**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-Q**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe Quarterly Period Ended September 30, 2006**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934

**Forthe Transition period from                    to                     **

**Commissionfile number 0-19612**

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**ImClone Systems Incorporated**

(Exact name of registrantas specified in its charter)

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

 

**(212) 645-1405**

(Registrant’s telephonenumber, including area code)

**Not Applicable**

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

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

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

 

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

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

| Class                         | ** ** | **Outstanding as of November 1, 2006** | ** ** |
|-------------------------------|------------|-----------------------------------------------------------------|------------|
| Common Stock, par value $.001 |       | (84,705,447) Shares                                             |       |

 

 

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**IMCLONE SYSTEMSINCORPORATEDINDEX**
| PART I—FINANCIAL  INFORMATION |                                                                                                                                     |
|-----------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------|
| Item 1.                                 | Financial Statements                                                                                                                     | 1 |
|                                    | Unaudited Consolidated Balance  Sheets—September 30, 2006 and December 31, 2005                                           | 1 |
|                                    | Unaudited Consolidated  Statements of Income—Three months and Nine months  ended September 30, 2006 and 2005         | 2 |
|                                    | Unaudited Consolidated Statement  of Stockholders’ Equity and Comprehensive   Income—Nine months ended September 30, 2006 | 3 |
|                                    | Unaudited Consolidated  Statements of Cash Flows—Nine months ended September 30, 2006  and 2005                      | 4 |
|                                    | Notes to Unaudited  Consolidated Financial Statements                                                                                    | 5 |
| Item 2.                                 | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                              | 31 |
| Item 3.                                 | Quantitative and Qualitative  Disclosures About Market Risk                                                                              | 47 |
| Item 4.                                 | Controls and Procedures                                                                                                                  | 48 |
| PART II—OTHER  INFORMATION    |                                                                                                                                     |
| Item 1.                                 | Legal Proceedings                                                                                                                        | 49 |
| Item 1A.                                | Risk Factors                                                                                                                             | 51 |
| Item 2.                                 | Unregistered Sales of Equity  Securities and Uses of Proceeds                                                                            | 52 |
| Item 3.                                 | Defaults upon Senior  Securities                                                                                                         | 53 |
| Item 4.                                 | Submission of Matters to a  Vote of Security Holders                                                                                     | 53 |
| Item 5.                                 | Other Information                                                                                                                        | 54 |
| Item 6.                                 | Exhibits                                                                                                                                 | 54 |
| Signatures                              | 59                                                                                                                                       |

 

i

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**PART I.FINANCIAL INFORMATION**

**Item 1.**                        *Financial Statements*

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

| ** **                                                                                                                                                                                                                                                                            | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                            | ** ** |                         | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                                                                                       |       |                         |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                             |       |                         | $          | 15,308                      |       |   |   | $ | 3,403 |   |   |
| Securities available for sale                                                                                                                                                                                                                                                         |       |                         | 976,172    |                        |       |   | 752,973 |   |   |
| Prepaid expenses                                                                                                                                                                                                                                                                      |       |                         | 5,740      |                        |       |   | 3,766 |   |   |
| Amounts due from corporate partners                                                                                                                                                                                                                                                   |       |                         | 92,783     |                        |       |   | 59,271 |   |   |
| Inventories                                                                                                                                                                                                                                                                           |       |                         | 58,923     |                        |       |   | 81,394 |   |   |
| Deferred income taxes, net                                                                                                                                                                                                                                                            |       |                         | 26,913     |                        |       |   | — |   |   |
| Other current assets                                                                                                                                                                                                                                                                  |       |                         | 11,221     |                        |       |   | 8,311 |   |   |
| Total current assets                                                                                                                                                                                                                                                                  |       |                         | 1,187,060  |                        |       |   | 909,118 |   |   |
| Property, plant and equipment, net                                                                                                                                                                                                                                                    |       |                         | 425,750    |                        |       |   | 406,595 |   |   |
| Deferred financing costs, net                                                                                                                                                                                                                                                         |       |                         | 9,747      |                        |       |   | 12,531 |   |   |
| Deferred income taxes, net                                                                                                                                                                                                                                                            |       |                         | 119,851    |                        |       |   | — |   |   |
| Inventories, less current portion                                                                                                                                                                                                                                                     |       |                         | 28,203     |                        |       |   | — |   |   |
| Other assets                                                                                                                                                                                                                                                                          |       |                         | 14,177     |                        |       |   | 15,171 |   |   |
| Total assets                                                                                                                                                                                                                                                                          |       |                         | $          | 1,784,788                   |       |   |   | $ | 1,343,415 |   |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                        | ** ** |                         | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current liabilities:                                                                                                                                                                                                                                                                  |       |                         |       |                        |       |   |   |   |   |
| Accounts payable (including $2,624 and $4,610 due  Bristol-Myers Squibb Company (“BMS”) at September 30, 2006 and  December 31, 2005, respectively)                                                                                                          |       |                         | $          | 27,973                      |       |   |   | $ | 35,530 |   |   |
| Accrued expenses (including $24,449 and $11,427 due  BMS at September 30, 2006 and December 31, 2005, respectively)                                                                                                                                                         |       |                         | 77,889     |                        |       |   | 60,934 |   |   |
| Withholding tax liability                                                                                                                                                                                                                                                             |       |                         | 264        |                        |       |   | 32,000 |   |   |
| Current portion of deferred revenue                                                                                                                                                                                                                                                   |       |                         | 128,084    |                        |       |   | 112,624 |   |   |
| Other current liabilities                                                                                                                                                                                                                                                             |       |                         | 3,094      |                        |       |   | 1,031 |   |   |
| Total current liabilities                                                                                                                                                                                                                                                             |       |                         | 237,304    |                        |       |   | 242,119 |   |   |
| Deferred revenue, less current portion                                                                                                                                                                                                                                                |       |                         | 271,255    |                        |       |   | 246,401 |   |   |
| Long-term debt                                                                                                                                                                                                                                                                        |       |                         | 600,000    |                        |       |   | 600,000 |   |   |
| Share based compensation                                                                                                                                                                                                                                                              |       |                         | 661        |                        |       |   | — |   |   |
| Deferred rent, less current portion                                                                                                                                                                                                                                                   |       |                         | 2,984      |                        |       |   | 2,491 |   |   |
| Total liabilities                                                                                                                                                                                                                                                                     |       |                         | 1,112,204  |                        |       |   | 1,091,011 |   |   |
| Commitments and contingencies                                                                                                                                                                                                                                                         |       |                         |       |                        |       |   |   |   |   |
| Stockholders’ equity:                                                                                                                                                                                                                                                            |       |                         |       |                        |       |   |   |   |   |
| Preferred stock, $1.00 par value; authorized  4,000,000 shares; reserved 1,200,000 series B participating cumulative  preferred stock, none issued or outstanding                                                                                                                |       |                         | —     |                        |       |   | — |   |   |
| Common stock, $.001 par value; authorized 200,000,000  shares; issued 85,548,867 and 84,412,408 at September 30, 2006 and  December 31, 2005, respectively; outstanding 84,544,193 and 83,407,734  at September 30, 2006 and December 31, 2005, respectively |       |                         | 86         |                        |       |   | 84 |   |   |
| Additional paid-in capital                                                                                                                                                                                                                                                            |       |                         | 826,299    |                        |       |   | 733,069 |   |   |
| Accumulated deficit                                                                                                                                                                                                                                                                   |       |                         | (118,343   | )                           |       |   | (442,459 | ) |   |
| Treasury stock, at cost; 1,004,674 at  September 30, 2006 and December 31, 2005, respectively                                                                                                                                                                               |       |                         | (29,149    | )                           |       |   | (29,149 | ) |   |
| Accumulated other  comprehensive loss:                                                                                                                                                                                                                                                |       |                         |       |                        |       |   |   |   |   |
| Net unrealized loss on securities available for sale                                                                                                                                                                                                                                  |       |                         | (6,309     | )                           |       |   | (9,141 | ) |   |
| Total stockholders’ equity                                                                                                                                                                                                                                                       |       |                         | 672,584    |                        |       |   | 252,404 |   |   |
| Total liabilities  and stockholders’ equity                                                                                                                                                                                                                                      |       |                         | $          | 1,784,788                   |       |   |   | $ | 1,343,415 |   |   |

 

See accompanying notes to consolidated financial statements.

1

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

| ** **                                              | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                               |       |                                                |       |                                               |       |   |   |   |   |
| Royalty revenue                                         |       | $                                                   | 78,599     |                                               | $          | 46,647 |   | $ | 213,483 |   | $ | 124,810 |   |
| License fees and milestone revenue                      |       | 34,948                                              |       | 27,146                                             |       | 212,807 |   | 76,171 |   |
| Manufacturing revenue                                   |       | 20,884                                              |       | 10,748                                             |       | 68,589 |   | 29,661 |   |
| Collaborative agreement revenue                         |       | 16,266                                              |       | 21,984                                             |       | 50,805 |   | 54,039 |   |
| Total revenues                                          |       | 150,697                                             |       | 106,525                                            |       | 545,684 |   | 284,681 |   |
| Operating expenses:                                     |       |                                                |       |                                               |       |   |   |   |   |
| Research and development                                |       | 26,437                                              |       | 28,958                                             |       | 87,013 |   | 74,564 |   |
| Clinical and regulatory                                 |       | 13,527                                              |       | 13,583                                             |       | 43,537 |   | 31,357 |   |
| Marketing, general and administrative                   |       | 15,977                                              |       | 19,463                                             |       | 56,941 |   | 53,919 |   |
| Royalty expense                                         |       | 18,051                                              |       | 15,165                                             |       | 56,531 |   | 42,069 |   |
| Cost of manufacturing revenue                           |       | 19,187                                              |       | 3,099                                              |       | 61,466 |   | 4,948 |   |
| Discontinuation of small molecule research program      |       | —                                              |       | —                                             |       | — |   | 6,200 |   |
| Total operating expenses                                |       | 93,179                                              |       | 80,268                                             |       | 305,488 |   | 213,057 |   |
| Operating income                                        |       | 57,518                                              |       | 26,257                                             |       | 240,196 |   | 71,624 |   |
| Other:                                                  |       |                                                |       |                                               |       |   |   |   |   |
| Interest income                                         |       | (11,058                                             | )          | (7,025                                             | )          | (28,444 | ) | (20,575 | ) |
| Interest expense                                        |       | 2,974                                               |       | 1,577                                              |       | 6,350 |   | 5,073 |   |
| Loss on sales of securities                             |       | —                                              |       | —                                             |       | — |   | 16 |   |
| Other, net                                              |       | (8,084                                              | )          | (5,448                                             | )          | (22,094 | ) | (15,486 | ) |
| Income before income taxes.                             |       | 65,602                                              |       | 31,705                                             |       | 262,290 |   | 87,110 |   |
| Provision (benefit) for income taxes                    |       | 8,286                                               |       | 754                                                |       | (61,826 | ) | 1,308 |   |
| Net income                                              |       | $                                                   | 57,316     |                                               | $          | 30,951 |   | $ | 324,116 |   | $ | 85,802 |   |
| Income per common share:                                |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                                   |       | $                                                   | 0.68       |                                               | $          | 0.37 |   | $ | 3.86 |   | $ | 1.03 |   |
| Diluted                                                 |       | $                                                   | 0.65       |                                               | $          | 0.35 |   | $ | 3.58 |   | $ | 0.98 |   |
| Shares used in  calculation of income per common share: |       |                                                |       |                                               |       |   |   |   |   |
| Basic                                                   |       | 84,335                                              |       | 83,785                                             |       | 84,013 |   | 83,561 |   |
| Diluted                                                 |       | 91,915                                              |       | 92,136                                             |       | 91,974 |   | 92,287 |   |

 

See accompanying notes to consolidated financial statements.

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**IMCLONE SYSTEMS INCORPORATEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEFor the Nine Months Ended September 30, 2006(in thousands, except share data)(Unaudited)**

| ** **                                                               | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                               | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **Deficit**                           | ** ** | **Stock**  | ** ** | **Loss** | ** ** | **Total** | ** ** |
| Balance at December 31, 2005                              |       |                     | —     |                  |       |                    | $          | —          |       |         | 84,412,408 |                                  |       | $          | 84         |   |   |   | $ | 733,069 |   |   |   | $ | (442,459 | ) |   |   | $ | (29,149 | ) |   |   | $ | (9,141 | ) |   | $ | 252,404 |   |
| Options exercised                                                        |       |                     |       |                  |       |                    |       |            |       | 1,112,700    |       |                                  | 2          |       |       |   | 17,164 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 17,166 |   |
| Issuance of shares through employee stock purchase  plan                 |       |                     |       |                  |       |                    |       |            |       | 23,759       |       |                                  | —     |       |       |   | 669 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 669 |   |
| Share based compensation  expense                                        |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   | 6,264 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 6,264 |   |
| Tax benefit of stock options                                             |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   | 69,133 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 69,133 |   |
| Comprehensive income:                                                    |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                               |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   | 324,116 |   |   |   |   |   |   |   |   |   |   | 324,116 |   |
| Other comprehensive  income:                                             |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on marketable securities arising  during the period |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,832 |   |   | 2,832 |   |
| Total other comprehensive  income                                        |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | 2,832 |   |   | 2,832 |   |
| Comprehensive income                                                     |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 326,948 |   |
| Balance at  September 30, 2006                                      |       |                     | —     |                  |       |                    | $          | —          |       |         | 85,548,867 |                                  |       | $          | 86         |   |   |   | $ | 826,299 |   |   |   | $ | (118,343 | ) |   |   | $ | (29,149 | ) |   |   | $ | (6,309 | ) |   | $ | 672,584 |   |

 

See accompanying notes to consolidated financial statements.

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

| ** **                                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                        |       |                                                |       |   |   |
| Net income                                                                                   |       | $                                                   | 324,116    |   | $ | 85,802 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities: |       |                                                |       |   |   |
| Depreciation and  amortization                                                               |       | 22,054                                              |       | 9,706 |   |
| Amortization of  deferred financing costs                                                    |       | 2,784                                               |       | 2,784 |   |
| Share based  compensation                                                                    |       | 6,264                                               |       | — |   |
| Tax benefit from  share based compensation                                                   |       | (69,133                                             | )          | — |   |
| Loss on disposal  of fixed assets                                                            |       | —                                              |       | 3,880 |   |
| Deferred income  taxes                                                                       |       | (146,764                                            | )          | — |   |
| Other                                                                                        |       | —                                              |       | 97 |   |
| Changes in:                                                                                  |       |                                                |       |   |   |
| Prepaid expenses                                                                             |       | (1,974                                              | )          | (1,794 | ) |
| Amounts due from  corporate partners                                                         |       | (33,512                                             | )          | 3,263 |   |
| Inventories                                                                                  |       | (5,732                                              | )          | (32,622 | ) |
| Other current  assets                                                                        |       | (2,910                                              | )          | 21,639 |   |
| Other assets                                                                                 |       | 903                                                 |       | 1,187 |   |
| Accounts payable                                                                             |       | (7,557                                              | )          | 1,744 |   |
| Accrued expenses                                                                             |       | 86,088                                              |       | (10,523 | ) |
| Share based  compensation                                                                    |       | 661                                                 |       | — |   |
| Withholding tax  liability                                                                   |       | (31,736                                             | )          | — |   |
| Other current  liabilities                                                                   |       | 2,063                                               |       | 2,063 |   |
| Litigation  settlement                                                                       |       | —                                              |       | (75,900 | ) |
| Deferred rent,  less current portion                                                         |       | 493                                                 |       | (1,136 | ) |
| Deferred revenue                                                                             |       | 40,314                                              |       | (77,714 | ) |
| Net cash provided  by (used in) operating activities                                         |       | 186,422                                             |       | (67,524 | ) |
| Cash flows from  investing activities:                                                       |       |                                                |       |   |   |
| Acquisitions of  property, plant and equipment                                               |       | (41,118                                             | )          | (69,804 | ) |
| Purchases of  securities available for sale                                                  |       | (1,213,832                                          | )          | (425,044 | ) |
| Proceeds from sale  of securities available for sale                                         |       | 872,665                                             |       | 408,601 |   |
| Maturities of  securities available for sale                                                 |       | 120,800                                             |       | 67,017 |   |
| Net cash used in  investing activities                                                       |       | (261,485                                            | )          | (19,230 | ) |
| Cash flows from  financing activities:                                                       |       |                                                |       |   |   |
| Proceeds from  exercise of stock options                                                     |       | 17,166                                              |       | 13,361 |   |
| Proceeds from  issuance of common stock under the employee stock purchase plan               |       | 669                                                 |       | 735 |   |
| Tax benefit from  share based compensation                                                   |       | 69,133                                              |       | — |   |
| Net cash provided  by financing activities                                                   |       | 86,968                                              |       | 14,096 |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | 11,905                                              |       | (72,658 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 3,403                                               |       | 79,321 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                                   | 15,308     |   | $ | 6,663 |   |
| Supplemental cash  flow information:                                                         |       |                                                |       |   |   |
| Cash paid for:                                                                               |       |                                                |       |   |   |
| Interest, net of  amounts capitalized                                                        |       | $                                                   | 1,503      |   | $ | 226 |   |
| Income taxes                                                                                 |       | $                                                   | 4,058      |   | $ | 1,400 |   |
| Non-cash investing  and financing activity:                                                  |       |                                                |       |   |   |
| (Decrease)  increase in net unrealized loss in securities available-for-sale                 |       | $                                                   | (2,832     | ) | $ | 7,017 |   |

 

See accompanying notes to consolidated financial statements.

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

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

The accompanying consolidated financial statements ofImClone Systems Incorporated (“ImClone Systems” or the “Company”) as of September 30,2006 and for the three and nine months ended September 30, 2006 and 2005are unaudited. The accompanying unaudited consolidated balance sheets,statements of income, statement of stockholders’ equity and comprehensiveincome and statements of cash flows have been prepared in accordance with U.S.generally accepted accounting principles (“GAAP”) for interim financialinformation and in conjunction with the rules and regulations of theSecurities and Exchange Commission (“SEC”). Accordingly, they do not includeall of the disclosures required by GAAP for complete financial statements. Thefinancial statements reflect all adjustments, consisting only of normal,recurring adjustments, which are in the opinion of management, necessary for afair presentation for the interim periods. Management of the Company has made anumber of estimates and assumptions relating to the reporting of assets andliabilities and related revenue and expense accounts and the disclosure ofcontingent assets and liabilities to prepare these consolidated financialstatements in conformity with GAAP. Actual results could differ materially fromthose estimates. These financial statements should be read in conjunction withthe audited consolidated financial statements and notes thereto included in theCompany’s Annual Report on Form 10-K for the fiscal year ended December 31,2005, as filed with the SEC.

The results of operations for the interim periods arenot necessarily indicative of results to be expected for the entire fiscal yearor any other period.

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

On September 28, 2006, Carl C. Icahn, AlexanderJ. Denner, Barberry Corp and High River Limited Partnership, filed with theSecurities and Exchange Commission a consent solicitation to remove six membersof the Company’s Board of Directors as well as to add Peter S. Liebert to theBoard. On October 10,2006, David M. Kies and William W. Crouse announced theirresignation from the Board of Directors of the Company. On October 20,2006 the Company announced that Peter S. Liebert, M.D., was appointed by theCompany’s Board of Directors to fill one of the vacancies resulting from theresignation of the two Directors discussed above. On October 25, 2006, theCompany announced that its Board of Directors has appointed Carl C. IcahnChairman of the Board. The Company also announced that Joseph L. Fischer resignedas Interim Chief Executive Officer and as a member of the Company’s Board ofDirectors, effective October 24, 2006, and was replaced by a newly formedExecutive Committee of the Board (the “Committee”), which will be chaired byAlex Denner, Ph.D., and include Directors Richard Mulligan, Ph.D., and CharlesWoler, M.D., Ph.D. The Committee will serve as the principal executive body forthe Company until such time as a Chief Executive Officer is named. The Companyalso announced that Directors Vincent T. DeVita, Jr., M.D., John A. Fazioand William R. Miller will not stand for reelection to the Board at the Company’snext annual meeting, which the Company expects to host in the first quarter 

5

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

of 2007. As a result ofthis decision, Carl Icahn and related parties have withdrawn their shareholderconsent solicitation, the Consent Solicitation Committee of the Board has beendissolved and the Company has withdrawn its shareholder consent revocationsolicitation. The Board also determined that it would waive all Board ofDirector fees for six months and all option grants for directors for the nextyear.

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

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

**Impact of RecentAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*. This Interpretationclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB No. 109 andprescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This Interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. This Interpretation is effective forfiscal years beginning after December 15, 2006. We are in the process ofanalyzing the impact that this Interpretation may have on the Company’sconsolidated financial statements. Therefore, we are not in a position toconclude whether the adoption of this Interpretation will have a materialimpact on the Company’s consolidated financial statements.

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

**ComprehensiveIncome**

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

| ** **                                                                    | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                                    |       | $                                                   | 57,316     |                                               | $          | 30,951 |   | $ | 324,116 |   | $ | 85,802 |   |
| Other comprehensive  income (loss):                                           |       |                                                |       |                                               |       |   |   |   |   |
| Unrealized gain  (loss) on marketable securities during the period            |       | 4,835                                               |       | (3,829                                             | )          | 2,832 |   | (7,017 | ) |
| Less: Reclassification adjustment for realized loss  included   in net income |       | —                                              |       | —                                             |       | — |   | 16 |   |
| Total other comprehensive income (loss)                                       |       | 4,835                                               |       | (3,829                                             | )          | 2,832 |   | (7,001 | ) |
| Total  comprehensive income                                                   |       | $                                                   | 62,151     |                                               | $          | 27,122 |   | $ | 326,948 |   | $ | 78,801 |   |

 

The tax (expense) benefiton the items included in other comprehensive income (loss) assuming they wererecognized in income would be approximately ($687,000) and $38,000 for thethree months ended September 30, 2006 and 2005, respectively, and($388,000) and $70,000 for the nine months ended September 30, 2006 and2005, respectively.

**Fair Value ofFinancial Instruments**

The fair value of theCompany’s 13¤8%convertible senior notes of $600,000,000 was approximately $529,500,000 and$502,500,000 at September 30, 2006 and December 31, 2005,respectively, based on their quoted market price.

**(2)**   Inventories

Inventoriesare 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,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials and  supplies |       |                         | $          | 16,412                      |       |   |   | $ | 22,664 |   |   |
| Work in process             |       |                         | 63,430     |                        |       |   | 49,149 |   |   |
| Finished goods              |       |                         | 7,284      |                        |       |   | 9,581 |   |   |
| Total                       |       |                         | $          | 87,126                      |       |   |   | $ | 81,394 |   |   |

 

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

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

inventory for excess orobsolete inventory and write down obsolete or otherwise unmarketable inventoryto its estimated net realizable value.

In June 2006, theCompany began producing ERBITUX for commercial use at its multiple productmanufacturing facility (“BB50”), located in Branchburg, New Jersey. The Companyexpects to file a sBLA with the FDA for approval of BB50 in the first quarterof 2007. Until such time as the Company receives approval of BB50 from the FDA,the ERBITUX inventory produced in BB50 cannot be used for commercial distribution.Based on management’s current expectations, the Company expects that the costsof such inventory will be fully realizable once the Company obtains approval ofBB50. As of September 30, 2006, the Company has capitalized approximately$28.2 million related to the costs of producing ERBITUX in BB50. This amount isclassified as long term inventory as it is not expected to be sold within oneyear. The Company will continue to capitalize the costs of producing ERBITUX inBB50 as long as management can conclude that the costs of such inventory willbe fully realizable in the future.

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

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

| ** **                                      | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Land                                            |       |                         | $          | 4,899                       |       |   |   | $ | 4,899 |   |   |
| Building.                                       |       |                         | 281,163    |                        |       |   | 67,597 |   |   |
| Leasehold  improvements                         |       |                         | 14,512     |                        |       |   | 13,969 |   |   |
| Machinery and  equipment                        |       |                         | 162,141    |                        |       |   | 62,806 |   |   |
| Furniture and  fixtures                         |       |                         | 6,303      |                        |       |   | 4,596 |   |   |
| Construction in  progress                       |       |                         | 44,413     |                        |       |   | 318,446 |   |   |
| Total cost                                      |       |                         | 513,431    |                        |       |   | 472,313 |   |   |
| Less accumulated  depreciation and amortization |       |                         | (87,681    | )                           |       |   | (65,718 | ) |   |
| Property, plant  and equipment, net             |       |                         | $          | 425,750                     |       |   |   | $ | 406,595 |   |   |

 

In June 2006, the Company transferred, fromconstruction in progress, the cost associated with our BB50 multi-productmanufacturing facility into the appropriate fixed asset categories, with theexception of certain costs, primarily equipment in a portion of the buildingwhich is not yet ready for its intended use. The total cost of BB50 through September 30,2006 amounted to approximately $331.0 million, including $22.7 million ofcapitalized interest.

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

**(4)**   WithholdingTax Assets and Liability

On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to federalincome taxes not withheld because one or more of the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payfederal income taxes for those 

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

years. Subsequently, theCompany became aware of another potential income and employment tax withholdingliability associated with the exercise of certain warrants granted in the earlyyears of the Company’s existence that were held by certain former officers,directors and employees. After disclosure to the IRS in 2003, the IRS commencedaudits of the Company’s income tax and employment tax returns for the years1999-2001. On February 8, 2006, the Company received a draft of theIRS’s report of its preliminary findings which indicated that the IRS, inaddition to imposing liability on the Company for taxes not withheld, intendedto assert penalties with respect to both the failure to withhold on non-qualifiedstock options and the failure to report and withhold on the warrants describedabove. On March 14, 2006, the Company reached an agreement in principlewith the IRS to resolve the employment tax audit, which includes the Company’sagreement to the imposition of an accuracy-related penalty under Section 6662of the Internal Revenue Code. Under this agreement, the Company’s liability tothe IRS was calculated to be approximately $32,000,000. The Company hadpreviously recorded a withholding tax liability of $18,096,000 and awithholding tax asset of $274,000 in its consolidated Balance Sheet as of December 31,2004. Based on the agreement in principle reached with the IRS, the Companyeliminated the withholding tax asset of $274,000 and recorded an additionalwithholding tax liability of $13,904,000, or a total of $32,000,000, in itsconsolidated Balance Sheet as of December 31, 2005. As a result, theCompany recorded in the fourth quarter of 2005 a net withholding tax expense of$14,178,000. On April 19, 2006, the Company signed an agreement with theIRS to resolve the employment tax audit. Pursuant to such agreement the Companypaid $28,655,509 to the IRS on April 21, 2006, and on April 28, 2006,the Company paid the IRS $3,080,789 consisting of interest.

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

**(5)**   Share-BasedCompensation Plans

Effective January 1, 2006, the Company adoptedthe provisions of FASB No. 123 (revised 2004), Share-Based Payment (“SFAS123R”) using the modified prospective transition method. Under this method,prior periods are not revised for comparative purposes and the Companyrecognizes compensation cost using a fair-value based method for allshare-based payments granted after December 31, 2005, plus any awardsgranted to employees prior to December 31, 2005 that remain unvested atthat time. Prior to January 1, 2006, the Company accounted for itsshare-based compensation plans in accordance with the provisions of AccountingPrinciples Board (“APB”) Opinion No. 25. “Accounting for Stock Issued toEmployees”, and related interpretations including Statement of FinancialAccounting Standards Board Interpretation No. 44, “Accounting for CertainTransactions Involving Stock Compensation—An Interpretation of APB Opinion No. 25”.On November 10, 2005, the FASB issued FASB Staff Position No. FAS123(R)-3, “Transition Election Related to Accounting for Tax Effects ofShare-Based Payment Awards.” The Company has elected to adopt the alternativetransition method provided in this FASB Staff Position for purposes ofcalculating the pool of excess tax benefits available to absorb taxdeficiencies recognized subsequent to the adoption of SFAS 123R.

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

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

***Stock Option Plans***

In February 1996, the Company’s Board ofDirectors adopted and the shareholders thereafter approved an Incentive StockOption Plan and Non-Qualified Stock Option Plan (the “96 Plans”). In May 1998,the Company’s Board of Directors adopted an additional Non-Qualified StockOption Plan (the ”98 Plan”), which shareholders were not required toapprove. On June 11, 2002, the shareholders approved and the Companyadopted the 2002 Stock Option Plan (the “02 Plan”). Effective with the adoptionof the 02 Plan, the Company will not award new grants from the 96 Plans or the98 Plan. The 02 Plan provides for the granting of both incentivestock options and non-qualified stock options to purchase, subject toadjustment under the plan, 3,300,000 shares of the Company’s common stock toemployees, directors, consultants and advisors of the Company. Any common stocksubject to an option which is cancelled, forfeited or expires prior toexercise, whether such option was granted under this plan or the 96 Plans orthe 98 Plan, shall again become available for grant under the 02 Plan. Optionsgranted under the 02 Plan become fully vested and exercisable upon theoccurrence of a change in control, as defined. Incentive stock options grantedunder the 02 Plan may not exceed 825,000 shares of common stock, may notbe granted at a price less than the fair market value of the stock at the dateof grant and may not be granted to non-employees. In September 2003,the shareholders approved an amendment to the 02 Plan that increased themaximum total number of shares of common stock currently available for grant ofoptions under the plan from 3,300,000 shares to 6,600,000 shares, and increasedthe number of shares of common stock with respect to which incentive stockoptions may be granted under the plan from 825,000 shares to 1,650,000shares.

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

On October 17, 2005, the Compensation Committeeof the Board of Directors approved the adoption of a stock option plan for thesole purpose of making one-time grants of stock options to newly hired key employeeswho have not previously been employees or directors of the Company as aninducement to such persons entering into employment with the Company (the “InducementPlan”), in accordance with NASDAQ Marketplace Rule 4350(i)(1)(A)(iv). TheInducement Plan permits the Company to issue up to a total of 600,000 “inducement”options to eligible participants to purchase shares of common stock of theCompany on terms and conditions set forth therein and in individual awardagreements under the Inducement Plan, in each case on terms commensurate withoptions granted under the 02 Plan. The Inducement Plan was cancelled effective September 20,2006.

On September 20, 2006, the shareholders approvedand the Company adopted the 2006 Stock Incentive Plan. (the “06 Plan”).Effective with the adoption of the 06 Plan, the company will not award newgrants from the 02 Plan. Any common stock option which is cancelled, forfeitedor expires prior to exercise whether such option was granted under this plan,the 96 Plans, the 98 Plan or the 02 Plan, shall again become available forgrant under the 06 Plan. Options granted under the 06 Plan generally vest overone to four year periods and unless earlier terminated, expire ten years fromthe date of grant. The aggregate number of shares of common stock that may begranted or used for reference purposes under the 06 Plan shall not exceed5,500,000 shares plus common stock available for grant under prior plans.

As of September 30, 2006, the number of remainingshares authorized for grant under the plans discussed above is approximately6,210,000. Incentive stock options may not be granted at a price less than

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

the fair market value ofthe stock at the date of grant and may not be granted to non-employees.Options under all the plans, unless earlier terminated, expire ten years fromthe date of grant. Options granted under these plans generally vest overone-to-four-year periods.

On December 16, 2005,the Company’s Board of Directors approved the acceleration of vesting ofunvested stock options with exercise prices equal to or greater than $33.44 pershare outstanding as of December 16, 2005 that had been previously awardedto Company employees and other eligible participants, including officers andnon-employee directors. Options to purchase approximately 2,805,169 sharesof the Company’s common stock were subject to this acceleration. Of thisamount, approximately 163,750 options are held by non-employee directors, witha weighted average exercise price of $45.00 per share, and 628,347 options areheld by officers of the Company with a weighted average exercise price of$44.32 per share. The Board required each non-employee director and, as acondition to continued employment, each officer of the Company, to agree torefrain from selling, transferring, pledging or otherwise disposing of sharesof Company common stock acquired upon any exercise of subject stock options(other than sales by such persons to fund the exercise price or to satisfyminimum statutory withholding on such exercise, each in accordance with theapplicable Plan and the Company’s existing policies and procedures) until thedate on which the exercise would have been permitted under the stock option’spre-acceleration vesting terms or pursuant to the Company’s Change-in-ControlPlan or, if earlier, the officer’s last day of employment with, or director’slast day of service as a director of, the Company. The decision to acceleratevesting of these stock options, which were “out-of-the-money”, was madeprimarily to minimize future compensation expense that the Company wouldotherwise have been required to recognize in its Consolidated Statements ofIncome pursuant to SFAS 123R, which the Company adopted on January 1,2006. The Company estimates that the aggregate future expense that will beeliminated as a result of this acceleration of vesting is approximately $22.5million in 2006 and $9.5 million in 2007.

***Employee Stock Purchase Plan***

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

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

***Retention Plan***

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

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

| ** **                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| Research and  development              |       | $                                                    | 318,000    |                                                |       | $ | — |   |   | $ | 1,341,000 |   |   | $ | — |   |   |
| Clinical and  regulatory               |       | 279,000                                              |       |                                                | —     |   |   | 948,000 |   |   | — |   |   |
| Marketing,  general and administrative |       | 1,223,000                                            |       |                                                | —     |   |   | 3,636,000 |   |   | — |   |   |
| Total                                  |       | $                                                    | 1,820,000  |                                                |       | $ | — |   |   | $ | 5,925,000 |   |   | $ | — |   |   |

 

In addition, the Company capitalized, during the threeand nine months ended September 30, 2006, $271,000 and $795,000,respectively, as part of the cost of inventory and $0 and $204,000,respectively, in property, plant and equipment.

As a result of adopting SFAS 123R, the Company’sincome before income taxes and net income for the three months ended September 30,2006 was $1,820,000 and $1,623,000 lower, respectively, than if it hadcontinued to account for share-based compensation in accordance with theprovisions of APB Opinion 25. The Company’s income before income taxes and netincome for the nine months ended September 30, 2006 was $5,925,000 and$5,114,000 lower, respectively, than if it had continued to account forshare-based compensation in accordance with the provisions of APB Opinion 25.Basic and diluted income per share 

12

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

for the three months endedSeptember 30, 2006, would have been $0.70 and $0.67, respectively, if theCompany had not adopted SFAS 123R, compared to reported basic and dilutedincome per share of $0.68 and $0.65, respectively. Basic and diluted income pershare for the nine months ended September 30, 2006, would have been $3.92and****$3.64, respectively, if the Companyhad not adopted SFAS 123R, compared to reported basic and diluted income pershare of $3.86 and $3.58, respectively. In addition, for the nine months ended September 30,2006, the adoption of SFAS 123R resulted in net cash provided by operatingactivities being lower and net cash provided by financing activities beinghigher by approximately $69,133,000. This amount represents the benefit ofequity net operating losses that will be taken as a reduction in our taxliability on our tax return and therefore, saving us cash by reducing ourfederal and state taxes due.

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

***Determining Fair Value***

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

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

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

*Risk-FreeInterest Rate:*   The risk-freeinterest rate used in the Black-Scholes option pricing model is based on theimplied yield available on U.S. Treasury zero-coupon issues with a remainingterm equal to the expected term used. The risk free rate used in theMonte-Carlo valuation model is based on the 

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

implied yield in effect atthe time of grant from the constant maturity treasury yield curve over thecontractual terms of the award.

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

*Forfeitures:**  *TheCompany uses historical data to estimate pre-vesting option forfeitures.Share-based compensation expense is recorded only for those awards that areexpected to vest. The Company’s pre-vesting forfeiture rate used was10.7%.

Thefollowing assumptions were used to estimate the fair value of options grantedunder the Company’s Stock Option Plans for the three and nine months ended September 30,2006 and 2005:

| ** **               | ** ** | **Stock Options**           | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
| ** **               | ** ** | **September 30,  2006**     | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Expected term  (years)   |       | 4.75-5.30                        |       |   | 4.99 |   |   | 3.95-5.72 |   |   | 4.47 |   |   |
| Expected  volatility     |       | 42.47                            | %          |   | 81.71 | % |   | 27.45%-42.70 | % |   | 82.97 | % |   |
| Risk free  interest rate |       | 4.58%-4.59                       | %          |   | 3.90 | % |   | 4.31%-5.21 | % |   | 3.61 | % |   |
| Expected dividend rate   |       | 0                                | %          |   | 0 | % |   | 0 | % |   | 0 | % |   |

 

The assumptions used inthe Monte-Carlo simulation modeling to estimate the fair value of awards underthe Retention Plan for the three and nine months ended September 30, 2006were: expected volatility of 42.47 %, risk free interest rate ranging from 4.77% to 4.98 % and expected dividend yield of 0%. The fair value of theCompany’s ESPP awards was calculated using the intrinsic value of the commonstock purchased on September 30, 2006 based on the fact that the Company’soffering period is three months and the ESPP does not contain a look-backprovision.

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

Stockoption activity for the nine months ended September 30, 2006 is summarizedas follows:

| ** **                              | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                              | ** ** | ** **                 | ** ** | ** **                                                 | ** ** | **(Years)**                                         | ** ** | **(in thousands)**             | ** ** |
| Outstanding at  December 31, 2005  |       | 12,619,193                 |       |                                                       | $          | 37.38                                               |       |                                |       |   |   |   |   |   |   |   |
| Granted                                 |       | 1,640,914                  |       |                                                       | 34.60      |                                                |       |                                |       |   |   |   |   |   |   |
| Exercised                               |       | (1,112,700                 | )          |                                                       | 15.43      |                                                |       |                                |       |   |   |   |   |   |   |
| Forfeitures                             |       | (1,022,285                 | )          |                                                       | 45.77      |                                                |       |                                |       |   |   |   |   |   |   |
| Expired                                 |       | (436                       | )          |                                                       | 6.01       |                                                |       |                                |       |   |   |   |   |   |   |
| Outstanding at  September 30, 2006 |       | 12,124,686                 |       |                                                       | $          | 38.31                                               |       |                                |       | 6.34 |   |   |   | $ | 27,008 |   |   |
| Vested and  expected to vest            |       | 11,882,015                 |       |                                                       | $          | 38.40                                               |       |                                |       | 6.21 |   |   |   | $ | 26,973 |   |   |
| Exercisable at September 30,  2006 |       | 10,483,565                 |       |                                                       | $          | 39.07                                               |       |                                |       | 5.88 |   |   |   | $ | 25,931 |   |   |

 

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

The weighted average fair value of options grantedduring the three months ended September 30, 2006 and 2005 was $14.27 and$22.48, respectively. The weighted average fair value of options granted duringthe nine months ended September 30, 2006 and 2005 was $14.74 and $25.44,respectively. The aggregate intrinsic value of options outstanding at September 30,2006 is calculated as the difference between the exercise price of theunderlying options and the market price of the Company’s common stock for the1,891,843 shares that had exercise prices that were lower than the $28.32market price of our common stock at September 30, 2006. The totalintrinsic value of options exercised during the three months ended September 30,2006 and 2005 was $7,794,000 and $2,202,000, respectively, determined as of thedate of exercise. The total intrinsic value of options exercised during thenine months ended September 30, 2006 and 2005 was $21,015,000 and$14,992,000, respectively, determined as of the date of exercise.

The Company recognized for the three and nine monthsended September 30, 2006 approximately $1,960,000 and $5,259,000,respectively in share-based compensation expense, net of amounts capitalized,for stock options granted under the Company’s Stock Option Plans. As of September 30,2006, there was $15,757,000 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the Company’sStock Option Plans. This amount assumes the Company’s expected forfeiture rate.That cost is expected to be recognized over a weighted average period ofapproximately 2.6 years. The Company utilizes newly issued shares to satisfythe exercise of stock options.

Upon issuance of the awards, the grant date fair valuefor the Retention Plan was approximately $3.7 million. The fair value(based on the September 30, 2006 valuation) of the Retention Plan awardsoutstanding at September 30, 2006 was approximately $2,550,000. The combinedfair value of the Retention Plan awards that were cancelled during the ninemonths ended September 30, 2006 was approximately $382,000 (based on the September 30,2006 valuation). The aggregate intrinsic value of the awards outstanding at September 30,2006, all of which are not vested, is $0 which is calculated based on thepercentage that the 30 day average closing stock price preceding September 30,2006 exceeded the trigger price of $32.99. The aggregate intrinsic value of theawards expected to vest at September 30, 2006 is $0. The weighted averageremaining contractual term for both the awards outstanding and the awards thatare vested and expected to vest at September 30, 2006 is approximately 1.8years.

The Company recognized for the three and nine monthsended September 30, 2006 approximately ($172,000) and $565,000,respectively in share-based compensation expense, net of amounts capitalized,for the Retention Plan. As of September 30, 2006, there was $1,433,000 oftotal unrecognized compensation cost related to non-vested share-basedcompensation arrangements granted under the Retention Plan. This amount assumesthe Company’s expected forfeiture rate. The costs associated with the awardsare expected to be recognized over the Performance Periods.

During the three and ninemonths ended September 30, 2006, the Company granted 8,704 and 23,759 shares,respectively for the ESPP for a total of 207,154 shares that have been issuedunder the plan and recognized approximately $32,000 and $101,000, respectively,in share-based compensation expense, net of amounts capitalized. The Companyutilizes newly issued shares to satisfy the issuance of shares under the ESPP.

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

***Comparable Disclosures***

Thefollowing table illustrates the pro forma effect on the Company’s net incomeand net income per share as if the Company had adopted the fair valuebased method of accounting for stock-based compensation under Statement ofFinancial Accounting Standards No. 123 “*Accountingfor Stock-Based Compensation*” for the three and nine months ended September 30,2005. See the assumptions disclosed previously in this note that were used toestimate the fair value of options granted under the stock option plans for thethree and nine months ended September 30, 2005.

| ** **                                                                                                                            | ** ** | **Three Months  Ended  September 30,  2005**            | ** ** | **Nine Months  Ended  September 30,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| **Net  Income**                                                                                                                       | ** ** |                                                              | ** ** | ** **                                            |       |   | ** ** | ** ** |   |
| Net Income, as  reported                                                                                                              |       |                                                              | $          | 30,951                                                |       |   |   | $ | 85,802 |   |   |
| Add: Stock-based  employee compensation expense included in net income, tax effected                                             |       |                                                              | —     |                                                  |       |   | — |   |   |
| Deduct: Total  share-based employee compensation expense determined under fair value method  for all awards, net of income taxes |       |                                                              | (12,300    | )                                                     |       |   | (41,345 | ) |   |
| Pro forma net  income                                                                                                                 |       |                                                              | $          | 18,651                                                |       |   |   | $ | 44,457 |   |   |
| **Net income per share**                                                                                                              | ** ** |                                                              | ** ** | ** **                                            |       |   | ** ** | ** ** |   |
| Basic—as reported                                                                                                                |       |                                                              | $          | 0.37                                                  |       |   |   | $ | 1.03 |   |   |
| Basic—pro forma                                                                                                                  |       |                                                              | $          | 0.22                                                  |       |   |   | $ | 0.53 |   |   |
| Diluted—as  reported                                                                                                             |       |                                                              | $          | 0.35                                                  |       |   |   | $ | 0.98 |   |   |
| Diluted—pro forma                                                                                                                |       |                                                              | $          | 0.22                                                  |       |   |   | $ | 0.52 |   |   |

 

For the three and ninemonths ended September 30, 2005 there were approximately 15,328,000 and 14,878,000,respectively, of potential common shares excluded from the pro forma dilutedincome per share computation because their inclusion would have had ananti-dilutive effect. The potential common shares excluded from the computationconsist of anti-dilutive stock options and anti-dilutive shares related to the 13¤8%convertible notes.

**(6)   Income PerCommon Share**

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

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

and 2) theconversion of convertible debt which is calculated using an “if-converted”basis. In addition, in computing the dilutive effect of convertible debt, thenumerator is adjusted to add back the after-tax amount of interest recognizedin the period. For the three months ended September 30, 2006 and 2005,there were an aggregate of 9,132,000 and 8,851,000, respectively, potentialcommon shares, excluded from the diluted income per share computation becausetheir inclusion would have had an anti-dilutive effect. For the nine monthsended September 30, 2006 and 2005, there were an aggregate of 8,574,000and 8,112,000, respectively, potential common shares, excluded from the dilutedincome per share computation because their inclusion would have had ananti-dilutive effect.

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

| ** **                                                                 | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|----------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| EPS  Numerator—Basic:                                                 |       |                                                |       |                                               |       |   |   |   |   |
| Net Income                                                                 |       | $                                                   | 57,316     |                                               | $          | 30,951 |   | $ | 324,116 |   | $ | 85,802 |   |
| EPS  Denominator—Basic:                                               |       |                                                |       |                                               |       |   |   |   |   |
| Weighted-average number of shares of common stock  outstanding             |       | 84,335                                              |       | 83,785                                             |       | 84,013 |   | 83,561 |   |
| EPS  Numerator—Diluted:                                               |       |                                                |       |                                               |       |   |   |   |   |
| Net Income                                                                 |       | $                                                   | 57,316     |                                               | $          | 30,951 |   | $ | 324,116 |   | $ | 85,802 |   |
| Adjustment for  interest, net of amounts capitalized and income tax effect |       | 2,610                                               |       | 1,536                                              |       | 5,481 |   | 4,997 |   |
| Net income, adjusted                                                       |       | $                                                   | 59,926     |                                               | $          | 32,487 |   | $ | 329,597 |   | $ | 90,799 |   |
| EPS  Denominator—Diluted:                                             |       |                                                |       |                                               |       |   |   |   |   |
| Weighted-average number of shares of common stock  outstanding             |       | 84,335                                              |       | 83,785                                             |       | 84,013 |   | 83,561 |   |
| Effect of dilutive  securities:                                            |       |                                                |       |                                               |       |   |   |   |   |
| Stock options                                                              |       | 1,244                                               |       | 2,015                                              |       | 1,625 |   | 2,390 |   |
| Convertible subordinated notes                                             |       | 6,336                                               |       | 6,336                                              |       | 6,336 |   | 6,336 |   |
| Dilutive potential common shares                                           |       | 7,580                                               |       | 8,351                                              |       | 7,961 |   | 8,726 |   |
| Weighted-average  common shares and dilutive potential common shares       |       | 91,915                                              |       | 92,136                                             |       | 91,974 |   | 92,287 |   |
| Basic income per  common share                                             |       | $                                                   | 0.68       |                                               | $          | 0.37 |   | $ | 3.86 |   | $ | 1.03 |   |
| Diluted income per  common share                                           |       | $                                                   | 0.65       |                                               | $          | 0.35 |   | $ | 3.58 |   | $ | 0.98 |   |

 

**(7)   Taxes**

The Company’s estimated annual effective income taxrate for 2006 is approximately 14%, excluding the effect of an adjustmentrecorded in the third quarter of 2006 of approximately $1.8 million, primarilyresulting from changes in certain state tax legislation and its effect on ourdeferred tax assets. The resulting effective tax rate for the third quarter andnine months of 2006, including such adjustment, is 12.6% and 14.4%,respectively. These estimated rates exclude the release of a portion of theCompany’s tax valuation allowance in the first quarter of 2006 discussed below.

 

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

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

**(8)   CollaborativeAgreements**

***(a)   Merck KGaA***

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

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

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

·       we retained the rights, (1) withoutthe right to sublicense, to make, have made, use, sell, or have sold BEC2 inNorth America in conjunction with Merck KGaA and (2) with the right tosublicense, to make, have made, use, sell, or have sold gp75 antigen in NorthAmerica;

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

In return, MerckKGaA:

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

·       was required to makemilestone payments to us of up to $22,500,000, of which $5,000,000 was receivedthrough September 30, 2006 based on milestones achieved in the productdevelopment of BEC2;

·       was required to makeroyalty payments to us on all sales of the licensed products outside NorthAmerica, if any, with a portion of the earlier funding received under theagreement being creditable against the amount of royalties due.

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

Following an analysis of the results of variousclinical studies involving BEC2 and work on the recombinant gp75 antigen, theCompany and Merck KGaA determined to discontinue their further development andterminated the related agreement in the fourth quarter of 2005. Approximately$1.6 million of deferred revenue related to this agreement was recorded asrevenue upon the cancellation of the contract. The Company incurred expenses of$0 for the three months ended September 30, 2006 and 2005, respectively,and expenses of $0 and approximately $19,000 for the nine months ended September 30,2006 and 2005, respectively related to this contract.

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

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

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

In July 2006, the Company and Merck KGaA enteredinto agreements amending and supplementing the 1998 development and licenseagreement. As part of the agreements, the Company consented to Merck KGaA’s sublicenseof certain intellectual property rights relating to the development andcommercialization of an anti-EGFR antibody to Takeda Pharmaceutical Company.Merck KGaA and Takeda signed an alliance in September 2005 for thedevelopment and commercialization of matuzumab (EMD72000), a humanizedEGFR-targeting monoclonal antibody. In consideration for the Company’s consent,Merck KGaA agreed to pay the Company EUR 2.5 million within 30 days of theexecution of the agreements and a further EUR 5 million within 30 days of theCompany’s written consent to the 

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

sublicense. The Companyreceived the first payment of EUR 2.5 million in August of 2006 and hasdeferred the revenue associated with this payment and is recognizing it overthe estimated service period. The Company expects to give written consent tosublicense in the fourth quarter of 2006. In addition, Merck KGaA agreed toincrease its fixed royalty to 9.5% on net sales of ERBITUX outside the U.S. andCanada, effective July 1, 2006. The agreements also promote freedom tooperate in the development and commercialization of matuzumab outside theUnited States and Canada and of IMC-11F8 (a fully human EGFR-targetedIgG1 monoclonal antibody being developed by ImClone Systems) within the UnitedStates and Canada through the granting of certain reciprocal rights, includingthe sharing of confidential technical information. This is in addition to theexclusive rights held by the Company to develop and commercialize IMC-11F8outside of the United States and Canada . The agreements do not extend to keyintellectual property rights in the U.S. and Canada, where the Company and itspartner Bristol-Myers Squibb continue to hold exclusive licenses to key patentscovering certain uses of EGFR-targeted monoclonal antibodies.

Amounts due from MerckKGaA related to these arrangements totaled approximately $11,828,000 and$7,768,000 at September 30, 2006 and December 31, 2005, respectively,and are included in amounts due from corporate partners in the ConsolidatedBalance Sheets. The Company has a liability due Merck KGaA of $0 andapproximately $2,532,000 as of September 30, 2006 and December 31,2005, respectively.

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

On September 19, 2001, the Company entered intoan acquisition agreement (the “Acquisition Agreement”) with BMS andBristol-Myers Squibb Biologics Company, a Delaware corporation (“BMS Biologics”),which is a wholly-owned subsidiary of BMS, providing for the tender offer byBMS Biologics to purchase up to 14,392,003 shares of the Company’s common stockfor $70.00 per share, net to the seller in cash. BMS accepted these shares forpayment on October 29, 2001 on a pro rata basis from all tenderingshareholders and those conditionally exercising stock options. In connectionwith the Acquisition Agreement, the Company entered into a stockholderagreement with BMS and BMS Biologics, dated as of September 19, 2001 (the “StockholderAgreement”), pursuant to which all parties agreed to various arrangementsregarding the respective rights and obligations of each party with respect to,among other things, the ownership of shares of the Company’s common stock byBMS and BMS Biologics. Concurrent with the execution of the AcquisitionAgreement and the Stockholder Agreement, the Company entered into theCommercial Agreement with BMS and E.R. Squibb, relating to ERBITUX,pursuant to which, among other things, BMS and E.R. Squibb are co-developingand co-promoting ERBITUX in the United States and Canada with the Company,and are co-developing and co-promoting ERBITUX in Japan with the Company andeither together or co-exclusively with Merck KGaA.

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

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

***Commercial Agreement***

*Rights Granted to E.R. Squibb**—Pursuant*to theCommercial Agreement, as amended on March 5, 2002, the Company granted toE.R. Squibb (1) the exclusive right to distribute, and the co-exclusiveright to develop and promote (together with the Company) any prescriptionpharmaceutical product using the compound ERBITUX (the “product”) in the UnitedStates and Canada, (2) the co-exclusive right to develop, distribute andpromote (together with the Company and together or co-exclusively with MerckKGaA and its affiliates) the product in Japan, and (3) the non-exclusiveright to use the Company’s registered trademarks for the product in the UnitedStates, Canada and Japan (collectively, the “territory”) in connection with theforegoing. In addition, the Company agreed not to grant any right or license toany third party, or otherwise permit any third party, to develop ERBITUX foranimal health or any other application outside the human health field withoutthe prior consent of E.R. Squibb (which consent may not be unreasonablywithheld).

*Rights Granted to the Company—**Pursuant*to theCommercial Agreement, E.R. Squibb has granted to the Company and the Company’saffiliates a license, without the right to grant sublicenses (other than toMerck KGaA and its affiliates for use in Japan and to any third party for useoutside the territory), to use solely for the purpose of developing, using,manufacturing, promoting, distributing and selling ERBITUX or the product, anyprocess, know-how or other invention developed solely by E.R. Squibb or BMSthat has general utility in connection with other products or compounds inaddition to ERBITUX or the product (“E.R. Squibb Inventions”).

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

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

*Development of the Product—**Responsibilities*associatedwith clinical and other ongoing studies is apportioned between the parties asdetermined by the product development committee described below. The CommercialAgreement provides for the establishment of clinical development plans settingforth the activities to be undertaken by the parties for the purpose ofobtaining marketing approvals, providing market support and developing newindications and formulations of the product. After transition ofresponsibilities for certain clinical and other studies, each party isprimarily responsible for performing the studies designated to it in theclinical development plans. In the United States and Canada, the CommercialAgreement provides that E.R. Squibb is responsible for 100% of the cost of allclinical studies other than those studies undertaken post-launch which are notpursuant to an IND (e.g. Phase IV studies), the cost of which is shared equallybetween E.R. Squibb and ImClone Systems. As between E.R. Squibb 

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

and ImClone Systems, eachis responsible for 50% of the costs of all studies in Japan. The Company hasalso agreed, and may agree in the future, to share with E.R. Squibb, onterms other than the foregoing, costs of clinical trials that the Companybelieves are not potentially registrational but should be undertaken prior to launchin the United States, Canada or Japan. In addition, to the extent that in 2005and 2006 the Company and BMS exceed the contractual maximum costs for clinicaldevelopment, the Company has agreed to share such cost with BMS. TheCompany has recorded expenses of $4,053,000 and $6,589,000 pursuant to suchcost sharing agreements for the three months ended September 30, 2006 and2005, respectively, and $17,692,000 and $11,877,000 for the nine months ended September 30,2006 and 2005, respectively. The Company has also incurred $1,029,000 and$293,000 for the three months ended September 30, 2006 and 2005,respectively, and $2,222,000 and $958,000 for the nine months ended September 30,2006 and 2005, respectively, related to the agreement with respect to Japan. Exceptas otherwise agreed upon by the parties, the Company will own all registrationsfor the product and is primarily responsible for the regulatory activitiesleading to registration in each country. E.R. Squibb will be primarilyresponsible for the regulatory activities in each country after the product hasbeen registered in that country. Pursuant to the terms of the CommercialAgreement, as amended, Andrew G. Bodnar, M.D., J.D., Senior VicePresident, Strategy and Medical & External Affairs of BMS, and amember of the Company’s Board of Directors, is entitled to oversee theimplementation of the clinical and regulatory plan for ERBITUX.

*Distribution and Promotion of the Product—**Pursuant*to theCommercial Agreement, E.R. Squibb has agreed to use all commercially reasonableefforts to launch, promote and sell the product in the territory with theobjective of maximizing the sales potential of the product and promoting thetherapeutic profile and benefits of the product in the most commerciallybeneficial manner. In connection with its responsibilities for distribution,marketing and sales of the product in the territory, E.R. Squibb is performingall relevant functions, including but not limited to the provision of salesforce personnel, marketing, warehousing and physical distribution of theproduct.

However, the Company has the right, at its electionand sole expense, to co-promote with E.R. Squibb the product in the territory.Pursuant to this co-promotion option, which the Company has exercised, the Companyis entitled on and after April 11, 2002 (at the Company’s sole expense) tohave the Company’s field organization participate in the promotion of theproduct consistent with the marketing plan agreed upon by the parties, providedthat E.R. Squibb retains the exclusive rights to sell and distribute theproduct. Except for the Company’s expenses incurred pursuant to theco-promotion option, E.R. Squibb is responsible for 100% of the distribution,sales and marketing costs in the United States and Canada, and as between E.R.Squibb and ImClone Systems, each is responsible for 50% of the distribution,sales, marketing costs and other related costs and expenses in Japan. TheCompany has an established sales force to maximize the potential commercialopportunities for ERBITUX and to serve as a foundation for the marketing offuture products derived either from within the Company’s pipeline or throughbusiness development opportunities.

*Manufacture and Supply—**The*CommercialAgreement provides that the Company is responsible for the manufacture andsupply of all requirements of ERBITUX in bulk form (“API”) for clinicaland commercial use in the territory, and that E.R. Squibb will purchase all ofits requirements of API for commercial use from the Company. The Companysupplies API for clinical use at the Company’s fully burdened manufacturingcost, and supplies API for commercial use at the Company’s fully burdenedmanufacturing cost plus a mark-up of 10%. The agreement also specifies that theCompany should use 

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

reasonable efforts toreduce the fully burdened manufacturing cost of producing bulk ERBITUX overtime. Specifically, beginning with 2006 production of bulk ERBITUX, theagreement provides that the cost of API should not exceed a predetermined priceper gram. Any excess over such amount will be shared equally by the Company andBMS.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

***Stockholder Agreement***

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

Based on the number of shares of common stock acquiredpursuant to the tender offer, BMS has the right to nominate two directors. BMSdesignated Andrew G. Bodnar, M.D., J.D., BMS’ Senior Vice President, Strategyand Medical & External Affairs, as one of the initial BMS directors.The nomination of Dr. Bodnar was approved by the Board on November 15,2001. BMS has not yet designated an individual to fill the open Board seat.

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

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

*Transfers of Shares—**Until*March 19,2005, neither BMS nor any of its affiliates were permitted to transfer anyshares of the Company’s common stock or enter into any arrangement thattransfers any of the economic consequences associated with the ownership ofshares. After March 19, 2005, neither BMS nor any of its affiliatesmay transfer any shares or enter into any arrangement that transfers anyof the economic consequences associated with the ownership of shares, except (1) pursuantto registration rights granted to BMS with respect to the shares, (2) pursuantto Rule 144 under the Securities Act of 1933, as amended or (3) forcertain hedging transactions. Any such transfer is subject to the followinglimitations: (1) the transferee may not acquire beneficial ownershipof more than 5% of the then-outstanding shares of common stock; (2) nomore than 10% of the total outstanding shares of common stock may be soldin any one registered underwritten public offering; and (3) neither BMSnor any of its affiliates may transfer shares of common stock (except forregistered firm commitment underwritten public offerings pursuant to theregistration rights described below) or enter into hedging transactions in anytwelve-month period that would, individually or in the aggregate, have theeffect of reducing the economic exposure of BMS and its affiliates by theequivalent of more than 10% of the maximum number of shares of common stockowned by BMS and its affiliates at any time after September 19, 2001.Notwithstanding the foregoing, BMS Biologics may transfer all, but notless than all, of the shares of common stock owned by it to BMS or to E.R.Squibb or another wholly-owned subsidiary of BMS.

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

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

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

In August 2005, theCompany entered into a Collaboration and License Agreement with UCB S.A., acompany registered in Belgium, for the development and commercialization of CDP-791,UCB’s investigational PEGylated di-Fab antibody targeting the vascularendothelial growth factor receptor-2 (“VEGFR-2”). No upfront ormilestone payments are payable under the Agreement. The Company did not incurany expenses related to this agreement in the three and nine months ended September 30,2006. The Company has a liability of $2,493,000 in accrued expenses as of September 30,2006 and December 31, 2005 related to this agreement.

***Collaborative Agreement Tables***

Royaltyrevenue consists of the following: (in thousands)

| ** **             | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **             | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS                    |       | $                                                   | 68,100     |                                               | $          | 41,715 |   | $ | 189,158 |   | $ | 113,828 |   |
| Merck KGaA             |       | 10,442                                              |       | 4,881                                              |       | 24,055 |   | 10,887 |   |
| Other                  |       | 57                                                  |       | 51                                                 |       | 270 |   | 95 |   |
| Total royalty  revenue |       | $                                                   | 78,599     |                                               | $          | 46,647 |   | $ | 213,483 |   | $ | 124,810 |   |

 

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

| ** **                                | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS:                                      |       |                                                |       |                                               |       |   |   |   |   |
| ERBITUX license fee revenue               |       | $                                                   | 34,830     |                                               | $          | 27,049 |   | $ | 212,578 |   | $ | 74,882 |   |
| Merck KGaA:                               |       |                                                |       |                                               |       |   |   |   |   |
| ERBITUX and BEC2 license fee revenue      |       | 118                                                 |       | 97                                                 |       | 229 |   | 1,289 |   |
| Total license  fees and milestone revenue |       | $                                                   | 34,948     |                                               | $          | 27,146 |   | $ | 212,807 |   | $ | 76,171 |   |

 

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

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

| ** **                                              | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS:                                                    |       |                                                |       |                                               |       |   |   |   |   |
| Drug                                                    |       | $                                                   | 1,936      |                                               | $          | 2,154 |   | $ | 6,329 |   | $ | 7,172 |   |
| ERBITUX clinical and regulatory expenses                |       | 3,277                                               |       | 3,467                                              |       | 9,419 |   | 10,338 |   |
| ERBITUX marketing, general and administrative  expenses |       | 297                                                 |       | 353                                                |       | 848 |   | 1,247 |   |
| ERBITUX royalty expenses                                |       | 7,858                                               |       | 4,813                                              |       | 21,826 |   | 13,134 |   |
| Total BMS                                               |       | 13,368                                              |       | 10,787                                             |       | 38,422 |   | 31,891 |   |
| Merck KGaA:                                             |       |                                                |       |                                               |       |   |   |   |   |
| Drug                                                    |       | 1,651                                               |       | 10,548                                             |       | 7,215 |   | 19,045 |   |
| ERBITUX clinical and regulatory expenses                |       | —                                              |       | (130                                               | )          | — |   | 928 |   |
| ERBITUX marketing, general and administrative  expenses |       | 10                                                  |       | 58                                                 |       | 109 |   | 278 |   |
| ERBITUX royalty expenses                                |       | 1,238                                               |       | 718                                                |       | 5,044 |   | 1,885 |   |
| Total Merck KGaA                                        |       | 2,899                                               |       | 11,194                                             |       | 12,368 |   | 22,136 |   |
| Other                                                   |       | (1                                                  | )          | 3                                                  |       | 15 |   | 12 |   |
| Total  collaborative agreement revenue                  |       | $                                                   | 16,266     |                                               | $          | 21,984 |   | $ | 50,805 |   | $ | 54,039 |   |

 

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

| ** **                   | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS                          |       | $                                                   | 20,305     |                                               | $          | 10,748 |   | $ | 64,541 |   | $ | 29,661 |   |
| Merck KGaA                   |       | 579                                                 |       | —                                             |       | 4,048 |   | — |   |
| Total manufacturing  revenue |       | $                                                   | 20,884     |                                               | $          | 10,748 |   | $ | 68,589 |   | $ | 29,661 |   |

 

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

| ** **                                 | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| BMS:                                       |       |                         |       |                        |       |   |   |   |   |
| ERBITUX                                    |       |                         | $          | 80,955                      |       |   |   | $ | 51,503 |   |   |
| Merck KGaA                                 |       |                         |       |                        |       |   |   |   |   |
| ERBITUX and BEC2                           |       |                         | 11,828     |                        |       |   | 7,768 |   |   |
| Total amounts due  from corporate partners |       |                         | $          | 92,783                      |       |   |   | $ | 59,271 |   |   |

 

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

Deferredrevenue consists of the following: (in thousands)

| ** **                                | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| BMS:                                      |       |                         |       |                        |       |   |   |   |   |
| ERBITUX commercial agreement              |       |                         | $          | 393,559                     |       |   |   | $ | 356,136 |   |   |
| Merck KGaA                                |       |                         |       |                        |       |   |   |   |   |
| ERBITUX development and license agreement |       |                         | 5,780      |                        |       |   | 2,889 |   |   |
| Total deferred revenue                    |       |                         | 399,339    |                        |       |   | 359,025 |   |   |
| Less current  portion                     |       |                         | (128,084   | )                           |       |   | (112,624 | ) |   |
| Total long term  deferred revenue         |       |                         | $          | 271,255                     |       |   |   | $ | 246,401 |   |   |

 

**(9)**   Commitmentsand Contingencies

As previously reported, on October 28, 2003, acomplaint was filed by Yeda Research and Development Company Ltd. (“Yeda”)against ImClone Systems and Aventis Pharmaceuticals, Inc. in the U.S.District Court for the Southern District of New York (03 CV 8484). This action didnot seek damages, but rather alleged that three individuals associated withYeda should also be named as co-inventors on U.S. Patent No. 6,217,866. OnJune 7, 2005, Yeda amended its U.S. complaint to seek sole inventorship ofthe subject patent. On November 4, 2005, the Court denied the Company’smotion for summary judgment with respect to this matter, as filed with theCourt on June 24, 2005. At the same time, the Court granted summaryjudgment to Yeda dismissing two of ImClone’s affirmative defenses. A benchtrial on the merits of Yeda’s complaint was held between June 5, 2006 and June 22,2006. On September 18, 2006, the Court ruled in favor of Yeda by awardingit sole inventorship rights to the patent. ImClone Systems then appealed theCourt’s decision to the Court of Appeals for the Federal Circuit. The appealwas docketed on October 5, 2006, and is in its early stages. The Companyplans to vigorously pursue this appeal. On September 20, 2006, subsequentto the Court’s inventorship decision, the Company also filed an action againstYeda in the U.S. District Court for the Southern District of New York seeking adeclaratory judgment that the patent is invalid due to the removal of theoriginally named inventors. On October 31, 2006, Yeda filed an answer andcounterclaim to the Company’s declaratory judgment in which Yeda seeksrestitution and orders the Company to license the patent and pay it royalties. TheCompany is unable to predict the outcome of these actions at the present time.

As previously reported, on March 25, 2004, anaction was filed in the United Kingdom Patent Office entitled Referrer’sStatement requesting transfer of co-ownership and amendment of patent EP (UK) 0 667165 to add three Yeda employees as inventors. Also on March 25, 2004, aGerman action entitled Legal Action was filed in the Munich District Court I,Patent Litigation Division, seeking to add three Yeda employees as inventors onpatent EP (DE) 0 667 165. The Company was not named as a party in these actionswhich relate to the European equivalent of U.S. Patent No. 6,217,866discussed above. Accordingly, the Company intervened in the U.K. and Germanactions. Yeda sought to amend its pleadings in the United Kingdom and Germanyto seek sole inventorship. Following hearings, both the U.K. and German courtsheld that Yeda was not entitled to amend its pleadings. In the U.K., Yeda hassought leave from the House of Lords to appeal the High Court’s decision. TheHouse of Lords has not yet decided whether they will grant Yeda leave to appeal.In Germany, Yeda has appealed the lower court’s decision to the Higher RegionalCourt of Munich, which has not yet commented on Yeda’s appeal. 

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

Additionally, on or about March 25,2005 and March 29, 2005, respectively, Yeda filed legal actions in Austriaand France against both Aventis and ImClone Systems seeking full inventorshipof EP (AU) 0 667 165 and EP (FR) 0 667 165, aswell as payment of legal costs and fees. The Company is vigorously defendingagainst claims asserted in these actions. The Company is unable to predict theoutcome of these actions at the present time.

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen and that the Company shouldtherefore pay damages. On July 28, 2006, the Court denied the Company’smotion for summary judgment seeking to dismiss all claims on the basis that thepatent rights at issue were exhausted as a matter of law and granted MIT andRepligen’s cross motion that their patent rights were not exhausted. On September 26,2006, a hearing was held in response to a Motion for Sanctions filed byRepligen, which alleged that Kenyon & Kenyon representing ImCloneSystems and the Company acted improperly during and after the deposition of oneof Repligen’s potential witnesses. The Court has not ruled on the motion. Upona ruling by the Court, which we cannot predict, the case will now proceed totrial on the merits of the Company’s other defenses. The Company is vigorouslydefending against claims asserted in this action. The Company is unable topredict the outcome of this action at the present time.

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

The Company is developing a fully human monoclonalantibody, referred to as IMC-11F8. The Company believes it has the rightto do so under its existing development and license agreement with Merck KGaA.However, Merck KGaA had advised the Company that it believed that IMC-11F8was covered under the development and license agreement with Merck KGaA andthat it could therefore have the exclusive rights to market IMC-11F8outside the United States and Canada and co-exclusive development rights inJapan, for which it would pay the same royalty as it pays for ERBITUX. See “CorporateCollaborations—Collaborations with Merck KGaA”. In agreement with Merck KGaA,the Company submitted this dispute to binding arbitration through an expeditedprocess outside of the provisions of the development and license agreement.Merck KGaA subsequently took the position that the expedited arbitrationprovision was no longer valid and the Company sued Merck KGaA in federal courtin the Southern District of New York to either enforce the arbitrationprovision previously agreed to or to have the court decide the question ofwhether IMC-11F8 is or is not covered under the development and licenseagreement with Merck KGaA. On November 29, 2005, the Court granted theCompany’s motion to enforce the expedited arbitration provision previouslyagreed to, and subsequently appointed a new arbitrator to hear and decide thisdispute. On March 31, 2006, the arbitrator decided the matter in favor ofthe Company, finding that Merck KGaA had no rights to IMC-11F8. Thatdecision is binding and unappealable pursuant to the parties’ arbitrationagreement and the parties have subsequently confirmed the arbitration award.

In October 2001, theCompany entered into a sublease (the “Sublease”) for a four-story building at325 Spring Street, New York, and New York, which includes approximately 100,000square feet of usable space. The Sublease has a term of 22 years, followed bytwo five-year renewal option periods. In order to 

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

inducethe sublandlord to enter into the Sublease, the Company made a loan to thesublandlord in the principal amount of a $10,000,000 note receivable, of which$8,463,000 is outstanding as of September 30, 2006. The loan is secured bya leasehold mortgage on the prime lease as well as a collateral assignment ofrents by the sublandlord. The loan is payable by the sublandlord over 20 yearsand 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 aconsent fee in the amount of $500,000. Effective March 1, 2005, theCompany amended the Sublease to add an additional 6,500 square feet of spaceupon all the same terms and conditions set forth in the Sublease. In connectionwith this amendment, the Company paid an up-front fee of $1,690,000 which isbeing amortized, as a reduction in lease expense, over the respective term ofthe Sublease. The future minimum lease payments remaining at September 30,2006, are approximately $46,938,000.

**(10)**   EmployeeBenefit Plans

***Defined Contribution Plan***

All employees of the Company who meet certain minimumage and period of service requirements are eligible to participate in a 401(k) definedcontribution plan. The 401(k) plan allows eligible employees to defer upto 25 percent of their annual compensation, subject to certain limitationsimposed by federal law. The amounts contributed by employees are immediatelyvested and non-forfeitable. Under the 401(k) plan, the Company, at management’sdiscretion, may match employee contributions and/or make discretionarycontributions. Neither the employee contributions nor voluntary matchingcontributions are invested in the Company’s securities. Total expense incurredby the Company was approximately $607,000 and $463,000 for the three monthsended September 30, 2006 and 2005, respectively, and $1,773,000 and$1,473,000 for the nine months ended September 30, 2006 and 2005,respectively.

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**Item 2.**                        *Management’s Discussion and Analysis of Financial Condition and Resultsof Operations*

The following discussionand analysis is provided to further the reader’s understanding of theconsolidated financial statements, financial condition and results ofoperations of ImClone Systems in this Quarterly Report on Form 10-Q.This discussion should be read in conjunction with the consolidated financialstatements and the accompanying notes included in our filings with the SEC,including our 2005 Annual Report on Form 10-K. This discussioncontains forward-looking statements based upon current expectations thatinvolve risk and uncertainties. Our actual results and the timing of certainevents could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth below andunder “Risk Factors” set forth in Part II, Item 1A of this report and Item1A and elsewhere in our 2005 Annual Report on Form 10-K.

**OVERVIEW**

ImClone Systems is a biopharmaceutical company whosemission is to advance oncology care by developing and commercializing aportfolio of targeted treatments designed to address the medical needs ofpatients with cancer. On February 12, 2004, the FDA approved ERBITUX foruse in combination with irinotecan in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are refractory toirinotecan-based chemotherapy and for use as a single agent in the treatment ofpatients with EGFR-expressing, metastatic colorectal cancer who are intolerantto irinotecan-based chemotherapy. In September 2005, Health Canadaapproved the use of ERBITUX for use in combination with irinotecan for thetreatment of EGFR-expressing metastatic colorectal carcinoma in patients whoare refractory to other irinotecan-based chemotherapy regimens and for use as asingle agent for the treatment of EGFR-expressing, metastatic colorectalcarcinoma in patients who are intolerant to irinotecan-based chemotherapy. On March 1,2006, the FDA approved ERBITUX for use in combination with radiation therapyfor the treatment of locally or regionally advanced SCCHN and as a single agentin recurrent or metastatic SCCHN where prior platinum-based chemotherapy hasfailed. Reference full prescribing information, available at www.ERBITUX.com,for important safety information relating to ERBITUX, including boxed warnings.

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

On September 28, 2006, Carl C. Icahn, AlexanderJ. Denner, Barberry Corp and High River Limited Partnership, filed with theSecurities and Exchange Commission a consent solicitation to remove six membersof the Company’s Board of Directors as well as to add Peter S. Liebert to theBoard. On October 10,2006, David M. Kies and William W. Crouse announced theirresignation from the Board of Directors of the Company. On October 20,2006 the Company announced that Peter S. Liebert, M.D., was appointed by theCompany’s Board of Directors to fill one of the vacancies resulting from theresignation of the two Directors discussed above.  On October 25, 2006, the Companyannounced that its Board of Directors has appointed Carl C. Icahn Chairman ofthe Board. The Company also announced that Joseph L. Fischer has resigned asInterim Chief Executive Officer and as a member of the ImClone Systems Board 

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of Directors, effective October 24,2006, and has been replaced by a newly formed Executive Committee of the Board(the “Committee”), which will be chaired by Alex Denner, Ph.D., and includeDirectors Richard Mulligan, Ph.D., and Charles Woler, M.D., Ph.D. TheCommittee will serve as the principal executive body for the Company until suchtime as a Chief Executive Officer is named. The Company also announced thatDirectors Vincent T. DeVita, Jr., M.D., John A. Fazio and William R.Miller will not stand for reelection to the Board at the Company’s next annualmeeting, which the Company expects to host in the first quarter of 2007. As aresult of this decision, Carl Icahn and related parties have withdrawn theirshareholder consent solicitation, the Consent Solicitation Committee of theBoard has been dissolved and the Company has withdrawn its shareholder consentrevocation solicitation. The Board also determined that it would waive allBoard of Director fees for six months and all option grants for directors forthe next year..

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

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

·       the timing of recognitionof license fees and milestone revenues;

·       the status of developmentof our various product candidates;

·       whether or not we achievespecified research or commercialization objectives;

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

·       legal costs and the outcomeof outstanding legal proceedings; and

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

As a result of oursubstantial investment in research and development, we have incurredsignificant operating losses and have an accumulated deficit of approximately$118.3 million as of September 30, 2006. We anticipate that ouraccumulated deficit will continue to decrease in the future as we earnrevenues on commercial sales of ERBITUX and generate net income. Although priorto 2004 we devoted most of our efforts and resources to research and development,we expect that we will continue to devote greater efforts and resources to themanufacturing, marketing, and commercialization of ERBITUX. There is noassurance that we will be able to continue to successfully manufacture, marketor commercialize ERBITUX or that potential customers will buy ERBITUX. We relyentirely on a third party for filling and finishing services with respect toERBITUX. If our current third party manufacturers or critical raw materialsuppliers fail to meet our expectations, we cannot be assured that we will beable to enter into new agreements with other suppliers or third partymanufacturers without an adverse effect on our business.

**HIGHLIGHTS ANDOUTLOOK**

In the third quarter of  2006, sales of ERBITUX worldwide amounted toapproximately $285 million compared to worldwide sales in the second quarter of2006 of $275.3 million, an increase of $9.7 million or 4%. During the thirdquarter of 2006, the FDA approved VectibixTM (panitumumab), which is  indicated for the treatment of patients withEGFr-expressing metastatic colorectal cancer who have disease progression, onor following fluoropyrimidine-, oxaliplatin- and irinotecan- containingregimens. We believe that ERBITUX’s strength and leadership in clinical data,the product’s established market presence, combined with our strategic plan,will effectively position us to address our competition within the colorectalmarketplace.  Over the next two quarters,we will have a significant body of Phase III registrational quality data whichcould further bolster the leadership and differentiation of ERBITUX in theEGFR-MaB space. Specifically, on November 6, 2006,we and our partner BMS announced results from 

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tworandomized Phase III trials of ERBITUX in patients with metastatic colorectalcancer.  These are the first large, randomized studies to examine theimpact of ERBITUX treatment on overall survival in colon cancer.

A randomized, multicenter, Phase III trialcompared ERBITUX plus best supportive care to best supportive care alone in 572 patientswith metastatic colorectal cancer whose disease was refractory to all availablechemotherapy, including irinotecan, oxaliplatin, and fluoropyrimidines. The study, conducted by the National Cancer Institute of Canada Clinical TrialsGroup in collaboration with the Australasian Gastro-Intestinal Trials Group,met its primary efficacy endpoint showing a statistically significantimprovement in overall survival.  These are the first data of ananticancer therapy to demonstrate overall survival in this refractory treatmentsetting.   

A second Phase III, randomized study, comparedirinotecan to irinotecan plus ERBITUX in approximately 1,300 patientswhose disease was not responding to first-line oxaliplatin-based chemotherapy. After randomization, patients were treated until their diseaseprogressed.  Upon disease progression, study treatment was stopped andfurther treatment was at the discretion of the physician.  Secondaryefficacy endpoints (progression free survival, response rate) strongly favoredthe combination of ERBITUX plus irinotecan over irinotecan alone; however, theprimary endpoint (overall survival) was not met. Efforts to interpret theseconfounded results are ongoing.  A preliminary review of the data revealthat a considerable number of patients randomized to the irinotecan arm went onto receive ERBITUX with or without irinotecan after failing irinotecan alone. Inaddition, in the first quarter of 2007, we expect results from a study in thefirst line colorectal cancer as well as a Phase III survival study in firstline pancreatic cancer. These studies represent the beginning of a series ofdata milestones from ten registrational quality clinical studies of ERBITUXexpected to mature through 2008.

In order to ensure maximum patient access, we haveincreased our commitment to patient financial support. Specifically, both weand out partner, BMS have made significant contributions to various co-payassistance foundations for colorectal and head and neck cancers. Additionally,we have offered our own patient support program that provides physicianassurances of reimbursement for on-label uses of ERBITUX. And shortly after thehead and neck approval, we and our partner BMS launched Destination Access andAccess ERBITUX, which represent enhanced patient support programs that providefinancial support for patients with household income of up to 1000% of thefederal poverty level, or $200 thousand per year for a 4-person family. Webelieve that these contributions to co-pay foundations and enhancements toexisting patient support programs significantly increase access to ERBITUX forthose most in need and further reinforces the ERBITUX leadership within ourtarget indications.

Royalty revenue in 2006 will continue to reflect 39%of BMS’s net sales and beginning July 1, 2006, 9.5% of Merck KGaA netsales. License fees and milestone revenue in 2006 will include the continuingamortization, based on clinical development spending, of the $900 millionreceived from BMS. At the anticipated rates of clinical spending for 2006,amortization of milestones for the full year should approximate between $240-250million. Manufacturing revenue in 2006 will continue to reflect ERBITUX sold toour partners for commercial use. The price charged for commercial material isbased on our actual cost to manufacture the product, plus, in the case of BMSonly, a 10% mark-up on bulk manufacturing costs. Collaborative agreementrevenue in 2006 will continue to include the purchase of ERBITUX for clinicaluse by our partners, reimbursement by our partners of certain regulatory,clinical and marketing expenses incurred related to ERBITUX, and reimbursementof royalty expenses of 4.5% of North American net sales in accordance with theexisting terms of the BMS agreement, as well as a low single digit amount fromMerck KGaA.

Effective January 1,2006, we adopted Financial Accounting Standards Statement No. 123 (revised2004),*Share-Based Payment,* whichprovides that the expense associated with share-based payment transactions berecognized in the financial statements. We estimate that the total expense forstock options in 2006 will be approximately $9.0 million. Compensationexpense for the three and nine months ended 

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September 30,2006 amounted to approximately $1.8 million and $5.9 million, respectively andthis expense is reflected in each expense category where the employee benefitsare categorized. Research and development expenses include costs to support ourpre-clinical research efforts as well as development costs for our pipelineproducts and clinical shipments of ERBITUX to our corporate partners. Thesecosts are expected to approximate $125 million in 2006, including approximately$2.7 million attributable to share based compensation expense. Clinical andregulatory expenses are expected to reach approximately $65-$70 millionin 2006, including approximately $1.3 million attributable to share basedcompensation expense. Marketing, general and administrative expenses shouldapproximate $75 million in 2006, including approximately $5.0 millionattributable to share based compensation expense. Royalty expense for theremainder of 2006 will consist of approximately 9.25% of North American netsales and a single-digit percentage of international net sales. Cost ofmanufacturing revenue for the remainder of 2006 will reflect full absorptioncosts since we have sold all previously expensed inventory. The Company’sestimated annual effective income tax rate for 2006 is approximately 14%,excluding the effect of an adjustment recorded in the third quarter of 2006 ofapproximately $1.8 million, primarily resulting from changes in certain statestax legislation. This estimated rate also excludes the release of a portion ofthe Company’s tax valuation allowance in the first quarter of 2006.

**CRITICAL ACCOUNTINGPOLICIES**

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

*RevenueRecognition—**Our*revenues are derived from fourprimary sources: license fees and milestone payments, manufacturing revenue,royalty revenue, and collaborative agreement revenue.

Revenues from license fees and milestone paymentsprimarily consist of up-front license fees and milestone payments receivedunder the Commercial Agreement with BMS, relating to ERBITUX, and milestonepayments received under the development and license agreement with Merck KGaA.We recognize all non-refundable up-front license fees as revenues in accordancewith the guidance provided in the SEC’s Staff Accounting Bulletin No. 104.Our most critical application of this policy, to date, relates to the$900,000,000 in license fees received from BMS under the Commercial Agreementwhich are being deferred and recognized as revenue based upon the actualproduct clinical and development costs incurred since September 19, 2001to date by BMS and ImClone as a percentage of the estimated total of such coststo be incurred over the 17 year term of the Commercial Agreement. Theestimated total of such costs is based on the clinical development budget whichestablishes joint responsibilities that will be carried out by both the Companyand BMS for certain clinical and other studies. Of the $900 million in paymentsreceived through September 30, 2006, $34.8 million was recognized asrevenue in the third quarter of 2006 and $506.4 million from the commencementof the Commercial Agreement in 2001 through September 30, 2006. Themethodology used to recognize deferred revenue involves a number of estimatesand judgments, such as the estimate of total product clinical and developmentcosts to be incurred under the Commercial Agreement. Changes in these estimatesand judgments can have a significant effect on the size and timing of revenuerecognition. In addition, if management had chosen a different methodology torecognize the 

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license fee and milestonepayments received under the Commercial Agreement, the Company’s financialposition and results of operations could have differed materially. For example,if the Company were to recognize the revenues earned from the CommercialAgreement on a straight-line basis over the life of the agreement, the Companywould have recognized approximately $16.0 million and $173.2 million as revenuein the third quarter of 2006 and from the commencement of the CommercialAgreement, respectively, through September 30, 2006. Management believesthat the current methodology used to recognize revenues under the CommercialAgreement, which reflects the level of effort consistent with the productdevelopment activities, is the most appropriate methodology because it reflectsthe level of expenditure and activity in the period in which it is being spentas compared to the total expected expenditure over the life of the CommercialAgreement. This cost to cost approach is systematic and rational, it provides afactually supportable pattern to track progress, and is reflective of the levelof effort, which varies over time.

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

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

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

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

*Inventories—**Until*February 12,2004, all costs associated with the manufacturing of ERBITUX were included inresearch and development expenses when incurred. Effective February 13,2004, the date after we received approval from the FDA for ERBITUX, we began tocapitalize in inventory the cost of manufacturing ERBITUX and have expensedsuch costs as cost of manufacturing revenue at the time of 

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sale. Since we hadpreviously expensed all inventory produced, the costs of manufacturing revenuein 2004 reflected minimal costs primarily consisting of shipping and storagecharges. In 2005, we continued to sell inventory that was previously expensedand gradually began to sell inventory that was partially expensed, since therewas inventory in process on the date that we received FDA approval of ERBITUX.In the first quarter of 2006, we sold all partially expensed inventory and weexpect that our quarterly margins on sales of ERBITUX will therefore begin tostabilize going forward and reflect an average margin that will range between5%- 8%. The fluctuation in our margin is based on various circumstances such asthe level of demand from our partners and the costs of filling and finishingthe product (which does not include a markup when selling to BMS), relative tothe overall costs of the bulk.

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

In June 2006, we began producing ERBITUX forcommercial use at our BB50 manufacturing facility. Based on our currenttimeline, we expect to file a sBLA with the FDA for approval of our BB50facility in the first quarter of 2007. Until such time as we receive approvalof BB50 from the FDA, we will not be able to sell the ERBITUX inventoryproduced in BB50. Based on management’s current expectations, we expect thatthe costs of such inventory will be fully realizable once we obtain approval ofBB50. Therefore, in June 2006 we began to capitalize the costs of producingERBITUX in BB50 and will continue to do so, as long as we can conclude that thecosts of such inventory will be fully realizable. As of September 30,2006, we have capitalized approximately $28.2 million of inventory produced inBB50, all of which is classified as long-term inventory in our ConsolidatedBalance Sheets.

*Litigation—**The*Company iscurrently involved in certain legal proceedings as disclosed in the notes tothe consolidated financial statements. As of September 30, 2006, we havenot established a legal reserve in our financial statements because we do notbelieve that such a reserve is required to be established at this time, inaccordance with Statement of Financial Standards No. 5. However, if in afuture period, events in any such legal proceedings render it probable that aloss will be incurred, and if such loss is reasonably estimable at that time,we will establish such a reserve. Thus, it is possible that legal proceedingsmay have a material adverse impact on the operating results for thatperiod, on our balance sheet or both.

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

*Income Taxes—**Income*taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Significant estimates are required in determining ourprovision for income taxes. In the first quarter of 2006, we released a portionof our valuation allowance against our 

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deferred tax assetsbecause we determined, based on revised expectations of our projected futureearnings, that it is more likely than not that we will realize the benefit ofthese deferred tax assets, which amounted to approximately $99.5 million. Ourconclusion to release a portion of our valuation allowance against our deferredtax assets is supported by several events that transpired during the firstquarter of 2006. In addition to obtaining approval from the FDA for ERBITUX asa second indication in March of 2006, the in-market sales for ERBITUXduring this period exceeded our expectations and continued to show stronggrowth in the marketplace. Most importantly, a potential competitor releasedcertain clinical data on their competing product, which gave us the ability tofurther understand the competitive threats posed by this potential product.Therefore, our decision is supported by a combination of better than expectedin-market sales that we believe will be sustainable in the future coupled withthe ability to further refine our future financial projections and assumptionsrelated to our competition. The financial projections supporting our conclusionto release a portion of our valuation allowance contain significant assumptionsbased on current facts about our market share and our competitive landscape. Ifsuch assumptions were to differ significantly, it may have a materialimpact on our ability to realize our deferred tax assets.

**Impact of RecentAccounting Pronouncements**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes—aninterpretation of FASB Statement No. 109*. This Interpretationclarifies the accounting for uncertainty in income taxes recognized in anenterprise’s financial statements in accordance with FASB No. 109,Accounting for Income Taxes. It also prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. ThisInterpretation also provides guidance on derecognition, classification of interestand penalties, accounting in interim periods, disclosure, and transition. ThisInterpretation is effective for fiscal years beginning after December 15,2006. We are in the process of analyzing the impact that this Interpretationmay have on our consolidated financial statements. Therefore, we are not in aposition to conclude whether the adoption of this Interpretation will have amaterial impact on our financial statements.

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**RESULTS OFOPERATIONS**

Selectedfinancial and operating data for the three and nine months ended September 30,2006 and 2005 are as follows: (in thousands)

| ** **                                          | ** ** | **Three Months Ended  September 30** | ** ** | **Nine Months Ended  September 30** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                          | ** ** | **2006**                                            | ** ** | **2005**                                           | ** ** | **Variance** | ** ** | **2006** | ** ** | **2005** | ** ** | **Variance** | ** ** |
| **Results  of Operations:**                         |       |                                                |       |                                               |       |   |   |   |   |   |   |   |   |
| Royalty revenue                                     |       | $                                                   | 78,599     |                                               | $          | 46,647 |   | $ | 31,952 |   | $ | 213,483 |   | $ | 124,810 |   | $ | 88,673 |   |
| License fees and  milestone revenue                 |       | 34,948                                              |       | 27,146                                             |       | 7,802 |   | 212,807 |   | 76,171 |   | 136,636 |   |
| Manufacturing  revenue                              |       | 20,884                                              |       | 10,748                                             |       | 10,136 |   | 68,589 |   | 29,661 |   | 38,928 |   |
| Collaborative  agreement revenue                    |       | 16,266                                              |       | 21,984                                             |       | (5,718 | ) | 50,805 |   | 54,039 |   | (3,234 | ) |
| Total revenues                                      |       | 150,697                                             |       | 106,525                                            |       | 44,172 |   | 545,684 |   | 284,681 |   | 261,003 |   |
| Research and  development                           |       | 26,437                                              |       | 28,958                                             |       | (2,521 | ) | 87,013 |   | 74,564 |   | 12,449 |   |
| Clinical and  regulatory                            |       | 13,527                                              |       | 13,583                                             |       | (56 | ) | 43,537 |   | 31,357 |   | 12,180 |   |
| Marketing,  general and administrative              |       | 15,977                                              |       | 19,463                                             |       | (3,486 | ) | 56,941 |   | 53,919 |   | 3,022 |   |
| Royalty expense                                     |       | 18,051                                              |       | 15,165                                             |       | 2,886 |   | 56,531 |   | 42,069 |   | 14,462 |   |
| Cost of  manufacturing revenue                      |       | 19,187                                              |       | 3,099                                              |       | 16,088 |   | 61,466 |   | 4,948 |   | 56,518 |   |
| Discontinuation  of small molecule research program |       | —                                              |       | —                                             |       | — |   | — |   | 6,200 |   | (6,200 | ) |
| Total operating expenses                            |       | 93,179                                              |       | 80,268                                             |       | 12,911 |   | 305,488 |   | 213,057 |   | 92,431 |   |
| Operating income                                    |       | $                                                   | 57,518     |                                               | $          | 26,257 |   | $ | 31,261 |   | $ | 240,196 |   | $ | 71,624 |   | $ | 168,572 |   |

 

***Three Months Ended September 30, 2006 and 2005***

**Revenues**

**Royalty Revenue**

Royalty revenue consists primarily of royalty paymentsearned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under ouragreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA we were entitled to royalty based on a percentage of gross margin ofMerck KGaA’s sales of ERBITUX outside the United States and Canada. Beginningin July of 2006, we are entitled to 9.5% of Merck’s KGaA’s net salesoutside of the United States and Canada. In the third quarter of 2006, ourroyalty revenue increased by approximately $32.0 million from the comparableperiod in 2005 due to an increase in net sales of ERBITUX. In North America,net sales by BMS in the third quarter of 2006 amounted to $174.6 millioncompared to net sales in the comparable period in 2005 of $107.0 million, anincrease of $67.6 million, or 63%. Outside of North America, net sales ofERBITUX by Merck KGaA in the third quarter of 2006 amounted to approximately$110.1 million, an increase of $38.7 million or 54% from the comparable periodin 2005.

Future royalty revenue isexpected to reflect 39% of BMS’ net sales and 9.5% of Merck KGaA’s net sales.

**License Fees andMilestone Revenue**

License fees and milestone revenue in the thirdquarter of 2006 of $34.9 million consists of the recognition of up-frontlicense fees and milestone payments received under the Commercial Agreementwith BMS of $34.8 million and recognition of payments received under thedevelopment and license agreements with Merck KGaA of $118,000. The increase of$7.8 million, or 29% from the comparable 

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period in 2005, isprimarily due to the higher amount of deferred revenue being recognized due tothe receipt of the $250 million milestone from BMS in the first quarter of2006.

License fees and milestonerevenue in 2006 will include the continuing amortization, based on the actualclinical development spending, of the $900 million received from BMS. At theanticipated rates of clinical spending for 2006, amortization of milestones forthe full year of 2006 should approximate between $240-$250 million.

**ManufacturingRevenue**

Manufacturing revenue in the third quarter of 2006 of$20.9 million consists of sales of ERBITUX to BMS and Merck KGaA for commercialuse. The $10.1 million increase from the comparable period in 2005 primarilyreflects higher volume purchases by BMS as well as sales to Merck KGaA. Theincrease in sales of ERBITUX to our partners for commercial use is directlyassociated with the increase in in-market sales (as described above underroyalty revenue) both in North America and internationally. In accordance withthe Commercial Agreement, we sell ERBITUX to BMS at our cost of production plusa 10% markup on bulk. We sell inventory to Merck KGaA at our full absorptioncost of production. During the third quarter of 2006, purchases by BMS amountedto approximately $20.3 million and purchases by Merck KGaA amounted to $579,000.

Manufacturing revenue in2006 will continue to reflect ERBITUX sold to our partners for commercial use.

**CollaborativeAgreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: clinical and regulatory expenses, the cost of ERBITUXsupplied to our partners for use in clinical studies, certain marketing andadministrative expenses, and a portion of royalty expense. During the thirdquarter of 2006, we earned $16.3 million in collaborative agreement revenue, ofwhich approximately $13.4 million represents amounts earned from BMS andapproximately $2.9 million represents amounts earned from Merck KGaA, ascompared to $22.0 million earned in the comparable period in 2005, of which$10.8 million was earned from BMS and approximately $11.2 million was earnedfrom Merck KGaA. The decrease in collaborative agreement revenue of $5.7 millionis principally due to a decrease in clinical materials shipped of approximately$9.1 million, partially offset by an increase in royalty expense reimbursementof approximately $3.6 million as a result of higher sales by our partners.

Collaborative agreementrevenue in 2006 will continue to include reimbursements from our corporatepartners for: the purchase of ERBITUX for clinical use, certain regulatory,clinical and marketing expenses incurred on related to ERBITUX, and for royaltyexpense of 4.5% of North American net sales in accordance with the existingterms of the BMS agreement and a low single digit amount from Merck KGaA.

**Expenses**

**Research and Development**

Research and developmentexpenses in the third quarter of 2006 of $26.4 million decreased byapproximately $2.5 million, or 9% from the comparable period in 2005. Thedecrease is primarily due to a reduction in clinical material shipped to MerckKGaA of approximately $4.2 million, a decrease in repairs and maintenance ofapproximately $1.0 million and a decrease in professional services ofapproximately $900,000, partially offset by increases in third party costs associated with the development of ournon-ERBITUX pipeline of $2.2 million, share based compensation expense of$318,000 and $1.2 million of depreciation expense related to our BB50manufacturing facility that became operational in June 2006. 

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Researchand development expenses include costs associated with our in-house andcollaborative research programs, product and process development expenses, costto manufacture our product candidates and quality assurance and quality controlcosts. Research and development includes costs that are reimbursable from ourcorporate partners. Approximately $3.6 million and $12.7 million of costs representingresearch and development expenses in the third quarters of 2006 and 2005,respectively, were reimbursable and included under collaborative agreementrevenue since they represent inventory supplied to our partners for use inclinical studies.

We expect that researchand development expenses will approximate $125 million in 2006, includingapproximately $2.7 million attributable to share based compensation expense.

**Clinical and Regulatory**

Clinical and regulatoryexpenses consist of costs to conduct our clinical studies and associatedregulatory activities. Clinical and regulatory expenses in the third quarter of2006 amounted to $13.5 million, and have remained stable from thecomparable period in 2005. Approximately $3.3 million of the costs included inthis category for the third quarters of both 2006 and 2005 are reflected asrevenues under collaborative agreement revenue since they represent costs thatare reimbursable by our corporate partners.

Clinical and regulatoryexpenses in 2006 are expected to reach approximately $65 - $70 million,including approximately $1.3 million attributable to share based compensationexpense.

**Marketing, General and Administrative**

Marketing, general andadministrative expenses include marketing and administrative personnel costs,including related facility costs, additional costs to develop internalmarketing and field operations capabilities and expenses associated withapplying for patent protection for our technology and products. Marketing,general and administrative expenses also include amounts reimbursable from ourcorporate partners.

Marketing, general andadministrative expenses in the third quarter of 2006 amounted to $16.0 million(including $1.2 million of share based compensation expense) as compared to$19.5 million in the comparable period in 2005, a decrease of $3.5 millionor 18%. The decrease in the third quarter of 2006 is principally attributableto a reduction in legal fees and professional services from the comparableperiod in 2005. Certain expenses in this category are reimbursable from ourcorporate partners. Approximately $307,000 and $411,000 of costs representingmarketing and general expenses in the third quarters of 2006 and 2005,respectively, were reimbursable and included in collaborative agreementrevenue. 

Marketing, general andadministrative expenses should approximate $75 million in 2006, includingapproximately $5.0 million attributable to share based compensation expense.The increase versus 2005 is principally attributable to increased marketingefforts in support of launching ERBITUX as a second indication and to sharebased compensation expense.

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**Royalty Expense**

Royalty expense consists of obligations related tocertain licensing agreements related to ERBITUX. We are obligated to payroyalties of approximately 9.25% of North American net sales and a single digitroyalty on sales outside of North America, which will increase if sales outsideof North America consist of ERBITUX produced in the United States. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a single digit percentage on net sales outside of North America, which isreflected in collaborative agreement revenue. In the third quarter of 2006, weincurred royalty expense of $18.1 million as compared to $15.2 million, anincrease of $2.9 million, or 19%. The increase is directly associated withthe increase in net sales of ERBITUX in North America and outside of NorthAmerica, as previously described. Approximately $9.1 million and$5.5 million of royalty expense were reimbursable by our corporatepartners and included as collaborative agreement revenue in the third quartersof 2006 and 2005, respectively.

Royalty expenses for theremainder of 2006 will consist of approximately 9.25% of North American netsales and a single-digit percentage of international net sales is also expectedto be incurred.

**Cost ofManufacturing Revenue**

Cost of manufacturingrevenue in the third quarter of 2006 amounted to $19.2 million representing agross margin of approximately 8% compared to costs of manufacturing revenue inthe comparable period of 2005 of approximately $3.1 million, or a gross marginof 71%. The fluctuation in our gross margin is due to the fact that prior toobtaining approval from the FDA for ERBITUX, we had previously expensed allERBITUX inventory produced as research and development expense. We began tocapitalize in inventory the cost of manufacturing ERBITUX after we receivedapproval in February of 2004. It has taken us two years to sell allinventory that was previously expensed or partially expensed. In the firstquarter of 2006, we exhausted the remaining batches of ERBITUX with partialcosts and we expect our margins to normalize going forward. We sell ERBITUX toBMS at our costs of production plus a 10% mark-up on bulk and to Merck KGaA atour cost of production. Therefore, depending on certain circumstances, such asthe mix of demand from our partners, and the costs of filling and finishingERBITUX bulk (for which we do not charge a 10% markup when selling to BMS), weexpect that our quarterly margins on sales of ERBITUX will reflect a gross marginthat will range between 5%-8%.

**Interest Income andInterest Expense**

Interest income in the third quarter of 2006 amountedto $11.1 million, an increase of approximately $4.0 million or 57% fromthe comparable period in 2005. This increase is attributable to increases ininterest rates from the comparable period in 2005, and an increase in theaverage balance of our investment portfolio.

Interest expense in thethird quarter of 2006 amounted to $3.0 million, an increase of $1.4million or 89% from the comparable period in 2005. The increase is due to thefact that we finalized construction of our BB50 manufacturing facility in May of2006, and therefore ceased capitalizing interest on the construction of thisfacility.

**Provision forIncome Taxes**

The Company’s estimatedannual effective income tax rate for 2006 is approximately 14%, excluding theeffect of an adjustment recorded in the third quarter of 2006 of approximately$1.8 million, primarily resulting from changes in certain state tax legislation.The resulting effective tax rate for the third quarter of 2006, including suchadjustment, is 12.6%. The projected tax rate for 2006 is less than the FederalStatutory rate of 35%, mainly due to the utilization of fully reserved deferredtax assets. These estimated rates exclude the release of a portion of theCompany’s tax valuation allowance in the first quarter of 2006. 

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**Net Income**

We had net income of $57.3million or $0.68 per basic common share and $.0.65 per diluted common share inthe third quarter of 2006, compared with net income of $31.0 million or $0.37per basic common share and $0.35 per diluted common share for the comparableperiod in 2005. The fluctuation in results was due to the factors noted above.

***Nine Months Ended September 30, 2006 and 2005***

**Revenues**

**Royalty Revenue**

Royalty revenue consists primarily of royalty paymentsearned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under ouragreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA we were entitled to royalty based on a percentage of gross margin ofMerck KGaA’s sales of ERBITUX outside the United States and Canada. Beginningin July of 2006, we are entitled to 9.5% of Merck’s KGaA’s net salesoutside of the United States and Canada. For the nine months ended September 30,2006, royalty revenue amounted to $213.5 million, an increase of $88.7 millionor 71% from the comparable period in 2005 due to an increase in net sales ofERBITUX. In North America, net sales by BMS for the first nine months of 2006amounted to $485.0 million compared to net sales in the comparable period in2005 of $291.9 million, an increase of $193.1 million, or 66%. Outside of North America,net sales of ERBITUX by Merck KGaA in the nine months of 2006 amounted to$302.4 million, an increase of $113.9 million or 60% from the comparableperiod in 2005.

Future royalty revenue isexpected to reflect 39% of BMS’ net sales and 9.5% of Merck KGaA’s net sales.

**License Fees andMilestone Revenue**

License fees and milestone revenue for the nine monthsended September 30, 2006 of $212.8 million consists of the recognition ofup-front license fees and milestone payments received under the Commercial Agreementwith BMS of $212.6 million and recognition of payments received under thedevelopment and license agreements with Merck KGaA of $229,000. The increase of$136.6 million from the comparable period in 2005 is mainly due to the factthat in March 2006, we earned the last milestone payment from BMS of $250million, as a result of obtaining approval from the FDA for ERBITUX in a secondindication. The milestone revenue earned in the first quarter of 2006 thereforeincludes a “catch-up” adjustment of approximately $112.7 million related to theactual product clinical development costs incurred from inception through December 31,2005 as a percentage of the estimated total costs to be incurred over the termof the Commercial Agreement. The remaining increase is due primarily to thehigher amount of deferred revenue being recognized during the nine months endedSeptember 30, 2006, as a result of the receipt of the $250 millionmilestone discussed above.

License fees and milestonerevenue in 2006 will include the continuing amortization, based on the clinicaldevelopment spending, of the $900 million received from BMS. At the anticipatedrates of clinical spend for 2006, amortization of milestones for the full yearof 2006 should approximate between $240-$250 million.

**ManufacturingRevenue**

Manufacturing revenue for the nine months ended September 30,2006 of $68.6 million consists of sales of ERBITUX to BMS and Merck KGaA forcommercial use. The increase from the comparable period in 2005 of $38.9million is due to an increase in sales to BMS of approximately $34.9 millionand 

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sales to Merck KGaA of$4.1 million. The increase in sales of ERBITUX to our partners forcommercial use is directly associated with the increase in in-market sales (asdescribed above under royalty revenue) both in North America andinternationally. In accordance with the Commercial Agreement, we sell ERBITUXto BMS at our cost of production plus a 10% markup on bulk. We sell bulkinventory to Merck KGaA at our full absorption cost of production. Duringthe nine months ended September 30, 2006, purchases by BMS amounted toapproximately $64.5 million and purchases by Merck KGaA amounted toapproximately $4.1 million.

Manufacturing revenue in2006 will continue to reflect ERBITUX sold to our partners for commercial use.

**CollaborativeAgreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: clinical and regulatory expenses, the cost of ERBITUXsupplied to our partners for use in clinical studies, certain marketing andadministrative expenses, and a portion of royalty expense. During the ninemonths ended September 30, 2006, we earned $50.8 million in collaborativeagreement revenue, of which approximately $38.4 million represents amountsearned from BMS and approximately $12.4 million represents amounts earned fromMerck KGaA, as compared to $54.0 million earned in the comparable period in2005, of which $31.9 million was earned from BMS and approximately $22.1million was earned from Merck KGaA. The decrease in collaborative agreementrevenue of $3.2 million is principally due to a decrease in reimbursementfor clinical drugs of approximately $12.7 million and in the reimbursementof clinical and marketing, general and administrative expenses of approximately$2.4 million, offset by an increase in reimbursement for royalty expense of$11.9 million, as a result of higher sales by our partners. 

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

**Expenses**

**Research andDevelopment**

Research and development expenses for the nine monthsended September 30, 2006 of $87.0 million increased by approximately $12.4million or 17% from the comparable period in 2005. The increase is primarilydue to an increase in third party costs associated with the development of ournon-ERBITUX pipeline of approximately $10.1 million, an increase in shipmentsof ERBITUX sold to our partners for clinical studies of approximately $1.0million, an increase in shared based compensation of approximately $1.3million, and an increase in depreciation expense of $3.6 million, related toour BB50 manufacturing facility that became operational in June 2006.These increases were partially offset by decreases in several categories suchas repair and maintenance and professional services. Research and developmentexpenses include costs associated with our in-house and collaborative researchprograms, product and process development expenses, cost to manufacture ourproduct candidates and quality assurance and quality control costs. Researchand development includes costs that are reimbursable from our corporatepartners. Approximately $13.5 million and $26.2 million of costs representingresearch and development expenses in the first nine months of 2006 and 2005,respectively, were reimbursable and included under collaborative agreementrevenue since they represent inventory supplied to our partners for use inclinical studies.

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We expect that researchand development expenses will approximate $125 million in 2006, includingapproximately $2.7 million attributable to share based compensation expense. 

**Clinical andRegulatory**

Clinical and regulatory expenses consist of costs toconduct our clinical studies and associated regulatory activities. Clinical andregulatory expenses for the nine months ended September 30, 2006 amountedto $43.5 million, an increase of $12.2 million or 39% from the comparableperiod in 2005. The increase is primarily due to an increase of $6.1 milliondue BMS for reimbursement of clinical expenses related to ERBITUX, increases inprofessional services related to ERBITUX and non-ERBITUX clinical trials ofapproximately $3.3 million and an increase in salaries and benefits ofapproximately $2.2 million, which includes approximately $948,000 of sharebased compensation expense. Approximately $9.4 million and $11.3 million of thecosts included in this category for the first nine months of 2006 and 2005,respectively, are reflected as revenues under collaborative agreement revenuesince they represent costs that are reimbursable by our corporate partners.

Clinical and regulatoryexpenses in 2006 are expected to reach approximately $65 - $70 million,including approximately $1.3 million attributable to share based compensationexpense. 

**Marketing, Generaland Administrative**

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

Marketing, general and administrative expenses for thenine months ended September 30, 2006 amounted to $56.9 million, anincrease of $3.0 million or 6% from the comparable period in 2005. The increaseis mainly due to an increase of $3.6 million in shared based compensationexpense, an increase in bonus to the field force of $2.4 million, which isdirectly correlated to the increase in ERBITUX in-market net sales and anincrease in marketing expenses associated with the launch of ERBITUX for use inhead and neck cancer (approved by the FDA in March 2006) of approximately$1.2 million. These increases are partially offset by decreases in consultingand legal services of approximately $2.9 million as well as smaller decreasesin various other categories. Certain expenses in this category are reimbursablefrom our corporate partners. Approximately $957,000 and $1.5 million of costsrepresenting marketing and general expenses for the nine months ended September 30,2006 and 2005, respectively, were reimbursable and included in collaborativeagreement revenue.

Marketing, general andadministrative expenses should approximate $75 million in 2006, includingapproximately $5.0 million attributable to share based compensation expense. Theincrease versus 2005 is principally attributable to increased marketing effortsin support of launching ERBITUX as a second indication and to share basedcompensation expense.

**Royalty Expense**

Royalty expense consists of obligations related tocertain licensing agreements related to ERBITUX. We are obligated to payroyalties of approximately 9.25% of North American net sales and a single digitroyalty on sales outside of North America, which will increase if sales outsideof North America consist of ERBITUX produced in the United States. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a single digit percentage on net sales outside of North America, which isreflected in collaborative agreement revenue. During the nine months ended September 30,2006, we incurred royalty expense of $56.5 million as compared to $42.1million, an increase of $14.5 million, 

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or 34%. The increaseis directly associated with the increase in net sales of ERBITUX in NorthAmerica and outside of North America, as previously described. Approximately$26.9 million and $15.0 million of royalty expense was reimbursableby our corporate partners and included as collaborative agreement revenue inthe first nine months of 2006 and 2005, respectively.

Royalty expenses for theremainder of 2006 will consist of approximately 9.25% of North Americanin-market net sales and a single-digit percentage of international net sales isalso expected to be incurred. 

**Cost ofManufacturing Revenue**

Cost of manufacturingrevenue for the nine months ended September 30, 2006 amounted to $61.5 millionrepresenting a gross margin of approximately 10% compared to costs ofmanufacturing revenue in the comparable period of 2005 of approximately $4.9million, or a gross margin of 83%. The fluctuation in our gross margin is dueto the fact that prior to obtaining approval from the FDA for ERBITUX, we hadpreviously expensed all ERBITUX inventory produced as research and development.We began to capitalize in inventory the cost of manufacturing ERBITUX after wereceived approval in February of 2004. It has taken us two years to sellall inventory that was previously expensed or partially expensed. In the firstquarter of 2006, we exhausted the remaining batches of ERBITUX with partialcosts and we expect our margins to normalize going forward. We sell ERBITUX toBMS at our costs of production plus a 10% mark-up on bulk and to Merck KGaA atour cost of production. Therefore, depending on certain circumstance such asthe mix of demand from our partners, and the costs of filling and finishingERBITUX bulk (for which we do not charge a 10% markup when selling to BMS), weexpect that our quarterly margins on sales of ERBITUX will reflect a grossmargin that will range between 5%-8%.

**Interest Income andInterest Expense**

Interest income for the nine months ended September 30,2006 amounted to $28.4 million, an increase of approximately $7.9 millionor 38% from the comparable period in 2005. This increase is attributable toincreases in interest rates from the comparable period in 2005, and an increasein the average balance of our investment portfolio.

Interest expense for thenine months ended September 30, 2006 amounted to $6.4 million, an increaseof approximately $1.3 million or 25% from the comparable period in 2005. Theincrease is due to the fact that we finalized construction of our BB50manufacturing facility in May of 2006, and therefore, ceased capitalizinginterest on the construction of this facility.

**Provision forIncome Taxes**

The Company’s estimated annual effective income taxrate for 2006 is approximately 14%, excluding the effect of an adjustmentrecorded in the third quarter of 2006 of approximately $1.8 million, primarilyresulting from changes in certain state tax legislation. The resultingeffective tax rate for the nine months of 2006, including such adjustment, is14.4%. These estimated rates also exclude the release of a portion of theCompany’s tax valuation allowance in the first quarter of 2006 discussed below.The projected tax rate for 2006 is less than the federal statutory rate of 35%,mainly due to the utilization of fully reserved deferred tax assets.

In the first quarter of2006, the Company released a portion of its valuation allowance against ourtotal deferred tax assets because we determined, based on revised expectationsof our projected future earnings, that it is more likely than not that we willrealize the benefit of these deferred tax assets, which amounted toapproximately $99.5 million. Our conclusion to release a portion of ourvaluation allowance against our deferred tax assets is supported by severalevents that transpired during the first quarter of 2006. In addition toobtaining approval from the FDA for ERBITUX in a second indication in 

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March of 2006,the in-market sales for ERBITUX during this period exceeded our expectationsand continued to show strong growth in the marketplace. Most importantly, apotential competitor released certain clinical data on their competing product,which gave us the ability to further understand the competitive threats posedby this potential product. Therefore, our decision is supported by a combinationof better than expected in-market sales that we believe will be sustainable inthe future coupled with the ability to further refine our future financialprojections and assumptions related to our competition. The financialprojections supporting our conclusion to release a portion of our valuationallowance contain significant assumptions based on current facts about ourmarket share and our competitive landscape. If such assumptions were to differsignificantly, it may have a material impact on our ability to realize ourdeferred tax assets. 

**Net Income**

We had net income of$324.1 million or $3.86 per basic common share and $3.58 per diluted commonshare for the nine months ended September 30, 2006, compared with netincome of $85.8 million or $1.03 per basic common share and $0.98 perdiluted common share for the comparable period in 2005. The fluctuation inresults was due to the factors noted above.

**LIQUIDITY ANDCAPITAL RESOURCES**

At September 30,2006, our principal sources of liquidity consisted of cash and cash equivalentsand securities available for sale of approximately $991.5 million.Historically, we have financed our operations through a variety of sources,most significantly through the issuance of public and private equity and convertiblenotes, license fees and milestone payments and reimbursements from ourcorporate partners. Since the approval of ERBITUX on February 12, 2004, webegan to generate royalty revenue and manufacturing revenue from the commercialsale of ERBITUX by our corporate partners and we have generated income fromoperations in 2004, 2005 and in the first nine months of 2006. As we continueto generate income, our cash flows from operating activities are expected tocontinue as a source to fund our operations. 

**SUMMARY OF CASH FLOWS**

| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** | ** ** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                            | ** ** | **2006**                                            | ** ** | **2005**   | ** ** | **Variance** | ** ** |
| Cash provided by (used)  in:                          |       |                                                |       |       |       |   |   |
| Operating activities                                  |       | $                                                   | 186,422    |       | $          | (67,524 | ) | $ | 253,946 |   |
| Investing activities                                  |       | (261,485                                            | )          | (19,230    | )          | (242,255 | ) |
| Financing activities                                  |       | 86,968                                              |       | 14,096     |       | 72,872 |   |
| Net increase  (decrease) in cash and cash equivalents |       | $                                                   | 11,905     |       | $          | (72,658 | ) | $ | 84,563 |   |

 

Historically our cash flows from operating activitieshave fluctuated significantly due to the nature of our operations and thetiming of our cash receipts. During the first nine months of 2006, we generatedapproximately $186.4 million in cash from operating activities, as compared tonet cash used in operating activities in the comparable period of 2005 of$67.5 million. The increase in operating cash flows in the first ninemonths of 2006 is primarily due to the receipt of $250 million milestonepayment from our corporate partner BMS, as a result of obtaining approval fromthe FDA for ERBITUX in a second indication, partly offset by a payment to the IRSof approximately $31.7 million for withholding taxes related to an employmenttax audit for the years 1999-2001. In addition, as previously noted, in June of2006, we began to operate suite 1 of our BB50 facility and during the thirdquarter of 2006, we spent approximately $28 million of operating cash flows to manufacture ERBITUX inventoryat BB50. Such inventory is 

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currentlybeing classified in the Company’s Balance Sheet as long term inventory, as weexpect to obtain approval for BB50 at the end of 2007. 

Our primary sources and uses of cash from investingactivities consist of purchases and sales activity in our investment portfolio,which we manage based on our liquidity needs, possible business developmenttransactions and amounts used for capital expenditures. During the first ninemonths of 2006, we used net cash from investing activities of $261.5 millioncomprised of approximately $41.1 million in acquisition of fixed assets, and wemade net purchases of securities of approximately $220.4 million by investingthe majority of the milestone payment received from BMS at the end of the firstquarter of 2006.

We generated net cash flows from financing activitiesin the first nine months of 2006 of approximately $87.0 million as compared to$14.1 million in the comparable period of 2005. Cash flows from financingactivities were generated from employees exercising stock options and from theissuance of common stock under our employee stock purchase plan. In addition,this category reflects the benefit of equity net operating losses that will betaken as a reduction in our tax liability on our tax return and therefore,saving us cash by reducing our federal and state taxes due.

Belowis a table that presents our contractual obligations and commercial commitmentsas of September 30, 2006: (in thousands)

| ** **                          | ** ** | **Payments due by Year(1)** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** |
| Long-term debt(2)                   |       | $                                          | 600,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest on  long-term debt         |       | 147,469                                    |       | 4,125 |   | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 110,344 |   |
| Operating leases                    |       | 67,215                                     |       | 1,081 |   | 5,411 |   | 4,253 |   | 4,281 |   | 4,174 |   | 48,015 |   |
| Purchase  obligations               |       | 9,678                                      |       | 9,678 |   | — |   | — |   | — |   | — |   | — |   |
| Contract services  obligations      |       | 16,560                                     |       | 6,480 |   | 4,140 |   | 1,350 |   | 1,620 |   | 2,970 |   | — |   |
| Total contractual cash  obligations |       | $                                          | 840,922    |   | $ | 21,364 |   | $ | 17,801 |   | $ | 13,853 |   | $ | 14,151 |   | $ | 15,394 |   | $ | 758,359 |   |

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(1)          Amounts in the abovetable do not include milestone-type payments payable by us under collaborativeagreements.

(2)          On May 15, 2009,2014 and 2019, or upon the occurrence of certain designated events, holders mayrequire the Company to repurchase the notes at a repurchase price equal to 100%of the principal amount of the notes plus accrued and unpaid interest.

**OFF-BALANCE SHEETARRANGEMENTS**

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

**Item 3.**                        *Quantitative and Qualitative Disclosures About Market Risk*

Our holdings of financial instruments comprise a mixof U.S. dollar denominated securities that may include U.S. corporate debt,foreign corporate debt, U.S. government debt, foreign government debt,asset-backed securities, agency debt and commercial paper. All such instrumentsare classified as securities available for sale. Generally, we do not invest inportfolio equity securities, commodities, foreign exchange contracts or usefinancial derivatives for trading purposes. Our debt security portfoliorepresents funds held temporarily pending use in our business and operations.We manage these funds accordingly. We seek reasonable assuredness of the safetyof principal and market liquidity by investing in investment grade fixed incomesecurities while at the same time seeking to achieve a favorable rate ofreturn. Our market 

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risk exposure consistsprincipally of exposure to changes in interest rates. Our holdings are alsoexposed to the risks of changes in the credit quality of issuers. We invest insecurities that have a range of maturity dates.

Thetable below presents the principal amounts and related weighted averageinterest rates by year of maturity for our investment portfolio as of September 30,2006: (in thousands, except interest rates)

| ** **             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|-----------------|------------|
| Fixed Rate             |       | $        | 60,000     |     | $          | 212,400  |       | $        | 100,000    |     | $          | 55,000                        |       | $         | 20,000     |            | $          | — |   | $ | 447,400 |   | $ | 441,171 |   |
| Average Interest  Rate |       | 3.01     | %          | 3.51     | %          | 3.86     | %          | 4.33     | %          | 4.54     | %          | —                        |       | 3.67      | %          |            |       |
| Variable Rate(1)       |       | —   |       | —   |       | 1,802    |       | —   |       | 10,000   |       | 523,279                       |       | 535,081   |       | 535,001         |       |
| Average Interest  Rate |       | —   |       | —   |       | 4.85     | %          | —   |       | 4.00     | %          | 5.32                          | %          | 5.29      | %          |            |       |
|                   |       | $        | 60,000     |     | $          | 212,400  |       | $        | 101,802    |     | $          | 55,000                        |       | $         | 30,000     |            | $          | 523,279 |   | $ | 982,481 |   | $ | 976,172 |   |

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

Our outstanding 13¤8%fixed rate convertible senior notes in the principal amount of $600,000,000 dueMay 15, 2024 are convertible into our common stock at a conversion priceof $94.69 per share, subject to certain restrictions as outlined in theindenture agreement. The fair value of fixed interest rate instruments isaffected by changes in interest rates and in the case of the convertible notesby changes in the price of our common stock as well. The fair value of the convertiblesenior notes was approximately $529,500,000 at September 30, 2006.

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

*Disclosure Controlsand Procedures*

Our management, with theparticipation of our Executive Committee of the Board, Chairman and Senior VicePresident, Finance, has evaluated the effectiveness of our “disclosure controlsand procedures” (as defined in Exchange Act Rules 13a-15(e) and15d-15(e)) as of the end of the period covered by this report. Based onsuch evaluation, our Executive Committee of the Board, Chairman and Senior VicePresident, Finance, have concluded that, as of the end of the period covered bythis report, our disclosure controls and procedures are effective in recording,processing, summarizing and reporting, on a timely basis, information that weare required to disclose in the reports that we file or submit under theExchange Act.

*Changes In InternalControl Over Financial Reporting*

There has been no change in our internal control overfinancial reporting during the three months ended September 30, 2006 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

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**PART II**

**OTHER INFORMATION**

**Item 1.**                        *Legal Proceedings*

***A.   Government Inquiries and Investigations***

In January 2003, New York State notified theCompany that the Company was liable for the New York State and City incometaxes that were not withheld because one or more the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payNew York State and City income taxes for those years. On March 13,2003, the Company entered into a closing agreement with New York State,paying $4,500,000 to settle the matter. The Company believes that substantiallyall of the underpayment of New York State and City income tax identified byNew York State is attributable to the exercise of non-qualified stockoptions by the Company’s former President and Chief Executive Officer, Dr. SamuelD. Waksal. At the same time, the Company informed the IRS, the SEC and theUnited States Attorney’s Office, responsible for the prosecution of Dr. SamuelD. Waksal, of this issue. In order to confirm whether the Company’s liabilityin this regard was limited to Dr. Samuel D. Waksal’s failure to pay incometaxes, the Company contacted current and former officers and employees who hadexercised non-qualified stock options to confirm that those individuals had properlyreported and paid their personal income tax liabilities for the years 1999 and2000 in which they exercised options, which would reduce or eliminate theCompany’s potential liability for failure to withhold income taxes on theexercise of those options. In the course of doing so, the Company became awareof another potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees,including the Company’s former President and Chief Executive Officer, Samuel D.Waksal, the Company’s former General Counsel, John B. Landes, the Company’sformer Chief Scientific Officer, Harlan W. Waksal, and the Company’s formerdirector and Chairman of the Board, Robert F. Goldhammer. Again, the Companypromptly informed the IRS, the SEC and the United States Attorney’s Office ofthis issue. The Company also informed New York State of this issue. On June 17,2003, New York State notified the Company that based on this issue, theywere continuing a previously conducted audit and were evaluating the terms ofthe closing agreement to determine whether it should be re-opened. On March 31,2004, the Company entered into a new closing agreement pursuant to which theCompany paid New York State an additional $1,000,000 in full satisfaction ofall the deficiencies and determinations of withholding taxes for the years 1999-2001.Therefore, the Company has eliminated the liability of $2,815,000, which wasaccrued as of December 31, 2003, primarily attributable to New York Statewithholding taxes on stock options and warrants exercised by Dr. Samuel D.Waksal and has recognized a benefit of $1,815,000 as a recovery in the ConsolidatedStatements of Operations in the first quarter of 2004.

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

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

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

***B.   Intellectual Property Litigation***

As previously reported, on October 28, 2003, acomplaint was filed by Yeda Research and Development Company Ltd. (“Yeda”)against ImClone Systems and Aventis Pharmaceuticals, Inc. in the U.S.District Court for the Southern District of New York (03 CV 8484). This action didnot seek damages, but rather alleged that three individuals associated withYeda should also be named as co-inventors on U.S. Patent No. 6,217,866.On June 7, 2005, Yeda amended its U.S. complaint to seek sole inventorshipof the subject patent. On November 4, 2005, the Court denied the Company’smotion for summary judgment with respect to this matter, as filed with theCourt on June 24, 2005. At the same time, the Court granted summaryjudgment to Yeda dismissing two of ImClone’s affirmative defenses. A benchtrial on the merits of Yeda’s complaint was held between June 5, 2006 and June 22,2006. On September 18, 2006, the Court ruled in favor of Yeda by awardingit sole inventorship rights to the patent. ImClone Systems then appealed theCourt’s decision to the Court of Appeals for the Federal Circuit. The appealwas docketed on October 5, 2006 (as No. 2007-1012), and is inits early stages. The Company plans to vigorously pursue this appeal. On September 20,2006, subsequent to the Court’s inventorship decision, the Company also filedan action (06 CV 7190) against Yeda in the U.S. District Court for the SouthernDistrict of New York seeking a declaratory judgment that the patent is invaliddue to the removal of the originally named inventors. On October 31, 2006,Yeda filed an answer and counterclaim to the Company’s declaratory judgment inwhich Yeda seeks restitution and orders the Company to license the patent andpay it royalties. As previously reported, on March 25, 2004, an action wasfiled in the United Kingdom Patent Office entitled Referrer’s Statementrequesting transfer of co-ownership and amendment ofpatent EP (UK) 0 667 165 to add three Yeda employees asinventors. Also on March 25, 2004, a German action entitled Legal Actionwas filed in the Munich District Court I, Patent Litigation Division, seekingto add three Yeda employees as inventors on patent EP (DE) 0 667 165. TheCompany was not named as a party in these actions which relate to the Europeanequivalent of U.S. Patent No. 6,217,866 discussed above. Accordingly, theCompany intervened in the U.K. and German actions. Yeda sought to amend itspleadings in the United Kingdom and Germany to seek sole inventorship.Following hearings, both the U.K. and German courts held that Yeda was notentitled to amend its pleadings. In the U.K., Yeda has sought leave from theHouse of Lords to appeal the High Court’s decision. The House of Lords has notyet decided whether they will grant Yeda leave to appeal. In Germany, Yeda hasappealed the lower court’s decision to the Higher Regional Court of Munich,which has yet commented on Yeda’s appeal. Additionally, on or about March 25,2005 and March 29, 2005, respectively, Yeda filed legal actions in Austriaand France against both Aventis and ImClone Systems seeking full inventorshipof EP (AU) 0 667 165 and EP (FR) 0 667 165, as well aspayment of legal costs and fees. The Company is vigorously defending againstclaims asserted in these actions. The Company is unable to predict the outcomeof these actions at the present time.

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen and that the Company shouldtherefore pay damages. On July 28, 2006, the Court denied the Company’smotion for summary judgment seeking to dismiss all claims on the basis that thepatent rights at issue were exhausted as a matter of law and granted MIT andRepligen’s cross motion that their patent rights were not exhausted. On September 26,2006, a hearing was held in response to a Motion for Sanctions filed byRepligen, which alleged that Kenyon & Kenyon representing ImCloneSystems and the Company acted improperly during and after the deposition of oneof Repligen’s potential witnesses. The Court has not ruled on the motion. 

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Upon a ruling by theCourt, which we cannot predict, the case will now proceed to trial on themerits of the Company’s other defenses. The Company is vigorously defendingagainst claims asserted in this action. The Company is unable to predict theoutcome of this action at the present time.

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

As previously disclosed,the Company is developing a fully human monoclonal antibody, referred to as IMC-11F8.The Company believes it has the right to do so under its existing developmentand license agreement with Merck KGaA. However, Merck KGaA had advised theCompany that it believed that IMC-11F8 was covered under the developmentand license agreement with Merck KGaA and that it could therefore have theexclusive rights to market IMC-11F8 outside the United States and Canadaand co-exclusive development rights in Japan, for which it would pay thesame royalty as it pays for ERBITUX. See “Corporate Collaborations—Collaborationswith Merck KGaA”. In agreement with Merck KGaA, the Company submitted thisdispute to binding arbitration through an expedited process outside of theprovisions of the development and license agreement. Merck KGaA subsequentlytook the position that the expedited arbitration provision was no longer validand the Company sued Merck KGaA in federal court in the Southern District ofNew York to either enforce the arbitration provision previously agreed to or tohave the court decide the question of whether IMC-11F8 is or is notcovered under the development and license agreement with Merck KGaA. On November 29,2005, the Court granted the Company’s motion to enforce the expeditedarbitration provision previously agreed to, and subsequently appointed a newarbitrator to hear and decide this dispute. On March 31, 2006, thearbitrator decided the matter in favor of the Company, finding that Merck KGaAhad no rights to IMC-11F8. That decision is binding and unappealablepursuant to the parties’ arbitration agreement and the parties havesubsequently confirmed the arbitration award.

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

**Supplemental RisksRelating to Intellectual Property**

**Protecting our proprietary rights is difficult andcostly. If we fail to adequately protect or enforce our proprietary rights, wecould lose revenue.**

Our success depends in large part on our ability toobtain, maintain and enforce our patents. Our ability to commercialize productssuccessfully largely depends on our ability to obtain and maintain patents ofsufficient scope to prevent third parties from successfully commercializing similaror competitive products. In the absence of patent protection, competitors maycause a negative impact to our business by developing and marketingsubstantially equivalent products and technology.

Patent disputes are frequent and can preclude thecommercialization of products. We have in the past been, are currently, and mayin the future be, involved in material patent litigation, such as the mattersdiscussed under “Part II—Item 1. Legal Proceedings”. Patent litigation istime-consuming and costly in its own right and could subject us to significantliabilities to third parties. In addition, an adverse decision could force usto either obtain third-party licenses at a material cost or cease using thetechnology or product in dispute.

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

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andlicenses relating to the therapeutic use of EGFR antibodies. These patentsexpire on various dates, the earliest of which is in 2007. Risks related to ourpatent position with respect to ERBITUX and our product candidates are morefully discussed under “Item 1—Business—Patents and Trademarks” in our 2005Annual Report on Form 10-K.

**Several lawsuits have been filed against us, includingcertain challenges to the inventorship of our licensed patent relatingto the therapeutic use of EGFR antibodies, which have resulted, and will likelycontinue to result, in litigation that is costly to defend and the outcome ofwhich is uncertain and may harm our business.**

Litigations or arbitrations to which we are currently,or have been in the past, subjected relate to, among other things, our patentand other intellectual property rights, licensing arrangements with otherpersons and those other claims more fully described under “Part II—Item 1.Legal Proceedings”, including an action brought by Yeda Research andDevelopment Company Ltd. (“Yeda”) in the U.S. District Court for the SouthernDistrict of New York alleging that three individuals associated with Yeda benamed as sole or co-inventors on U.S. Patent No. 6,217,866 relating to thetherapeutic use of EGFR antibodies, which is now on appeal. Related actions arecurrently pending in the United Kingdom, Germany, France and Austria.

We cannot provide anyassurance as to the outcome of these pending lawsuits or arbitrations. Anyconclusion of these matters in a manner adverse to us, including anysettlement, could have a material adverse effect on our business and operatingresults. In addition, the costs to us of defending these claims or any otherproceedings, even if resolved in our favor, could be substantial. Uncertaintiesresulting from the initiation and continuation of any litigation or otherproceedings could also harm our ability to compete in the marketplace.

**Supplemental RisksRelating to Our Business and Other Matters**

**The recent changes in the composition of our Board ofDirectors together with the additional changes anticipated following our nextannual meeting may result in a “change of control” in the future under certainof our employee benefit plans, which may adversely affect our business.**

The recent change in thecomposition of our Board of Directors, and the additional changes anticipatedfollowing our next annual meeting, together may result in a change of controlin the future for purposes of certain severance and compensation arrangementsentered into by the Company. As a result, covered employees may become eligiblefor additional compensation if their employment is terminated without cause orif they leave the Company for good reason (as defined in the relevantagreements and plan documents) following such change of control. In addition,under certain circumstances, covered employees’ equity awards may also vest infull. If this occurs, we may bear additional expenditures to retain or replacethe services of covered employees.

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

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

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

Not applicable

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

Not applicable

**Item4.**                        *Submission of Matters to a Vote of Security Holders*

(a)          TheCompany held its annual meeting of stockholders on September 20, 2006 (the“Annual Meeting”).

(b)         No response is requiredto Paragraph (b) because (i) proxies for the meeting were solicitedpursuant to Regulation 14 under the Securities Exchange Act of 1934, asamended; (ii) there was no solicitation in opposition to those nomineeslisted in the proxy statement; and (iii) all such nominees were elected.

(c)          Each of the mattersvoted upon at the Annual Meeting were approved by the margins set forth below.

(i)             Proposalto approve nominees for the Board of Directors:

| **Name**                | ** ** | ** ** | ** ** | **In Favor** | ** ** | **Withheld** | ** ** |
|-------------------------|------------|------------|------------|-------------------|------------|--------------|------------|
| Andrew G. Bodnar        |       | 67,519,289 |       | 11,858,961        |       |
| William W. Crouse       |       | 65,472,234 |       | 13,906,016        |       |
| Alexander J.  Denner    |       | 77,293,361 |       | 2,084,889         |       |
| Vincent T.  DeVita, Jr. |       | 67,415,993 |       | 11,962,257        |       |
| John A. Fazio           |       | 67,677,221 |       | 11,701,029        |       |
| Joseph L. Fischer       |       | 67,095,619 |       | 12,282,631        |       |
| Carl C. Icahn           |       | 76,445,505 |       | 2,932,745         |       |
| David M. Kies           |       | 64,612,576 |       | 14,765,674        |       |
| William R. Miller       |       | 73,981,463 |       | 5,396,787         |       |
| Richard C.  Mulligan    |       | 77,636,305 |       | 1,741,945         |       |
| David Sidransky         |       | 73,883,027 |       | 5,495,223         |       |
| Charles Woler           |       | 77,646,334 |       | 1,731,916         |       |

 

(ii)         Proposalto ratify the appointment of KPMG LLP to serve as the Company’s independentregistered public accounting firm for the fiscal year ending December 31,2006:

| FOR             |   | 70,031,199 |   |
|-----------------|--------|------------|--------|
| AGAINST         |   | 538,162    |   |
| ABSTAIN         |   | 8,808,889  |   |
| BROKER NON-VOTE |   | 0          |   |

 

(iii)     Proposalfor approval of the ImClone Systems Incorporated 2006 Stock Incentive Plan:

| FOR             |   | 42,853,330 |   |
|-----------------|--------|------------|--------|
| AGAINST         |   | 21,073,376 |   |
| ABSTAIN         |   | 119,908    |   |
| BROKER NON-VOTE |   | 15,331,636 |   |

 

In addition, onSeptember 28, 2006, Carl C. Icahn, Alexander J. Denner, Barberry Corp. andHigh River Limited Partnership (the “Soliciting Persons”) filed a preliminaryconsent solicitation statement with the Securities and Exchange Commission tocommence a solicitation of written consents to effect proposals to remove certainof our directors and appoint Peter S. Liebert, M.D. 

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to fill one of thevacancies that would be created if such directors were removed. OnOctober 25, 2006, as discussed under “—Overview” included in Item 2, theSoliciting Persons withdrew their consent solicitation.

**Item 5.**                        *Other Information*

Not applicable

**Item6.**                        *Exhibits*
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                  | **Description** | ** **        | **Incorporated   by   Reference** | ** ** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------|-------------------|-----------------------------------|------------|
| 3.1              |       | Certificate of Incorporation, as amended through  December 31, 1998                                                                                                                                    |            | (D)(3.1)          |                              |
| 3.2              |       | Amendment dated June 4, 1999 to the Company’s  Certificate of Incorporation, as amended                                                                                                           |            | (H)(3.1A)         |                              |
| 3.3              |       | Amendment dated June 12, 2000 to the Company’s  Certificate of Incorporation, as amended                                                                                                          |            | (K)(3.1A)         |                              |
| 3.4              |       | Amendment dated August 9, 2002 to the Company’s  Certificate of Incorporation, as amended                                                                                                         |            | (Q)(3.1C)         |                              |
| 3.5              |       | Amended and Restated By-Laws of the Company                                                                                                                                                                 |            | (Z)(3.1)          |                              |
| 4.1              |       | Rights Agreement dated as of February 15, 2002  between the Company and EquiServe Trust Company, N.A., as Rights Agent, as  amended May 4, 2006                                                   |            | (JJ)(EX-1,  EX-2) |                              |
| 4.2              |       | Stockholder Agreement, dated as of  September 19, 2001, among Bristol-Myers Squibb Company, Bristol-Myers  Squibb Biologics Company and the Company                                                    |            | (L)(99.D2)        |                              |
| 4.3              |       | Indenture dated as of May 7, 2004 by and between  the Company and The Bank of New York, as Trustee and Form of 13¤8% Convertible Notes Due  2024                                             |            | (KK)(4.5)         |                              |
| 4.4              |       | Registration Rights Agreement dated as of  May 7, 2004 by and between the Company, as Issuer, and Morgan  Stanley & Co., Incorporated and UBS Securities LLC, as the  Initial Purchasers |            | (KK)(4.6)         |                              |
| 10.1             |       | 1996 Incentive Stock Option Plan, as amended                                                                                                                                                                |            | (O)(99.1)         |                              |
| 10.2             |       | 1996 Non-Qualified Stock Option Plan, as amended                                                                                                                                                            |            | (O)(99.2)         |                              |
| 10.3             |       | ImClone Systems Incorporated 1998 Non-Qualified  Stock Option Plan, as amended                                                                                                                              |            | (O)(99.3)         |                              |
| 10.4             |       | ImClone Systems Incorporated 2002 Stock Option Plan                                                                                                                                                         |            | (Q)(99.8)         |                              |
| 10.5             |       | ImClone Systems Incorporated 1998 Employee Stock  Purchase Plan                                                                                                                                             |            | (I)(99.4)         |                              |
| 10.6             |       | Option Agreement, dated as of September 1,  1998, between the Company and Ron Martell                                                                                                                  |            | (F)(99.3)         |                              |
| 10.7             |       | License Agreement between the Company and the  Regents of the University of California dated April 9, 1993                                                                                             |            | (B)(10.48)        |                              |
| 10.8             |       | License Agreement between the Company and  Rhone-Poulenc Rorer dated June 13, 1994                                                                                                                     |            | (C)(10.56)        |                              |
| 10.9             |       | Development and License Agreement between the  Company and Merck KGaA dated December 14, 1998                                                                                                          |            | (E)(10.70)        |                              |
| 10.10            |       | Lease Agreement dated as of December 15, 1998  for the Company’s premises at 180 Varick Street, New York, New York                                                                           |            | (G)(10.69)        |                              |
| 10.11            |       | Amendment dated March 2, 1999 to Development  and License Agreement between the Company and Merck KGaA                                                                                                 |            | (G)(10.71)        |                              |

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| 10.12 |   | Acquisition Agreement dated as of September 19,  2001, among the Company, Bristol-Myers Squibb Company and Bristol-Myers  Squibb Biologics Company                                                                                                                                                                    |   | (L)(99.D1)   |   |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------|--------|
| 10.13 |   | Development, Promotion, Distribution and Supply  Agreement, dated as of September 19, 2001, among the Company,  Bristol-Myers Squibb Company and E.R. Squibb & Sons, L.L.C                                                                                                                                   |   | (L)(99.D3)   |   |
| 10.14 |   | Employment Agreement, dated as of March 19,  2004, between the Company and Daniel S. Lynch                                                                                                                                                                                                                            |   | (U)(10.1)    |   |
| 10.15 |   | Agreement of Sublease dated October 5, 2001, by  and between 325 Spring Street LLC and the Company                                                                                                                                                                                                               |   | (O)(10.86)   |   |
| 10.16 |   | Promissory Note in the principal amount of  $10,000,000, dated October 5, 2001, executed by 325 Spring Street LLC in  favor of the Company                                                                                                                                                                            |   | (O)(10.86.1) |   |
| 10.17 |   | Amendment No. 1 to Development, Promotion,  Distribution and Supply Agreement, dated as of March 5, 2002, among the  Company, Bristol-Myers Squibb Company and E.R. Squibb & Sons, L.L.C                                                                                                                |   | (N)(99.2)    |   |
| 10.18 |   | Amendment, dated as of August 16, 2001 to the  Development and License Agreement between the Company and Merck KGaA                                                                                                                                                                                                   |   | (P)(10.88)   |   |
| 10.19 |   | Agreement of Sale and Purchase between Building  Associates, LP and ImClone Systems Incorporated pertaining to 33 Chubb Way,  Branchburg, New Jersey executed as of March 1, 2002                                                                                                                                     |   | (Q)(10.92)   |   |
| 10.20 |   | Target Price Contract, dated as of July 15,  2002, between ImClone Systems Incorporated and Kvaerner Process, a division  of Kvaerner U.S. Inc., for the Architectural, Engineering, Procurement  Assistance, Construction Management and Validation of a Commercial  Manufacturing Project in Branchburg, New Jersey |   | (R)(10.93)   |   |
| 10.21 |   | Modifications Agreement dated as of  December 15, 2000 by an between 180 Varick Street Corporation and  the Company                                                                                                                                                                                              |   | (S)(10.94)   |   |
| 10.22 |   | Amendment Number 4 to the Company’s lease at 180  Varick Street dated August 13, 2004 by and between 180 Varick Street  Corporation and the Company                                                                                                                                                              |   | (V)(10.28)   |   |
| 10.23 |   | ImClone Systems Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                         |   | (T)(A.C)     |   |
| 10.24 |   | Supply Agreement between the Company and Lonza  Biologics PLC dated March 17, 2005                                                                                                                                                                                                                                    |   | (Y)(10.30)   |   |
| 10.25 |   | ImClone Systems Incorporated Senior Executive  Severance Plan                                                                                                                                                                                                                                                              |   | (W)(10.29)   |   |
| 10.26 |   | ImClone Systems Incorporated Change in Control Plan,  as amended                                                                                                                                                                                                                                                           |   | (FF)(10.32)  |   |
| 10.27 |   | Terms of inducement stock option grants to  Drs. Philip Frost and Eric Rowinsky on March 1, 2005 and  February 21, 2005, respectively, as approved by the Compensation  Committee of Board of Directors                                                                                                |   | (AA)         |   |
| 10.28 |   | Collaboration and License Agreement between the  Company and UCB S.A. dated August 15, 2005. Confidential Treatment has  been requested for a portion of this Exhibit                                                                                                                                                 |   | (CC)(10.35)  |   |
| 10.29 |   | Approval by Board of Directors of certain compensation  related matters and Company stock repurchase program                                                                                                                                                                                                               |   | (BB)         |   |
| 10.30 |   | ImClone Systems Incorporated 2005 Inducement Stock  Option Plan                                                                                                                                                                                                                                                            |   | (DD)(10.1)   |   |
| 10.31 |   | Terms of accelerated Company stock options and form  of lock-up agreement                                                                                                                                                                                                                                                  |   | (EE)(10.1)   |   |
| 10.32 |   | ImClone Systems Incorporated 2006-2008  Retention Plan                                                                                                                                                                                                                                                                     |   | (GG)(10.1)   |   |
| 10.33 |   | ImClone Systems Incorporated Transition Severance  Plan                                                                                                                                                                                                                                                                    |   | (FF)(10.40)  |   |

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| 10.34   |   | Approval by the Compensation Committee of Board of  Directors of performance criteria for executive officer cash bonus awards  under the Company’s Annual Incentive Plan for the year ended  December 31, 2006, together with maximum permitted bonuses under the  plan |   | (HH)        |   |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|--------|
| 10.35   |   | Letter Agreement, dated March 21, 2006, by and  between Joseph L. Fischer and ImClone Systems Incorporated                                                                                                                                                                   |   | (II)(10.42) |   |
| 10.36   |   | Letter Agreement, dated August 23, 2006, by and  between Joseph L. Fischer and ImClone Systems Incorporated                                                                                                                                                                  |   | (LL)(99.1)  |   |
| 10.37   |   | Letter Agreement, dated October 24, 2006, by  and between Joseph L. Fischer and ImClone Systems Incorporated                                                                                                                                                                 |   | (MM)(99.1)  |   |
| 10.38** |   | Settlement Agreement, dated July 19, 2006, by  and between ImClone Systems Incorporated and Merck KGaA, including an  amendment to the Development and License Agreement between the Company and  Merck KGaA, as amended                                                     |   |        |   |
| 31.1*   |   | Certification of the Company’s Executive Committee  of the Board pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                              |   |        |   |
| 31.2*   |   | Certification of the Company’s Senior Vice President  of Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                              |   |        |   |
| 32*     |   | Certification of the Company’s Executive Committee  of the Board and Senior Vice President of Finance pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                        |   |        |   |

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*                                 Filedherewith.

**                          Filedherewith. Confidential Treament has been requested for a portion of thisexhibit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(T)                     Previouslyfiled with the Commission; incorporated by reference to the Company’s ProxyStatement for its 2003 Annual Meeting of Shareholders, filed August 21,2003, as appendix C.

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

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

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

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

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

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

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

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

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

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

57

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

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

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

(II)                    Previouslyfiled with the Commission, incorporated by reference to the Company’s CurrentReport on Form 10-K/A dated May 1, 2006.

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

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

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

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

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                              | IMCLONE  SYSTEMS INCORPORATED  (Registrant) |
|------------------------------|---------------------------------------------|
|                         | By:                                         | /s/  ALEXANDER J. DENNER |
|                         |                                        | Alexander J.  Denner |
|                         | * *                                    | *Executive  Committee of the Board, Chairman* |
| Date:  November 9, 2006 |                                        |   |
|                         | By:                                         | /s/  ANA I. STANCIC |
|                         |                                        | Ana I. Stancic |
|                         |                                        | *Senior  Vice President, Finance* |
| Date:  November 9, 2006 |                                        |   |

 

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