UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



Form 10-Q

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2008o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition period
from                             to


Commission file number 0-19612



ImClone Systems Incorporated(Exact name of registrant as specified in its charter)

Delaware(State or other jurisdiction of
incorporation or organization)

04-2834797(IRS Employer
Identification No.)180 Varick Street, New York, NY(Address of principal executive offices)

10014(Zip Code)(212) 645-1405(Registrant's telephone number, including area code)Not Applicable(Former name, former address and former fiscal year, if changed since last report)




Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of "accelerated filer," "large accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company o


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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of
November 1, 2008

Class

Outstanding as of November 1, 2008Common Stock, par value $0.001

88,851,674 Shares




---



IMCLONE SYSTEMS INCORPORATED
INDEX

PART IFINANCIAL INFORMATIONItem 1.

Financial Statements

1Unaudited Consolidated Balance SheetsSeptember 30, 2008 and
December 31, 2007

1Unaudited Consolidated Statements of OperationsThree months and Nine months ended September 30, 2008 and 2007

2Unaudited Consolidated Statement of Stockholders' Equity and Comprehensive IncomeNine months ended September 30, 2008

3Unaudited Consolidated Statements of Cash FlowsNine months ended September 30, 2008 and 2007

4Notes to Unaudited Consolidated Financial Statements

5Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

23Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38Item 4.

Controls and Procedures

40PART IIOTHER INFORMATIONItem 1.

Legal Proceedings

41Item 1A.

Risk Factors

42Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44Item 3.

Defaults Upon Senior Securities

44Item 4.

Submission of Matters to a Vote of Security Holders

44Item 5.

Other Information

45Item 6.

Exhibits

45Signatures

46


i

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PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share and share data)

(Unaudited)

September 30,
2008

December 31,
2007ASSETSCurrent assets:Cash and cash equivalents

$
816,814

$
602,227Securities available for sale


204,652


304,534Prepaid expenses


2,914


3,632Amounts due from corporate partners


90,193


95,838Inventories


139,782


116,153Deferred income taxes, net


14,169


14,582Deferred financing costs, net


2,321


Other current assets


9,492


11,696Total current assets


1,280,337


1,148,662Property, plant and equipment, net


393,330


397,682Deferred financing costs, net





5,105Deferred income taxes, net


41,936


82,043Securities available for sale


84,613


109,060Other assets


29,477


26,707Total assets

$
1,829,693

$
1,769,259LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Accounts payable (including $142 and $1,387 due Bristol-Myers Squibb Company ("BMS") at September 30, 2008 and December 31, 2007, respectively)

$
28,211

$
30,528Accrued expenses (including $5,832 and $1,758 due BMS at September 30, 2008 and December 31, 2007, respectively)


78,861


54,374Current portion of deferred revenue


98,418


107,182Current portion of convertible notes payable


600,000


Other current liabilities


5,362


4,573Total current liabilities


810,852


196,657Deferred revenue, less current portion


107,648


176,605Convertible notes payable





600,000Other liabilities


14,192


12,208Total liabilities


932,692


985,470Commitments and contingencies (Note 9)Stockholders' equity:Preferred stock, $1.00 par value; authorized 4,000,000 shares; reserved 1,200,000 series B participating cumulative preferred stock, none issued or
outstanding





Common stock, $0.001 par value; authorized 200,000,000 shares; issued 89,603,661 and 87,314,181 at September 30, 2008 and December 31, 2007,
respectively; outstanding 88,612,596 and 86,323,116 at September 30, 2008 and December 31, 2007, respectively


90


87Additional paid-in capital


992,431


893,613Accumulated deficit


(71,451
)

(30,478
)Treasury stock, at cost; 991,065 at September 30, 2008 and December 31, 2007, respectively


(28,754
)

(28,754
)Accumulated other comprehensive income (loss):Net unrealized gain (loss) on securities available for sale


4,675


(50,679
)Foreign currency translation adjustments


10


Total stockholders' equity


897,001


783,789Total liabilities and stockholders' equity

$
1,829,693

$
1,769,259


See accompanying notes to consolidated financial statements.

1

---



IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(Unaudited)

Three Months Ended September 30,

Nine Months Ended September 30,2008

2007

2008

2007Revenues:Royalties

$
90,205

$
87,853

$
282,955

$
242,360License fees and milestones


25,771


19,226


77,721


81,965Manufacturing


25,979


21,973


72,812


61,456Collaborative agreement reimbursements


23,112


18,495


60,738


53,698Total revenues


165,067


147,547


494,226


439,479Operating expenses:Research and development


61,551


47,241


165,098


142,489Selling, general and administrative


24,323


21,894


71,615


57,798Royalties


21,624


19,324


69,497


55,098Cost of manufacturing revenue


24,294


22,256


68,223


59,110Merger related expenses


2,750





2,750


Litigation settlement





50,000


17,500


50,000Total operating expenses


134,542


160,715


394,683


364,495Operating income (loss)


30,525


(13,168
)

99,543


74,984Other income (expense):Interest and other income


6,541


13,369


23,209


39,203Interest expense


(2,990
)

(3,100
)

(8,972
)

(9,062
)Loss on impairment of securities available for sale


(15,366
)




(102,044
)

Gain on insurance settlement





3,775





3,775Other income (expense), net


(11,815
)

14,044


(87,807
)

33,916Income before income taxes


18,710


876


11,736


108,900Income tax provision


18,535


1,792


52,709


49,156Net income (loss)

$
175

$
(916
)
$
(40,973
)
$
59,744Earnings (loss) per common share:Basic

$
0.00

$
(0.01
)
$
(0.47
)
$
0.70Diluted

$
0.00

$
(0.01
)
$
(0.47
)
$
0.69Shares used in calculation of earnings (loss) per common share:Basic


87,780


85,957


86,903


85,649Diluted


90,170


85,957


86,903


86,568


See
accompanying notes to consolidated financial statements.

2

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IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

For the Nine Months Ended September 30, 2008

(in thousands, except share data)

(Unaudited)

Accumulated
Other
Comprehensive
Income
(Loss)Preferred Stock

Common Stock





Treasury StockAdditional
Paid-in
Capital

Accumulated
DeficitShares

Amount

Shares

Amount

Shares

Amount

TotalBalance at December 31, 2007




$



87,314,181

$
87

$
893,613

$
(30,478
)

991,065

$
(28,754
)
$
(50,679
)
$
783,789Options exercised and restricted shares issued








2,265,851


3


74,838














74,841Issuance of shares through employee stock purchase plan








23,629





880














880Share-based compensation expense














11,478














11,478Tax benefit of stock options














11,622














11,622Comprehensive income:Net loss

















(40,973
)










(40,973
)Other comprehensive income:Unrealized loss on securities available for sale arising during the year


























(46,690
)

(46,690
)Reclassification adjustment for recognized losses included in income


























102,044


102,044Foreign currency translation adjustments


























10


10Total other comprehensive income


























55,364


55,364Comprehensive income





























14,391Balance at September 30, 2008




$



89,603,661

$
90

$
992,431

$
(71,451
)

991,065

$
(28,754
)
$
4,685

$
897,001


See accompanying notes to consolidated financial statements.

3

---



IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

Nine Months Ended
September 30,2008

2007Cash flows from operating activities:Net income (loss)

$
(40,973
)
$
59,744Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


24,989


23,593Amortization of deferred financing costs


2,784


2,784Share-based compensation


11,478


4,480Tax effect of share-based compensation


(11,622
)

(14,040
)Loss on impairment of securities available for sale


102,044


Loss on disposal of fixed assets


8


3,969Deferred income taxes


40,520


31,273Other





40Changes in:Prepaid expenses


718


813Amounts due from corporate partners


5,645


(14,610
)Inventories


(28,435
)

(15,179
)Other current assets


2,204


(1,121
)Other assets


359


(14,037
)Accounts payable


(2,317
)

(1,997
)Accrued expenses


34,893


1,753Share-based compensation, less current portion





473Other current liabilities


789


3,301Deferred revenue


(77,721
)

(75,145
)Other liabilities


1,984


375Net cash provided by (used in) operating activities


67,347


(3,531
)Cash flows from investing activities:Acquisitions of property, plant and equipment


(18,980
)

(8,772
)Purchases of securities available for sale


(171,561
)

(1,229,228
)Proceeds from sale of securities available for sale


7,000


1,346,750Proceeds from maturities of securities available for sale


242,200


249,820Net cash provided by investing activities


58,659


358,570Cash flows from financing activities:Proceeds from exercise of stock options


76,072


23,620Proceeds from issuance of common stock under the employee stock purchase plan


880


556Tax effect of share-based compensation


11,622


14,040Proceeds from sale of treasury stock





500Net cash provided by financing activities


88,574


38,716Effect of exchange rates on cash and cash equivalents


7


Net increase in cash and cash equivalents


214,587


393,755Cash and cash equivalents at beginning of period


602,227


20,568Cash and cash equivalents at end of period

$
816,814

$
414,323Supplemental cash flow information:Cash paid for:Interest, net of amounts capitalized

$
4,125

$
4,215Income taxes

$
105

$
3,722Non-cash investing and financing activities:Change in net unrealized loss in securities available for sale

$
46,690

$
13,826Value of restricted stock units not issued in lieu of withholding taxes

$
1,231

$



See accompanying notes to consolidated financial statements.

4

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Business Overview and Basis of Presentation

The accompanying consolidated financial statements of ImClone Systems Incorporated ("ImClone Systems" or the "Company") as of September 30, 2008 and for the three and nine months
ended September 30, 2008 and 2007 are unaudited. The accompanying unaudited consolidated balance sheets, statements of operations, statement of stockholders' equity and comprehensive income and
statements
of cash flows have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and in conjunction with the rules and regulations of the
Securities and Exchange Commission (SEC). Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. The financial statements reflect all adjustments,
consisting only of normal, recurring adjustments, which are in the opinion of management, necessary for a fair presentation for the interim periods. Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and liabilities and related revenue and expense accounts and the disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with GAAP. Actual results could differ materially from those estimates. These financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2007, as filed with the SEC.

As
further described in Note 12, on October 6, 2008, the Company entered into a merger agreement with Eli Lilly and Company (Lilly). Under the terms of the merger
agreement, Lilly will acquire all of the outstanding shares of common stock of the Company for $70 per share in cash. The merger agreement is subject to certain regulatory approvals and is expected to
close either in the fourth quarter of 2008 or the first quarter of 2009.

The
results of operations for the interim periods are not necessarily indicative of results to be expected for the entire fiscal year or any other period.

Certain
previously reported amounts have been reclassified to conform with current period presentation. Clinical and regulatory expenses that were previously reported separately in the
Consolidated Statements of Operations for the three months and nine months ended September 30, 2007 have been included within Research and development expenses. Certain expenses of
approximately $1.1 million and $3.1 million for the three months and nine months ended September 30, 2007, respectively, that were previously reported within Research and
development expenses have been reclassified to Selling, general and administrative expenses.

The
Company is a biopharmaceutical company whose mission is to advance oncology care by developing and commercializing a portfolio of targeted treatments designated to address the
medical need of patients with cancer. Our commercially available product, ERBITUX® (cetuximab) binds specifically to epidermal growth factor receptor (EGFR, HER1,
c-ErbB-1) on both normal and tumor cells, and competitively inhibits the binding of epidermal growth factor (EGF) and other ligands, such as transforming growth factor-alpha.
We are conducting, and in some cases have completed, clinical studies evaluating ERBITUX for broader use in colorectal cancer, squamous cell carcinoma of the head and neck (SCCHN), for the potential
treatment of lung cancer, as well as other potential indications. The Company does not operate separate lines of business or separate business entities and does not currently maintain any significant
operations outside the U.S. Accordingly, the Company does

5

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

not
prepare discrete financial information with respect to separate product areas or by location and does not have separately reportable segments.

Impact of Recent Accounting Pronouncements

In November 2007, the Emerging Issues Task Force reached a consensus on Issue No. 07-1, "Accounting for
Collaborative Arrangements." This Issue establishes accounting for costs incurred and revenues generated on sales to third parties should be reported by partners to joint development agreements in
each of their respective income statements, how sharing payments made to or received by a partner pursuant to a Collaboration Agreement should be presented in the income statement, and disclosures
related to the combined sales and expenses of the partners to a Collaboration Agreement that are used to compute the payments made/received. This Issue will be effective for fiscal years beginning
after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating
the effect this Issue will have on its consolidated financial statements.

In
May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled
in Cash Upon Conversion (Including Partial Cash Settlement)" (FSP 14-1). FSP 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlements) should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible borrowing rate when interest
cost is recognized in subsequent periods. FSP 14-1 is effective for financial statements issued for fiscal years beginning after December 31, 2008, and interim periods within those
fiscal years. The Company is evaluating the effect that FSP 14-1 will have on its consolidated financial statements.

Comprehensive Income (Loss)

The following table reconciles net income (loss) to comprehensive income (loss): (in thousands)

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007Net income (loss)

$
175

$
(916
)
$
(40,973
)
$
59,744Other comprehensive income (loss):Unrealized loss on securities available for sale during the period


(6,905
)

(15,286
)

(46,690
)

(13,826
)Reclassification adjustment for recognized losses on securities available for sale during the period


15,366





102,044


Foreign currency translation adjustments


10





10


Total other comprehensive income (loss)


8,471


(15,286
)

55,364


(13,826
)Total comprehensive income (loss)

$
8,646

$
(16,202
)
$
14,391

$
45,918


6

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) Fair Value Measurements

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 157, "Accounting for Fair Value Measurements" (SFAS 157), on January 1, 2008.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
(an exit price). The standard outlines a valuation framework and creates a fair value hierarchy in order to increase the consistency and comparability of fair value measurements and the related
disclosures. Under GAAP, certain assets and liabilities must be measured at fair value, and SFAS 157 details the disclosures that are required for items measured at fair value. In February
2008, the FASB issued Staff Position No. FAS 157-2 (FSP 157-2), which delays the effective date of SFAS 157 for one year for all nonfinancial assets and
liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not have nonfinancial assets and nonfinancial liabilities
that are required to be measured at fair value on a recurring basis. Based on this guidance, the Company expects to adopt the provisions of SFAS 157 as related to nonfinancial assets and
nonfinancial liabilities, effective January 1, 2009 and this adoption is not expected to have a material impact on the Company's financial statements.

In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" (FSP
157-3). FSP 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued.
The Company adopted the provisions of FSP 157-3 as of September 30, 2008.

Under
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159), entities are permitted to choose to measure many financial
instruments and certain other items at fair value. The Company did not elect the fair value measurement option under SFAS 159 for our financial assets or liabilities.

Financial
assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:



7

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) Fair Value Measurements (Continued)

In
accordance with the fair value hierarchy described above, the following table shows the fair value of our securities available for sale that are required to be measured at fair value
as of September 30, 2008: (in thousands)

Fair Value Measurement at Reporting Date UsingDescription

Total as of
September 30,
2008

Quoted Prices in
Active Markets
for Identical
Assets (Level 1)

Significant
Other
Observable
Inputs (Level 2)

Significant
Unobservable
Inputs
(Level 3)Securities available for sale

$
204,652

$
44,963

$


$
159,689Securities available for sale, non-current


84,613








84,613Total

$
289,265

$
44,963

$


$
244,302


The
following table summarizes the changes in fair value for our Level 3 assets: (in thousands)

Fair Value Measurement of
Assets Using Level 3 InputsSecurities Available for
Sale, non-currentBalance at January 1, 2008

$
109,060Total gains (losses) (realized or unrealized)Included in earnings


(75,556
)Included in other comprehensive income


44,560Transfers into Level 3


166,538Redemptions of principal


(300
)Balance at September 30, 2008

$
244,302Total gains (losses) for the nine months ended September 30, 2008 included in earnings attributable to the change in unrealized gains or losses
(including other-than-temporary impairment) relating to assets still held at the reporting date

$
(75,556
)


As
of September 30, 2008, the Company has $161.4 million of principal invested in auction rate securities (ARS), of which $144.1 million represent interests in
synthetic collateralized debt obligations referencing portfolios of corporate bonds (CDOs), $5.1 million represents interests in floating rate surplus notes of captive insurance companies
(FRNs) and $12.2 million represents interests in student loans and student loan revenue bonds (Student Loans). These securities have long-term nominal maturities for which interest
rates are reset through a dutch-auction each month and these auctions had historically provided a liquid market for these securities. As a result of the continuing liquidity issues experienced in the
global credit and capital markets, these ARS have had continuing failed auctions; the CDOs and FRNs have been failing at auction since August 2007 and the Student Loans have been failing at auction
since March 2008. The estimated fair value of the CDOs and FRNs were $80.0 million and $2.7 million, respectively, as of September 30, 2008, which were determined based on
valuations performed by Pluris Valuation Advisors LLC (Pluris). The estimated fair value of the

8

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(2) Fair Value Measurements (Continued)

Student
Loans were $10.3 million as of September 30, 2008, which were determined based on valuations performed by Pluris. In October 2008, in accordance with the North American
Securities Administrators Association settlement, the Company was notified that the Student Loans would be and subsequently were repurchased by the investment bank that sold them to the Company at
100% of face value, or $12.2 million. Collectively, the fair value of the ARS of $94.9 million as of September 30, 2008 is significantly below the fair value at
December 31, 2007 of $121.7 million. While interest continues to be paid by the issuers of these securities, due to the severity of the decline in fair value and the duration of time for
which these securities have been in a loss position, the Company concluded that these securities experienced an other-than-temporarily decline in fair value and recorded
impairment charges of $69.1 million, $1.8 million, and zero related to these ARS in the first, second and third quarters of 2008, respectively. In October 2008, the CDOs and FRNs with a
cost basis of $149.2 million and a fair value $82.7 million as of September 30, 2008 had ratings ranging from A to BB- and have been classified as
long-term investments in the Company's Consolidated Balance Sheets given that these securities are illiquid until there is a successful auction for them, the timing of which is not
presently knowable. The Company also has investments in government agency bonds that are not impaired with a fair value of $10.3 million, based on actively traded markets, and are classified in
the table above as Level 1. In addition, the Company has investments in a money market fund with a cost basis of $154.0 million and a fair value of $149.4 million, which was based
on the last available net asset value quoted for the fund, and are
classified in the table above as Level 3. During the third quarter of 2008, the Company concluded that the money market fund had experienced an other-than-temporary
decline in fair value and recorded an impairment charge of $4.6 million. The fund has temporarily restricted redemptions, and therefore, the Company has reclassified this amount from Cash and
cash equivalents to Securities available for sale as of September 30, 2008. On October 31, 2008, the Company received cash of $78.2 million as a partial redemption of the
investment balance in this fund.

As
of September 30, 2008, the Company has equity securities with an original cost basis of $61.2 million that have a fair value of $34.7 million (using
Level 1 inputs), representing a decline in fair value of $26.5 million. During the first and third quarters of 2008, the Company determined that the declines in fair value were
other-than-temporary and accordingly, the Company recorded impairment charges of approximately $15.8 million and $10.7 million, respectively. In making these
determinations the Company considered a number of factors, including the nature of the investment, the cause of the decline in fair value, the severity and duration of the decline in fair value, the
financial position and prospects of the company whose securities are held, analyst reports, as well as other factors. The fair value of the Company's equity securities was determined using the
September 30, 2008 closing market price of the securities (Level 1 inputs).

Changes
in the fair values of securities available for sale deemed to be temporary are included in the Company's Consolidated Balance Sheets as Net unrealized gain (loss) on securities
available for sale which is included within Accumulated other comprehensive income (loss).

The
fair value of the Company's 13/8% convertible senior notes of $600.0 million was approximately $577.5 million and $564.8 million at
September 30, 2008 and December 31, 2007, respectively, based on their quoted price in the active market for this debt instrument.

9

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(3) Inventories

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

September 30,
2008

December 31,
2007Raw materials and supplies

$
18,799

$
19,357Work in process


87,449


79,859Finished goods


38,340


16,937Total

$
144,588

$
116,153


In
June 2006, the Company began producing ERBITUX for commercial use at its multiple product manufacturing facility (BB50), located in Branchburg, New Jersey. In August 2007, the Company
received approval from the FDA for the manufacture of ERBITUX in BB50, and therefore was able to sell the ERBITUX inventory produced in BB50. In July 2007, the Company transitioned its BB50 plant from
the production of ERBITUX to the production of pipeline products and has expensed the cost of manufacturing these products as Research and development expense.

The
Company has produced a mix of ERBITUX and pipeline products in BB50 during 2008. In February 2008, the Company transitioned BB50 to the production of ERBITUX and subsequently during
the third quarter of 2008 began the transition back to the production of pipeline products. This facility is approved by the FDA as a single-product manufacturing facility for the production of
ERBITUX. Therefore, we are required to file a supplemental biologics license application with the FDA for approval of the procedures and controls in the operation of BB50 as a multi-product
manufacturing facility, which we did in May 2008 and anticipate receiving approval by the end of 2008. Since the initial review period of thirty days has passed we are allowed to sell this product
prior to approval, however, there is no assurance that the FDA will approve these procedures and controls in the operation of BB50 as a multi-product manufacturing facility. As of September 30,
2008, the Company has capitalized approximately $49.8 million related to the costs of producing ERBITUX in BB50 during 2008. The Company has sold approximately $3.8 million worth of this
inventory to BMS which could be returned to us in the event of an unfavorable determination by the FDA. The Company also has capitalized an additional $31.1 million of ERBITUX inventory related
to a change in raw material sourcing that requires regulatory approval before it can be sold. The Company filed for the required regulatory approvals with the FDA in May 2008 and anticipates receiving
approval by the end of 2008. Since the initial review period of thirty days has passed we are allowed to sell this product prior to approval, however, there is no assurance that the FDA will approve
this product for distribution. At September 30, 2008, the Company has capitalized approximately $4.8 million of ERBITUX that is being filled at a BMS facility that must file for FDA
approval before the finished product can be sold. This amount is classified as long-term inventory and included in Other assets at September 30, 2008, as it is not expected to be
available for sale within one year. Management expects the total capitalized costs of ERBITUX to be fully realizable.

10

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(4) Property, Plant and Equipment

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

September 30,
2008

December 31,
2007Land

$
4,899

$
4,899Building


284,791


283,415Leasehold improvements


24,516


24,369Machinery and equipment


179,971


176,109Furniture and fixtures


7,222


7,016Construction in progress


40,572


27,237Total cost


541,971


523,045Less accumulated depreciation


(148,641
)

(125,363
)Property, plant and equipment, net

$
393,330

$
397,682


In
the first quarter of 2007, the Company determined that it was not cost effective to develop its Spring Street facility to house its Research organization. As a result, the Company
recorded a write-off of approximately $3.6 million related to design and engineering costs associated with this facility. This write-off is included in Research and
development expenses in the Company's Statement of Operations for the nine months ended September 30, 2007. The Company is in the process of evaluating alternative uses for this facility.

The
process of preparing consolidated financial statements in accordance with GAAP requires the Company to evaluate the carrying values of its long-lived assets. The
recoverability of the carrying values of long-lived assets depends on the Company's ability to earn sufficient returns on ERBITUX. Other than the asset impairment discussed above, based on
management's current estimates, the Company expects to recover the carrying value of such assets.

(5) Share-Based Compensation Plans

On February 15, 2008, the Company awarded, for no consideration, 296,719 Restricted Stock Units (RSU) to its employees under its 2006 Stock Incentive Plan (the "06 Plan"). The
grant date fair value of the Company's RSU awards was calculated using the closing market price of the Company's common stock as listed on the Nasdaq Global Select Market on February 15, 2008.
Except as discussed in Note 12, the RSU vest 331/3% annually over the three-year vesting period, with the exception of 30,000 RSU that cliff-vest at the
end of three years.

11

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) Share-Based Compensation Plans (Continued)

RSU
activity for the nine months ended September 30, 2008 is summarized as follows:

Number of
Units

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic Value(in thousands)Outstanding at December 31, 2007


255,975Granted


296,719Vested


(82,849
)Forfeitures


(32,384
)Outstanding at September 30, 2008


437,461


1.33

$
27,298Expected to vest


380,833


1.29

$
23,764


The
grant date fair values of the RSU was $39.06 and $29.84 for grants issued during the nine months ended September 30, 2008 and 2007, respectively. The aggregate intrinsic value
of RSU outstanding as of September 30, 2008 is calculated as the number of units multiplied by the closing market price of our common stock on that date, which was $62.40.

In
addition to the RSU discussed above, the Company also granted stock options for promotions and to newly hired employees. The activity related to stock options for the nine months
ended September 30, 2008 is summarized as follows:

Number of
Options

Weighted
Average
Exercise Price
Per Share

Weighted
Average
Remaining
Contractual
Term (Years)

Aggregate
Intrinsic Value(in thousands)Outstanding at December 31, 2007


9,614,528

$
39.36Granted


1,027,405

$
47.10Exercised


(2,212,701
)
$
34.38Forfeitures


(178,057
)
$
41.50Outstanding at September 30, 2008


8,251,175

$
41.61


5.57

$
174,792Vested and expected to vest


7,895,736

$
41.69


5.42

$
166,731Exercisable at September 30, 2008


5,988,543

$
42.03


4.30

$
124,854


The
weighted average fair value of options granted during the three months ended September 30, 2008 and 2007 was $17.20 and $14.34, respectively. The weighted
average fair value of options granted during the nine months ended September 30, 2008 and 2007 was $17.09 and $14.77, respectively. The aggregate intrinsic value of options outstanding at
September 30, 2008 is calculated as the difference between the exercise price of the options and the market price of the Company's common stock for the options that had exercise prices that
were lower than the market price of our common stock on that date. The total intrinsic value of options exercised during the three months ended September 30, 2008 and 2007 was
$56.4 million and $4.2 million, respectively, determined as of the date of exercise. The total intrinsic value of options exercised during the nine months ended September 30, 2008
and 2007

12

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(5) Share-Based Compensation Plans (Continued)

was
$60.5 million and $15.6 million, respectively, determined as of the date of exercise. As discussed in Note 12, vesting of all outstanding stock options will accelerate in
connection with the completion of the proposed merger with Lilly.

In
February 2008, the Company's Board of Directors adopted the ImClone Systems Incorporated 2008 Employee Stock Purchase Plan (the "ESPP"), subject to shareholders' approval, which was
received in September 2008. The ESPP allows eligible employees to purchase shares of the Company's common stock through payroll deductions at the end of six-month offering periods, on
April 1 and October 1 of each year. To be eligible, an individual must be an employee, work more than 20 hours per week for at least five months per calendar year and not own
greater than 5% of the Company's common stock. Pursuant to the ESPP, the Company has reserved 1,000,000 shares of common stock for issuance. Such shares may be newly issued shares or shares reacquired
in private transactions or open market purchases. Prior to the first day of each six-month offering period, each eligible employee may elect to participate in the ESPP. The participant is
granted an option to purchase a number of shares of common stock determined by dividing each participant's contribution accumulated prior to the last day of the six-month offering period
by the purchase price. The purchase price will be the lesser of (i) 85% of the fair market value of the common stock on the last day of the offering period or (ii) 85% of the fair market
value on the first day of the offering period. The participant has the ability to withdraw from the ESPP at any time at least 15 days prior to the last day of the six-month offering
period. An employee may purchase stock from the accumulation of payroll deductions up to the lesser of 15% of such employee's compensation or $25,000 in aggregate purchase price, per year.

(6) Earnings Per Common Share

Basic earnings per common share (EPS) is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed by
dividing net income by the weighted-average number of common shares outstanding during the period increased to include all additional common shares that would have been outstanding assuming
potentially dilutive common share equivalents had been issued. Dilutive common share equivalents include (1) the dilutive effect of in-the-money shares related to stock
options, which is calculated based on the average share price for each period using the treasury stock method; (2) the conversion of convertible debt which is calculated using an
"if-converted" basis; and (3) the dilutive effect of RSU which is calculated under the treasury stock method. Under the treasury stock method, the exercise price of an option, the
average amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in
capital, if any, when the option is exercised, are assumed to be used to repurchase shares in the current period. In addition, in computing the dilutive effect of convertible debt, the numerator is
adjusted to add back the after-tax amount of interest recognized in the period. Under the treasury stock method for RSU, the average amount of compensation cost, if any, for future service
that the Company has not yet recognized, and the amount of tax benefits that would be recorded in additional paid-in capital, if any, are assumed to be used to repurchase shares in the
current period. For the three months ended September 30, 2008 and 2007, there were an aggregate of 965,757 and 9,894,906, respectively, potential common shares related to share-based
instruments, excluded from the diluted EPS computation because their inclusion would have had an anti-dilutive effect. For the nine months ended September 30, 2008 and 2007, there
were an aggregate of 9,928,756 and 7,995,161, respectively,

13

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(6) Earnings Per Common Share (Continued)

potential
common shares related to share-based instruments, excluded from the diluted EPS computation because their inclusion would have had an anti-dilutive effect. For the three and nine
months ended September 30, 2008 and 2007, there was an additional 6,336,466 potential common shares, which are attributable to the convertible subordinated notes, excluded from the diluted EPS
computation because their inclusion would have had an anti-dilutive effect.

Basic
and diluted EPS were computed using the following: (in thousands, except per share data)

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

2008

2007EPS NumeratorBasic:Net Income (Loss)

$
175

$
(916
)
$
(40,973
)
$
59,744EPS DenominatorBasic:Weighted-average number of shares of common stock outstanding


87,780


85,957


86,903


85,649EPS NumeratorDiluted:Net Income (Loss)

$
175

$
(916
)
$
(40,973
)
$
59,744Adjustment for interest, net of amounts capitalized and income tax effect











Net income (loss), adjusted

$
175

$
(916
)
$
(40,973
)
$
59,744EPS DenominatorDiluted:Weighted-average number of shares of common stock outstanding


87,780


85,957


86,903


85,649Effect of dilutive securities:Stock options


2,169








864Restricted stock units


221








55Convertible subordinated notes











Dilutive potential common shares


2,390








919Weighted-average common shares and dilutive potential common shares


90,170


85,957


86,903


86,568Basic earnings (loss) per common share

$
0.00

$
(0.01
)
$
(0.47
)
$
0.70Diluted earnings (loss) per common share

$
0.00

$
(0.01
)
$
(0.47
)
$
0.69


(7) Taxes

The Company's annual effective income tax rate for 2008 is approximately 47%, excluding the effect of any discrete (benefits) charges and the effect of impairment charges of
approximately $102.0 million on investments, for which no tax benefit has been taken due to the Company's expected inability to utilize capital losses. During the three months ended
September 30, 2008 and 2007, excluding the effect of impairment charges, the Company recognized discrete charges (benefits) of approximately $0.3 million and $(0.8) million,
respectively, related to certain deferred items. During the nine months ended September 30, 2008 and 2007, excluding the effect of impairment charges, the Company recognized discrete (benefits)
charges of approximately $(0.8) million and $4.0 million, respectively, related to certain deferred items. The difference between the statutory rate and the

14

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(7) Taxes (Continued)

Company's
expected annual effective income tax rate primarily relates to state taxes. Actual cash tax payments in 2008 are estimated to be less than $0.5 million. The Company recognizes both
interest and penalties accrued related to unrecognized tax benefits as elements of income tax expense in the Consolidated Statements of Operations. During the three months ended September 30,
2008 and 2007, the Company recorded approximately $260,000 and $229,000, respectively, of interest and penalties. During the nine months ended September 30, 2008 and 2007, the Company recorded
approximately $780,000 and $857,000, respectively, of interest and penalties.

The
Company is subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The statute of limitations on the Company's federal income tax returns through
2002 has expired. The statute of limitations on the Company's New Jersey income tax returns through 2003 has expired.

(8) Collaborative Agreements

The
following represents an update of the Company's contractual relationship with Merck KGaA during the nine months ended September 30, 2008. For a more detailed description of
the Company's contractual relationship, reference Note 10(a) and (c) of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2007.

On
February 27, 2008, the Company received verbal notification from Merck KGaA that Merck KGaA was taking the position that the Yeda Settlement Agreement of December 7,
2007 resulted in the breach of one of the Company's representations in the Development License Agreement and that, therefore, Merck KGaA was no longer obligated to reimburse a portion of the royalty
payments paid by ImClone to Yeda and Sanofi-Aventis following the date of that agreement. Merck KGaA has subsequently made payment for the first, second and third quarters of 2008 royalty
reimbursement. Merck KGaA has communicated to the Company that any such payments are being made under protest. On September 22, 2008, the Company received correspondence from counsel for Merck
KGaA dated September 20, 2008 commencing an arbitration proceeding between Merck KGaA and the Company. Merck KGaA is asserting a claim of approximately $10.4 million, as well as other
unspecified damages relating to an alleged dimunition of value of the Company's Development and License Agreement with Merck KGaA. The Company has asserted a counterclaim against Merck KGaA. In
general, the counterclaim seeks damages based upon Merck KGaA's breach of certain obligations owed to the Company with respect to the Company's defense and settlement of Yeda's claims. These damages
include, among other things, one-half of the Company's expenses in defending against Yeda's claims as well as one-half of the $60 million paid by the Company to secure Merck KGaA's rights in
the Yeda settlement. The Company has not recognized revenue of approximately $4.8 million for royalty reimbursements for the nine months ended September 30, 2008, pending a final
resolution with Merck KGaA and has included that amount in Accrued expenses in its consolidated balance sheet at
September 30, 2008. The Company does not believe that the settlement with Yeda altered Merck KGaA's obligation to pay us the royalty reimbursement and will vigorously defend against the claims
asserted. The Company has a liability due Merck KGaA of approximately $605,000 and $2.2 million as of September 30, 2008 and December 31, 2007, respectively, which does not
include the amount of royalty reimbursements received from Merck KGaA under protest as discussed above.

15

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(8) Collaborative Agreements (Continued)

The
following represents an update of the Company's contractual relationship with BMS during the nine months ended September 30, 2008. For a more detailed description of the
Company's contractual relationship, reference Note 10(b) and (c) of the Notes to the Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2007. On September 22, 2008, John E. Celentano, a BMS-appointed director resigned from the Company's Board
of Directors.

The
Company recorded expenses of approximately $2.6 million and $943,000 pursuant to cost sharing agreements with BMS for the three months ended September 30, 2008 and
2007, respectively and $7.6 million and $2.6 million for the nine months ended September 30, 2008 and 2007, respectively. The Company has also recorded expenses of $170,000 and
$601,000 for the three months ended September 30, 2008 and 2007, respectively, and $721,000 and $1.9 million for the nine months ended September 30, 2008 and 2007, respectively,
related to the agreements with respect to co-development of ERBITUX in Japan.

Pursuant
to the Commercial Agreement with BMS and our agreement with Merck KGaA, we had granted E.R. Squibb and Merck KGaA co-exclusive rights (together or without the
Company) to develop, distribute and promote ERBITUX in Japan. Subsequently, on October 12, 2007, the Company entered into agreements with Merck KGaA, Merck Serono Japan Company, Limited, E.R.
Squibb, Bristol-Myers K.K., and BMS for the co-development and co-commercialization of ERBITUX in Japan. Under the terms of the agreements, the Company, BMS, Merck KGaA, and
respective affiliates will collaborate on a joint effort to develop and, following regulatory approval, market ERBITUX in Japan for the treatment of EGFR-expressing mCRC, as well as for
the treatment of any other cancers the parties agree to pursue. BMS and Merck KGaA will utilize their respective sales forces in Japan, and the three companies will share development costs incurred
and profits/losses realized as a result of this collaboration. Merck Serono Japan will distribute the product and record the sales for the collaboration. The agreements have a term of
twenty-five years; provided that either BMS or Merck KGaA may terminate the agreement without cause upon three months' notice if ERBITUX is not launched in Japan by December 31,
2009 and without cause upon six months' notice following the earlier of a launch of a biosimilar product in Japan and the tenth anniversary of the agreements. On July 16, 2008, the Company
announced that ERBITUX was approved for commercial sale in Japan for the treatment of advanced colorectal cancer. A price review was completed by Japan's Ministry of Health, Labor and Welfare and
product launch was in September 2008.

The
terms of these new agreements provide that Merck KGaA will receive 50% of the profit/loss from sales in Japan and bear 50% of the related development expense, and the Company and BMS
will each
receive 25% of the profit/loss and bear 25% of the related development expense. The sharing of profit/loss reflects the co-exclusive rights to ERBITUX in Japan previously granted by the
Company to Merck KGaA and BMS. In addition to its percentage of profit/loss, ImClone Systems will receive from Merck KGaA a royalty equal to 4.75% of total net sales in Japan. Any bulk ERBITUX
supplied by the Company pursuant to the agreements for use in Japan will be at its fully-burdened manufacturing cost.

16

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(8) Collaborative Agreements (Continued)

The
Company recorded expenses of approximately $1.8 million and $3.5 million for the three and nine months ended September 30, 2008, respectively, related to the
agreement with respect to commercialization in Japan.



Royalty revenue consists of the following: (in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,2008

2007

2008

2007BMSERBITUX

$
72,112

$
71,957

$
221,301

$
197,627Merck KGaAERBITUX


18,091


15,860


61,641


44,651Other


2


36


13


82Total royalties

$
90,205

$
87,853

$
282,955

$
242,360


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

Three Months Ended September 30,

Nine Months Ended September 30,2008

2007

2008

2007BMSERBITUX

$
25,503

$
18,958

$
76,918

$
81,460Merck KGaAERBITUX


268


268


803


505Total license fees and milestones

$
25,771

$
19,226

$
77,721

$
81,965


Manufacturing
revenue consists of the following: (in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,2008

2007

2008

2007BMSERBITUX

$
23,552

$
20,923

$
66,012

$
57,781Merck KGaAERBITUX


2,427


1,050


6,800


3,675Total manufacturing

$
25,979

$
21,973

$
72,812

$
61,456


17

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(8) Collaborative Agreements (Continued)

Collaborative
agreement reimbursements revenue consists of the following: (in thousands)

Three Months Ended September 30,

Nine Months Ended September 30,2008

2007

2008

2007BMSERBITUX:Drug supplied for clinical trials

$
3,059

$
2,736

$
6,936

$
7,875Clinical and regulatory expenses


6,988


7,040


19,863


14,430Selling, general and administrative expenses


292


387


973


878Royalty expenses


4,623


4,612


14,186


12,668Total BMS


14,962


14,775


41,958


35,851Merck KGaAERBITUX:Drug supplied for clinical trials


8,079


1,815


16,042


11,477Selling, general and administrative expenses


2


1


184


89Royalty expenses


69


1,904


2,554


5,681Total Merck KGaA


8,150


3,720


18,780


17,247Other











600Total collaborative agreement reimbursements

$
23,112

$
18,495

$
60,738

$
53,698


Amounts
due from corporate partners consists of the following: (in thousands)

September 30,
2008

December 31,
2007BMSERBITUX

$
66,939

$
74,326Merck KGaAERBITUX


23,254


21,512Total amounts due from corporate partners

$
90,193

$
95,838


Deferred
revenue consists of the following: (in thousands)

September 30,
2008

December 31,
2007BMSERBITUX commercial agreement

$
195,160

$
272,078Merck KGaAERBITUX development and license agreement


10,906


11,709Total deferred revenue


206,066


283,787Less current portion


(98,418
)

(107,182
)Total long term deferred revenue

$
107,648

$
176,605


18

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) Commitments and Contingencies

In December 2002, Opposition Proceedings seeking to revoke EP 0 667 165 were brought by Scripps Research Institute, Amgen Inc., Abgenix, Inc., and
YM Biosciences Inc. An Opposition Proceeding is an administrative process, the outcome of which may be that the patent will be revoked. The Opposition Proceedings were suspended pending a final
determination of the entitlement cases in Europe and are yet to be formally recommenced.

On
May 2, 2007, the Company filed an Opposition in the European Patent Office regarding EP 1,058,562 B1, which is a patent directed to, inter alia, the use of either radiation or
chemotherapy in concert with an EGFR antibody that inhibits receptor dimerization. The patent is assigned to the University of Pennsylvania. Oppositions to that European Patent have also been filed by
Amgen, Inc., Merck Patent GmbH, Oncoscience AG, Genmab AS and F. Hoffmann La-Roche AG. On April 9, 2008, the University filed a submission in response to the
Oppositions proposing a new set of claims. On October 11, 2008 and October 23, 2008, Genmab AS and Oncoscience AG, respectively, filed further submissions in answer to that response. The
Company, having had the advice of its patent counsel, plans to vigorously challenge the claims now proposed in this patent office administrative proceeding.

On
February 5, 2007, a complaint was filed against the Company by Abbott Laboratories (Abbott) in the U.S. District Court for the District of Massachusetts
(07-cv-10216). This action alleged that the manufacture and sale of ERBITUX infringed U.S. Patent No. 5,665,578, which is owned by Abbott. On September 23, 2008,
a written settlement agreement was signed by the Company and Abbott to end all litigation pending between the parties. Under the terms of the settlement agreement, in October 2008, ImClone Systems
paid Abbott $17.5 million in cash for full and final settlement of all claims and counterclaims raised in these cases, including all claims related to U.S. Patent No. 5,665,578.

Other
than the Abbott settlement discussed above, no reserves have been established in the financial statements for any legal proceedings, because the Company does not believe that such
reserves are required to be established at this time under SFAS No. 5. However, if in a future period, events in any such legal proceedings render it probable that a loss will be incurred and
if such loss is reasonably
estimable at that time, the Company will establish such a reserve. Thus, it is possible that legal proceedings and settlements arising therefrom, if any, may have a material adverse impact on
operating results for that period, on our balance sheet, or both.

On
September 3, 2008, a suit was filed by Eugene Smith, a purported stockholder of the Company, individually and on behalf of others, against the Company, the Company's board of
directors and BMS in the Court of Chancery of the State of Delaware alleging, among other things, breach of fiduciary duty by the Company's board directors and that BMS aided and abetted those
breaches. The Company plans to vigorously defend against the claims asserted in this matter

On
September 22, 2008, the Company received correspondence from counsel for Merck KGaA dated September 20, 2008, commencing an arbitration proceeding between Merck and the
Company. Merck claims that the Yeda Settlement Agreement of December 7, 2007 resulted in the breach of one of the Company's representations in the Development and License Agreement with Merck,
and that, therefore, Merck was no longer obligated to reimburse a portion of the royalty payments paid by the Company to Yeda and Sanofi-Aventis following the date of that agreement. Merck is
asserting a claim of approximately $10.4 million as well as other unspecified damages relating to an alleged diminution

19

---



IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) Commitments and Contingencies (Continued)

of
value of the Company's Development and License Agreement with Merck. The Company has asserted a counterclaim against Merck KGaA. In general, the counterclaim seeks damages based upon
Merck KGaA's breach of certain obligations owed to the Company with respect to the Company's defense and settlement of Yeda's claims. These damages include, among other things, one-half of the
Company's expenses in defending against Yeda's claims as well as one-half of the $60 million paid by the Company to secure Merck KGaA's rights in the Yeda settlement. The Company does
not believe that the settlement with Yeda altered Merck KGaA's obligation to pay us the royalty reimbursement and will vigorously defend against the claims asserted.

On
October 22, 2008, State-Boston Retirement System, Ms. Roberta Feinstein, Mr. Howard Karp and Mr. Jay Herman, each a purported stockholder of the Company,
filed a class action complaint in the Supreme Court of the State of New York, County of New York, purportedly on behalf of themselves and all other stockholders of the Company, against the Company,
the members of the Company's board of directors, Eli Lilly and Company (Lilly) and Alaska Acquisition Corporation (Alaska). The complaint alleges, among other things, that the members of the Company's
board of directors breached their fiduciary duties to the Company's stockholders in connection with the transactions contemplated by the Merger Agreement with Lilly and Alaska and failed to provide
the Company's stockholders with material information to make an informed decision as to whether to tender their shares of the Company's common stock in Alaska's tender offer. In addition, the
complaint alleges that Lilly and Alaska knowingly aided and abetted the alleged wrongdoing of the Company's board of directors. The complaint seeks, among other relief, class action status, an order
preliminarily and permanently enjoining the defendants from proceeding with Alaska's tender offer, a judgment enjoining the defendants from consummating the tender offer and the merger until the
Company's Solicitation/Recommendation Statement on Schedule 14D-9 is supplemented to include certain additional information, and an award to plaintiffs of the costs of the action,
including reasonable attorneys' and experts' fees. In connection with the complaint, an Order to Show Cause was
filed by plaintiff's counsel requesting (i) expedited discovery for the production of documents by the defendants, (ii) depositions of representatives of the Company and J.P. Morgan, the
Company's financial advisor, and (iii) such other relief as the Court deems just and proper. On October 30, 2008, the Court denied Plaintiffs' motion to expedite discovery. The Company
plans to vigorously defend against the claims asserted in this matter.

In
October 2001, the Company entered into a sublease (the "Sublease") for a four-story building at 325 Spring Street, New York, New York, which includes approximately 100,000
square feet of usable space. The Sublease has a term of 22 years, followed by two five-year renewal option periods. In order to induce the sublandlord to enter into the Sublease,
the Company made a loan to the sublandlord in the principal amount of a $10.0 million note receivable, of which $7.5 million is outstanding as of September 30, 2008. The loan is
secured by a leasehold mortgage on the prime lease as well as a collateral assignment of rents by the sublandlord. The loan is payable by the sublandlord over 20 years and bears interest at
51/2% in years one through five, 61/2% in years six through ten, 71/2% in years eleven through fifteen and 81/2% in years sixteen through
twenty. In addition, the Company paid the owner a consent fee in the amount of $500,000. Effective March 1, 2005, the Company amended the Sublease to add an additional 6,500 square feet of
space upon all the same terms and conditions set forth in the Sublease. In connection with this amendment, the Company paid an up-front fee of

20

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(9) Commitments and Contingencies (Continued)

$1.7 million
which is being amortized to lease expense over the respective term of the Sublease. The future minimum lease payments remaining at September 30, 2008, are approximately
$42.2 million.

(10) Employee Benefit Plans



All employees of the Company who meet certain minimum age and period of service requirements are eligible to participate in a 401(k)
defined contribution plan. The 401(k) plan allows eligible employees to defer up to 25 percent of their annual compensation, subject to certain limitations imposed by federal law. The amounts
contributed by employees are immediately vested and non-forfeitable. Under the 401(k) plan, the Company, at management's discretion, may match employee contributions and/or make
discretionary contributions. Neither the employee contributions nor voluntary matching contributions are invested in the Company's securities. Total expense incurred by the Company was $568,000 and
$502,000 for the three months ended September 30, 2008 and 2007, respectively, and approximately $2.0 million and $1.6 million for the nine months ended September 30, 2008
and 2007, respectively.

(11) Convertible Notes Payable

During the second quarter of 2008, the Company reclassified its convertible notes payable to a current liability since the notes include a put provision whereby the holders can seek
repayment of the convertible notes payable from the Company in May 2009. The amount of the notes was $600.0 million at September 30, 2008 and December 31, 2007. For a more
detailed description of the Company's convertible notes payable, reference Note 8 "Long-term Debt" of the Notes to the Consolidated Financial Statements included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2007.

Under
the Registration Rights Agreement for these convertible notes, the Company could be subject to liquidated damages if the effectiveness of the registration statement covering the
convertible debt is not maintained at any time prior to the redemption of the convertible notes, the repayment of the convertible notes, or certain corporate events as defined in the convertible note
agreement. The Company believes the likelihood of such an event occurring is remote and, as such we have not recorded a liability as of September 30, 2008. In the unlikely event that it becomes
probable that we would have to pay liquidated damages under the Registration Rights Agreement, until a shelf
registration statement covering the convertible debt is again effective, the potential liquidated damages would be 0.25% of the outstanding amount of notes for the first 90 days and 0.50% of
the outstanding amount of notes thereafter. Such damages (i) would accrue only with respect to the shares of the Company's common stock that were not already sold by the holder (using the
registration statement or pursuant to SEC Rule 144) and that were not eligible for sale without a registration statement; (ii) would accrue only over the period during which the
registration statement was not effective; and (iii) would be settled in cash in accordance with the terms of the Registration Rights Agreement.

21

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(12) Subsequent Event

On October 6, 2008, the Company entered into a definitive merger agreement with Lilly and Alaska Acquisition Corporation (Alaska), a wholly-owned subsidiary of Lilly. Under
the terms of the merger agreement, Lilly has commenced a tender offer to purchase all outstanding shares of our common stock at a price of $70 per share in cash. The tender offer is conditioned upon,
among other things, at least a majority of our shares outstanding being tendered. Assuming that the tender offer is successful, the merger agreement provides that the tender offer will be followed by
a merger pursuant to which we would be acquired by Lilly.

The
tender offer commenced on October 14, 2008 and the merger is expected to be completed either in the fourth quarter of 2008 or the first quarter of 2009. The closing of the
tender offer and Lilly's obligation to pay for all shares tendered is subject to certain other conditions, including: the expiration or termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976; the absence of certain legal impediments to consummation of the tender offer; the continued accuracy of our representations and
warranties in the merger agreement (subject to a materiality standard); compliance in all material respects by us with our covenants in the merger agreement; the absence of any changes or events
arising since the date of the merger agreement that have had or would reasonably be expected to have, individually or in the aggregate, a material adverse
effect on us; and all required consents, approvals or authorizations of any governmental entity being obtained (subject to a materiality standard). A copy of the merger agreement and joint press
release announcing the transaction was filed as exhibits to a Form 8-K filed by us with the SEC on October 8, 2008. On November 3, 2008, the applicable waiting period
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 with respect to the tender offer expired. Unless extended by Lilly, the tender offer will expire at midnight at the end of
November 20, 2008. There are no assurances that the proposed transaction with Lilly will be consummated on the expected timetable, or at all. Under certain circumstances, we could be
potentially liable for costs for legal, accounting and investment banking expenses of up to $20 million, as well as a break-up fee of $150 million if the merger with Lilly is
not consummated.

Under
terms of the merger agreement, vesting on all outstanding restricted stock units and stock options will accelerate in connection with the completion of the proposed merger.

As
more fully discussed in Note 9, on October 22, 2008, State-Boston Retirement System, Ms. Roberta Feinstein, Mr. Howard Karp and Mr. Jay Herman, each
a purported stockholder of the Company, filed a class action complaint in the Supreme Court of the State of New York, County of New York, purportedly on behalf of themselves and all other stockholders
of the Company, against the Company, the members of the Company's board of directors, Lilly and Alaska.

22

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

The following discussion and analysis is provided to further the reader's understanding of the consolidated financial statements,
financial condition and results of operations of ImClone Systems in this Quarterly Report on Form 10-Q. This discussion should be read in conjunction with the consolidated financial
statements and the accompanying notes included in our filings with the SEC, including our 2007 Annual Report on Form 10-K. This discussion contains forward-looking statements based
upon current expectations that involve risk and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth below and under "Risk Factors" set forth in Part IIItem 1A and elsewhere in our 2007 Annual Report on
Form 10-K.

OVERVIEW

As further described in Note 12 of the notes to the consolidated financial statements, on October 6, 2008, the Company
entered into a merger agreement with Eli Lilly and Company (Lilly) and Alaska Acquisition Corporation (Alaska), a wholly-owned subsidiary of Lilly. Under terms of the merger agreement, Lilly will
acquire all of the outstanding shares of common stock of the Company for $70 per share in cash. The transactions contemplated by the merger agreement are subject to certain regulatory approvals and
are expected to close either in the fourth quarter of 2008 or the first quarter of 2009.

ImClone
Systems is a biopharmaceutical company whose mission is to advance oncology care by developing and commercializing a portfolio of targeted treatments designed to address the
medical needs of patients with cancer. Our commercially available product, ERBITUX® (cetuximab) binds specifically to epidermal growth factor receptor (EGFR, HER1,
c-ErbB-1) on both normal and tumor cells, and competitively inhibits the binding of epidermal growth factor (EGF) and other ligands, such as transforming growth factor-alpha.
We are conducting, and in some cases have completed, clinical studies evaluating ERBITUX for broader use in colorectal cancer, squamous cell carcinoma of the head and neck, and for the potential
treatment of lung cancer, as well as other potential indications, including esophageal, stomach, prostate, and bladder cancers.

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



23

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As
a result of our substantial investment in research and development, recent patent litigation settlements and losses on impairment of investments, we have incurred significant
operating losses and have an accumulated deficit of approximately $71.5 million as of September 30, 2008. We anticipate that our accumulated deficit will decrease in the future as we
earn revenues on commercial sales of ERBITUX and generate net income. There is no assurance that we will be able to continue to successfully manufacture, market or commercialize ERBITUX or that
potential customers will buy ERBITUX. We rely entirely on third-party manufacturers for filling and finishing services with respect to ERBITUX. If our current third-party manufacturers or critical raw
material suppliers fail to meet our expectations, we cannot be assured that we will be able to enter into new agreements with other suppliers or third party manufacturers without an adverse effect on
our business.

HIGHLIGHTS AND OUTLOOK

We have continued our progress in achieving key milestones in 2008 that will help us accelerate ERBITUX sales in 2009 and beyond.
Building on our steady sales growth in North America, we are seeking to expand the ERBITUX approved label within earlier stage settings and in non-small cell lung cancer (NSCLC). These
efforts include filing supplemental Biologic License Applications (sBLA) with the FDA based on registration-quality earlier-stage studies. In August 2008, we submitted an sBLA for
first-line head and neck cancer, based upon the EXTREME data, and we plan to file an sBLA for first-line NSCLC in the fourth quarter of 2008, based upon the FLEX data.

During
the third quarter of 2008, we achieved a major milestone in our efforts to maximize the global commercialization of ERBITUX with the approval we received in Japan for use in
treating patients with metastatic colorectal cancer. With this approval, ERBITUX is now approved for use in the world's three largest markets for colorectal cancer therapies. A pricing review has been
completed and the product was commercially launched in Japan in September. We look forward to further broadening the approved use of ERBITUX in Japan to include earlier stage settings and additional
tumor types in the future, including head and neck cancer.

We
are also planning to expand the approved use of ERBITUX in Europe and other countries through supplemental regulatory filings as we are doing in the U.S. The supplemental filing for
first-line head and neck cancer was submitted to the European Medicines Agency (EMEA) by our partner Merck KGaA in June 2008, for which they recently received a positive opinion from the
Committee for Medicinal Products for Human Use (CHMP), the scientific committee of the EMEA. The supplemental filing for first-line NSCLC was submitted to the EMEA by Merck KGaA in
September 2008. Additionally, our partner Merck KGaA received approval from the European Commission in July 2008 for its application to broaden the use of ERBITUX in metastatic colorectal cancer
including first-line treatment.

Another
milestone of note in our efforts to expand globally was the recent commercial launch of ERBITUX in Canada for advanced colorectal cancer. Additionally, Health Canada approved
ERBITUX for first-line treatment of head and neck cancer.

While
these activities highlight our progress in maximizing the potential of ERBITUX by expanding its use in the U.S. and around the world, we do not expect the impact of potential new
indications for ERBITUX in the U.S. to be seen until 2009 and beyond.

24

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ERBITUX and Pipeline Clinical Development Update

ERBITUX Clinical Development

Since the start of the third quarter, ImClone Systems has made a number of commercial, regulatory and clinical advancements with
ERBITUX.

ERBITUX
was commercially launched in Japan for use in treating patients with advanced or metastatic colorectal cancer (mCRC) in September 2008. ERBITUX is the only approved EGFR targeted
monoclonal antibody cancer therapy available for use in Japan.

ERBITUX
was commercially launched in Canada for use in the treatment of mCRC in October 2008. Additionally, Health Canada approved ERBITUX for use in combination with radiation therapy
for the initial treatment of locally or regionally advanced squamous cell carcinoma of the head and neck (SCCHN).

In
August 2008, ImClone Systems submitted an application to the U.S. Food and Drug Administration (FDA) to broaden the use of ERBITUX to include first-line treatment of
patients with recurrent and/or metastatic SCCHN. The FDA has accepted the sBLA for filing and priority review. Priority review status indicates that the FDA will aim to complete its review of the sBLA
within six months.

In
August 2008, the Company announced overall survival results from BMS CA225-099 (BMS-099), an open-label Phase 3 study of ERBITUX in
combination with a taxane and carboplatin in the first-line treatment of all histological subtypes of advanced non-small cell lung cancer (NSCLC). The results from this overall
survival analysis, a secondary endpoint, did not reach statistical significance. BMS-099, a
676-patient study, was not powered to detect an improvement in overall survival with the same degree of statistical precision as was the larger 1,125-patient pivotal FLEX
(First-line in Lung cancer with ErbituX) multinational Phase 3 study which showed that the addition of ERBITUX to platinum-based chemotherapy significantly increased overall
survival in the first-line treatment of patients with advanced NSCLC, when compared with platinum-based chemotherapy alone. Nonetheless, the BMS-099 survival results support
those of FLEX, of which overall survival was the primary endpoint. ImClone Systems plans to submit an sBLA to the FDA based on the FLEX study to broaden the use of ERBITUX to include
first-line treatment of patients with NSCLC.

In
September 2008, results from a Phase 3 trial of ERBITUX plus platinum-based chemotherapy in the first-line treatment of patients with recurrent and/or metastatic
SCCHN were published in the New England Journal of Medicine. Results of the study, known as EXTREME (ErbituX in first-line Treatment of REcurrent or MEtastatic head & neck cancer),
show that adding ERBITUX to a platinum-based chemotherapy in the first-line treatment of SCCHN resulted in statistically significant improvement in the primary endpoint of overall
survival, as well as secondary endpoints of progression-free survival and overall response rate. The EXTREME study is the basis for the ERBITUX sBLA for first-line head and
neck cancer currently under review by the FDA.

In
September 2008, the Company announced five-year overall survival data from the pivotal Phase 3 study examining ERBITUX combined with radiation in patients with
locally or regionally advanced SCCHN. Analysis of these five-year data demonstrates that the addition of ERBITUX to radiation therapy resulted in a significant increase in median overall
survival for patients with SCCHN when compared to radiation therapy alone. These data are consistent with results in the current head and neck labeling for ERBITUX, which include the median overall
survival rate.

In
September 2008, the Company announced an update from the previously reported positive Phase 3 CRYSTAL (Cetuximab combined with iRinotecan in first line therapY for metaSTatic
colorectAL cancer) study of ERBITUX plus FOLFIRI, an irinotecan-based chemotherapy, in patients with previously untreated metastatic colorectal cancer (mCRC). As reported in 2007, the
1,198-patient

25

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CRYSTAL
study met its primary endpoint of increasing progression-free survival, but the study did not demonstrate a statistically significant prolongation of overall survival, a secondary
endpoint, compared to chemotherapy alone. However, the survival times of ERBITUX-treated patients in this study are among the longest seen in this indication, particularly for the ERBITUX-treated
patients whose colon cancer had the non-mutated, or "wild-type," form of the K-ras oncogene, which is noted in about 60% of patients with mCRC. A preliminary review
of the data reveals that a greater proportion of patients randomized to the FOLFIRI-only arm went on to receive ERBITUX following the development of disease progression compared to
patients randomized to FOLFIRI plus ERBITUX. This may explain why the
CRYSTAL study met its primary endpoint of progression-free survival but did not achieve a statistically-significant secondary endpoint of overall survival.

In
October 2008, results from a retrospective K-ras analysis from the pivotal Phase 3 NCIC CTG CO.17 study were published in the New England Journal of
Medicine. The data showed that mCRC patients with wild-type K-ras tumors who were treated with ERBITUX plus best supportive care (BSC) had a statistically significant
increase in overall survival and progression-free survival compared to those treated with BSC alone. Specifically, patients whose tumors had the normal K-ras gene achieved a
near two-fold improvement in overall survival and progression-free survival over patients treated with BSC alone. These analyses build on previously reported results of the
study, which demonstrated that treating patients with ERBITUX as a monotherapy plus BSC significantly increased overall survival compared to BSC alone in patients with unknown K-ras
status.

Pipeline Clinical Development

Since the beginning of the third quarter, ImClone Systems has continued to make progress in advancing its proprietary pipeline,
consisting of five receptor-targeted fully-human IgG1 antibodies.

In
August 2008, the Company announced that the first patient was treated in a global Phase 3 clinical trial of IMC-1121B, ImClone's anti-vascular
endothelial growth factor receptor-2 (VEGFR-2) IgG1 monoclonal antibody, in women with metastatic breast cancer. A second Phase 3 study of IMC-1121B, in
gastric cancer, is expected to commence within the next year. During the quarter, a Phase 2 clinical trial of IMC-1121B in patients with advanced prostate cancer commenced
enrollment. In addition to these studies, Phase 2 trials of IMC-1121B in patients with metastatic liver, melanoma, ovarian and renal cancers are ongoing. The Company plans to open
additional Phase 2 clinical trials of IMC-1121B in 2008 and 2009.

A
number of trials of IMC-A12, ImClone Systems' anti-insulin-like growth factor-1 receptor (IGF-1R) monoclonal antibody, are
ongoing. During the third quarter, Phase 2 clinical trials of IMC-A12 in patients with advanced breast cancer and in adolescents and adult patients with several types of soft tissue
sarcoma opened for patient enrollment. In addition to these studies, Phase 2 studies of IMC-A12 in patients with soft tissue sarcoma (adults and adolescents) and advanced
colorectal, head and neck, liver, pancreatic and prostate cancers, as well as a series of Phase 1/2 studies in pediatric malignancies and another evaluating the combination of
IMC-A12 and temsirolimus, are enrolling patients. The Company plans to open additional Phase 2 clinical trials of IMC-A12 in 2008 and 2009, and it is currently planning
to initiate the first Phase 3 study of IMC-A12 by the end of 2009.

A
Phase 2 trial of FOLFOX chemotherapy plus IMC-11F8, ImClone Systems' fully-human IgG1 anti-epidermal growth factor receptor monoclonal antibody,
completed patient enrollment in Europe earlier this year. Preliminary results of the trial included an acceptable safety profile and an objective response rate of 65.2% in patients whose tumors were
not pre-selected on the basis of K-ras mutational status. ImClone Systems is planning two global Phase 3 studies of IMC-11F8 in two different indications in
2009.

Continued
progress has been made towards the completion of Phase 1 clinical trials of IMC-18F1, ImClone Systems' anti-vascular endothelial growth factor
receptor-1 (VEGFR-1) monoclonal antibody,

26

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and
IMC-3G3, ImClone Systems' monoclonal antibody targeting platelet-derived growth factor receptor-alpha. The Company plans to initiate disease-directed clinical trials with both novel
antibodies following completion of these Phase 1 trials.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Estimates are
deemed critical when a different methodology could have reasonably been used or where changes in the estimate from period to period may have a material impact on our financial condition or results of
operations. Our critical accounting policies that require management to make significant judgments, estimates, and assumptions are disclosed in the management discussion and analysis (MD&A) section of
our Annual Report on Form 10-K for the period ended December 31, 2007. The development and selection of the critical accounting policies, and the related disclosure, have
been reviewed with the Audit Committee of our Board of Directors. Updates to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the period
ended December 31, 2007 are set forth in our Form 10-Q for the period ended March 31, 2008.

Impact of Recent Accounting Pronouncements

In November 2007, the Emerging Issues Task Force reached a consensus on Issue No. 07-1, "Accounting for
Collaborative Arrangements." This Issue establishes accounting for costs incurred and revenues generated on sales to third parties should be reported by partners to joint development agreements in
each of their respective income statements, how sharing payments made to or received by a partner pursuant to a Collaboration Agreement should be presented in the income statement, and disclosures
related to the combined sales and expenses of the partners to a Collaboration Agreement that are used to compute the payments made/received. This Issue will be effective for fiscal years beginning
after December 15, 2008, and is to be applied retrospectively to all periods presented for all collaborative arrangements existing as of the effective date. The Company is currently evaluating
the effect this Issue will have on its consolidated financial statements.

In
May 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled
in Cash Upon Conversion (Including Partial Cash Settlement)" (FSP 14-1). FSP 14-1 specifies that issuers of convertible debt instruments that may be settled in cash upon
conversion (including partial cash settlements) should separately account for the liability and equity components in a manner that will reflect the entity's nonconvertible borrowing rate when interest
cost is recognized in subsequent periods. FSP 14-1 is effective for financial statements issued for fiscal years beginning after December 31, 2008, and interim periods within those
fiscal years. The Company is evaluating the effect that FSP 14-1 will have on its consolidated financial statements.

In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active" (FSP
157-3). FSP 157-3 clarifies the application of FASB Statement of Financial Accounting Standards (SFAS) No. 157, "Accounting for Fair Value Measurements"
(SFAS 157) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not
active. FSP 157-3 was effective upon issuance, including prior periods for which financial statements had not been issued. The Company adopted the provisions of FSP 157-3 as of
September 30, 2008.

27

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RESULTS OF OPERATIONS

Selected financial and operating data for the three and nine months ended September 30, 2008 and 2007 are as follows (in
thousands):

Three Months Ended
September 30,

Nine Months Ended
September 30,2008

2007

Variance

2008

2007

VarianceResults of Operations:Royalties

$
90,205

$
87,853

$
2,352

$
282,955

$
242,360

$
40,595License fees and milestones


25,771


19,226


6,545


77,721


81,965


(4,244
)Manufacturing


25,979


21,973


4,006


72,812


61,456


11,356Collaborative agreement reimbursements


23,112


18,495


4,617


60,738


53,698


7,040Total revenues


165,067


147,547


17,520


494,226


439,479


54,747Research and development


61,551


47,241


14,310


165,098


142,489


22,609Selling, general and administrative


24,323


21,894


2,429


71,615


57,798


13,817Royalties


21,624


19,324


2,300


69,497


55,098


14,399Cost of manufacturing revenue


24,294


22,256


2,038


68,223


59,110


9,113Merger related expenses


2,750





2,750


2,750





2,750Litigation settlements





50,000


(50,000
)

17,500


50,000


(32,500
)Total operating expenses


134,542


160,715


(26,173
)

394,683


364,495


30,188Operating income

$
30,525

$
(13,168
)
$
43,693

$
99,543

$
74,984

$
24,559


Three Months Ended September 30, 2008 and 2007

Revenues

Royalties

Royalty revenue consists primarily of royalty payments earned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under our
agreement with BMS, we are entitled to royalty payments equal to 39% of BMS's net sales of ERBITUX in the U.S. and Canada. Under our agreement with Merck KGaA, we are entitled to royalty payments
equal to 9.5% of Merck's KGaA's net sales outside of the U.S. and Canada, which are calculated per the agreement using the exchange rate of the U.S. dollar as compared to the Euro at the end of the
quarterly period.

In
the third quarter of 2008, our royalty revenue increased by approximately $2.4 million, or 3%, from the comparable period in 2007 due to an increase in global net sales of
ERBITUX combined with favorable foreign exchange rates for sales made outside of the U.S. and Canada. In the U.S. and Canada, in-market net sales by BMS in the third quarter of 2008
amounted to $184.9 million, an increase of $0.4 million, or less than 1%. Outside of the U.S. and Canada, in-market net sales of ERBITUX by Merck KGaA in the third quarter of
2008 amounted to approximately $191.0 million, an increase of $24.0 million or 14% from the comparable period in 2007. Favorable foreign currency translation contributed to approximately
$1.7 million of the in-market increase, which corresponds to a $0.2 million increase in royalty revenue for the quarter.

Royalty
revenue in 2008 will continue to reflect 39% of BMS' net sales and 9.5% of Merck KGaA's net sales except for sales in Japan where the royalty rate will be 4.75%. Changes in
exchange rate of the Euro versus the U.S. dollar could materially impact our royalty revenues during 2008. We do not expect the impact of potential new indications for ERBITUX in the U.S. to be seen
until 2009 and beyond.

28

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License Fees and Milestones

License fees and milestone revenue consists of the recognition of up-front license fees and milestone payments received
under the Commercial Agreement with BMS and recognition of payments received under the development and license agreements with Merck KGaA. In the third quarter of 2008, license fee and milestone
revenue consisted of approximately $25.5 million earned from BMS and $268,000 from Merck KGaA, as compared to the same period in 2007, in which approximately $19.0 million was earned
from BMS and $268,000 was earned from Merck KGaA.

The
increase of $6.5 million, or 34%, from the comparable period in 2007 is attributable to the effect of our amendment to the Commercial Agreement dated July 27, 2007 (the
"BMS Amendment"), on the ERBITUX clinical development cost estimates used to calculate BMS license fees and milestone revenues.

We
continue to anticipate that full year 2008 milestone revenue will range between $100 million and $110 million. Also, there remains an aggregate of approximately
$206.1 million of milestone payments to be recognized as revenue over future periods, which are classified as current and long-term deferred revenue in our September 30, 2008
consolidated balance sheet.

Manufacturing Revenue

Manufacturing revenue consists of sales of ERBITUX to our corporate partners for commercial use. In accordance with the Commercial
Agreement, we are contractually obligated to sell ERBITUX to BMS at our cost of production plus a 10% markup on bulk. We sell bulk inventory to Merck KGaA at our cost of production.

During
the third quarter of 2008, manufacturing revenue increased by $4.0 million from the comparable period in 2007 due to increased volume purchases from our partners in the
third quarter of 2008 as compared to the third quarter of 2007.

Collaborative Agreement Reimbursements

Collaborative agreement reimbursements revenue consists primarily of reimbursements from our partners BMS and Merck KGaA under our
collaborative agreements. There are certain categories for which we receive reimbursement from our partners: the cost of ERBITUX supplied to our partners for use in clinical studies, certain clinical
and regulatory expenses, certain selling and administrative expenses, and a portion of royalty expense. During the third quarter of 2008, we earned approximately $23.1 million in collaborative
agreement reimbursements revenue, of which $15.0 million was earned from BMS and $8.1 million was earned from Merck KGaA, as compared to $18.5 million earned in the comparable
period in 2007, of which $14.8 million was earned from BMS and $3.7 million was earned from Merck KGaA.

The
increase from the comparable period of approximately $4.6 million, or 25%, is due to increased reimbursements of clinical shipments of ERBITUX to our partners of approximately
$6.6 million. These increases were partially offset by reduced reimbursements for royalty expenses of $1.8 million, as a result of the fact that in 2008 we have not recognized revenue on
the royalties that Merck KGaA is paying under protest which is discussed in more detail below.

On
February 27, 2008, we received verbal notification from Merck KGaA that they were taking the position that the Yeda Settlement Agreement of December 7, 2007 resulted in
the breach of one of our representations in the Development License Agreement and that, therefore, they were no longer obligated to reimburse a portion of the royalty payments paid by us to Yeda and
Sanofi-Aventis following the date of that agreement. Merck KGaA has subsequently made payment for the first, second and third quarters of 2008 royalty reimbursements. Merck KGaA has communicated to
the Company that any such payments are being made under protest. On September 22, 2008, the Company

29

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received
correspondence from counsel for Merck KGaA dated September 20, 2008 commencing an arbitration proceeding between Merck KGaA and the Company. Merck KGaA is asserting a claim of
approximately $10.4 million, as well as other unspecified damages relating to an alleged dimunition of value of the Company's Development and License Agreement with Merck KGaA. The Company has
asserted a counterclaim against Merck KGaA. In general, the counterclaim seeks damages based upon Merck KGaA's breach of certain obligations owed to the Company with respect to the
Company's defense and settlement of Yeda's claims. These damages include, among other things, one-half of the Company's expenses in defending against Yeda's claims as well as one-half of the
$60 million paid by the Company to secure Merck KGaA's rights in the Yeda settlement. The Company has not recognized revenue of approximately $1.3 million of these royalty
reimbursements for the three months ended September 30, 2008 pending a final resolution with Merck KGaA. We do not believe that the settlement with Yeda altered Merck KGaA's obligation to pay
us the royalty reimbursement and will vigorously defend against the claims asserted.

Expenses

Research and Development

Research and development expenses include costs associated with our in-house research programs, product and process
development expenses, costs to manufacture our product candidates for clinical studies, quality assurance and quality control infrastructure, costs to conduct clinical studies and associated
regulatory activities. Research and development expenses also include our cost of inventory that is supplied to our partners for use in clinical studies and certain clinical and regulatory amounts
that are reimbursable from our corporate partners. As a result, approximately $18.1 million and $11.6 million of costs representing research and development expenses in the third
quarters of 2008 and 2007, respectively, were reimbursable and included under Collaborative agreement reimbursements revenue.

Research
and development expenses in the third quarter of 2008 of $61.6 million increased from the comparable period in 2007 by $14.3 million, or 30%. This increase is
primarily due to an increase in third-party clinical trial expenses of approximately $8.7 million associated with ERBITUX and the Company's pipeline products, an $8.7 million increase in
salaries and benefits due to increased headcount, an increase in clinical trial shipments to our partners of $7.0 million as well as smaller increases across various categories. The increase is
also due to the effect of a $7.6 million adjustment that was made in the prior year to reduce previously expensed ERBITUX clinical development costs incurred during the period prior to signing
the BMS Amendment in July 2007, which fell under a then newly established threshold amount and therefore were the sole responsibility of BMS. These increases were partly offset by the effect of the
BB-50 manufacturing facility producing ERBITUX in the third quarter of 2008 resulting in $16.0 million of costs being capitalized into the production of ERBITUX in 2008, while in
the 2007 third quarter BB-50 produced pipeline product and similar costs were recorded as research and development expense as well as a $6.5 million decrease in material costs
associated with the production of pipeline products.

Due
to the timing of production of clinical trial material, we will continue to see fluctuations in our research and development expenses on a
quarter-over-quarter basis. But we reiterate our expectation that research and development expenses for the full year of 2008 will increase by 25% to 30% over the levels
reported for 2007. This is primarily due to the increase in investment in the clinical development of our proprietary pipeline antibodies.

Selling, General and Administrative

Selling, general and administrative expenses include selling and administrative personnel costs, including related facility costs,
additional costs to develop internal marketing and field operations capabilities and expenses associated with applying for patent protection for our technology and products. Selling, general and
administrative expenses also include amounts reimbursable from our

30

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corporate
partners. As a result, approximately $294,000 and $388,000 of costs representing selling and general expenses in the third quarters of 2008 and 2007, respectively, were reimbursable and
included in Collaborative agreement reimbursements revenue.

Selling,
general and administrative expenses in the third quarter of 2008 amounted to $24.3 million, an increase of $2.4 million or 14% from the comparable period in 2007.
Expenses in this category have increased from the comparable period in 2007, mainly due to our share of the costs for increased commercialization efforts by our partners in Japan as well as an
increase in headcount, which were partially offset by a decrease in legal expenses.

We
reiterate our guidance for 2008 that on an annual basis, we continue to expect our selling, general and administrative expenses as a percentage of total revenues will marginally
increase during 2008 as compared to the prior year.

Royalties

Royalty expense consists of obligations related to certain licensing agreements related to ERBITUX. Our effective royalty rate for the
third quarter of 2008 on global in-market sales of ERBITUX was approximately 5.8%, as compared to 5.5% in 2007. We expect royalty expense as a percentage of global in-market
sales of ERBITUX to be in the low-6% range for 2008. This rate may fluctuate based on the amount of net sales outside of the U.S. and Canada that consist of ERBITUX produced in the U.S. In
the third quarter of 2008, we incurred royalty expense of $21.6 million, an increase of $2.3 million, or 12%, from the comparable period in 2007.

A
portion of our royalties are reimbursed by our corporate partners, which is reflected in Collaborative agreement reimbursements revenue. As a result, approximately $4.7 million
and $6.5 million of royalty expense were reimbursable by our corporate partners and included as Collaborative agreement reimbursement revenue in the third quarters of 2008 and 2007,
respectively.

Cost of Manufacturing Revenue

We sell ERBITUX to BMS at our cost of production plus a 10% mark-up on bulk and we sell bulk to Merck KGaA at our cost of
production. Therefore, depending on certain circumstances, such as the mix of demand from our partners, and the costs of filling and finishing ERBITUX bulk (for which we do not charge a 10% markup
when selling to BMS), and as the cost used for the computation of manufacturing revenue is contractually based, which may be different than the cost of manufacturing revenue, our gross margins on
sales of ERBITUX may fluctuate from quarter to quarter.

Cost
of manufacturing revenue in the third quarter of 2008 amounted to $24.3 million resulting in a gross margin of 6%, compared to costs of manufacturing revenue in the
comparable period of 2007 of approximately $22.3 million, including $2.1 million of expense for batches of ERBITUX that were damaged during the period. Excluding the costs of the damaged
batches, our resulting gross margin for the third quarter of 2007 was 8%. The fluctuation in our gross margin is based on the explanation noted above.

Merger Related Expenses

These represent expenses incurred in the third quarter of 2008 related to work performed by an investment bank and external legal
counsel associated with the potential acquisition of ImClone Systems.

Litigation Settlement

Litigation settlement expense of $50.0 million was recorded in the third quarter of 2007 resulting from the settlement agreement
executed in September 2007 with the Massachusetts Institute of Technology (MIT) and Repligen Corporation (Repligen).

31

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Other Income (Expense)

Interest and other income in the third quarter of 2008 amounted to $6.5 million, a decrease of approximately
$6.8 million, or 51% from the comparable period in 2007. This decrease is attributable to lower interest rates on our investment portfolio in the current year period and a shift to lower
yielding money-market funds commencing in the third quarter of 2007 due to liquidity concerns in the global credit and capital markets.

Because
of our concentration of investments in money-market accounts, we expect our interest income will continue to track the Federal Funds rate and other similar short-term
rates for the remainder of 2008.

Interest
expense in the third quarter of 2008 amounted to $3.0 million, which is comparable to the same period in 2007.

During
the third quarter of 2008, we recorded impairment charges of $15.4 million on certain securities available for sale due to other-than-temporarily
declines in fair value. The impairment was due to numerous factors including the severity of the decline in estimated fair value of these securities and the duration of time for which they have been
in a loss position.

Other
income for the third quarter of 2007 includes a gain of $3.8 million from the proceeds of an insurance reimbursement primarily for lost royalties on an ERBITUX shipment that
was damaged in-transit during 2006.

Provision for Income Taxes

The Company's estimated annual effective income tax rate for 2008 is approximately 47%, excluding the effect of any discrete (benefits)
charges and the effect of impairment charges of $15.4 million on investments, for which no tax benefit has been taken because of our expected inability to utilize capital losses. During the
three months ended September 30, 2008 and 2007, excluding the effect of the impairment charges, we recognized discrete charges (benefits) of approximately $0.3 million and $(0.8)
million, respectively, related to certain deferred items. The difference between the statutory rate and our expected annual effective income tax rate primarily relates to state taxes. Actual cash tax
payments in 2008 are estimated to be less than $0.5 million.

Nine Months Ended September 30, 2008 and 2007

Revenues

Royalties

For the nine months ended September 30, 2008, royalty revenue amounted to $283.0 million, an increase of
$40.6 million, or 17%, from the comparable period in 2007. This is a result of an increase in global net sales of ERBITUX combined with favorable foreign exchange rates for sales made outside
of the U.S. and Canada. In the U.S. and Canada, in-market net sales by BMS for the first nine months of 2008 amounted to $567.4 million, an increase of $60.7 million, or 12%.
Outside of the U.S. and Canada, in-market net sales of ERBITUX by Merck KGaA in the first nine months of 2008 amounted to $649.1 million, an increase of $179.1 million or 38%
from the comparable period in 2007. Favorable foreign currency translation contributed to approximately $69.4 million of the in-market sales increase, which corresponds to a
$6.6 million increase in royalty revenue for the first nine months of 2008.

Royalty
revenue in 2008 will continue to reflect 39% of BMS' net sales and 9.5% of Merck KGaA's net sales except for sales in Japan where the royalty rate will be 4.75%. Changes in
exchange rate of the Euro versus the U.S. dollar could materially impact our royalty revenues during 2008. We do not expect the impact of potential new indications for ERBITUX in the U.S. to be seen
until 2009 and beyond.

32

---



License Fees and Milestone Revenue

For the nine months ended September 30, 2008, license fees and milestone revenue consisted of $76.9 million earned from
BMS and $803,000 from Merck KGaA, as compared to the same period in 2007 in which $81.5 million was earned from BMS and $505,000 was earned from Merck KGaA.

The
decrease of $4.2 million, or 5%, from the comparable period in 2007 is attributable to the effect of our amendment to the Commercial Agreement, dated July 27, 2007, on
the ERBITUX clinical development cost estimates used to calculate BMS license fees and milestone revenues.

We
continue to anticipate that full year 2008 milestone revenue will range between $100 million and $110 million. Also, there remains an aggregate of approximately
$206.1 million of milestone payments to
be recognized as revenue over future periods, which are classified as current and long-term deferred revenue in our September 30, 2008 consolidated balance sheet.

Manufacturing Revenue

During the first nine months of 2008, manufacturing revenue increased by $11.4 million from the comparable period in 2007 due
primarily to increased volume of product purchased by our partners. This increase was partially offset by revenue reductions due to efficiencies in the manufacturing process of ERBITUX resulting in a
decrease in the price we charge our partners for ERBITUX.

Collaborative Agreement Reimbursements

During the nine months ended September 30, 2008, we earned $60.7 million in collaborative agreement reimbursements
revenue, of which approximately $41.9 million was earned from BMS and approximately $18.8 million was earned from Merck KGaA, as compared to $53.7 million earned in the comparable
period in 2007, of which $35.9 million was earned from BMS, approximately $17.2 million was earned from Merck KGaA, and $600,000 was received as final payment from a former corporate
partner.

The
increase in collaborative agreement reimbursements revenue of $7.0 million is principally due to increases in reimbursements of clinical and regulatory expenses of
approximately $5.4 million, and shipments of clinical drugs of approximately $3.6 million. These increases were partially offset by a decrease in reimbursements for royalty expense of
$1.6 million, due to the Merck dispute discussed below.

On
February 27, 2008, we received verbal notification from Merck KGaA that they were taking the position that the Yeda Settlement Agreement of December 7, 2007 resulted in
the breach of one of our representations in the Development License Agreement and that, therefore, they were no longer obligated to reimburse a portion of the royalty payments paid by us to Yeda and
Sanofi-Aventis following the date of that agreement. Merck KGaA has subsequently made payment for the first, second and third quarters of 2008 royalty reimbursements. Merck KGaA has communicated to
the Company that any such payments are being made under protest. On September 22, 2008, the Company received correspondence from counsel for Merck KGaA dated September 20, 2008
commencing an arbitration proceeding between Merck KGaA and the Company. Merck KGaA is asserting a claim of approximately $10.4 million, as well as other unspecified damages relating to an
alleged dimunition of value of the Company's Development and License Agreement with Merck KGaA. The Company has asserted a counterclaim against Merck KGaA. In general, the counterclaim seeks
damages based upon Merck KGaA's breach of certain obligations owed to the Company with respect to the Company's defense and settlement of Yeda's claims. These damages include, among other
things, one-half of the Company's expenses in defending against Yeda's claims as well as one-half of the $60 million paid by the Company to secure Merck KGaA's rights in the Yeda
settlement. The Company has not recognized revenue of approximately $4.8 million of these royalty reimbursements for the nine months ended September 30, 2008 pending a final resolution
with Merck KGaA. We do not believe that the

33

---



settlement
with Yeda altered Merck KGaA's obligation to pay us the royalty reimbursement and will vigorously defend against the claims asserted.

Expenses

Research and Development

Research and development expenses for the nine months ended September 30, 2008 of $165.1 million increased by
approximately $22.6 million, or 16%, from the comparable period in 2007. This increase is primarily due to an increase in salaries and benefits of $19.9 million due to increased
headcount, increases in third-party clinical trial expenses of approximately $15.9 million associated with ERBITUX and the Company's pipeline products, an increase of $6.3 million that
we are responsible to pay our corporate partner BMS as a result of different thresholds of cost sharing in 2008 as compared to the prior year following the amended and restated BMS agreement, a
$1.6 million increase as a result of more filling and labeling of clinical material, a $1.6 million increase in clinical trial shipments to our partners as well as smaller increases
across various categories. These increases were partly offset by the effect of the BB-50 manufacturing facility producing ERBITUX in the third quarter of 2008 resulting in
$16.0 million of costs being
capitalized into the production of ERBITUX in 2008, while in the 2007 third quarter BB-50 produced pipeline product and similar costs were recorded as research and development expense, a
$5.5 million decrease in material costs associated with the production of pipeline products, and a $4.7 million decrease in third-party production costs of pipeline product. Also
partially offsetting these increases was the effect of the write-off of $3.6 million of previously capitalized costs associated with the development of our Spring Street location
during the nine months ended September 30, 2007. Approximately $42.8 million and $33.8 million of costs representing research and development expenses in the first nine months of
2008 and 2007, respectively, were reimbursable and included under Collaborative agreement reimbursements revenue.

Due
to the timing of production of clinical trial material, we will continue to see fluctuations in our research and development expenses on a
quarter-over-quarter basis. But we reiterate our expectation that research and development expenses for the full year of 2008 will increase by 25% to 30% over the levels
reported for 2007. This is primarily due to the increase in investment in the clinical development of our proprietary pipeline antibodies.

Selling, General and Administrative

Selling, general and administrative expenses for the nine months ended September 30, 2008 amounted to $71.6 million, an
increase of $13.8 million or 24% from the comparable period in 2007. Expenses in this category have increased from the comparable period in 2007, mainly due to our expanded efforts to grow
ERBITUX sales in North America primarily through the expansion of our U.S. sales force, as well as our share of the costs for increased commercialization efforts by our partners in Japan.
Approximately $1.2 million and $967,000 of costs representing selling and general expenses in the first nine months of 2008 and 2007, respectively, were reimbursable and included in
Collaborative agreement reimbursements revenue.

We
reiterate our guidance for 2008 that on an annual basis, we continue to expect our selling, general and administrative expenses as a percentage of total revenues will marginally
increase during 2008 as compared to the prior year.

Royalties

Our effective royalty rate for the first nine months of 2008 on global in-market sales of ERBITUX was approximately 5.7%,
as compared to 5.6% in the first nine months of 2007. We expect royalty expense as a percentage of global in-market sales of ERBITUX to be in the low-6% range for 2008. This
rate may fluctuate based on the amount of net sales outside of the U.S. and Canada that consist of ERBITUX produced in the U.S. In the first nine months of 2008, we incurred royalty expense of

34

---



$69.5 million
as compared to $55.1 million, an increase of $14.4 million, or 26% from the comparable period in 2007. Approximately $16.7 million and $18.3 million of
royalty expense was reimbursable by our corporate partners and included as Collaborative agreement reimbursement revenue in the first nine months of 2008 and 2007, respectively.

Cost of Manufacturing Revenue

Cost of manufacturing revenue for the nine months ended September 30, 2008 amounted to $68.2 million resulting in a gross
margin of approximately 6% compared to costs of manufacturing revenue in the comparable period of 2007 of approximately $59.1 million, which includes a $3.1 million charge for batches of
ERBITUX that were damaged during the period. Excluding the costs of the damaged batches, our gross margin for the first nine months of 2007 was 9%.

Merger Related Expenses

These represent expenses incurred in the third quarter of 2008 related to work performed by an investment bank and external legal
counsel associated with the potential acquisition of ImClone Systems.

Litigation Settlement

On February 5, 2007, a complaint was filed against the Company by Abbott Laboratories (Abbott) in the U.S. District Court for
the District of Massachusetts (07-cv-10216). This action alleged that the manufacture and sale of ERBITUX infringed U.S. Patent No. 5,665,578, which is owned by Abbott.
On September 23, 2008, a written settlement agreement was signed by the Company and Abbott to end all litigation pending between the parties. Under the terms of the settlement agreement, in
October 2008, ImClone Systems paid Abbott $17.5 million in cash for full and final settlement of all claims and counterclaims raised in these cases, including all claims related to U.S. Patent
No. 5,665,578.

Litigation
settlement expense of $50.0 million was recorded in the third quarter of 2007 resulting from the settlement agreement executed in September 2007 with MIT and Repligen.

Other Income (Expense)

Interest and other income for the nine months ended September 30, 2008 amounted to $23.2 million, a decrease of
approximately $16.0 million, or 41% from the comparable period in 2007. This decrease is attributable to lower interest rates on our investment portfolio in the current year period and a shift
to lower yielding money-market funds commencing in the third quarter of 2007 due to the liquidity concerns in the global credit and capital markets.

Because
of our concentration of investments in money-market accounts, we expect our interest income will continue to track the Federal Funds rate and other similar short-term
rates for the remainder of 2008.

Interest
expense for the nine months ended September 30, 2008 amounted to approximately $9.0 million, which is comparable to the same period in 2007.

During
the first nine months of 2008, we recorded impairment charges of $102.0 million on certain securities available for sale due to
other-than-temporarily declines in fair value. The impairment was primarily due to numerous factors including the severity of the decline in estimated fair value of these
securities and the duration of time for which they have been in a loss position.

Other
income for the third quarter of 2007 includes a gain of $3.8 million from the proceeds of an insurance reimbursement primarily for lost royalties on an ERBITUX shipment that
was damaged in-transit during 2006.

35

---





Provision for Income Taxes

The Company's estimated annual effective income tax rate for 2008 is approximately 47%, excluding the effect of any discrete (benefits)
charges and the effect of impairment charges of $102.0 million on investments, for which no tax benefit has been taken because of our expected inability to utilize capital losses. During the
nine months ended September 30, 2008 and 2007, excluding the effect of impairment charges, we recognized discrete (benefits) charges of approximately $(0.8) million and $4.0 million,
respectively, related to certain deferred items. The difference between the statutory rate and the Company's expected annual effective income tax rate primarily relates to state taxes. Actual cash tax
payments in 2008 are estimated to be less than $0.5 million.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2008, our principal sources of liquidity consisted of cash and cash equivalents and securities available for
sale of approximately $1.0 billion. We also have an additional $94.9 million of securities available for sale which have been classified as long-term due to the current
illiquidity in the market for auction rate securities (ARS). We expect the holders our $600.0 million convertible notes payable will exercise their right under a put provision whereby the
holders can seek repayment of the convertible notes payable from us in May 2009. We are currently evaluating payment and refinancing options for the convertible notes payable. Historically, we have
financed our operations through a variety of sources, most significantly through the issuance of public and private equity and convertible notes, license fees and milestone payments and reimbursements
from our corporate partners. Since the approval of ERBITUX on February 12, 2004, we began to generate royalty revenue and manufacturing revenue from the commercial sale of ERBITUX by our
corporate partners. As we continue to generate income, our cash flows from operating activities are expected to increase as a source to fund our operations. Therefore, we
anticipate that our future financial condition and our future operating performance will continue to experience significant changes and that past performance will not likely be indicative of our
future performance.

SUMMARY OF CASH FLOWS

Nine months ended September 30,2008

2007

VarianceCash provided by (used in):Operating activities

$
67,347

$
(3,531
)
$
70,878Investing activities


58,659


358,570


(299,911
)Financing activities


88,574


38,716


49,858Effect of exchange rates on cash and cash equivalents


7





7Net increase in cash and cash equivalents

$
214,587

$
393,755

$
(179,168
)


Historically
our cash flows from operating activities have fluctuated significantly due to the nature of our operations and the timing of our cash receipts. During the
first nine months of 2008, we generated approximately $67.3 million in cash from operating activities, as compared to using $3.5 million in the comparable period of 2007.

Our
primary sources and uses of cash from investing activities consist of purchases and sales activity in our investment portfolio, which we manage based on our liquidity needs, possible
business development transactions and amounts used for capital expenditures. During the first nine months of 2008, we generated net cash from investing activities of $58.7 million comprised of
approximately $249.2 million of proceeds from our investment portfolio, partially offset by approximately $19.0 million used for acquisition of fixed assets, and purchases of additional
securities of approximately $171.5 million. The decrease in proceeds from investing activities from last year is due to our decision to start moving
money out of our ARS and other investments in the third quarter of 2007 and into cash equivalent type securities, while in 2008 most of our portfolio was already in cash equivalents.

36

---



Net
cash flows generated in financing activities in 2008 were approximately $88.6 million, of which approximately $77.0 million of proceeds were generated from the exercise
of stock options and sales under the Company's employee stock purchase plan and $11.6 million was generated from tax benefits associated with equity net operating losses that will be taken as a
reduction on our tax returns. These increases are due to increased stock option exercises as a result of the increase in our stock price due to an offer by BMS to acquire ImClone during the third
quarter of 2008.

Our
future working capital and capital requirements will depend upon numerous factors, including, but not limited to:



37

---





Below
is a table that presents our contractual obligations and commercial commitments as of September 30, 2008, which reflects our expectation of the repayment of our convertible
long-term debt in May 2009: (in thousands)

Payments due by Year(1),(2)Total

2008

2009

2010

2011

2012

2013 and
ThereafterConvertible notes payable(3)

$
600,000

$


$
600,000

$


$


$


$
Interest on convertible notes payable


8,250


4,125


4,125











Operating leases


63,738


1,775


7,278


6,039


4,663


4,236


39,747Purchase obligations


21,168


21,168














Contract services obligations


8,550


720


4,860


2,970








Total contractual cash obligations

$
701,706

$
27,788

$
616,263

$
9,009

$
4,663

$
4,236

$
39,747


---

OFF-BALANCE SHEET ARRANGEMENTS

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

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Our holdings of financial instruments comprise a mix of U.S. dollar denominated securities that may include U.S. corporate debt, money
market funds, foreign corporate debt, U.S. government debt, foreign government debt, asset-backed securities, ARS and commercial paper. Generally, we do not invest in equity securities, commodities,
foreign exchange contracts or use financial derivatives for trading purposes. However, we currently have investments in equity securities and may continue to make these investments depending upon our
needs. Our debt security portfolio normally represents funds held temporarily pending use in our business and operations. We manage these funds accordingly. We seek reasonable assuredness of the
safety of principal and market liquidity by investing in investment grade fixed income securities while at the same time seeking to achieve a favorable rate of return. Our market risk exposure
consists principally of exposure to changes in interest rates. Our holdings are also exposed to the risks of changes in the credit quality of issuers. We invest in securities that have a range of
maturity dates.

During
2007, liquidity issues began to affect the global credit and capital markets. As a result, ARS, which historically have had a liquid market and had their interest rates reset
periodically (e.g., monthly) through dutch auctions, began to fail at auction. These auction failures have caused many ARS to become illiquid since investors are hesitant to purchase these
types of investments, which in turn has caused the fair values for these securities to decline.

38

---



As
of September 30, 2008, the Company has $161.4 million of principal invested in ARS, of which $144.1 million represent interests in synthetic collateralized debt
obligations referencing portfolios of corporate bonds (CDOs), $5.1 million represents interests in floating rate surplus notes of captive insurance companies (FRNs) and $12.2 million
represents interests in student loans and student loan revenue bonds (Student Loans). These securities have long-term nominal maturities for which interest rates are reset through a
dutch-auction each month and these auctions had historically provided a liquid market for these securities. As a result of the continuing liquidity issues experienced in the global credit and capital
markets, these ARS have had continuing failed auctions; the CDOs and FRNs have been failing at auction since August 2007 and the Student Loans have been failing at auction since March 2008. The
estimated fair value of the CDOs and FRNs were $80.0 million and $2.7 million, respectively, as of September 30, 2008, which were determined based on valuations performed by
Pluris Valuation Advisors LLC (Pluris). The estimated fair value of the Student Loans were $10.3 million as of September 30, 2008, which were determined based on valuations
performed by Pluris. In October 2008, in accordance with the North American Securities Administration Association settlement, the Company was notified that the Student Loans would be and subsequently
were repurchased by the investment bank that sold them to the Company at 100% of face value, or $12.2 million. Collectively, the fair value of the ARS of $94.9 million as of
September 30, 2008 is
significantly below the fair value at December 31, 2007 of $121.7 million. While interest continues to be paid by the issuers of these securities, due to the severity of the decline in
fair value and the duration of time for which these securities have been in a loss position, the Company concluded that these securities experienced an other-than-temporarily
decline in fair value and recorded impairment charges of $69.1 million, $1.8 million, and zero related to these ARS in the first, second and third quarters of 2008, respectively. In
October 2008, the CDOs and FRNs with a cost basis of $149.2 million and a fair value $82.7 million as of September 30, 2008 had ratings ranging from A to BB- and have
been classified as long-term investments in the Company's Consolidated Balance Sheets given that these securities are illiquid until there is a successful auction for them, the timing of
which is not presently knowable. The Company also has investments in government agency bonds that are not impaired with a fair value of $10.3 million, based on actively traded markets. In
addition, the Company has investments in a money market fund with a cost basis of $154.0 million and a fair value of $149.4 million which was based on the last available net asset value
quoted for the fund. During the third quarter of 2008, the Company concluded that the money market fund had experienced an other-than-temporary decline in fair value and
recorded an impairment charge of $4.6 million.The fund has temporarily restricted redemptions, and therefore the Company reclassified this amount from Cash and cash equivalents to Securities
available for sale as of September 30, 2008. On October 31, 2008, we received cash of $78.2 million as a partial redemption of the investment balance in this fund.

As
of September 30, 2008, the Company has equity securities with an original cost basis of $61.2 million that have a fair value of $34.7 million (using the closing
market price of the securities), representing a decline in fair value of $26.5 million. During the first and third quarters of 2008, the Company determined that the decline in fair value during
the nine months ended September 30, 2008 were other-than-temporary and accordingly, the Company recorded impairment charges of approximately $15.8 million and
$10.7 million, respectively. In making these determinations the Company considered a number of factors, including the nature of the investment, the cause of the decline in fair value, the
severity and duration of the decline in fair value, the financial position and prospects of the company whose securities are held, analyst reports, as well as other factors.

39

---



The
table below presents the principal amounts and related weighted average interest rates by year of maturity for our fixed and variable rate securities within our investment portfolio
as of September 30, 2008 (in thousands, except interest rates):

2008

2009

2010

2011

2012

2013 and
Thereafter

Total

Fair ValueFixed Rate

$


$


$
10,000

$


$


$


$
10,000

$
10,275Average Interest Rate








5.00
%










5.00
%Variable Rate


154,038














161,420
(1)

315,458


244,302Average Interest Rate


0.60
%













4.15
%

2.12
%$
154,038

$


$
10,000

$


$


$
161,420

$
325,458

$
254,577


---

Our
outstanding 13/8% fixed rate convertible notes in the principal amount of $600.0 million due May 15, 2024 are convertible into our common stock at a
conversion price of $94.69 per share, subject to certain restrictions as outlined in the indenture agreement. The fair value of fixed interest rate instruments is affected by changes in interest rates
and in the case of the convertible notes by changes in the price of our common stock as well. The fair value of the convertible notes was approximately $577.5 million at September 30,
2008.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
our "disclosure controls and procedures" (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 Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, our
disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information that we are required to disclose in the reports that we file or
submit under the Exchange Act.

Changes In Internal Control Over Financial Reporting

There has been no change in our internal control over financial reporting during the three months ended September 30, 2008 that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II        OTHER INFORMATION

Item 1.    Legal Proceedings

Intellectual Property Litigation

On February 5, 2007, a complaint was filed against the Company by Abbott Laboratories (Abbott) in the U.S. District Court for
the District of Massachusetts (07-cv-10216). This action alleged that the manufacture and sale of ERBITUX infringed U.S. Patent No. 5,665,578, which is owned by Abbott.
On September 23, 2008, a written settlement agreement was signed by the Company and Abbott to end all litigation pending between the parties. Under the terms of the settlement agreement, in
October 2008, ImClone Systems
paid Abbott $17.5 million in cash for full and final settlement of all claims and counterclaims raised in these cases, including all claims related to U.S. Patent No. 5,665,578.

On
February 27, 2008, the Company received verbal notification from Merck KGaA that Merck KGaA was taking the position that the Yeda Settlement Agreement of December 7,
2007 resulted in the breach of one of the Company's representations in the Development License Agreement and that, therefore, Merck KGaA was no longer obligated to reimburse a portion of the royalty
payments paid by ImClone to Yeda and Sanofi-Aventis following the date of that agreement. Merck KGaA has subsequently made payment for the first, second and third quarters of 2008 royalty
reimbursement. Merck KGaA has communicated to the Company that any such payments are being made under protest. On September 22, 2008, the Company received correspondence from counsel for Merck
KGaA dated September 20, 2008 commencing an arbitration proceeding between Merck KGaA and the Company. Merck KGaA is asserting a claim of approximately $10.4 million, as well as other
unspecified damages relating to an alleged dimunition of value of the Company's Development and License Agreement with Merck KGaA. The Company has asserted a counterclaim against Merck KGaA. In
general, the counterclaim seeks damages based upon Merck KGaA's breach of certain obligations owed to the Company with respect to the Company's defense and settlement of Yeda's claims. These damages
include, among other things, one-half of the Company's expenses in defending against Yeda's claims as well as one-half of the $60 million paid by the Company to secure Merck KGaA's rights in
the Yeda settlement. The Company has not recognized revenue of approximately $4.8 million for royalty reimbursements for the nine months ended September 30, 2008, pending a final
resolution with Merck KGaA. The Company does not believe that the settlement with Yeda altered Merck KGaA's obligation to pay us the royalty reimbursement and will vigorously defend against the claims
asserted.

The
Company recorded in the second quarter of 2008 an accrued liability of $17.5 million for the settlement of the Abbott matter discussed above. No reserves have been established
in the financial statements for any other legal proceedings, because the Company does not believe that such reserves are required to be established at this time under SFAS No. 5. However, if in
a future period, events in any such legal proceedings render it probable that a loss will be incurred and if such loss is reasonably estimable at that time, the Company will establish such a reserve.
Thus, it is possible that legal proceedings and settlements arising therefrom, if any, may have a material adverse impact on operating results for that period, on our balance sheet, or both.

Other

On September 3, 2008, a suit was filed by Eugene Smith, a purported stockholder of the Company, individually and on behalf of
others, against the Company, the Company's board of directors and BMS in the Court of Chancery of the State of Delaware alleging, among other things, breach of fiduciary duty by the Company's board
directors and that BMS aided and abetted those breaches. The Company plans to vigorously defend against the claims asserted in this matter.

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On
October 22, 2008, State-Boston Retirement System, Ms. Roberta Feinstein, Mr. Howard Karp and Mr. Jay Herman, each a purported stockholder of the Company,
filed a class action complaint in the Supreme Court of the State of New York, County of New York, purportedly on behalf of themselves and all other stockholders of the Company, against the Company,
the members of the Company's board of directors, Eli Lilly and Company (Lilly) and Alaska Acquisition Corporation (Alaska). The complaint alleges, among other things, that the members of the Company's
board of directors breached their fiduciary duties to the Company's stockholders in connection with the transactions contemplated by the Merger Agreement with Lilly and Alaska and failed to provide
the Company's stockholders with material information to make an informed decision as to whether to tender their shares of the Company's common stock in Alaska's tender offer. In addition, the
complaint alleges that Lilly and Alaska knowingly aided and abetted the alleged wrongdoing of the Company's board of directors. The complaint seeks, among other relief, class action status, an order
preliminarily and permanently enjoining the defendants from proceeding with Alaska's tender offer, a judgment enjoining the defendants from consummating the tender offer and the merger until the
Company's Solicitation/Recommendation Statement on Schedule 14D-9 is supplemented to include certain additional information, and an award to plaintiffs of the costs of the action,
including reasonable attorneys' and experts' fees. In connection with the complaint, an Order to Show Cause was filed by plaintiff's counsel requesting (i) expedited discovery for the
production of documents by the defendants, (ii) depositions of representatives of the Company and J.P. Morgan, the Company's financial advisor, and (iii) such other relief as the Court
deems just and proper. On October 30, 2008, the Court denied Plaintiffs' motion to expedite discovery. The Company plans to vigorously defend against the claims asserted in this matter.

Item 1A.    Risk Factors

There have been no material changes to the risk factors as set forth in the Company's Annual Report filed on
Form 10-K for the year ended December 31, 2007 except as follows:

We may be unable to refinance our $600.0 million of convertible notes payable in May 2009 or be required to refinance the convertible notes payable at less favorable
terms.

Pursuant to the terms of the merger agreement with Lilly, Lilly has requested that we discharge the Company's convertible notes payable
and we will deposit the funds necessary to discharge such notes with the trustee conditional upon Alaska's successful delegation of the tender offer. If Alaska's tender offer is not successfully
completed, holders of such convertible notes payable may require us to repay the full $600.0 million in May 2009 pursuant to the terms of the notes. We currently have sufficient liquidity to
repay this indebtedness, however our continuing efforts to expand the uses of ERBITUX and develop our pipeline products will require substantial capital in the coming years. If we are unable to
refinance this indebtedness, we may have to seek funds from other sources, including the issuance of common stock or entering into collaboration agreements to further the development of our pipeline
products.

In
addition, if we are able to refinance the convertible notes, we may have to pay interest at a higher interest rate than the 13/8% fixed rate that we currently pay. This
would adversely impact the amount of interest expense and our results of operations.

If the merger contemplated by the definitive merger agreement entered into on October 6, 2008 with Lilly does not occur, we may have to pay a termination fee, will
have incurred significant expenses and may experience disruption.

On October 6, 2008, we entered into a definitive merger agreement with Eli Lilly and Company (Lilly) and Alaska
Acquisition Inc. (Alaska), a wholly-owned subsidiary of Lilly. Under the terms of the merger agreement, Lilly has commenced a tender offer to purchase all of the outstanding shares of our

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common
stock at a price of $70 per share in cash. The tender offer is conditioned upon, among other things, at least a majority of our shares outstanding being tendered. Assuming that the tender offer
is successful, the merger agreement provides that the tender offer will be followed by a merger pursuant to which we would be acquired by Lilly. The tender offer commenced on October 14, 2008
and the merger is expected to be completed either in the fourth quarter of 2008 or the first quarter of 2009.

The
transactions contemplated in the merger agreement may be delayed or even abandoned before completion if certain events occur resulting in a "Company Material Adverse Effect," or if
regulatory approvals are not forthcoming. A "Company Material Adverse Effect" means any fact, change, event,
development, condition, circumstance, occurrence or effect that (i) is, or would reasonably be expected to be, materially adverse to the business, condition (financial or otherwise), assets,
liabilities or results of operations of ImClone Systems and its subsidiaries, taken as a whole or (ii) prevents, or would reasonably be expected to prevent, consummation of the tender offer or
the merger or performance by ImClone Systems of any of its material obligations under the merger agreement. The definition of "Company Material Adverse Effect" excludes from clause (i) any of
the following facts, changes, events, developments, conditions, circumstances, occurrences or effects: (a) changes generally affecting the economy, financial or securities markets or political
or regulatory conditions, to the extent such changes do not adversely affect ImClone Systems and its subsidiaries in a manner disproportionate to other pharmaceutical or biotechnology companies;
(b) changes in the pharmaceutical or biotechnology industry, to the extent such changes do not adversely affect ImClone Systems and its subsidiaries in a disproportionate manner relative to
other participants in such industry; (c) any change in law or generally accepted accounting principles or the interpretation thereof; (d) acts of war, armed hostility or terrorism, to
the extent such changes do not adversely affect ImClone Systems and its subsidiaries; (e) any change attributable to the negotiation, execution or announcement of the tender offer and the
merger, including litigation resulting therefrom, adverse change in customer, employee, supplier, financing, licensor, licensee, shareholder, joint venture partner or similar relationships, including
as a result of the identity of Lilly; (f) any publicly available statement made by Lilly or Alaska concerning ImClone Systems or its subsidiaries, employees, customers or suppliers, or
otherwise relating to the tender offer or the merger; (g) any change ImClone Systems can demonstrate resulted from Lilly withholding its consent to certain actions requiring Lilly's consent
under the merger agreement; (h) any failure by ImClone Systems to meet any internal or published industry analyst projections or forecasts or estimates for any period ending on or after
October 6, 2008; and (i) any change in the price or trading volume of ImClone Systems' common stock or a decline in the value or rating of ImClone Systems' convertible notes.

We
may terminate the merger agreement under certain circumstances, including if our board of directors reasonably determines that it has received an unsolicited bona fide "Superior
Proposal," as defined in the merger agreement. In the event of such termination, we would have to pay a break-up fee of $150 million to Lilly. In addition, if the merger agreement
is terminated under certain circumstances, and within twelve (12) months after the date of such termination we enter into a definitive agreement providing that, or consummates a transaction
whereby, more than 95% of the assets of, or the equity interests in, us are acquired by a third party, we will be obligated to pay Lilly the same $150 million break-up fee.

We
cannot predict whether the closing conditions for the tender offer set forth in the merger agreement will be satisified. As a result, we cannot assure you that the tender offer or
other transactions contemplated by the merger agreement will be completed. If the closing conditions for the tender offer set forth in the merger agreement are not satisfied or waived pursuant to the
merger agreement, or if the transactions are not completed for any other reason, the market price of our common stock may decline. In addition, if the tender offer or other transactions contemplated
by the merger agreement does not occur, we will nonetheless remain liable for significant expenses that we

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have
incurred related to the transaction. The majority of such expenses would relate to legal and banking fees and may be substantial.

If
the tender offer or other transactions contemplated by the definitive merger agreement do not occur, we may also experience loss of key personnel and significant disruption in our
sales, research activities and our organization. As a result there may be delays before we can achieve pre-transaction levels of activity in various functions, including sales and research
and development, which may have a material adverse effect on our financial performance and also affect the price of our common stock. In addition, failure to complete the contemplated transactions may
substantially limit our ability to grow and implement our current business strategies.

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



Name

In Favor

WithheldJohn E. Celentano


76,650,607


215,178Alexander J. Denner


75,055,449


1,810,336Thomas F. Deuel


76,166,399


699,386Jules Haimovitz


75,668,391


1,197,394Carl C. Icahn


64,755,846


12,109,939John H. Johnson


76,250,925


614,860Peter S. Liebert


75,711,527


1,154,258Richard C. Mulligan


76,201,542


664,243David Sidransky


72,315,536


4,550,249Charles Woler


76,226,475


639,310




FOR


76,193,612AGAINST


626,051ABSTAIN


6,122


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FOR


67,803,919AGAINST


1,060,760ABSTAIN


34,821NON VOTES


7,966,315


Item 5.    Other Information

Not applicable

Item 6.    Exhibits

Exhibit No.

Description31.1

Certification of the Company's Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification of the Company's Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232

Certification of the Company's Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.

IMCLONESYSTEMSINCORPORATED(Registrant)Date: November 10, 2008

By:

/s/ JOHN H. JOHNSON John H. Johnson Chief Executive Officer
Principal Executive OfficerDate: November 10, 2008

By:

/s/ KENNETH J. ZUERBLIS Kenneth J. Zuerblis Senior Vice President and Chief Financial Officer
Principal Financial Officer


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