pursuant toregistration rights granted to BMS with respect to the shares, (2) pursuantto Rule 144 under the Securities Act of 1933, as amended or (3) forcertain hedging transactions. Any such transfer is subject to the followinglimitations: (1) the transferee may not acquire beneficial ownershipof more than 5% of the then-outstanding shares of common stock; (2) nomore than 10% of the total outstanding shares of common stock may be soldin any one registered underwritten public offering; and (3) neither BMSnor any of its affiliates may transfer shares of common stock (except forregistered firm commitment underwritten public offerings pursuant to theregistration rights described below) or enter into hedging transactions in anytwelve-month period that would, individually or in the aggregate, have theeffect of reducing the economic exposure of BMS and its 

26

----

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

affiliates by theequivalent of more than 10% of the maximum number of shares of common stockowned 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.

*RegistrationRights—**The*Company granted BMS customaryregistration rights with respect to shares of common stock owned by BMS or anyof its affiliates.

Amountsdue from BMS related to this agreement totaled approximately $57,852,000 and$51,503,000 at March 31, 2006 and December 31, 2005, respectively,and are included in amounts due from corporate partners in the ConsolidatedBalance Sheets.

***(c)****   UCB S.A.*

In August 2005, theCompany entered into a Collaboration and License Agreement with UCB S.A., acompany registered in Belgium, for the development and commercialization of CDP-791,UCB’s novel, investigational PEGylated di-Fab antibody targeting the vascularendothelial growth factor receptor-2 (“VEGFR-2”). No upfront ormilestone payments are payable under the Agreement. The Agreement provides thatthe Company and UCB S.A. will share equally all agreed upon development costsfor CDP-791 as well as worldwide profits derived from thecommercialization of CDP-791 in indications jointly pursued by theparties. The Company will also receive an incremental single-digit royalty onnet sales worldwide for such indications. Under certain circumstances, oneparty may be entitled to pursue (in its territory) an indicationindependently of the other party, which retains the option to join in thedevelopment or commercialization at a later stage. The Company has exclusivecommercialization rights to CDP-791 in North America, with UCB receivingsuch rights in Europe, Japan, and the rest of the world. The Company did notincur any expenses related to this agreement in the three months ended March 31,2006. The Company has a liability of $2,493,000 in accrued expenses as of March 31,2006 related to this agreement.

Royaltyrevenue consists of the following: (in thousands)

| ** **             | ** ** | **Three Months   Ended March 31,** | ** ** |
|------------------------|------------|--------------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                               | ** ** | **2005** | ** ** |
| BMS                    |       | $                                                      | 53,832     |   | $ | 33,981 |   |
| Merck KGaA             |       | 6,276                                                  |       | 2,391 |   |
| Other                  |       | 162                                                    |       | — |   |
| Total royalty  revenue |       | $                                                      | 60,270     |   | $ | 36,372 |   |

 

27

----

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

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

| ** **                                | ** ** | **Three Months  Ended March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| BMS:                                      |       |                                             |       |   |   |
| ERBITUX license fee revenue               |       | $                                                | 144,347    |   | $ | 23,438 |   |
| Merck KGaA:                               |       |                                             |       |   |   |
| ERBITUX and BEC2 license fee revenue      |       | 56                                               |       | 1,096 |   |
| Total license  fees and milestone revenue |       | $                                                | 144,403    |   | $ | 24,534 |   |

 

**Collaborativeagreement revenue from partners consists of the following: (in thousands)**

| ** **                                    | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| BMS:                                          |       |                                             |       |   |   |
| ERBITUX supplied for clinical trials          |       | $                                                | 3,382      |   | $ | 1,633 |   |
| ERBITUX clinical and regulatory expenses      |       | 3,369                                            |       | 3,488 |   |
| ERBITUX marketing, general and administrative |       | 251                                              |       | 514 |   |
| ERBITUX royalty expenses                      |       | 6,211                                            |       | 3,921 |   |
| Total BMS                                     |       | 13,213                                           |       | 9,556 |   |
| Merck KGaA:                                   |       |                                             |       |   |   |
| ERBITUX supplied for clinical trials          |       | 5,437                                            |       | 3,007 |   |
| ERBITUX clinical and regulatory expenses      |       | —                                           |       | 672 |   |
| ERBITUX marketing, general and administrative |       | 63                                               |       | 56 |   |
| ERBITUX royalty expenses                      |       | 2,387                                            |       | 547 |   |
| Total Merck KGaA                              |       | 7,887                                            |       | 4,282 |   |
| Other                                         |       | 9                                                |       | 8 |   |
| Total  collaborative agreement revenue        |       | $                                                | 21,109     |   | $ | 13,846 |   |

 

**Manufacturingrevenue from corporate partners consists of the following: (in thousands)**

| ** **                   | ** ** | **Three Months  Ended March 31,** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| BMS                          |       | $                                                | 16,631     |   | $ | 11,019 |   |
| Merck KGaA                   |       | 2,718                                            |       | — |   |
| Total  Manufacturing revenue |       | $                                                | 19,349     |   | $ | 11,019 |   |

 

28

----

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

**Amountsdue from corporate partners consists of the following: (in thousands)**

| ** **                                 | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| BMS:                                       |       |                     |       |                        |       |   |   |   |   |
| ERBITUX                                    |       |                     | $          | 57,852                      |       |   |   | $ | 51,503 |   |   |
| Merck KGaA:                                |       |                     |       |                        |       |   |   |   |   |
| ERBITUX and BEC2                           |       |                     | 12,507     |                        |       |   | 7,768 |   |   |
| Total amounts due  from corporate partners |       |                     | $          | 70,359                      |       |   |   | $ | 59,271 |   |   |

 

**Deferredrevenue consists of the following: (in thousands)**

| ** **                                | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| BMS:                                      |       |                     |       |                        |       |   |   |
| ERBITUX commercial agreement              |       | $                        | 461,789    |                        |       | $ | 356,136 |   |   |
| Merck KGaA:                               |       |                     |       |                        |       |   |   |
| ERBITUX development and license agreement |       | 2,833                    |       |                        | 2,889      |   |   |
| Total deferred revenue                    |       | 464,622                  |       |                        | 359,025    |   |   |
| Less: current  portion                    |       | (160,548                 | )          |                        | (112,624   | ) |   |
| Total long-term  deferred revenue         |       | $                        | 304,074    |                        |       | $ | 246,401 |   |   |

 

**(8)**   Commitmentsand Contingencies

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.On November 4, 2005, the Court denied the Company’s motion for summaryjudgment with respect to this matter, as filed with the Court on June 24,2005, and a June 2006 trial date has been set. The Company is vigorouslydefending against the claims asserted in this action. The Company is unable topredict the outcome of this action at the present time.

On March 25, 2004, an action was filed in theUnited Kingdom Patent Office entitled Referrer’s Statement requesting transferof co-ownership and amendment of patent EP (UK) 0 667 165to add three Yeda employees as inventors. Also on March 25, 2004, a Germanaction entitled Legal Action was filed in the Munich District Court I, PatentLitigation Division, seeking to add three Yeda employees as inventors on patentEP (DE) 0 667 165. The Company was not named as a party in these actions thatrelate to the European equivalent of U.S. Patent No. 6,217,866 discussedabove; accordingly, the Company has intervened in the German and the U.K.actions. On June 29, 2005, Yeda sought to amend their pleadings in theUnited Kingdom to seek sole inventorship. A hearing on the validity of thisamendment concluded on January 30, 2006. A subsequent ruling held thatYeda was not entitled to amend their pleading; Yeda has appealed this ruling. Additionally,on or about March 25, 2005 and March 29, 2005, respectively, Yedafiled legal actions in Austria and France against both Aventis and ImCloneSystems seeking full inventorship of EP (AU) 0 667 165 and EP (FR) 0667 165, as well as payment of legal costs and fees.

29

----

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

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

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

The Company is developing a fully human monoclonal antibody,referred to as IMC-11F8, which it intends to commercialize outside theUnited States and Canada. The Company believes it has the right to do so underits existing development and license agreement with Merck KGaA. However, MerckKGaA had advised the Company that it believed that IMC-11F8 was coveredunder the 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. In agreement with MerckKGaA, the Company submitted this dispute to binding arbitration through anexpedited process outside of the provisions of the development and license agreement.Merck KGaA subsequently took the position that the expedited arbitrationprovision was no longer valid and the Company sued Merck KGaA in federal courtin the Southern District of New York to either enforce the arbitrationprovision previously agreed to or to have the court decide the question ofwhether IMC-11F8 is or is not covered under the development and licenseagreement with Merck KGaA. On November 29, 2005, the Court granted theCompany’s motion to enforce the expedited arbitration provision previouslyagreed to, and subsequently appointed a new arbitrator to hear and decide thisdispute. Merck KGaA has appealed that decision. The Company intends tovigorously defend its position that the arbitration was proper and binding onMerck KGaA, but there can be no assurance that its position will prevail. On March 31,2006, the arbitrator decided the matter in favor of the Company, finding thatMerck KGaA had no rights to IMC-11F8. That decision is binding andunappealable pursuant to the parties’ arbitration agreement.

In October 2001, theCompany entered into a sublease (the “Sublease”) for a four-story building at325 Spring Street, New York, New York, which includes approximately 100,000square feet of usable space. The Sublease has a term of 22 years, followed bytwo five-year renewal option periods. In order to induce the sublandlord toenter into the Sublease, the Company made a loan to the sublandlord in theprincipal amount of a $10,000,000 note receivable, of which $8,650,000 isoutstanding as of March 31, 2006. The loan is secured by a leaseholdmortgage on the prime lease as well as a collateral assignment of rents by thesublandlord. The loan is payable by the sublandlord over 20 years and bearsinterest at 51¤2%in years one through five, 61¤2%in years six through ten, 71¤2%in years eleven through fifteen and 81¤2%in years sixteen through twenty. In addition, the Company paid the owner aconsent fee in the amount of $500,000. Effective March 1, 2005, theCompany amended the Sublease to add an additional 6,500 square feet of spaceupon all the same terms and conditions set forth in the Sublease. In connectionwith this amendment, the Company paid an up-front fee of $1,690,000 which isbeing amortized, as a reduction in lease expense, over the respective term ofthe Sublease. The future minimum lease payments remaining at 

30

----

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

March 31,2006, are approximately $48,152,000 The Company is in the process of developingthe property for occupancy by its research department.

**(9)**   EmployeeBenefit Plans

***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, at management’sdiscretion, may match employee contributions and/or make discretionarycontributions. Neither the employee contributions nor voluntary matchingcontributions are invested in the Company’s securities. Total expense incurredby the Company was $681,000 and $512,000 for the three months ended March 31,2006 and 2005, respectively.

31

----

**ITEM 2.    **MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussionand analysis is provided to further the reader’s understanding of theconsolidated financial statements, financial condition and results ofoperations of ImClone Systems in this Quarterly Report on Form 10-Q.This discussion should be read in conjunction with the consolidated financialstatements and the accompanying notes included in our filings with the SEC,including our 2005 Annual Report on Form 10-K. This discussioncontains forward-looking statements based upon current expectations thatinvolve risk and uncertainties. Our actual results and the timing of certainevents could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth below andunder “Risk Factors” set forth in Item 1A and elsewhere in our 2005 AnnualReport on Form 10-K.

**OVERVIEW**

ImClone Systems is a biopharmaceutical company whosemission is to advance oncology care by developing and commercializing aportfolio of targeted treatments designed to address the medical needs ofpatients with cancer. Our lead product, ERBITUX, is a first-of-its-kindantibody approved by the FDA for use in combination with irinotecan in thetreatment of patients with EGFR-expressing, metastatic colorectal cancer whoare refractory to irinotecan-based chemotherapy and for use as a single agentin the treatment of patients with EGFR-expressing, metastatic colorectal cancerwho are intolerant to irinotecan-based chemotherapy. ERBITUX binds specificallyto epidermal growth factor receptor (EGFR, HER1, c-ErbB-1) on bothnormal and tumor cells, and competitively inhibits the binding of epidermalgrowth factor (EGF) and other ligands, such as transforming growthfactor-alpha. We are conducting, and in some cases have completed, clinicalstudies evaluating ERBITUX for broader use in colorectal cancer and head andneck cancers, and for potential treatment in lung and pancreatic cancers, aswell as other potential indications.

On February 12, 2004, the FDA approved ERBITUXfor use in combination with irinotecan in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are refractory toirinotecan-based chemotherapy and for use as a single agent in the treatment ofpatients with EGFR-expressing, metastatic colorectal cancer who are intolerantto irinotecan-based chemotherapy. In September 2005, Health Canadaapproved the use of ERBITUX for use in combination with irinotecan for thetreatment of EGFR-expressing metastatic colorectal carcinoma in patients whoare refractory to other irinotecan-based chemotherapy regimens and for use as asingle agent for the treatment of EGFR-expressing, metastatic colorectal carcinomain patients who are intolerant to irinotecan-based chemotherapy. On March 1,2006, the FDA approved ERBITUX for use in combination with radiation therapyfor the treatment of locally or regionally advanced SCCHN and as a single agentin recurrent or metastatic SCCHN where prior platinum-based chemotherapy hasfailed. Reference full prescribing information, available at www.ERBITUX.com,for important safety information relating to ERBITUX, including boxed warnings.

On December 1, 2003, Swissmedic, the Swiss agencyfor therapeutic products, approved ERBITUX in Switzerland for the treatment ofpatients with colorectal cancer who no longer respond to standard chemotherapytreatment with irinotecan. Merck KGaA licensed the right to market ERBITUX outsidethe United States and Canada from the Company in 1998. In Japan, Merck KGaA hasmarketing rights to ERBITUX, which are co-exclusive to the co-developmentrights of the Company and BMS. On June 30, 2004, Merck KGaA receivedmarketing approval by the European Commission to sell ERBITUX for use incombination with irinotecan for the treatment of patients with EGFR-expressingmetastatic colorectal cancer after failure of irinotecan including cytotoxictherapy. On December 22, 2005, Swissmedic approved ERBITUX in Switzerlandin combination with radiation in the treatment of patients with previouslyuntreated, advanced SCCHN. On April 3, 2006, Merck KGaA was grantedmarketing authorization by the 

32

----

European Commission toextend the use of ERBITUX, in combination with radiotherapy, to the treatmentof patients with locally advanced SCCHN.

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 of revenues earned fromcommercial sales of ERBITUX;

·  the timing of recognition of license fees andmilestone revenues;

·  the status of development of our variousproduct candidates;

·  whether or not we achieve specified researchor commercialization objectives;

·  fluctuations in our effective tax rate andtiming on when we may revise our conclusions regarding the realization ofour net deferred tax assets, which currently have a partial valuationallowance;

·  legal costs and the outcome of outstandinglegal proceedings; and

·  the addition or termination of researchprograms or funding support and variations in the level of expenses related toour 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$212.9 million as of March 31, 2006. We anticipate that our accumulateddeficit may continue to decrease in the future as we earn revenues oncommercial sales of ERBITUX and generate net income. Although prior to 2004 wedevoted most of our efforts and resources to research and development,  we expect that we will continue to devotegreater efforts and resources to the manufacturing, marketing, andcommercialization of ERBITUX. There is no assurance that we will be able tocontinue to successfully manufacture, market or commercialize ERBITUX or thatpotential customers will buy ERBITUX. We rely entirely on third partymanufacturers for filling and finishing services with respect to ERBITUX. Ifour current third party manufacturers or critical raw material suppliers failto meet our expectations, we cannot be assured that we will be able to enterinto new agreements with other suppliers or third party manufacturers withoutan adverse effect on our business.

**HIGHLIGHTS ANDOUTLOOK**

As previously noted in our 2005 Annual Report on Form 10-K,on January 24, 2006, we announced that our Board of Directors had engagedthe investment bank Lazard to conduct, in conjunction with management, a fullreview of the Company’s strategic alternatives to maximize shareholder value. This review was initiated to ensurethat we could benefit from our long-term, high-value investments in the shortterm, realizing immediate shareholder value while mitigating the impact onprofitability associated with the development of ERBITUX and our productcandidates. Among the alternatives we may ultimately pursue are a merger,sale or strategic alliance. It should be noted that while this process isongoing, we continue to execute a program of focused investment in order to ensure that we sustain our competitiveposition and that we are adequately positioned for sustainable, longer-termgrowth. While it is our intention to execute an appropriate transaction,we cannot make assurances that any particular alternative will be pursued orthat a transaction will occur. To that end, we will continue to operate in theordinary course, and we will continue a program of robust investment in thefuture of our products.

The first quarter of 2006 was a very successfulquarter for us. ERBITUX was approved on March 1st bythe FDA for use in head and neck cancer in the United States which triggered amilestone payment of $250 million from our corporate partner, BMS. Inaddition, in-market net sales of ERBITUX reached  $138 million, a 14% increase over lastquarter, and a 58% increase over the first quarter of 2005. The significantincrease in North American in-market net sales combined with revenues recordedas a result of 

33

----

earning a milestonepayment, led to a very strong quarter for us, with a total of $143.6 million inoperating income on revenues of $245.1 million.

Several other important events transpired during thequarter. We announced that full patient enrollment has been completed in anumber of international, registrational Phase III clinical trials of ERBITUX. Weexpect that a number of these studies will be coming to maturity in the secondhalf of 2006 or in the beginning of 2007. Also during this quarter, we scoredan important victory when an arbitrator decided in our favor in our disputewith Merck KGaA over rights to develop and commercialize IMC-11F8—ourEGFR targeted fully-human IgG1 antibody—outside of North America. The decisionis binding and cannot be appealed. Therefore, we are prepared to initiatelater-stage developmental trials of IMC-11F8 in the second half of 2006following completion of Phase I trials.

As noted above, during the remainder of 2006, we arecontinuing to execute a program of focused investments and our financialexpectations and plans for the year reflect these objectives. The followingguidance has been provided on our expected results for 2006:

Royalty revenue in 2006 will continue to reflect 39%of BMS’s net sales and a range of 6.5% - 7.5% of Merck KGaA net sales. Licensefees and milestone revenue in 2006 will include the continuing amortization,based on clinical development spending, of the $900 million received from BMS. Atthe anticipated rates of clinical spending for 2006, amortization of milestonesfor the full year should approximate $250 million. Manufacturing revenue in2006 will continue to reflect ERBITUX shipped to our partners for commercialuse. The price charged for commercial material is based on our actual cost tomanufacture the product, plus, in the case of BMS only, a 10% mark-up on bulkmanufacturing costs. The selling price to our partners in 2006 is estimated tobe comparable to the price charged in 2005. Collaborative agreement revenue in2006 will continue to include the purchase of ERBITUX for clinical use by ourpartners, reimbursement by our corporate partners of certain regulatory,clinical and marketing expenses incurred on behalf of ERBITUX, andreimbursement of royalty expenses of 4.5% of domestic net sales in accordancewith the existing terms of the BMS agreement, as well as a low single digitamount from Merck KGaA.

Effective January 1,2006, we adopted Financial Accounting Standards Statement No. 123 (revised2004),*Share-Based Payment,* whichprovides that the expense associated with share-based payment transactions berecognized in the financial statements. Based on the implementation of thisStatement, we estimate that the total expense for stock options in 2006 will beapproximately $9.6 million. Compensation expense for the first quarter of2006 amounted to approximately $1.9 million and it is reflected in each expensecategory where the employee benefits are categorized. Research and developmentexpenses include costs to support our pre-clinical research efforts as well asdevelopment costs (including process scale-up, toxicology and production ofnon-ERBITUX clinical materials) for our pipeline. These costs are expected toapproximate $135 million in 2006, including approximately $3.1 millionattributable to share based compensation expense. The increase from 2005reflects additional efforts in support of our non-ERBITUX pipeline, includingthird-party manufacturing costs, costs associated with producing clinicalsupplies of ERBITUX for use by us and our partners (which are reimbursed as acomponent of collaborative agreement revenue), and expansion of basic researchactivities. Clinical and regulatory expenses in 2006 are expected to increasesignificantly as we embark on a number of studies in support of expanded use ofERBITUX as well as later-stage clinical development programs for our pipelineproducts. In addition, we are enhancing our medical affairs programs, andexpanding our regulatory capabilities. As a result, total clinical andregulatory expenses are expected to reach approximately $90 million in 2006,including approximately $1.3 million attributable to share based compensationexpense. A contractually determined portion of the ERBITUX-related expenseswill continue to be reimbursed as a component of collaborative agreementrevenue. Marketing, general and administrative expenses should approximate $80million in 2006, including approximately $5.2 million attributable to sharebased compensation expense. Royalty expense for the remainder of 2006 willconsist of  9.25% of North American netsales, with 4.5% of 

34

----

NorthAmerican net sales expected to be reimbursed by BMS as a component ofcollaborative agreement revenue, resulting in a net royalty burden to us of4.75%. In addition, a single-digit percentage of international net sales willalso be incurred. Cost of manufacturing revenue in 2006 will reflect fullabsorption costs since we sold substantially all previously expensed inventoryin 2005. The effective tax rate for thefirst quarter of 2006, and the estimate for the full year, is approximately 13%which excludes the effect of the partial release of our valuation allowance.Our tax rate is different from the 25% rate that we guided on ourfourth-quarter earnings call. This reflects the recognition of a portion of ourdeferred tax assets originating in 2006, as a result of events that transpiredin the first quarter of 2006. Additionally, the impact of a partial release ofour valuation allowance resulted in a benefit to tax expense of approximately$99.5 million, which was recognized in the first quarter of 2006. Thecombination of both these items resulted in a net tax benefit in the firstquarter of 2006 of $80.3 million.

**CRITICAL ACCOUNTINGPOLICIES**

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

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

Revenues from license fees and milestone paymentsprimarily consist of up-front license fees and milestone payments receivedunder the Commercial Agreement with BMS, relating to ERBITUX, and milestonepayments received under the development and license agreement with Merck KGaA.We recognize all non-refundable up-front license fees as revenues in accordancewith the guidance provided in the SEC’s Staff Accounting Bulletin No. 104.Our most critical application of this policy, to date, relates to the$900,000,000 in license fees received from BMS under the Commercial Agreementwhich are being deferred and recognized as revenue based upon the actualproduct clinical and development costs incurred since September 19, 2001to date by BMS and ImClone as a percentage of the estimated total of such coststo be incurred over the 17 year term of the Commercial Agreement. Theestimated total of such costs is based on the clinical development budget whichestablishes joint responsibilities that will be carried out by both the Companyand BMS for certain clinical and other studies. Of the $900,000,000 in paymentsreceived through March 31, 2006, $144,347,000 was recognized as revenue inthe first quarter of 2006 and $438,211,000 from the commencement of theCommercial Agreement in 2001 through March 31, 2006. The methodology usedto recognize deferred revenue involves a number of estimates and judgments,such as the estimate of total product clinical and development costs to beincurred under the Commercial Agreement. Changes in these estimates andjudgments can have a significant effect on the size and timing of revenuerecognition. In addition, if management had chosen a different methodology torecognize the license fee and milestone payments received under the CommercialAgreement, the Company’s financial position and results of operations couldhave differed materially. For example, if the Company were to recognize therevenues earned from the Commercial Agreement on a straight-line basis over thelife of the agreement, the Company would have recognized approximately$12,392,000 and $141,196,000 as revenue in the first quarter of 2006 and fromthe commencement of the Commercial Agreement, respectively, 

35

----

through March 31,2006. Management believes that the current methodology used to recognizerevenues under the Commercial Agreement, which reflects the level of effortconsistent with the product development activities, is the most appropriatemethodology because it reflects the level of expenditure and activity in theperiod in which it is being spent as compared to the total expected expenditureover the life of the Commercial Agreement. This cost to cost approach issystematic and rational, it provides a factually supportable pattern to trackprogress, and is reflective of the level of effort, which varies over time.

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

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

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

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

*WithholdingTaxes—*On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to federalincome taxes not withheld because one or more of the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payfederal income taxes for those years. Subsequently, the Company became aware ofanother potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees.After disclosure to the IRS in 2003, the IRS commenced audits of the Company’sincome tax and employment tax returns for the years 1999-2001. On February 8,2006, the Company received a draft of the IRS’s report of its preliminaryfindings which indicated that the IRS, in addition to imposing liability on theCompany 

36

----

for taxes not withheld,intended to assert penalties with respect to both the failure to withhold onnon-qualified stock options and the failure to report and withhold on thewarrants described above. On March 14, 2006, the Company reached anagreement in principle with the IRS to resolve the employment tax audit, whichincludes the Company’s agreement to the imposition of an accuracy-relatedpenalty under Section 6662 of the Internal Revenue Code. Under thisagreement, the Company’s liability to the IRS was calculated to beapproximately $32,000,000. The Company had previously recorded a withholdingtax liability of $18,096,000 and a withholding tax asset of $274,000 in itsconsolidated Balance Sheet as of December 31, 2004. Based on the agreementin principle reached with the IRS, the Company eliminated the withholding taxasset of $274,000 and recorded an additional withholding tax liability of$13,904,000, or a total of $32,000,000, in its consolidated Balance Sheet as ofDecember 31, 2005. As a result, the Company recorded in the fourth quarterof 2005 a net withholding tax expense of $14,178,000. On April 19, 2006,the Company signed a final agreement with the IRS to resolve the employment taxaudit. Pursuant to such agreement the Company paid $28,655,509 to the IRS on April 21,2006 and on April 28, 2006 the Company paid the IRS $3,080,789 consistingof interest.

*Inventories—*UntilFebruary 12, 2004, all costs associated with the manufacturing of ERBITUXwere included in research and development expenses when incurred. Effective February 13,2004, the date after we received approval from the FDA for ERBITUX, we began tocapitalize in inventory the cost of manufacturing ERBITUX and have expensedsuch costs as cost of manufacturing revenue at the time of sale. Since we hadpreviously expensed all inventory produced, the costs of manufacturing revenuein 2004 reflected minimal costs primarily consisting of shipping and storagecharges. In 2005, we continued to sell inventory that was previously expensedand gradually began to sell inventory that was partially expensed, since therewas inventory in process on the date that we received FDA approval of ERBITUX.In the fourth quarter of 2005, we sold substantially all inventory with partialcosts. As a result, our cost of manufacturing revenue in the remainder of 2006will reflect full absorption costs of production since the remaining partiallyexpensed inventory was fully recognized in the first quarter of 2006. We expectthat our quarterly margins on sales of ERBITUX will therefore begin tostabilize in 2006 and reflect an average margin of approximately 10%.

Our policy is to capitalize inventory costs associatedwith our products when, based on management’s judgment, future economic benefitis expected to be realized. Our accounting policy addresses the attributes thatshould be considered in evaluating whether the costs to manufacture a producthave met the definition of an asset as stipulated in FASB Concepts Statement No. 6.If applicable, we assess the regulatory and approval process including anyknown constraints and impediments to approval. We also consider the shelf lifeof the product in relation to the expected timeline for approval. We review ourinventory for excess or obsolete inventory and write down obsolete or otherwiseunmarketable inventory to its estimated net realizable value.

We are in the process of finalizing the validation andcommissioning of our BB50 facility and expect to begin production of ERBITUXfor commercial use in May of 2006. It is our expectation, based on ourcurrent timeline that we will be ready to file an sBLA with the FDA forapproval of our BB50 facility in the first quarter of 2007. Until such time aswe receive approval of BB50 from the FDA we will not be able to sell theinventory produced in BB50. Based on management’s current expectations, weexpect that the cost of such inventory will be fully realizable once we obtainapproval of BB50. Therefore, it is our intention to capitalize all ERBITUXinventory produced in BB50 as long as we can conclude that the costs of suchinventory will be fully realizable.

*Litigation—**The*Company iscurrently involved in certain legal proceedings as disclosed in the notes tothe consolidated financial statements. As of March 31, 2006, we have notestablished a legal reserve in our financial statements because we do notbelieve that such a reserve is required to be established at this time, inaccordance with Statement of Financial Standards No. 5. However, if in afuture period, events in any such legal proceedings render it probable that aloss will be incurred, and if such loss is reasonably 

37

----

estimable at that time, wewill establish such a reserve. Thus, it is possible that legal proceedings may havea material adverse impact on the operating results for that period, on ourbalance sheet or both**.**

*Long-LivedAssets—**We*review long-lived assets forimpairment when events or changes in business conditions indicate that theirfull carrying value may not be recovered. Assets are considered to beimpaired and written down to fair value if expected associated undiscountedcash flows are less than carrying amounts. Fair value is generally determinedas the present value of the expected associated cash flows. We own a number ofbuildings that are primarily dedicated to the manufacturing of ERBITUX andother clinical products in our pipeline. Based on management’s current estimates,we expect to recover the carrying value of such assets. Changes in regulatoryor other business conditions in the future could change our judgments about thecarrying value of these facilities, which could result in the recognition ofmaterial impairment losses.

*IncomeTaxes—**Income*taxes are accounted forunder the asset and liability method. Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe financial statement carrying amounts of existing assets and liabilities andtheir respective tax bases and operating loss and tax credit carryforwards.Significant estimates are required in determining our provision for incometaxes. In the first quarter of 2006, we released a portion of our valuationallowance against our deferred tax assets because we determined based onrevised expectations of our projected future earnings that it is more likelythan not that we will realize the benefit of these deferred tax assets, whichamounted to approximately $99.5 million. Our conclusion to release a portion ofour valuation allowance against our deferred tax assets is supported by severalevents that transpired during the first quarter of 2006. In addition toobtaining approval from the FDA for ERBITUX as a second indication in March of2006, the in-market sales for ERBITUX during this period exceeded ourexpectations and have continued to show strong growth in the marketplace. Mostimportantly, a potential competitor released certain clinical data on theircompeting product, which gave us the ability to further understand thecompetitive threats posed by this potential product. Therefore, our decision issupported by a combination of better than expected in-market sales that webelieve will be sustainable in the future coupled with the ability to furtherrefine our future financial projections and assumptions related to ourcompetition. The financial projections supporting our conclusion to release aportion of our valuation allowance contain significant assumptions based oncurrent facts about our market share and our competitive landscape. If suchassumptions were to differ significantly, it may have a material impact onour ability to realize our deferred tax assets.

38

----

**RESULTS OFOPERATIONS**

Selectedfinancial and operating data for the three months ended March 31, 2006 and2005 are as follows: (in thousands)

| ** **                             | ** ** | **Three Months Ended  March 31,** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|------------|------------|
| ** **                             | ** ** | **2006**                                         | ** ** | **2005**   | ** ** | **Variance** | ** ** |
| **Results of Operations:**             | ** ** | ** **                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Royalty revenue                        |       | $                                                | 60,270     |       | $          | 36,372 |   | $ | 23,898 |   |
| License fees and  milestone revenue    |       | 144,403                                          |       | 24,534     |       | 119,869 |   |
| Manufacturing  revenue                 |       | 19,349                                           |       | 11,019     |       | 8,330 |   |
| Collaborative  agreement revenue       |       | 21,109                                           |       | 13,846     |       | 7,263 |   |
| Total revenues                         |       | 245,131                                          |       | 85,771     |       | 159,360 |   |
| Research and development               |       | 32,993                                           |       | 21,173     |       | 11,820 |   |
| Clinical and  regulatory               |       | 15,081                                           |       | 9,398      |       | 5,683 |   |
| Marketing,  general and administrative |       | 18,001                                           |       | 17,623     |       | 378 |   |
| Royalty expense                        |       | 20,066                                           |       | 12,566     |       | 7,500 |   |
| Cost of  manufacturing revenue         |       | 15,402                                           |       | 743        |       | 14,659 |   |
| Total operating expenses               |       | 101,543                                          |       | 61,503     |       | 40,040 |   |
| Operating income                       |       | $                                                | 143,588    |       | $          | 24,268 |   | $ | 119,320 |   |

 

***Three Months Ended March 31, 2006 and 2005***

**Revenues**

**Royalty Revenue**

Royalty revenue consists primarily of royalty paymentsearned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under ouragreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA, we are entitled to royalty payments based on a percentage of grossmargin of Merck KGaA’s sales of ERBITUX outside the United States and Canada. Inthe first quarter of 2006, our royalty revenue increased by approximately $23.9million from the comparable period in 2005 due to an increase in net sales ofERBITUX. In North America, sales by BMS in the first quarter of 2006 amountedto $138 million compared to net sales in the comparable period in 2005 of $87.1million, an increase of $50.9 million, or 58%. Outside of North America, salesof ERBITUX by Merck in the first quarter of 2006 amounted to approximately$89.8, an increase of $34.8 million or 63% from the comparable period in 2005.

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

**License Fees andMilestone Revenue**

License fees and milestone revenue in the firstquarter of 2006 of $144.4 million consists of the recognition of up-frontlicense fees and milestone payments received under the Commercial Agreementwith BMS of $144.3 million and recognition of payments received under thedevelopment and license agreements with Merck KGaA of $56,000. The increase of$119.9 million from the comparable period in 2005 is mainly due to the factthat in March of 2006 we earned the last milestone payment from BMS of$250 million, as a result of obtaining approval from the FDA for ERBITUX in asecond indication. The first quarter milestone revenue contains a “catch-up”adjustment of approximately $112.7 million related 

39

----

to the actual product researchand development costs incurred from inception through December 31, 2005 asa percentage of the estimated total costs to be incurred over the term of theCommercial Agreement.

License fees and milestonerevenue in 2006 will include the continuing amortization, based on clinicaldevelopment spending, of the $900 million received from BMS. At the anticipatedrates of clinical spending for 2006, amortization of milestones for the fullyear of 2006 should approximate $250 million.

**ManufacturingRevenue**

Manufacturing revenue in the first quarter of 2006 of$19.3 million consists of sales of ERBITUX to BMS and Merck KGaA for commercialuse. The increase from the comparable period of $8.3 million or 75% is due toan increase in sales to BMS of approximately $5.6 million and sales to MerckKGaA of $2.7 million. This is the first quarter that we sold ERBITUX forcommercial distribution to Merck KGaA. The increase in sales of ERBITUX to ourpartners for commercial use is directly associated with the increase in in-marketsales (as described above under royalty revenue) both in North America andinternationally. In accordance with the Commercial Agreement, we sell ERBITUXto BMS at our cost of production plus a 10% markup on bulk. We sell bulkinventory to Merck KGaA at our full absorption cost of production.

Manufacturing revenue in2006 will continue to reflect ERBITUX shipped to our partners for commercialuse.

**CollaborativeAgreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: clinical and regulatory expenses, the cost of ERBITUXsupplied to our partners for use in clinical studies, certain marketing andadministrative expenses, and a portion of royalty expense. During the firstquarter of 2006, we earned $21.1 million in collaborative agreement revenue, ofwhich approximately $13.2 million represents amounts earned from BMS andapproximately $7.9 million represents amounts earned from Merck KGaA, ascompared to $13.8 million earned in the comparable period in 2005, of which$9.6 million was earned from BMS and approximately $4.3 million was earned fromMerck KGaA. The increase in collaborative agreement revenue of $7.3 million isprincipally due to an increase in reimbursement for clinical drugs ofapproximately $4.2 million and an increase in royalty expense reimbursement ofapproximately $4.1 million, partly offset by decreases in the reimbursement ofclinical and marketing, general and administrative expenses.

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

**Expenses**

**Research andDevelopment**

Research and development expenses in the first quarterof 2006 of $33.0 million increased by approximately $11.8 million or 56% fromthe comparable period in 2005. The increase is primarily due to an increase inshipments of ERBITUX sold to our partners for clinical studies of approximately$7.6 million, an increase in costs associated with the development of ournon-ERBITUX pipeline of approximately $3.2 million, and approximately $500,000of shared based compensation expense. Research and development expenses includecosts associated with our in-house and collaborative research programs, 

40

----

product and processdevelopment expenses, cost to manufacture our product candidates and qualityassurance and quality control costs. Research and development includes coststhat are reimbursable from our corporate partners. Approximately $8.8 millionand $4.6 million of costs representing research and development expenses in thefirst quarters of 2006 and 2005, respectively, were reimbursable and includedunder collaborative agreement revenue since they represent inventory suppliedto our partners for use in clinical studies.

We expect that researchand development expenses will approximate $135 million in 2006, includingapproximately $3.1 million attributable to share based compensation expense.The increase from 2005 reflects additional efforts in support of ournon-ERBITUX pipeline, including third-party manufacturing costs, costsassociated with clinical supplies of ERBITUX for use by us and our partners(which are reimbursed as a component of collaborative agreement revenue), andexpansion of basic research activities.

**Clinical andRegulatory**

Clinical and regulatory expenses consist of costs toconduct our clinical studies and associated regulatory activities. Clinical andregulatory expenses in the first quarter of 2006 amounted to $15.1 million,an increase of $5.7 million or 60% from the comparable period in 2005. Theincrease is primarily due to an increase of $3.8 million due BMS for reimbursementof clinical expenses related to ERBITUX and an increase in salaries andbenefits of approximately $1.0 million, which includes $300,000 of share basedcompensation expense. During 2005, we gradually increased our headcount in ourclinical and regulatory department in order to invest in the continued growthof ERBITUX and to develop other product candidates. Approximately $3.4 millionand $4.2 million of the costs included in this category for the first quartersof 2006 and 2005, respectively, are reflected as revenues under collaborativeagreement revenue since they represent costs that are reimbursable by ourcorporate partners.

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

**Marketing, Generaland Administrative**

Marketing, general and administrative expenses includemarketing and administrative personnel costs, including related facility costs,additional costs to develop internal marketing and field operationscapabilities and expenses associated with applying for patent protection forour technology and products. Marketing, general and administrative expensesalso include amounts reimbursable from our corporate partners.

Marketing, general and administrative expenses in thefirst quarter of 2006 amounted to $18.0 million, which includes approximately$1.1 million of share based compensation expense as compared to $17.6 millionin the comparable period in 2005. Expenses in this category have remainedfairly stable from the comparable period in 2005, mainly due to having noincreases in headcount and spending consistently in marketing efforts andlegal, accounting and consulting expenses. Certain expenses in this categoryare reimbursable from our corporate partners. Approximately $314,000 and$570,000 of costs representing marketing and general expenses in the firstquarters of 2006 and 2005, respectively, were reimbursable and included incollaborative agreement revenue.

41

----

Marketing, general andadministrative expenses should approximate $80 million in 2006, includingapproximately $5.2 million attributable to share based compensation expense.The increase versus 2005 is principally attributable to increased marketingefforts in support of launching ERBITUX as a second indication.

**Royalty Expense**

Royalty expense consists of obligations related tocertain licensing agreements related to ERBITUX. We are obligated to payroyalties of approximately 12.25% of North American net sales and a singledigit royalty on sales outside of North America, which will increase if salesoutside of North America consist of ERBITUX produced in the United States.Beginning in the second quarter of 2006, gross royalty expense will decrease asa percentage of net sales in North America to 9.25%. We receive reimbursementsfrom our corporate partners of 4.5% on North American net sales and a singledigit percentage on net sales outside of North America, which is reflected incollaborative agreement revenue. In the first quarter of 2006, we incurredroyalty expense of $20.1 million as compared to $12.6 million, an increase of$7.5 million, or 60%. The increase is directly associated with theincrease in net sales of ERBITUX in North America and outside of North America,as previously described. Approximately $8.6 million and $4.5 millionof royalty expense was reimbursable by our corporate partners and included ascollaborative agreement revenue in the first quarters of 2006 and 2005,respectively.

Royalty expenses for theremainder of 2006 will consists of 9.25% of North American in-market net saleswith 4.5% of North American in-market net sales expected to be reimbursed as acomponent of collaborative agreement revenue, resulting in a net royalty burdenof 4.75%. In addition, a single-digit percentage of international net sales isalso expected to be incurred.

**Cost ofManufacturing Revenue**

Cost of manufacturingrevenue in the first quarter of 2006 amounted to $15.4 million representing agross margin of approximately 20% compared to costs of manufacturing revenue inthe comparable period of 2005 of approximately $743,000, or a gross margin of93%. The fluctuation in our gross margin is due to the fact that prior toobtaining approval from the FDA for ERBITUX, we had previously expensed allERBITUX inventory produced as research and development. We began to capitalizein inventory the cost of manufacturing ERBITUX after we received approval in February of2004. It has taken us almost two years to sell all inventory that waspreviously expensed or partially expensed. In the fourth quarter of 2005, wesold substantially all inventory with partial costs and fully exhausted theremaining batches of ERBITUX with partial costs during the first quarter of2006. Therefore, we expect to reflect full absorption cost in the remainder of2006.     We sell ERBITUX to BMS at ourcosts of production plus a 10% mark-up on bulk and to Merck KGaA at our cost ofproduction. We expect that our quarterly margins on sales of ERBITUX will beginto stabilize in 2006 and reflect an average margin of approximately 10%.

**Interest Income andInterest Expense**

Interest income in the first quarter of 2006 amountedto $7.2 million, an increase of approximately $407,000 or 6% from thecomparable period in 2005. This increase is attributable to increases ininterest rates from the comparable period in 2005.

Interest expense in thefirst quarter of 2006 amounted to $1.5 million, a decrease of  $347,000 or19% from the comparable period in 2005. The decrease is due to the fact that wecapitalized $347,000 more interest related to the construction of our BB50manufacturing facility in first quarter of 2006 than in the comparable period. Theincrease in capitalized interest is directly related to the increase in costsincurred for our BB50 facility.

42

----

**Provision forIncome Taxes**

The effective tax rate forthe first quarter of 2006, and the estimate for the full year, is approximately13% which excludes the effect of a partial release of our valuation allowance.In addition to the 13% effective tax rate, the Company released a portion ofits deferred tax asset valuation allowance in the first quarter of 2006 becausewe believe that it is more likely than not that we will realize these deferredtax assets in the future. The impact of the partial release of our valuationallowance against our deferred tax assets resulted in a benefit to tax expenseof approximately $99.5 million, which was recognized in the first quarter of2006. The combination of both these items resulted in a net tax benefit in thefirst quarter of 2006 of $80.3 million.

**Net Income**

We had net income of$229.6 million or $2.75 per basic common share and $2.51 per diluted commonshare for the first quarter of 2006, compared with net income of $28.8 millionor $0.35 per basic common share and $0.33 per diluted common share for thecomparable period in 2005. The fluctuation in results was due to the factorsnoted above.

**LIQUIDITY ANDCAPITAL RESOURCES**

At March  31,2006, our principal sources of liquidity consisted of cash and cash equivalentsand securities available for sale of approximately $990.7 million.Historically, we have financed our operations through a variety of sources,most significantly through the issuance of public and private equity andconvertible notes, license fees and milestone payments and reimbursements fromour corporate partners. Since the approval of ERBITUX on February 12,2004, we began to generate royalty revenue and manufacturing revenue from thecommercial sale of ERBITUX by our corporate partners and we have generatedincome from operations in 2004 and 2005 and in the first quarter of 2006. As wecontinue to generate income, our cash flows from operating activities areexpected to increase as a source to fund our operations. Therefore, weanticipate that our future financial condition and our future operatingperformance will continue to experience significant changes and that pastperformance will not likely be indicative of our future performance.

**SUMMARY OF CASH FLOWS**

| ** **                                            | ** ** | **March 31,  2006** | ** ** | **March 31,  2005** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------|------------|
| Cash provided by (used)  in :                         |       |                     |       |                     |       |         |       |
| Operating activities                                  |       | $                        | 209,601    |                     | $          | (70,004      | )          | $ | 279,605 |   |
| Investing activities                                  |       | 20,388                   |       | 454                      |       | 19,934       |       |
| Financing activities                                  |       | 42,469                   |       | 6,617                    |       | 35,852       |       |
| Net increase  (decrease) in cash and cash equivalents |       | $                        | 272,458    |                     | $          | (62,933      | )          | $ | 335,391 |   |

 

Historically our cash flows from operating activitieshave fluctuated significantly due to the nature of our operations and thetiming of our cash receipts. During the first quarter of 2006, we generatedapproximately $209.6 million in cash from operating activities, as compared tonet cash used in operating activities in the comparable period of 2005 of$70 million. The increase in operating cash flows in the first quarter of2006 is primarily due to the receipt of $250 million milestone payment from ourcorporate partner BMS, as a result of obtaining approval from the FDA forERBITUX in a second indication. In the first quarter of 2006, we usedapproximately $20 million from sales and maturities of our investments in orderto fund some of our operating activities, as further described below. Althoughwe generate positive cash flows from operating activities, as long as wecontinue to invest in research and development, in 

43

----

clinical development andin the development of our pipeline, we will continue to experience fluctuationsin our operating cash flows, depending on the level of such investments.

Our primary sources and uses of cash under investingactivities consist of purchases and sales activity in our investment portfolio,which we manage based on our liquidity needs, possible business developmenttransactions and amounts used for capital expenditures. During the firstquarter of 2006, we generated net cash from investing activities of $20.4million comprised of approximately $16.4 million in acquisition of fixedassets, offset by net proceeds from the sale and maturity of securities in ourinvestment portfolio of $36.8 million.In January of 2006, we usedapproximately $20 million of proceeds from sales and maturities in order tofund some of our operating activities including bonuses which are paid in January toall employees as well as payment of royalty expense related to sales from thefourth quarter of 2005.

We generated net cash flows from financing activitiesin the first quarter of 2006 of approximately $42.5 million as compared to $6.6million in the comparable period of 2005. Cash flows from financing activitiesin these periods were generated from employees’ exercising stock options andfrom the issuance of common stock under our employee stock purchase plan.

We believe that ourexisting cash and cash equivalents and marketable securities and our cashprovided by operating activities will provide us with sufficient liquidity tosupport our operations at least through the second quarter of 2007. We are alsoentitled to reimbursement for certain marketing, royalty expense, and researchand development expenditures. Our future working capital and capitalrequirements will depend upon numerous factors, including, but not limited to:

·  progress and cost of our research anddevelopment programs, pre-clinical testing and clinical studies;

·  the amount and timing of revenues earned fromthe commercial sale of ERBITUX;

·  our corporate partners fulfilling theirobligations to us;

·  timing and cost of seeking and obtainingadditional regulatory approvals;

·  level of resources that we devote to thedevelopment of marketing and field operations capabilities;

·  costs involved in filing, prosecuting andenforcing patent claims; and legal costs associated with the outcome ofoutstanding legal proceedings and investigations;

·  status of competition; and

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

**OFF-BALANCE SHEETARRANGEMENTS**

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,asset-backed securities, agency debt and commercial paper. All such instrumentsare classified as securities available for sale. Generally, we do not invest inportfolio equity securities, commodities, foreign exchange contracts or usefinancial derivatives for trading purposes. Our debt security portfolio representsfunds held temporarily pending use in our business and operations. We managethese funds accordingly. We seek 

44

----

reasonable assuredness ofthe safety of principal and market liquidity by investing in investment gradefixed income securities while at the same time seeking to achieve a favorablerate of return. Our market risk exposure consists principally of exposure tochanges in interest rates. Our holdings are also exposed to the risks ofchanges in the credit quality of issuers. We invest in securities that have arange of maturity dates.

Thetable below presents the principal amounts and related weighted averageinterest rates by year of maturity for our investment portfolio as of March 31,2006: (in thousands, except interest rates)

| ** **                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** **                                                                                        |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|-----------------|---------------------------------------------------------------------------------------------------|
| Fixed Rate                  |       | $        | 150,000    |     | $          | 212,400  |       | $        | 100,000    |     | $          | 55,000                        |       | $         | 20,000     |            | $               — |   | $ | 537,400 |   | $ | 527,127 |   |
| Average Interest Rate  |       | 2.97     | %          | 3.51     | %          | 3.86     | %          | 4.33     | %          | 4.54     | %          | —                        |       | 3.55      | %          |            |                                                                                              |
| Variable Rate(1)            |       | —   |       | —   |       | 1,803    |       | —   |       | 10,000   |       | 176,109                       |       | 187,912   |       | 187,711         |                                                                                              |
| Average Interest Rate  |       | —   |       | —   |       | 4.85     | %          | —   |       | 4.00     | %          | 4.74                          | %          | 4.71      | %          |            |                                                                                              |
|                        |       | $        | 150,000    |     | $          | 212,400  |       | $        | 101,803    |     | $          | 55,000                        |       | $         | 30,000     |            | $      176,109                                                      |   | $ | 725,312 |   | $ | 714,838 |   |

----

(1)   *These holdings primarily consist of U.S. corporate and foreigncorporate floating rate notes. Interest on the securities is adjusted monthly,quarterly or semi-annually, depending on the instrument, using prevailinginterest rates. These holdings are highly liquid and we consider the potentialfor loss of principal to be minimal.*

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 the convertiblesenior notes was approximately $523,476,000 at March 31, 2006.

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

*Disclosure Controlsand Procedures*

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

*Changes In InternalControl Over Financial Reporting*

There has been no change in our internal control overfinancial reporting during the three months ended March 31, 2006 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.  ***GovernmentInquiries and Investigations

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 substantially all ofthe 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 had properlyreported and paid their personal income tax liabilities for the years 1999 and2000 in which they exercised options, which would reduce or eliminate theCompany’s potential liability for failure to withhold income taxes on theexercise of those options. In the course of doing so, the Company became awareof another potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees,including the Company’s former President and Chief Executive Officer, Samuel D.Waksal, the Company’s former General Counsel, John B. Landes, the Company’sformer Chief Scientific Officer, Harlan W. Waksal, and the Company’s formerdirector and Chairman of the Board, Robert F. Goldhammer. Again, the Companypromptly informed the IRS, the SEC and the United States Attorney’s Office ofthis issue. The Company also informed New York State of this issue. On June 17,2003, New York State notified the Company that based on this issue, they werecontinuing a previously conducted audit and were evaluating the terms of theclosing agreement to determine whether it should be re-opened. On March 31,2004, the Company entered into a new closing agreement pursuant to which theCompany paid New York State an additional $1,000,000 in full satisfaction ofall the deficiencies and determinations of withholding taxes for the years 1999-2001.Therefore, the Company has eliminated the liability of $2,815,000, which wasaccrued as of December 31, 2003, primarily attributable to New York Statewithholding taxes on stock options and warrants exercised by Dr. Samuel D.Waksal and has recognized a benefit of $1,815,000 as a recovery in the ConsolidatedStatements of Operations in the first quarter of 2004.

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

After disclosure to theIRS in 2003, the IRS commenced audits of the Company’s income tax andemployment tax returns for the years 1999-2001. The Company hascooperated in full with this audit and has responded to all requests forinformation and documents received from the IRS. On February 8, 2006, theCompany received a draft of the IRS’s report of its preliminary findings withrespect to the employment tax audit. The draft report indicated that the IRS,in addition to imposing liability on the Company for taxes not withheld,intended to assert penalties with respect to both the failure to withhold onnon-qualified stock options and the failure to report and withhold on thewarrants described above. On 

46

----

April 19,2006, the Company reached an agreement with the IRS to resolve the employmenttax audit.   Pursuant to such agreementthe Company paid $28,655,509 to the IRS on April 21, 2006 and on April 28,2006 the Company paid the IRS $3,080,789, consisting of interest.

***B.  ***IntellectualProperty Litigation

As previously reported, on October 28, 2003, acomplaint was filed by Yeda Research and Development Company Ltd. (“Yeda”)against ImClone Systems and Aventis Pharmaceuticals, Inc. in the U.S.District Court for the Southern District of New York (03 CV 8484). This actionalleges and seeks that three individuals associated with Yeda should also benamed as co-inventors on U.S. Patent No. 6,217,866. On June 7, 2005,Yeda amended their U.S. complaint to seek sole inventorship of the subjectpatent. On November 4, 2005, the Court denied the Company’s motion forsummary judgment with respect to this matter, as filed with the Court on June 24,2005, and a June 2006 trial date has been set. The Company is vigorouslydefending against the claims asserted in this action. The Company is unable topredict the outcome of this action at the present time.

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

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen. The Company is vigorouslydefending against claims asserted in this action. The parties have filedmotions for summary judgment with respect to this matter. A hearing on thesemotions was held on February 2, 2006; a determination is forthcoming. TheCompany is unable to predict the outcome of this action at the present time.

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

As previously disclosed, the Company is developing afully human monoclonal antibody, referred to as IMC-11F8, which itintends to commercialize outside the United States and Canada. The Companybelieves it has the right to do so under its existing development and licenseagreement with Merck KGaA. However, Merck KGaA had advised the Company that itbelieved that IMC-11F8 was covered under the development and licenseagreement with Merck KGaA and that it could therefore have the exclusive rightsto market IMC-11F8 outside the United States and Canada and co-exclusivedevelopment rights in Japan, for which it would pay the same royalty as it paysfor ERBITUX. See “Corporate Collaborations—Collaborations with Merck KGaA”. Inagreement with Merck KGaA, the Company submitted this dispute to bindingarbitration through an expedited process outside of the provisions of thedevelopment and license agreement.

47

----

Merck KGaA subsequently took the position that theexpedited arbitration provision was no longer valid and the Company sued MerckKGaA in federal court in the Southern District of New York to either enforcethe arbitration provision previously agreed to or to have the court decide thequestion of whether IMC-11F8 is or is not covered under the developmentand license agreement with Merck KGaA. On November 29, 2005, the Courtgranted the Company’s motion to enforce the expedited arbitration provisionpreviously agreed to, and subsequently appointed a new arbitrator to hear anddecide this dispute. Merck KGaA has appealed that decision. The Company intendsto vigorously defend its position that the arbitration was proper and bindingon Merck KGaA, but there can be no assurance that its position will prevail.

On March 31, 2006,the arbitrator decided the matter in favor of the Company, finding that MerckKGaA had no rights to IMC-11F8. That decision is binding and unappealablepursuant to the parties’ arbitration agreement.

**Item 1A.     *Risk Factors***

Not applicable

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

Not applicable

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

Not applicable

**Item 4.**        *Submission of Matters to a Vote of Security Holders*

Not applicable

**Item 5.**        *Other Information*

Not applicable

**Item6.**        *Exhibits*

| Exhibit No. | ** ** | **Description**                                                                                                                                           | ** ** | **Incorporated   by   Reference** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------|
| 3.1              |       | Certificate of Incorporation, as amended through  December 31, 1998                                                                                  |       | D(3.1)                            |
| 3.2              |       | Amendment dated  June 4, 1999 to the Company’s Certificate of Incorporation, as amended                                                         |       | H(3.1A)                           |
| 3.3              |       | Amendment dated  June 12, 2000 to the Company’s Certificate of Incorporation, as amended                                                        |       | K(3.1A)                           |
| 3.4              |       | Amendment dated  August 9, 2002 to the Company’s Certificate of Incorporation, as amended                                                       |       | Q(3.1C)                           |
| 3.5              |       | Amended and Restated  By-Laws of the Company                                                                                                              |       | Z(3.1)                            |
| 4.1              |       | Rights Agreement dated  as of February 15, 2002 between the Company and EquiServe Trust Company,  N.A., as Rights Agent, as amended May 4, 2006 |       | JJ(EX-2)                          |

48

----

 

| 4.2   |   | Stockholder Agreement, dated as of  September 19, 2001, among Bristol-Myers Squibb Company, Bristol-Myers  Squibb Biologics Company and the Company                                               |   | L(99.2D2) |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|
| 4.3   |   | Indenture dated as of  May 7, 2004 by and between the Company and The Bank of New York, as  Trustee and Form of 13¤8%  Convertible Notes Due 2024                                       |   | V(4.5)    |
| 4.4   |   | Registration Rights  Agreement dated as of May 7, 2004 by and between the Company, as Issuer,  and Morgan Stanley & Co., Incorporated and UBS Securities LLC, as  the Initial Purchasers |   | V(4.6)    |
| 10.1  |   | Company’s 1986 Employee  Incentive Stock Option Plan, including form of Incentive Stock Option  Agreement                                                                                         |   | A(10.1)   |
| 10.2  |   | Company’s 1986  Non-qualified Stock Option Plan, including form of Non-qualified Stock Option  Agreement                                                                                          |   | A(10.2)   |
| 10.3  |   | 1996 Incentive Stock  Option Plan, as amended                                                                                                                                                          |   | O(99.1)   |
| 10.4  |   | 1996 Non-Qualified Stock  Option Plan, as amended                                                                                                                                                      |   | O(99.2)   |
| 10.5  |   | ImClone Systems  Incorporated 1998 Non-Qualified Stock Option Plan, as amended                                                                                                                         |   | O(99.2)   |
| 10.6  |   | ImClone Systems  Incorporated 2002 Stock Option Plan                                                                                                                                                   |   | Q(99.8)   |
| 10.7  |   | ImClone Systems  Incorporated 1998 Employee Stock Purchase Plan                                                                                                                                        |   | I(99.4)   |
| 10.8  |   | Option Agreement, dated  as of September 1, 1998, between the Company and Ron Martell                                                                                                             |   | F(99.3)   |
| 10.10 |   | 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)  |

49

----

 

| 10.17 |   | Development, Promotion, Distribution and Supply  Agreement, dated as of September 19, 2001, among the Company,  Bristol-Myers Squibb Company and E.R. Squibb & Sons, L.L.C                                                                                                                                   |   | L(99.D3)    |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
| 10.20 |   | Employment Agreement, dated as of March 19,  2004, between the Company and Daniel S. Lynch                                                                                                                                                                                                                            |   | U(10.1)     |
| 10.21 |   | Agreement of Sublease  dated October 5, 2001, by and between 325 Spring Street LLC and the  Company                                                                                                                                                                                                              |   | O(10.86)    |
| 10.22 |   | Promissory Note in the  principal amount of $10,000,000, dated October 5, 2001, executed by 325  Spring Street LLC in favor of the Company                                                                                                                                                                            |   | O(10.86.1)  |
| 10.23 |   | Amendment No. 1 to  Development, Promotion, Distribution and Supply Agreement, dated as of  March 5, 2002, among the Company, Bristol-Myers Squibb Company and E.R.  Squibb & Sons, L.L.C                                                                                                               |   | N(99.2)     |
| 10.24 |   | Amendment, dated as of  August 16, 2001 to the Development and License Agreement between the  Company and Merck KGaA                                                                                                                                                                                                  |   | P  (10.88)  |
| 10.25 |   | Agreement of Sale and  Purchase between Building Associates, LP and ImClone Systems Incorporated  pertaining to 33 Chubb Way, Branchburg, New Jersey executed as of  March 1, 2002                                                                                                                                    |   | Q(10.92)    |
| 10.26 |   | Target Price Contract,  dated as of July 15, 2002, between ImClone Systems Incorporated and  Kvaerner Process, a division of Kvaerner U.S. Inc., for the Architectural,  Engineering, Procurement Assistance, Construction Management and Validation  of a Commercial Manufacturing Project in Branchburg, New Jersey |   | R(10.930)   |
| 10.27 |   | Modifications Agreement  dated as of December 15, 2000 by an between 180 Varick Street  Corporation and the Company                                                                                                                                                                                                   |   | S(10.94)    |
| 10.28 |   | Amendment number 4 to  the Company’s lease at 180 Varick Street dated August 13, 2004 by and  between 180 Varick Street Corporation and the Company                                                                                                                                                              |   | V(10.28)    |
| 10.29 |   | ImClone Systems  Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                        |   | T(A.C)      |
| 10.30 |   | Supply Agreement between  the Company and Lonza Biologics PLC dated March 17, 2005                                                                                                                                                                                                                                    |   | Y(10.30)    |
| 10.31 |   | ImClone Systems  Incorporated Senior Executive Severance Plan                                                                                                                                                                                                                                                              |   | W(10.29)    |
| 10.32 |   | ImClone Systems  Incorporated Change in Control Plan, as amended                                                                                                                                                                                                                                                           |   | FF  (10.32) |
| 10.34 |   | Terms of inducement  stock option grants to Dr. Philip Frost and Dr. Eric Rowinsky on  March 1, 2005 and February 21, 2005, respectively, as approved by  the Compensation Committee of Board of Directors                                                                                             |   | AA          |
| 10.35 |   | Collaboration and  License Agreement between the Company and UCB S.A. dated August 15,  2005. Confidential Treatment has been requested for a portion of this Exhibit                                                                                                                                                 |   | CC  (10.35) |

50

----

 

| 10.36 |   | Approval by Board of Directors of certain  compensation related matters and Company stock repurchase program                                                                                                                                                                      |   | BB        |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|
| 10.37 |   | ImClone Systems  Incorporated 2005 Inducement Stock Option Plan                                                                                                                                                                                                                   |   | DD(10.1)  |
| 10.38 |   | Terms of accelerated  Company stock options and form of lock-up agreement                                                                                                                                                                                                         |   | EE(10.1)  |
| 10.39 |   | ImClone Systems  Incorporated 2006-2008 Retention Plan                                                                                                                                                                                                                            |   | GG(10.1)  |
| 10.40 |   | ImClone Systems  Incorporated Transition Severance Plan                                                                                                                                                                                                                           |   | FF(10.40) |
| 10.41 |   | Approval by the  Compensation Committee of Board of Directors of performance criteria for  executive officer cash bonus awards under the Company’s Annual Incentive Plan  for the year ended December 31, 2006, together with maximum permitted  bonuses under the plan |   | HH        |
| 10.42 |   | Letter Agreement dated  March 21, 2006, by and between Joseph L. Fischer and ImClone Systems  Incorporated                                                                                                                                                                   |   | II(10.42) |
| 31.1* |   | Certification of the  Company’s Interim Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                              |   |      |
| 31.2* |   | Certification of the  Company’s Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                                                                                                                      |   |      |
| 32*   |   | Certification of the  Company’s Interim Chief Executive Officer and Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                  |   |      |

----

| *   |   | Filed herewith.                                                                                                                                                                                                                                                      |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (A) |   | Previously filed with the Commission; incorporated  by reference to Amendment No. 1 to Registration Statement on to  Form S-1, File No. 33-61234.                                                                                                     |
| (B) |   | Previously filed with the Commission; 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) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, File  No. 0-19612, for the fiscal year ended December 31, 1994.                                                                    |
| (D) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q, File  No. 0-19612, for the quarter ended June 30, 1997.                                                                         |
| (E) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Registration Statement on Form S-3,  File No. 333-67335. Confidential treatment was granted for a  portion of this Exhibit.                                         |
| (F) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Registration Statement on Form S-8,  File No. 333-64827.                                                                                                            |
| (G) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, File  No. 0-19612, for the fiscal year ended December 31, 1998.                                                                    |
| (H) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 1999.                                                                                                 |
| (I) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1999.                                                                                                   |
| (K) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2000.                                                                                                 |

51

----

 
| (L)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Schedule 14D-9 filed on  September 28, 2001.                                                                                                     |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (N)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  March 6, 2002.                                                                                                 |
| (O)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2001.                                                                               |
| (P)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2001, and Confidential Treatment has been  requested for a portion of this exhibit. |
| (Q)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2002.                                                                              |
| (R)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2002.                                                                         |
| (S)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2002.                                                                               |
| (T)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Proxy Statement for its 2003 Annual Meeting of  Shareholders, filed August 21, 2003, as appendix C.                                                   |
| (U)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  March 19, 2004.                                                                                                |
| (V)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2004.                                                                         |
| (W)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2004.                                                                                |
| (Y)  |   | Previously filed with the Commission; incorporated  by reference to the Quarterly Report on Form 10-Q for the quarter  ended March 31, 2005.                                                                                            |
| (Z)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  June 21, 2005.                                                                                                 |
| (AA) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  July 15, 2005.                                                                                                 |
| (BB) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  September 19, 2005.                                                                                            |
| (CC) |   | Previously filed with the Commission, incorporated  by reference to the Quarterly Report on Form 10-Q for the quarter  ended September 30, 2005.                                                                                        |
| (DD) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  October 21, 2005.                                                                                              |
| (EE) |   | Previously filed with the Commission, incorporated  by reference to the Company’s Current Report on Form 8-K dated  December 21, 2005.                                                                                             |
| (FF) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2005.                                                                                |
| (GG) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  January 23, 2006.                                                                                              |
| (HH) |   | Previously filed with the Commission, incorporated  by reference to the Company’s Current Report on Form 8-K dated  March 22, 2006.                                                                                                |
| (II) |   | Previously filed with the Commission, incorporated  by reference to the Company’s Current Report on Form 10-K/A dated  May 1, 2006.                                                                                                |
| (JJ) |   | Previously filed with the Commission, incorporated  by reference to The Company’s Current Report on Form 8-A/A dated May 4,  2006.                                                                                                 |

 

52

----

**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/ JOSEPH L.FISCHER |
|                    |                                       | Joseph L. Fischer |
|                    | * *                                   | *Interim  Chief Executive Officer* |
| Date: May 10, 2006 |                                       |   |
|                    |                                       |   |
|                    | By:                                        | /s/ MICHAEL J. HOWERTON |
|                    |                                       | Michael J.  Howerton |
|                    | * *                                   | *Chief  Financial Officer* |
| Date: May 10, 2006 |                                       |   |

 

53

----