**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-Q**

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

 

**Commissionfile number 0-19612**

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**ImCloneSystems Incorporated**

(Exact name of registrantas specified in its charter)

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

 

**(212) 645-1405**

(Registrant’s telephonenumber, including area code)

**Not Applicable**

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

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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

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act). Yes x   No o

Indicate by check markwhether the registrant is a shell company (as defined in 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 3, 2005** |
|-------------------------------|--------|----------------------------------------------|
| Common Stock, par value $.001 |   | 83,964,120 Shares                            |

 

 

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**IMCLONESYSTEMS INCORPORATEDINDEX**

| ** **                              | ** ** | ** **                                                                                                                              | ** ** | **Page** |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I—FINANCIAL  INFORMATION |       | 1                                                                                                                                       |
| Item 1.                                 |       | Financial Statements                                                                                                                    |       | 1        |
|                                    |       | Unaudited Consolidated Balance Sheets—September 30,  2005 and December 31, 2004                                          |       | 1        |
|                                    |       | Unaudited  Consolidated Statements of Operations—Three and Nine months ended  September 30, 2005 and 2004                |       | 2        |
|                                    |       | Unaudited  Consolidated Statement of Stockholders’ Equity and Comprehensive Income—Nine  months ended September 30, 2005 |       | 3        |
|                                    |       | Unaudited  Consolidated Statements of Cash Flows—Nine months ended September 30,  2005 and 2004                          |       | 4        |
|                                    |       | Notes to  Unaudited Consolidated Financial Statements                                                                                   |       | 5        |
| Item 2.                                 |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                             |       | 30       |
| Item 3.                                 |       | Quantitative  and Qualitative Disclosures About Market Risk                                                                             |       | 46       |
| Item 4.                                 |       | Controls and  Procedures                                                                                                                |       | 47       |
| PART II—OTHER INFORMATION     |       | 48                                                                                                                                      |
| Item 1.                                 |       | Legal Proceedings                                                                                                                       |       | 48       |
| Item 2.                                 |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                            |       | 53       |
| Item 3.                                 |       | Defaults upon  Senior Securities                                                                                                        |       | 53       |
| Item 4.                                 |       | Submission of  Matters to a Vote of Security Holders                                                                                    |       | 53       |
| Item 5.                                 |       | Other Information                                                                                                                       |       | 53       |
| Item 6.                                 |       | Exhibits                                                                                                                                |       | 54       |
| Signatures                              |       | 58                                                                                                                                      |
|                                         |            |                                                                                                                                         |            |          |  |  |

 

i

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**PART I. FINANCIAL INFORMATION**

**Item 1.   *Financial Statements***

**IMCLONESYSTEMS INCORPORATEDCONSOLIDATED BALANCE SHEETS(in thousands, except per share and share data)(Unaudited)**

| ** **                                                                                                                                                                                                                                                                        | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                                        | ** ** |                         | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| Current assets:                                                                                                                                                                                                                                                                   |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Cash and cash equivalents                                                                                                                                                                                                                                                         |       |                         | $          | 6,663                       | ** ** |   |   | $ | 79,321 | ** ** |   |
| Securities available for  sale                                                                                                                                                                                                                                                    |       |                         | 782,860    | ** **                  |       |   | 840,451 | ** ** |   |
| Prepaid expenses                                                                                                                                                                                                                                                                  |       |                         | 5,848      | ** **                  |       |   | 4,054 | ** ** |   |
| Amounts due from  corporate partners less allowances of $388 and $430 at September 30,  2005 and December 31, 2004, respectively                                                                                                                                        |       |                         | 66,490     | ** **                  |       |   | 69,753 | ** ** |   |
| Inventories                                                                                                                                                                                                                                                                       |       |                         | 73,240     | ** **                  |       |   | 40,618 | ** ** |   |
| Other current assets                                                                                                                                                                                                                                                              |       |                         | 6,601      | ** **                  |       |   | 28,240 | ** ** |   |
| Total current assets                                                                                                                                                                                                                                                              |       |                         | 941,702    | ** **                  |       |   | 1,062,437 | ** ** |   |
| Property, plant and  equipment, net                                                                                                                                                                                                                                               |       |                         | 395,618    | ** **                  |       |   | 339,293 | ** ** |   |
| Deferred financing costs,  net                                                                                                                                                                                                                                                    |       |                         | 13,460     | ** **                  |       |   | 16,244 | ** ** |   |
| Other assets                                                                                                                                                                                                                                                                      |       |                         | 15,427     | ** **                  |       |   | 16,802 | ** ** |   |
| Total assets                                                                                                                                                                                                                                                                      |       |                         | $          | 1,366,207                   | ** ** |   |   | $ | 1,434,776 | ** ** |   |
| **LIABILITES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                      |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Current liabilities:                                                                                                                                                                                                                                                              |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Accounts payable  (including $3,669 and $2,535 due Bristol-Myers Squibb Company (“BMS”) at  September 30, 2005 and December 31, 2004, respectively)                                                                                                           |       |                         | $          | 40,236                      | ** ** |   |   | $ | 38,492 | ** ** |   |
| Accrued expenses  (including $7,934 and $3,187 due BMS at September 30, 2005 and  December 31, 2004, respectively)                                                                                                                                                      |       |                         | 50,654     | ** **                  |       |   | 61,177 | ** ** |   |
| Litigation settlement                                                                                                                                                                                                                                                             |       |                         | -          | ** **                  |       |   | 75,900 | ** ** |   |
| Withholding tax liability                                                                                                                                                                                                                                                         |       |                         | 18,096     | ** **                  |       |   | 18,096 | ** ** |   |
| Current portion of  deferred revenue                                                                                                                                                                                                                                              |       |                         | 101,679    | ** **                  |       |   | 108,994 | ** ** |   |
| Other current liabilities                                                                                                                                                                                                                                                         |       |                         | 3,094      | ** **                  |       |   | 1,031 | ** ** |   |
| Total current liabilities                                                                                                                                                                                                                                                         |       |                         | 213,759    | ** **                  |       |   | 303,690 | ** ** |   |
| Deferred revenue, less  current portion                                                                                                                                                                                                                                           |       |                         | 278,415    | ** **                  |       |   | 348,814 | ** ** |   |
| Long-term debt                                                                                                                                                                                                                                                                    |       |                         | 600,000    | ** **                  |       |   | 600,000 | ** ** |   |
| Deferred rent, less  current portion                                                                                                                                                                                                                                              |       |                         | 2,298      | ** **                  |       |   | 3,434 | ** ** |   |
| Total liabilities                                                                                                                                                                                                                                                                 |       |                         | 1,094,472  | ** **                  |       |   | 1,255,938 | ** ** |   |
| Commitments and contingencies                                                                                                                                                                                                                                                     |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Stockholders’ equity:                                                                                                                                                                                                                                                        |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Preferred stock, $1.00  par value; authorized 4,000,000 shares; reserved 1,200,000 series B  participating cumulative preferred stock, none issued or outstanding                                                                                                                 |       |                         | —     | ** **                  |       |   | — | ** ** |   |
| Common stock, $.001 par  value; authorized 200,000,000 shares; issued 84,050,894 and 83,250,146 at  September 30, 2005 and December 31, 2004, respectively; outstanding  83,857,636 and 83,056,888 at September 30, 2005 and December 31,  2004, respectively |       |                         | 84         | ** **                  |       |   | 83 | ** ** |   |
| Additional paid-in  capital                                                                                                                                                                                                                                                       |       |                         | 726,914    | ** **                  |       |   | 712,819 | ** ** |   |
| Accumulated deficit                                                                                                                                                                                                                                                               |       |                         | (443,153   | **)**                       |       |   | (528,955 | **)** |   |
| Treasury stock, at cost;  193,258 shares at September 30, 2005 and December 31, 2004                                                                                                                                                                                    |       |                         | (4,300     | **)**                       |       |   | (4,300 | **)** |   |
| Accumulated other comprehensive loss:                                                                                                                                                                                                                                             |       |                         |       | ** **                  |       |   |   | ** ** |   |
| Net unrealized loss on  securities available for sale                                                                                                                                                                                                                             |       |                         | (7,810     | **)**                       |       |   | (809 | **)** |   |
| Total stockholders’  equity                                                                                                                                                                                                                                                  |       |                         | 271,735    | ** **                  |       |   | 178,838 | ** ** |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                                   |       |                         | $          | 1,366,207                   | ** ** |   |   | $ | 1,434,776 | ** ** |   |

 

See accompanying notes to consolidated financial statements.

1

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**IMCLONESYSTEMS INCORPORATEDCONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share data)(Unaudited)**

| ** **                                         | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                         | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Revenues:                                          |       |                                                 |       |                                                |       |   |   |   |   |
| License fees and milestone revenue                 |       | $                                                    | 27,146     |                                                | $          | 22,958 |   | $ | 76,171 |   | $ | 108,604 |   |
| Manufacturing revenue                              |       | 10,748                                               |       | 29,952                                              |       | 29,661 |   | 70,252 |   |
| Royalty revenue                                    |       | 46,647                                               |       | 34,137                                              |       | 124,810 |   | 69,742 |   |
| Collaborative agreement revenue                    |       | 21,984                                               |       | 10,414                                              |       | 54,039 |   | 32,795 |   |
| Total revenues                                     |       | 106,525                                              |       | 97,461                                              |       | 284,681 |   | 281,393 |   |
| Operating expenses:                                |       |                                                 |       |                                                |       |   |   |   |   |
| Research and development                           |       | 28,958                                               |       | 17,635                                              |       | 74,564 |   | 56,682 |   |
| Clinical and regulatory                            |       | 13,583                                               |       | 7,595                                               |       | 31,357 |   | 20,859 |   |
| Marketing, general and administrative              |       | 19,463                                               |       | 14,816                                              |       | 53,919 |   | 40,021 |   |
| Royalty expense                                    |       | 15,165                                               |       | 9,661                                               |       | 42,069 |   | 19,340 |   |
| Cost of manufacturing revenue                      |       | 3,099                                                |       | 223                                                 |       | 4,948 |   | 559 |   |
| Discontinuation of small molecule research program |       | —                                               |       | —                                              |       | 6,200 |   | — |   |
| Other                                              |       | —                                               |       | —                                              |       | — |   | (1,815 | ) |
| Total operating expenses                           |       | 80,268                                               |       | 49,930                                              |       | 213,057 |   | 135,646 |   |
| Operating income                                   |       | 26,257                                               |       | 47,531                                              |       | 71,624 |   | 145,747 |   |
| Other:                                             |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                                    |       | (7,025                                               | )          | (5,169                                              | )          | (20,575 | ) | (8,076 | ) |
| Interest expense                                   |       | 1,577                                                |       | 1,962                                               |       | 5,073 |   | 6,476 |   |
| (Gain) loss on sales of securities                 |       | —                                               |       | (20                                                 | )          | 16 |   | (131 | ) |
| Net other                                          |       | (5,448                                               | )          | (3,227                                              | )          | (15,486 | ) | (1,731 | ) |
| Income before income taxes                         |       | 31,705                                               |       | 50,758                                              |       | 87,110 |   | 147,478 |   |
| Provision for income taxes                         |       | 754                                                  |       | 10,975                                              |       | 1,308 |   | 20,647 |   |
| Net income                                         |       | $                                                    | 30,951     |                                                | $          | 39,783 |   | $ | 85,802 |   | $ | 126,831 |   |
| Income per common share:                           |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                              |       | $                                                    | 0.37       |                                                | $          | 0.48 |   | $ | 1.03 |   | $ | 1.62 |   |
| Diluted                                            |       | $                                                    | 0.35       |                                                | $          | 0.44 |   | $ | 0.98 |   | $ | 1.45 |   |
| Shares used in  calculation of income per share:   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                              |       | 83,785                                               |       | 82,514                                              |       | 83,561 |   | 78,395 |   |
| Diluted                                            |       | 92,136                                               |       | 94,630                                              |       | 92,287 |   | 91,434 |   |

 

See accompanying notes to consolidated financial statements.

2

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**IMCLONESYSTEMS INCORPORATEDCONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOMEFor the Nine Months Ended September 30, 2005(in thousands, except share data)(Unaudited)**

| ** **                                                                  | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                                  | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **Deficit**                           | ** ** | **Stock**  | ** ** | **Loss** | ** ** | **Total** | ** ** |
| Balance at December 31, 2004                                           |       |                     | —     |                  |       |                    | $          | —          |       |         | 83,250,146 |                                  |       | $          | 83         |   |   |   | $ | 712,819 |   |   |   | $ | (528,955 | ) |   |   | $ | (4,300 | ) |   |   | $ | (809 | ) |   | $ | 178,838 |   |
| Options exercised                                                           |       |                     |       |                  |       |                    |       |            |       | 773,881      |       |                                  | 1          |       |       |   | 13,360 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 13,361 |   |
| Issuance of shares through employee stock purchase  plan                    |       |                     |       |                  |       |                    |       |            |       | 26,867       |       |                                  | —     |       |       |   | 735 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 735 |   |
| Comprehensive income:                                                       |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                  |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   | 85,802 |   |   |   |   |   |   |   |   |   |   | 85,802 |   |
| Other comprehensive loss:                                                   |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on marketable securities arising  during the period         |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (7,017 | ) |   | (7,017 | ) |
| Less: Reclassification adjustment for realized loss included  in net income |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (16 | ) |   | (16 | ) |
| Total other comprehensive loss                                              |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (7,001 | ) |   | (7,001 | ) |
| Comprehensive income                                                        |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 78,801 |   |
| Balance at  September 30, 2005                                         |       |                     | —     |                  |       |                    | $          | —          |       |         | 84,050,894 |                                  |       | $          | 84         |   |   |   | $ | 726,914 |   |   |   | $ | (443,153 | ) |   |   | $ | (4,300 | ) |   |   | $ | (7,810 | ) |   | $ | 271,735 |   |

 

See accompanying notes to consolidated financial statements.

3

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**IMCLONESYSTEMS INCORPORATEDCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(Unaudited)**

| ** **                                                                                                           | ** ** | **Nine Months Ended  September 30,** | ** **   |
|----------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|--------------|
| ** **                                                                                                           | ** ** | **2005**                                            | ** **   | **2004** | ** ** |
| Cash flows from operating activities:                                                                                |       | *** ***                                        | *** *** |   |   |
| Net income                                                                                                           |       | $                                                   | 85,802       | *** *** | $ | 126,831 |   |
| Adjustments to reconcile net income to net cash (used  in) provided by operating activities:                         |       | *** ***                                        | *** *** |   |   |
| Depreciation and  amortization                                                                                       |       | 9,706                                               | *** *** | 9,664 |   |
| Amortization of deferred  financing costs                                                                            |       | 2,784                                               | *** *** | 2,181 |   |
| Expense associated with  stock options                                                                               |       | —                                              | *** *** | 4,165 |   |
| Loss on disposal of fixed  assets                                                                                    |       | 3,880                                               | *** *** | — |   |
| Other                                                                                                                |       | 81                                                  | *** *** | (1,815 | ) |
| Loss (gain) on securities  available for sale, net                                                                   |       | 16                                                  | *** *** | (131 | ) |
| Changes in:                                                                                                          |       | *** ***                                        | *** *** |   |   |
| Prepaid expenses                                                                                                     |       | (1,794                                              | ***)***      | (1,895 | ) |
| Amounts due from  corporate partners                                                                                 |       | 3,263                                               | *** *** | (50,211 | ) |
| Inventories                                                                                                          |       | (32,622                                             | ***)***      | (33,981 | ) |
| Other current assets                                                                                                 |       | 21,639                                              | *** *** | (1,577 | ) |
| Other assets                                                                                                         |       | 1,187                                               | *** *** | (1,699 | ) |
| Accounts payable                                                                                                     |       | 1,744                                               | *** *** | 1,387 |   |
| Accrued expenses                                                                                                     |       | (10,523                                             | ***)***      | 14,110 |   |
| Realized tax benefit from  stock options                                                                             |       | —                                              | *** *** | 12,109 |   |
| Litigation settlement                                                                                                |       | (75,900                                             | ***)***      | — |   |
| Withholding tax liability                                                                                            |       | —                                              | *** *** | (1,076 | ) |
| Other current liabilities                                                                                            |       | 2,063                                               | *** *** | (1,123 | ) |
| Deferred revenue                                                                                                     |       | (77,714                                             | ***)***      | 141,455 |   |
| Other liabilities                                                                                                    |       | (1,136                                              | ***)***      | 374 |   |
| Net cash (used in)  provided by operating activities                                                                 |       | (67,524                                             | ***)***      | 218,768 |   |
| Cash flows from investing activities:                                                                                |       | *** ***                                        | *** *** |   |   |
| Acquisitions of property,  plant and equipment                                                                       |       | (69,804                                             | ***)***      | (75,745 | ) |
| Purchases of securities  available for sale                                                                          |       | (425,044                                            | ***)***      | (2,719,667 | ) |
| Sales of securities  available for sale                                                                              |       | 408,601                                             | *** *** | 744,125 |   |
| Maturities of securities  available for sale                                                                         |       | 67,017                                              | *** *** | 1,251,473 |   |
|                                                                                                                 |       | *** ***                                        | *** *** | — |   |
| Other                                                                                                                |       | —                                              | *** *** | (8 | ) |
| Net cash used in  investing activities                                                                               |       | (19,230                                             | ***)***      | (799,822 | ) |
| Cash flows from financing activities:                                                                                |       | *** ***                                        | *** *** |   |   |
| Proceeds from exercise of  stock options                                                                             |       | 13,361                                              | *** *** | 70,817 |   |
| Proceeds from issuance of  common stock under the employee stock purchase plan                                       |       | 735                                                 | *** *** | 598 |   |
| Proceeds from issuance of  13¤8% convertible notes                                                              |       | —                                              | *** *** | 600,000 |   |
| Deferred financing costs                                                                                             |       | —                                              | *** *** | (18,510 | ) |
| Proceeds from issuance of  common stock to Merck KGaA                                                                |       | —                                              | *** *** | 5,000 |   |
| Other                                                                                                                |       | —                                              | *** *** | (55 | ) |
| Net cash provided  by financing activities                                                                           |       | 14,096                                              | *** *** | 657,850 |   |
| Net (decrease)  increase in cash and cash equivalents                                                                |       | (72,658                                             | ***)***      | 76,796 |   |
| Cash and cash  equivalents at beginning of period                                                                    |       | 79,321                                              | *** *** | 30,865 |   |
| Cash and cash  equivalents at end of period                                                                          |       | $                                                   | 6,663        | *** *** | $ | 107,661 |   |
| Supplemental cash flow information:                                                                                  |       | *** ***                                        | *** *** |   |   |
| Cash paid for:                                                                                                       |       | *** ***                                        | *** *** |   |   |
| Interest, net of  amounts capitalized                                                                                |       | $                                                   | 226          | *** *** | $ | 5,444 |   |
| Taxes                                                                                                                |       | $                                                   | 1,400        | *** *** | $ | 4,630 |   |
| Non-cash investing and financing activity:                                                                           |       | *** ***                                        | *** *** |   |   |
| Change in net unrealized  loss (gain) in marketable securities                                                       |       | $                                                   | 7,017        | *** *** | $ | (104 | ) |
| Options exercised in  exchange for mature shares of common stock                                                     |       | $                                                   | —       | *** *** | $ | 200 |   |
| Conversion of 51¤2% subordinated convertible notes into common stock                                            |       | $                                                   | —       | *** *** | $ | 239,997 |   |
| Reclassification of unamortized deferred financing  costs on the 51¤2% subordinated convertible notes to equity |       | $                                                   | —       | *** *** | $ | 1,193 |   |

 

See accompanying notes to consolidated financial statements.

4

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

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

The accompanyingconsolidated financial statements of ImClone Systems Incorporated (“ImCloneSystems” or the “Company”) as of September 30, 2005 and for the three andnine months ended September 30, 2005 and 2004 are unaudited. Theaccompanying unaudited consolidated balance sheets, statements of operations,statement of stockholders’ equity and comprehensive income and statements ofcash flows have been prepared in accordance with U.S. generally acceptedaccounting principles (“GAAP”) for interim financial information and inconjunction with the rules and regulations of the Securities and ExchangeCommission (“SEC”). Accordingly, they do not include all of the disclosuresrequired by GAAP for complete financial statements. The financial statementsreflect all adjustments, consisting only of normal, recurring adjustments,which are in the opinion of management, necessary for a fair presentation forthe interim periods. Management of the Company has made a number of estimatesand assumptions relating to the reporting of assets and liabilities and relatedrevenue and expense accounts and the disclosure of contingent assets and liabilitiesto prepare these consolidated financial statements in conformity with GAAP.Actual results could differ materially from those estimates. These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the fiscal year ended December 31, 2004, asfiled with the SEC.

The results of operationsfor the interim periods are not necessarily indicative of results to beexpected for the entire fiscal year or any other period. Certain amountspreviously reported have been reclassified to conform to the current year’spresentation. In the Consolidated Statement of Cash Flows, the Company hasreclassified master notes and other investments of approximately $138.8 millionas of September 30, 2004, from cash and cash equivalents to securitiesavailable for sale. In addition, the Company has reclassified Collaborativeagreement revenue and Royalty expense in 2004 to reflect the reimbursed portionof royalties for agreements that were finalized in January of 2005.

The Company is abiopharmaceutical company whose mission is to advance oncology care bydeveloping and commercializing a portfolio of targeted treatments designed toaddress the medical needs of patients with cancer. A substantial portion of theCompany’s efforts and resources are devoted to research and developmentconducted on its own behalf and through collaborations with corporate partnersand academic research and clinical institutions. The Company does not operateseparate lines of business or separate business entities and does not conductany of its operations outside of the United States. Accordingly, the Companydoes not prepare discrete financial information with respect to separate productareas or by location and does not have separately reportable segments.

On February 12, 2004,the United States Food and Drug Administration (“FDA”) approved ERBITUX®(Cetuximab) Injection for use in combination with irinotecan in the treatmentof patients with EGFR-expressing, metastatic colorectal cancer who arerefractory to irinotecan-based chemotherapy and for use as a single agent inthe treatment of patients with EGFR-expressing, metastatic colorectal cancerwho are intolerant to irinotecan-based chemotherapy. In September 2005,Health Canada approved the use of ERBITUX for use in combination withirinotecan for the treatment of EGFR-expressing metastatic colorectal carcinomain patients who are refractory to other irinotecan-based chemotherapy regimensand for use as a single agent for the treatment of EGFR expressing, metastaticcolorectal carcinoma in patients who are intolerant to irinotecan-basedchemotherapy. In August 2005, the Company filed an sBLA to seekapproval of ERBITUX for use as a single agent and in combination with radiationin Squamous Cell Carcinoma of the Head and Neck (SCCHN) with the FDA. InOctober 2005, the FDA notified the Company that it had accepted the sBLA forfiling and had granted it priority review.

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 

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chemotherapytreatment with irinotecan. Merck KGaA licensed the right to market ERBITUXoutside the United States and Canada from the Company in 1998. In Japan, MerckKGaA has marketing rights to ERBITUX, which are co-exclusive to theco-development rights of the Company and BMS. On June 30, 2004, Merck KGaAreceived marketing approval by the European Commission to sell ERBITUX for usein combination with irinotecan for the treatment of patients withEGFR-expressing metastatic colorectal cancer after failure of irinotecanincluding cytotoxic therapy. As of September 30, 2005, Merck KGaA hasobtained approval for ERBITUX in 45 countries, with Ecuador, Guatemala, Panama,Philippines and Malaysia approving it during the third quarter of 2005.

**Impactof Recent Accounting Pronouncements**

On November 24, 2004the Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 151*, Inventory Costs*, an amendment of ARB No. 43.This Statement amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing”, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). Theprovisions of this Statement are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The adoption of thisaccounting pronouncement is not expected to have a material effect on theCompany’s consolidated financial statements.

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

**StockBased Compensation Plans**

The Company has two typesof stock-based compensation plans: stock option plans and a stock purchaseplan. The Company accounts for its stock-based compensation plans in accordancewith the provisions of APB Opinion No. 25, and related interpretationsincluding Statement of Financial Accounting Standards Board Interpretation No. 44,“Accounting for Certain Transactions Involving Stock Compensation—AnInterpretation of APB Opinion No. 25” (“Interpretation No. 44”).Accordingly, compensation expense would be recorded on the date of grant of anoption to an employee or member of the Board of Directors (the “Board”) only ifthe market price of the underlying stock on the date of grant exceeds theexercise price. Historically, the Company’s stock option grants have been basedon the closing market price of its stock on the date of grant.

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

| ** **               | ** ** | **Nine Months  Ended September 30,** | ** ** |
|--------------------------|------------|-----------------------------------------------------|------------|
| ** **               | ** ** | **2005**                                            | ** ** | **2004** | ** ** |
| Expected life  (years).  |       | 4.47                                                |       | 4.50 |   |
| Risk free  interest rate |       | 3.61                                                | %          | 2.70 | % |
| Expected  volatility     |       | 82.97                                               | %          | 86.00 | % |
| Dividend yield           |       | 0.00                                                | %          | 0.00 | % |

 

Thefollowing table illustrates the effect on net income and net income per commonshare if the compensation cost for the Company’s stock option grants had beendetermined based on the fair value at the grant dates for awards consistentwith the fair value method of Statement of Financial Accounting Standards No. 123“Accounting for Stock-Based Compensation” (“SFAS 123”): (in thousands,except per share amounts)

| ** **                                                                                                       | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                       | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income as  reported                                                                                          |       | $                                                    | 30,951     |                                                | $          | 39,783 |   | $ | 85,802 |   | $ | 126,831 |   |
| Add: Stock-based  employee compensation expense included in net income, tax effected                             |       | —                                               |       | 43                                                  |       | — |   | 1,500 |   |
| Deduct: Total  stock-based employee compensation expense determined under fair value  based method, tax effected |       | (12,300                                              | )          | (10,721                                             | )          | (41,345 | ) | (34,200 | ) |
| Pro forma net  income                                                                                            |       | $                                                    | 18,651     |                                                | $          | 29,105 |   | $ | 44,457 |   | $ | 94,131 |   |
| Net income per common  share:                                                                                    |       |                                                 |       |                                                |       |   |   |   |   |
| Basic, as reported                                                                                               |       | $                                                    | 0.37       |                                                | $          | 0.48 |   | $ | 1.03 |   | $ | 1.62 |   |
| Basic, pro forma                                                                                                 |       | $                                                    | 0.22       |                                                | $          | 0.35 |   | $ | 0.53 |   | $ | 1.20 |   |
| Diluted, as reported                                                                                             |       | $                                                    | 0.35       |                                                | $          | 0.44 |   | $ | 0.98 |   | $ | 1.45 |   |
| Diluted, pro  forma                                                                                              |       | $                                                    | 0.22       |                                                | $          | 0.33 |   | $ | 0.52 |   | $ | 1.10 |   |

 

For the three months ended September 30, 2005 and2004, there were approximately 15,328,000 and 1,426,000, respectively, ofpotential common shares excluded from the pro forma diluted income per sharecomputation and for the nine months ended September 30, 2005 and 2004,there were approximately 14,878,000 and 2,675,000, respectively, of potentialcommon shares excluded from the pro forma diluted income per share computationbecause their inclusion would have had an anti-dilutive effect. The potentialcommon shares excluded from the computation consist of anti-dilutive stockoptions for all periods and anti-dilutive shares related to the 13¤8%convertible notes for the three and nine months ended September 30, 2005. Thepro forma effect on net income for the three and nine months ended September 30,2005 and 2004 are not necessarily indicative of the pro forma effect on futureperiods’ operating results.

On September 16, 2005, the Board of Directors,upon recommendation of the Compensation Committee of the Board of Directors,approved guidelines governing option grants to be made during calendar year2006 to the Chairman, Vice Chairman and other non-employee directors topurchase 30,000, 25,000 and 20,000 shares, respectively, of the Company’scommon stock. These option grants are anticipated to be made in 2006 pursuantto an equity plan approved by the Company’s shareholders on 

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such dates and furtherterms and conditions as are approved by the Board of Directors at a later date.In addition, the Board of Directors determined that, beginning in 2006, anynon-employee director newly joining the Board of Directors will be entitled toreceive a one-time grant of stock options to purchase 20,000 shares of theCompany’s common stock upon first becoming a member of the Board of Directors. Suchoption grants are anticipated to be made pursuant to an equity plan approved bythe Company’s shareholders on such dates and further terms and conditions asare approved by the Board of Directors at a later date.

On September 19, 2005 the Company announced theapproval by the Board of Directors of a stock repurchase program permitting therepurchase of up to****$100 million in aggregate principalamount of outstanding shares of the Company’s common stock during a two yearperiod. The stock repurchase program is to be employed for general corporatepurposes, including to offset dilution resulting from future grants of stockoptions or other dilutive incentive compensation granted to the Company’semployees and directors. Stock repurchases under this program may be madethrough open market or privately negotiated transactions at such times and insuch amounts as the Company deems appropriate, based on a variety of factorssuch as price, corporate and regulatory requirements and overall marketconditions. The stock repurchase program may be limited or terminated at anytime without prior notice.

On October 17, 2005,the Compensation Committee of the Board of Directors approved the adoption of astock option plan for the sole purpose of making one-time grants of stockoptions to newly hired key employees who have not previously been employees ordirectors of the Company as an inducement to such persons entering intoemployment with the Company (the “Inducement Plan”), in accordance with NASDAQMarketplace Rule 4350(i)(1)(A)(iv). The Inducement Plan permits theCompany to issue up to a total of 600,000 “inducement” options to eligibleparticipants to purchase shares of common stock of the Company on terms andconditions set forth therein and in individual award agreements under theInducement Plan, in each case on terms commensurate with options granted underthe Company’s 2002 Stock Option Plan.

**Comprehensive Income**

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

| ** **                                                                         | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                         |       | $                                                    | 30,951     |                                                | $          | 39,783 |   | $ | 85,802 |   | $ | 126,831 |   |
| Other comprehensive  income (loss):                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Unrealized (loss) gain on marketable securities  during the period                 |       | (3,829                                               | )          | 903                                                 |       | (7,017 | ) | 104 |   |
| Less: Reclassification adjustment for realized gain  (loss) included in net income |       | —                                               |       | 20                                                  |       | (16 | ) | 131 |   |
| Total other comprehensive income (loss)                                            |       | (3,829                                               | )          | 883                                                 |       | (7,001 | ) | (27 | ) |
| Total comprehensive  income                                                        |       | $                                                    | 27,122     |                                                | $          | 40,666 |   | $ | 78,801 |   | $ | 126,804 |   |

 

The tax benefit (expense)on the items included in Other comprehensive income (loss) assuming they wererecognized in income would be approximately $38,000 and ($87,000) for the threemonths ended September 30, 2005 and 2004, respectively, and $70,000 and$4,000 for the nine months ended September 30, 2005 and 2004, respectively.

**Fair Value of Financial Instruments**

The fair value of theCompany’s 1 3/8% convertible senior notes of $600,000,000 was approximately$500,250,000 at September 30, 2005.

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**(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,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Raw materials and  supplies |       |                         | $          | 17,810                      |       |   |   | $ | 9,536 |   |   |
| Work in process.            |       |                         | 52,057     |                        |       |   | 30,082 |   |   |
| Finished goods              |       |                         | 3,373      |                        |       |   | 1,000 |   |   |
| Total                       |       |                         | $          | 73,240                      |       |   |   | $ | 40,618 |   |   |

 

Prior to receipt ofapproval of ERBITUX for commercial sale on February 12, 2004, the Companyhad expensed all costs associated with the production of ERBITUX to researchand development expense. Effective February 13, 2004, the Company began tocapitalize the cost of manufacturing ERBITUX as inventories, including the costto label, package, fill and ship previously manufactured bulk inventory whosecosts had already been expensed as research and development. Although it is theCompany’s policy to state inventories reflecting full absorption costs, untilthe Company sells all of its existing inventories for which all or a portion ofthe costs were previously expensed, inventories will reflect costs incurred toprocess into finished goods previously expensed raw materials and work inprocess, as well as costs to manufacture inventory subsequent to February 12,2004. As the Company continues to process the inventory that was partiallyproduced and expensed prior to February 13, 2004, the Company willcontinue to reflect in inventory only those incremental costs incurred tocomplete such inventory into finished goods.

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

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

| ** **                                      | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Land                                            |       |                         | $          | 4,899                       |       |   |   | $ | 4,899 |   |   |
| Building                                        |       |                         | 67,323     |                        |       |   | 67,083 |   |   |
| Leasehold  improvements                         |       |                         | 13,931     |                        |       |   | 15,518 |   |   |
| Machinery and  equipment                        |       |                         | 58,756     |                        |       |   | 55,430 |   |   |
| Furniture and  fixtures.                        |       |                         | 4,556      |                        |       |   | 4,265 |   |   |
| Construction in  progress.                      |       |                         | 308,388    |                        |       |   | 248,736 |   |   |
| Total cost.                                     |       |                         | 457,853    |                        |       |   | 395,931 |   |   |
| Less accumulated  depreciation and amortization |       |                         | (62,235    | )                           |       |   | (56,638 | ) |   |
| Property, plant  and equipment, net.            |       |                         | $          | 395,618                     |       |   |   | $ | 339,293 |   |   |

 

The Company is building amultiple product manufacturing facility (“BB50”) in Branchburg, New Jersey withcapacity of up to 110,000 liters (production volume). Management estimates thatthe 250,000 square foot facility will cost approximately $290,000,000. Theactual cost of the new facility may change depending upon various factors. TheCompany has incurred approximately $279,341,000 in conceptual design,engineering, pre-construction, construction and start up costs (which areincluded in construction in progress in the preceding table), excludingcapitalized interest of approximately $18,647,000, through September 30,2005. As of September 30, 2005, committed purchase orders totalingapproximately $187,592,000 have been placed with subcontractors for equipmentrelated to this project and $72,744,000 for engineering, procurement,construction management and validation costs. Through September 30, 2005,$250,810,000 has been paid relating to these committed purchase orders. Alloutstanding committed purchase orders as of September 30, 2005 requirepayment in 2005.

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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)**                                              ContractServices

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

**(5)**                                              WithholdingTax Assets and Liability

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

In January 2003, the New York State Department ofTaxation and Finance (“New York State”) notified the Company that it was liablefor the New York State and City income taxes that were not withheld because oneor more of the Company’s employees who exercised certain non-qualified stockoptions in 1999 and 2000 failed to pay New York State and City income taxes forthose years. On March 13, 2003, the Company entered into a closingagreement with New York State, paying $4,500,000 by March 31, 2003, tosettle the matter. On June 17, 2003, New York State notified the Companythat based on the warrant issue identified below, it was continuing apreviously conducted audit of the Company and was evaluating the terms of theclosing agreement to determine whether or not it should be re-opened. On March 31,2004, the Company entered into a new closing agreement pursuant to which theCompany paid New York State an additional $1,000,000 in full satisfaction ofall the deficiencies and determinations of withholding taxes for the years 1999-2001.The Company had an estimated liability related to this contingency of$2,815,000 as of December 31, 2003. Therefore the Company has eliminatedsuch liability and has recognized a benefit of $1,815,000 as a recovery in theConsolidated Statements of Operations in the first quarter of 2004.

On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to federalincome taxes on the exercise of non-qualified stock options on which income taxwas not properly withheld. Although the IRS has not yet asserted that theCompany is required to make a payment with respect to such failure to withhold,the IRS may assert that such a liability exists, and may further assert thatthe Company is liable for interest and penalties. The Company has determinedthat all but an insignificant amount of the potential liability for withholdingtaxes with respect to exercises of non-qualified stock options in 1999 and 2000is attributable to those amounts related to Dr. Samuel D. Waksal, theCompany’s former Chief Executive Officer. In addition, in the course of theCompany’s investigation 

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into its potentialliability in respect of the non-qualified stock options described above, theCompany identified certain warrants that were granted in 1991 and prior yearsto then current and former officers, directors and advisors that the Companypreviously treated as non-compensatory warrants and thus not subject to taxwithholding and information reporting requirements upon exercise. Accordingly,when exercised in 2001 and prior years, the Company did not deduct income andpayroll taxes upon exercise or report applicable information to the taxingauthorities. The Company now believes that such treatment was incorrect, andthat the exercise of such warrants by current and former officers of theCompany should have been treated in the same manner for withholding andreporting purposes as the exercise of non-qualified stock options. The Companyhas informed the relevant authorities, including the IRS, of this matter and intendsto resolve its liability, in conjunction with its resolution of the matterdescribed above.

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

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

**(6)**                                              IncomePer Common Share

Basic income per commonshare is computed by dividing net income by the weighted-average number ofcommon shares outstanding during the period. Diluted income per common share iscomputed by dividing net income by the weighted-average number of common sharesoutstanding during the period increased to include all additional common sharesthat would have been outstanding assuming potentially dilutive common shareshad been issued 1) on the exercise of stock options and any proceedsthereof used to repurchase common stock at the average market price during theperiod and 2) on conversion of convertible debt. In addition, in computingthe dilutive effect of convertible debt, the numerator is adjusted to add backthe after-tax amount of interest recognized in the period. The number ofdiluted common shares for the three and nine months ended September 30,2004 has been adjusted to conform to EITF Issue No. 04-8 “The Effectof Contingently Convertible Debt on Diluted Earnings per Share”. Suchadjustment has reduced the previously reported diluted income per share by$0.01 and $0.02 per share for the three and nine months ended September 30,2004, respectively. There were approximately 8,851,000 and 723,000 of potentialcommon shares excluded from the diluted income per share computation for thethree months ended September 30, 2005 and 2004, respectively, becausetheir inclusion would have had an anti-dilutive effect. There were approximately8,112,000 and 1,644,000, respectively, of potential common shares excluded fromthe diluted income per share computation for the nine months ended September 30,2005 and 2004, respectively , because their inclusion would have had ananti-dilutive effect.

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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,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| EPS Numerator—Basic:                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                 |       | $                                                    | 30,951     |                                                | $          | 39,783 |   | $ | 85,802 |   | $ | 126,831 |   |
| EPS Denominator—Basic:                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 83,785                                               |       | 82,514                                              |       | 83,561 |   | 78,395 |   |
| EPS Numerator—Diluted:                                                |       |                                                 |       |                                                |       |   |   |   |   |
| Net income                                                                 |       | $                                                    | 30,951     |                                                | $          | 39,783 |   | $ | 85,802 |   | $ | 126,831 |   |
| Adjustment for interest, net of amounts capitalized  and income tax effect |       | 1,536                                                |       | 1,506                                               |       | 4,997 |   | 5,569 |   |
| Net income, adjusted                                                  |       | $                                                    | 32,487     |                                                | $          | 41,289 |   | $ | 90,799 |   | $ | 132,400 |   |
| EPS Denominator—Diluted:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted-average number of shares of common  stock outstanding             |       | 83,785                                               |       | 82,514                                              |       | 83,561 |   | 78,395 |   |
| Effect of  dilutive securities:                                            |       |                                                 |       |                                                |       |   |   |   |   |
| Stock options                                                              |       | 2,015                                                |       | 5,780                                               |       | 2,390 |   | 7,013 |   |
| Convertible subordinated notes                                             |       | 6,336                                                |       | 6,336                                               |       | 6,336 |   | 6,026 |   |
| Dilutive potential common shares                                           |       | 8,351                                                |       | 12,116                                              |       | 8,726 |   | 13,039 |   |
| Weighted-average common shares and dilutive  potential common shares       |       | 92,136                                               |       | 94,630                                              |       | 92,287 |   | 91,434 |   |
| Basic income per  share                                                    |       | $                                                    | 0.37       |                                                | $          | 0.48 |   | $ | 1.03 |   | $ | 1.62 |   |
| Diluted income per share                                                   |       | $                                                    | 0.35       |                                                | $          | 0.44 |   | $ | 0.98 |   | $ | 1.45 |   |

 

**(7)**                                              Taxes

The Company’s estimatedeffective income tax rate for 2005 (assuming no milestone is earned fromBristol-Myers Squibb) is approximately 1.0% excluding the effect of theadjustment resulting from the reconciliation of the prior years’ tax provisionto its recently filed tax returns. The estimated effective tax rate for thethree months ended September 30, 2005 and for the full year, including theadjustment of approximately $440,000 is approximately 2.4% and 1.5%,respectively,  which is less than thefederal statutory rate of 35%. The difference from the statutory rate resultsfrom the utilization of fully reserved deferred tax assets, primarily theamortization of deferred revenue associated with license fees and milestones,which were taxable in prior periods. As of September 30, 2005, the Companyhas provided a valuation allowance against its net deferred tax assets because,more likely than not, its net deferred tax assets will not be realized.

**(8)**                                              CollaborativeAgreements

***(A)          MerckKGaA***

In April 1990, the Company entered into adevelopment and commercialization agreement with Merck KGaA with respect toBEC2 and the recombinant gp75 antigen product candidate. The agreement has beenamended a number of times, most recently in December 1997. The agreementgrants Merck KGaA a license, with the right to sublicense, to make, have made,use, sell, or have sold BEC2 and gp75 antigen outside North America. Theagreement also grants Merck KGaA a license, without the right to sublicense, touse, sell, or have sold, but not to make BEC2 within North America inconjunction with the 

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Company. Pursuant to theterms of the agreement the Company has 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. In return, the Company has recognized research support paymentstotaling $4,700,000 and is not entitled to any further research supportpayments under the agreement. Merck KGaA is also required to make payments ofup to $22,500,000, of which $5,000,000 has been received through September 30,2005, based on milestones achieved in the licensed products’ development.  The Company does not anticipate any additionalmilestone payments regarding BEC2. Merck KGaA is also responsible for worldwidecosts of up to DM17,000,000 associated with a multi-site, multinational PhaseIII clinical trial for BEC2 in limited disease small-cell lung carcinoma. Thisexpense level was reached during the fourth quarter of 2000 and all expensesincurred from that point forward are being shared 60% by Merck KGaA and 40% bythe Company. The Company incurred no expenses and approximately $156,000 in thethree months ended September 30, 2005 and 2004, respectively, and $19,000and $285,000 for the nine months ended September 30, 2005 and 2004,respectively, associated with this agreement. On June 7, 2004, the Companyand Merck KGaA announced that the international, randomized Phase III clinicaltrial of the Companies’ BEC2 cancer vaccine did not meet its primary endpointof survival. Following the analysis of the Phase III data in small cell lungcancer, the Company and Merck KGaA agreed to discontinue further development ofBEC2.

In December 1998, the Company entered into adevelopment and license agreement with Merck KGaA with respect to ERBITUX. Inexchange for granting Merck KGaA exclusive rights to market ERBITUX outside ofthe United States and Canada and co-exclusive development rights in Japan, theCompany has received $30,000,000 through September 30, 2005 in up-frontcash fees and early cash payments based on the achievement of definedmilestones. An additional $30,000,000 has been received through September 30,2005 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 sales ofERBITUX outside of the United States and Canada. In August 2001, theCompany and Merck KGaA amended this agreement to provide, among other things,that Merck KGaA may manufacture ERBITUX for supply in its territory and mayutilize a third party to do so upon the Company’s reasonable acceptance. Theamendment further released Merck KGaA from its obligations under the agreementrelating to providing a guaranty under a $30,000,000 credit facility relatingto the build-out of BB36. In addition, the amendment provides that thecompanies have co-exclusive rights to ERBITUX in Japan, including the right tosublicense and Merck KGaA waived its right of first offer in the case of aproposed sublicense by the Company of ERBITUX in the Company’s territory. Inconsideration for the amendment, the Company agreed to a reduction in royaltiespayable by Merck KGaA on sales of ERBITUX in Merck KGaA’s territory.

In September 2002,the Company entered into a binding term sheet, effective as of April 15,2002, for the supply of ERBITUX to Merck KGaA, which replaces previous supplyarrangements. The term sheet provides for Merck KGaA to purchase bulk andfinished ERBITUX ordered from the Company during the term of the December 1998development and license agreement at a price equal to the Company’s fullyloaded cost of goods. The term sheet also provided for Merck KGaA to usereasonable efforts to enter into its own contract manufacturing agreements forsupply of ERBITUX and obligates Merck KGaA to reimburse the Company for costsassociated with transferring technology and any other services requested byMerck KGaA relating to establishing its own manufacturing or contractmanufacturing capacity. Amounts due from Merck KGaA related to thesearrangements totaled approximately $20,178,000 and $8,096,000 at September 30,2005 and December 31, 2004, respectively, and are included in amounts duefrom corporate partners in the Consolidated Balance Sheets. The Companyrecorded collaborative 

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agreementrevenue related to these arrangements in the Consolidated Statements ofOperations totaling approximately $11,194,000 and $883,000 for the three monthsended September 30, 2005 and 2004, respectively, and $22,136,000 and$4,651,000 for the nine months ended September 30, 2005 and 2004,respectively. Of these amounts, $10,548,000 and $92,000 for the three monthsended September 30, 2005 and 2004, respectively, and $19,045,000 and $2,261,000for the nine months ended September 30, 2005 and 2004, respectively,related to reimbursable costs associated with supplying ERBITUX to Merck KGaAfor use in clinical trials. The related manufacturing costs in 2004 and aportion in 2005 of the ERBITUX sold to Merck KGaA was produced and expensedprior to February 13, 2004 when the related raw materials were purchasedand the associated direct labor and overhead was consumed since the Company didnot have approval to sell ERBITUX. Reimbursable clinical and regulatoryexpenses  totaled approximately $0 and$328,000 for the three months ended September 30, 2005 and 2004,respectively, and $928,000 and $1,142,000 for the nine months ended September 30,2005 and 2004, respectively. These amounts have been recorded as clinical andregulatory expenses, and also as collaborative agreement revenue in theConsolidated Statements of Operations. In the three months ended September 30,2005, the Company issued a credit memo in the amount of $130,000 to Merck KGaAwhich has been recorded as a reduction to collaborative agreement revenue.Reimbursable general and administrative expenses and royalty expenses wereincurred and totaled approximately $776,000 and $463,000 for the three monthsended September 30, 2005 and 2004, respectively, and $2,163,000 and$1,248,000 for the nine months ended September 30, 2005 and 2004,respectively. These amounts have been recorded as marketing, general andadministrative expenses, royalty expense, and also as collaborative agreementrevenue in the Consolidated Statements of Operations. The Company has aliability due Merck KGaA of approximately $1,909,000, and $2,059,000 as of September 30,2005 and December 31, 2004, respectively.

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

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

On March 5, 2002, the Company amended theCommercial Agreement with E.R. Squibb and BMS. The amendment changed certaineconomics of the Commercial Agreement and expanded the clinical and strategicroles of BMS in the ERBITUX development program. One of the principal economicchanges to the Commercial Agreement is that the Company received payments of$140,000,000 on March 7, 2002 and $60,000,000 on March 5, 2003. Suchpayments are in lieu of the $300,000,000 milestone payment the Company wouldhave received upon acceptance by the FDA of the ERBITUX BLA under the originalterms of the Commercial Agreement. In addition, the Company agreed to resumeand has resumed construction of BB50. The terms of the Commercial Agreement, asamended on March 5, 2002, are set forth in more detail below.

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***Commercial Agreement***

*RightsGranted 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).

*RightsGranted 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-Frontand Milestone Payments—**The*Commercial Agreementprovides for up-front and milestone payments by E.R. Squibb to us of$900,000,000 in the aggregate, of which $200,000,000 was paid on September 19,2001, $140,000,000 was paid on March 7, 2002, $60,000,000 was paid on March 5,2003, and $250,000,000 was paid on March 12, 2004. An additional$250,000,000 would become payable upon receipt of marketing approval from theFDA with respect to a second tumor type for ERBITUX. All such payments arenon-refundable and non-creditable.

*DistributionFees—**The* Commercial Agreement providesthat E.R. Squibb shall pay the Company distribution fees based on a percentageof “annual net sales” of the product (as defined in the Commercial Agreement)by E.R. Squibb in the United States and Canada. The distribution fee is 39% ofnet sales in the United States and Canada.

The Commercial Agreement also provides that thedistribution fees for the sale of the product in Japan by E.R. Squibb orImClone Systems shall be equal to 50% of operating profit or loss with respectto such sales for any calendar month. In the event of an operating profit, E.R.Squibb shall pay the Company the amount of such distribution fee, and in theevent of an operating loss, the Company shall credit E.R. Squibb the amount ofsuch distribution fee.

*Developmentof the Product—**Responsibilities* associated withclinical and other ongoing studies are apportioned between the parties asdetermined by the product development committee described below. The CommercialAgreement provides for the establishment of clinical development plans settingforth the activities to be undertaken by the parties for the purpose ofobtaining marketing approvals, providing market support and developing newindications and formulations of the product. After transition of responsibilitiesfor certain clinical and other studies, each party is primarily responsible forperforming the studies designated to it in the clinical development plans. Inthe United States and Canada, the Commercial Agreement provides that E.R.Squibb is responsible for 100% of the cost of all clinical studies other thanthose studies undertaken post-launch which are not pursuant to an IND (e.g.Phase IV studies), the cost of which is shared equally between E.R. Squibb andImClone Systems. As between E.R. Squibb and ImClone Systems, each isresponsible for 50% of the costs of all studies in Japan. The Company has alsoagreed, and may agree in the future, to share with E.R. Squibb, on terms otherthan the foregoing, costs of clinical trials that the Company believes are notpotentially registrational but should be undertaken 

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prior to launch in theUnited States, Canada or Japan. The Company has incurred $4,789,000 and$1,237,000 pursuant to such cost sharing for the three months ended September 30,2005 and 2004, respectively, and $10,077,000 and $5,958,000 for the nine monthsended September 30, 2005 and 2004, respectively. In addition, to theextent that in 2005 and 2006 the Company and BMS exceed the contractual maximumregistrational costs for clinical development, the Company has agreed to sharesuch cost with BMS. For the three and nine months ended September 30,2005, the Company has recorded approximately $1.8 million related to thiscommitment.  The Company has alsoincurred $293,000 and $153,000 for the three months ended September 30,2005 and 2004, respectively, and $958,000 and $595,000 for the nine monthsended September 30, 2005 and 2004, respectively, related to the agreementwith respect to development in Japan. Except as otherwise agreed upon by the parties,the Company will own all registrations for the product and is primarilyresponsible for the regulatory activities leading to registration in eachcountry. E.R. Squibb will be primarily responsible for the regulatoryactivities in each country after the product has been registered in thatcountry. Pursuant to the terms of the Commercial Agreement, as amended, AndrewG. Bodnar, M.D., J.D., Senior Vice President, Strategy and Medical &External Affairs of BMS, and a member of the Company’s Board of Directors, isentitled to oversee the implementation of the clinical and regulatory plan forERBITUX.

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

However, the Company has the right, at its electionand sole expense, to co-promote with E.R. Squibb the product in the territory.Pursuant to this co-promotion option, which the Company has exercised, theCompany is entitled on and after April 11, 2002 (at the Company’s soleexpense) to have the Company’s field organization participate in the promotionof the product consistent with the marketing plan agreed upon by the parties,provided that E.R. Squibb retains the exclusive rights to sell and distributethe product. Except for the Company’s expenses incurred pursuant to theco-promotion option, E.R. Squibb is responsible for 100% of the distribution,sales and marketing costs in the United States and Canada, and as between E.R.Squibb and ImClone Systems, each is responsible for 50% of the distribution,sales, marketing costs and other related costs and expenses in Japan. Duringthe third quarter of 2004, the Company established a sales force to maximizethe potential commercial opportunities for ERBITUX and to serve as a foundationfor the marketing of future products derived either from within the Company’spipeline or through business development opportunities.

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

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

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

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

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

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

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

*Rightof First Offer—**E.R.* Squibb has a right of firstoffer with respect to the Company’s investigational KDR monoclonal antibodies(such as 1121B) should the Company decide to enter into a partneringarrangement with a third party with respect to IMC-KDR antibodies at any timeprior to the earlier to occur of September 19, 2006 and the firstanniversary of the date which is 45 days after any date on which BMS’sownership interest in ImClone Systems is less than 5%. If the Company decidesto enter into a partnering arrangement during such period, the Company mustnotify E.R. Squibb. If E.R. Squibb notifies the Company that it is interestedin such an arrangement, the Company will provide its proposed terms to E.R.Squibb and the parties will negotiate in good faith for 90 days to attemptto agree on the terms and conditions of such an arrangement. If the parties donot reach agreement during this period, E.R. Squibb must propose the terms ofan arrangement which it is willing to enter into, and if the Company rejectssuch terms the Company may enter into an agreement with a third party withrespect to such a partnering arrangement (provided that the terms of any suchagreement may not be more favorable to the third party than the terms proposedby E.R. Squibb).

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*Rightof First Negotiation—**If* at any time during therestricted period (as defined below), the Company is interested in establishinga partnering relationship with a third party involving certain compounds orproducts not related to IMC-KDR antibodies, the Company must notify E.R. Squibband E.R. Squibb will have 90 days to enter into a non-binding agreementwith the Company with respect to such a partnering relationship. In the eventthat E.R. Squibb and ImClone Systems do not enter into a non-binding agreement,the Company is free to negotiate with third parties without further obligationto E.R. Squibb. The “restricted period” means the period from September 19,2001 until the earliest to occur of (1) September 19, 2006, (2) areduction in BMS’s ownership interest in ImClone Systems to below 5% for 45consecutive days, (3) a transfer or other disposition of shares of the Company’scommon stock by BMS or any of its affiliates such that BMS and its affiliatesown or have control over less than 75% of the maximum number of shares of theCompany’s common stock owned by BMS and its affiliates at any time after September 19,2001, (4) an acquisition by a third party of more than 35% of theoutstanding shares, (5) a termination of the Commercial Agreement by BMSdue to significant regulatory or safety concerns regarding ERBITUX, or (6) theCompany’s termination of the Commercial Agreement due to a material breach byBMS.

*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 EGF receptor) in any country in the territory. In the event that any partyproposes to commercialize a competing product or purchases or otherwise takescontrol of a third party which has developed or commercialized a competingproduct, then such party must either divest the competing product within12 months or offer the other party the right to participate in thecommercialization and development of the competing product on a 50/50 basis(provided that if the parties cannot reach agreement with respect to such anagreement, the competing product must be divested within 12 months).

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

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

*Indemnification—*Pursuantto the Commercial Agreement, each party has agreed to indemnify the other for(1) its negligence, recklessness or wrongful intentional acts oromissions, (2) its failure to perform certain of its obligations under theagreement, and (3) any breach of its representations and warranties underthe agreement.

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*Termination—*Unlessearlier terminated pursuant to the termination rights discussed below, theCommercial Agreement expires with regard to the product in each country in theterritory on the later of September 19, 2018 and the date on which thesale of the product ceases to be covered by a validly issued or pending patentin such country. The Commercial Agreement may also be terminated prior to suchexpiration as follows:

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

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

***Acquisition Agreement***

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

***Stockholder Agreement***

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

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

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

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

*Approval Required for CertainActions*—The Company may not take any action that constitutesa prohibited action under the Stockholder Agreement without the consent of theBMS directors, until September 19, 2006 or earlier, if any of thefollowing occurs: (1) a reduction in BMS’s ownership interest to below 5%for 45 consecutive days, (2) a transfer or other disposition of shares ofthe Company’s 

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common stock by BMS or anyof its affiliates such that BMS and its affiliates own or have control overless than 75% of the maximum number of shares of the Company’s common stockowned by BMS and its affiliates at any time after September 19, 2001, (3) anacquisition by a third party of more than 35% of the outstanding shares of theCompany’s common stock, (4) a termination of the Commercial Agreement byBMS due to significant regulatory or safety concerns regarding ERBITUX, or (5) atermination of the Commercial Agreement due to a material breach by BMS. Suchprohibited actions include (1) issuing additional shares or securitiesconvertible into shares in excess of 21,473,002 shares of the Company’s commonstock in the aggregate, subject to certain exceptions; (2) incurringadditional indebtedness if the total of (A) the principal amount ofindebtedness incurred since September 19, 2001 and then-outstanding, and (B) thenet proceeds from the issuance of any redeemable preferred stockthen-outstanding, would exceed the Company’s amount of indebtedness forborrowed money outstanding as of September 19, 2001 by more than$500 million; (3) acquiring any business if the aggregateconsideration for such acquisition, when taken together with the aggregate considerationfor all other acquisitions consummated during the previous twelve months, is inexcess of 25% of the Company’s aggregate value at the time the bindingagreement relating to such acquisition was entered into; (4) disposing ofall or any substantial portion of the Company’s non-cash assets; (5) enteringinto non-competition agreements that would be binding on BMS, its affiliates orany BMS director; (6) taking certain actions that would have adiscriminatory effect on BMS or any of its affiliates as a stockholder; and (7) issuingcapital stock with more than one vote per share.

*Limitation on Additional Purchasesof Shares and Other Actions*—Subject to the exceptions setforth below, until September 19, 2006 or, if earlier, the occurrence ofany of (1) an acquisition by a third party of more than 35% of the Company’soutstanding shares, (2) the first anniversary of a reduction in BMS’sownership interest in the Company to below 5% for 45 consecutive days, or (3) theCompany’s taking a prohibited action under the Stockholder Agreement withoutthe consent of the BMS directors, neither BMS nor any of its affiliates willacquire beneficial ownership of any shares of the Company’s common stock ortake any of the following actions: (1) encourage any proposal for abusiness combination with the Company’s or an acquisition of our shares; (2) participatein the solicitation of proxies from holders of shares of the Company’s commonstock; (3) form or participate in any “group” (within the meaning of Section 13(d)(3) ofthe Securities Exchange Act of 1934) with respect to shares of the Company’scommon stock; (4) enter into any voting arrangement with respect to sharesof the Company’s common stock; or (5) seek any amendment to or waiver ofthese restrictions.

The following are exceptions to the standstillrestrictions described above: (1) BMS Biologics may acquire beneficialownership of shares of the Company’s common stock either in the open market orfrom the Company pursuant to the option described below, so long as, aftergiving effect to any such acquisition of shares, BMS’ ownership interest wouldnot exceed 19.9%; (2) BMS may make, subject to certain conditions, aproposal to the Board to acquire shares of the Company’s common stock if theCompany provides material non-public information to a third party in connectionwith, or begins active negotiation of, an acquisition by a third party of morethan 35% of the outstanding shares; (3) BMS may acquire shares of theCompany’s common stock if such acquisition has been approved by a majority ofthe non-BMS directors; and (4) BMS may make, subject to certainconditions, including that an acquisition of shares be at a premium of at least25% to the prevailing market price, non-public requests to the Board to amendor waive any of the standstill restrictions described above. Certain of theexceptions to the standstill provisions described above will terminate upon theoccurrence of: (1) a reduction in BMS’s ownership interest in the Companyto below 5% for 45 consecutive days, (2) a transfer or other dispositionof shares of the Company’s common stock by BMS or any of its affiliates suchthat BMS and its affiliates own or have control over less than 75% of themaximum number of shares owned by BMS and its affiliates at any time after September 19,2001, (3) a termination of the Commercial Agreement by BMS due tosignificant regulatory or safety concerns regarding ERBITUX, or (4) atermination of the Commercial Agreement by the Company due to a material breachby BMS.

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*Option to Purchase Shares in theEvent of Dilution*—BMS Biologics has the right under certaincircumstances to purchase additional shares of common stock from the Company atmarket prices, pursuant to an option granted to BMS by the Company, in theevent that BMS’s ownership interest is diluted (other than by any transfer orother disposition by BMS or any of its affiliates). BMS can exercise this right(1) once per year, (2) if the Company issues shares of common stockin excess of 10% of the then-outstanding shares in one day, and (3) if BMS’sownership interest is reduced to below 5% or 12.5%. BMS Biologics’ right topurchase additional shares of common stock from the Company pursuant to thisoption will terminate on September 19, 2006 or, if earlier, upon theoccurrence of (1) an acquisition by a third party of more than 35% of theoutstanding shares, or (2) the first anniversary of a reduction in BMS’sownership interest in the Company to below 5% for 45 consecutive days.

*Transfers of Shares*—UntilMarch 19, 2005, neither BMS nor any of its affiliates were permitted totransfer any shares of the Company’s common stock or enter into any arrangementthat transfers any of the economic consequences associated with the ownershipof shares. After March 19, 2005, neither BMS nor any of its affiliates maytransfer any shares or enter into any arrangement that transfers any of theeconomic 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 ownership ofmore than 5% of the then-outstanding shares of common stock; (2) no morethan 10% of the total outstanding shares of common stock may be sold in any oneregistered underwritten public offering; and (3) neither BMS nor any ofits affiliates may transfer shares of common stock (except for registered firmcommitment underwritten public offerings pursuant to the registration rightsdescribed below) or enter into hedging transactions in any twelve-month periodthat would, individually or in the aggregate, have the effect of reducing theeconomic exposure of BMS and its affiliates by the equivalent of more than 10%of the maximum number of shares of common stock owned by BMS and its affiliatesat any time after September 19, 2001. Notwithstanding the foregoing, BMSBiologics may transfer all, but not less than all, of the shares of commonstock owned by it to BMS or to E.R. Squibb or another wholly-owned subsidiaryof BMS.

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

Amounts due from BMS related to this agreement totaledapproximately $46,312,000 and $61,621,000 at September 30, 2005 and December 31,2004, respectively, and are included in amounts due from corporate partners inthe Consolidated Balance Sheets. The Company recorded collaborative agreementrevenue related to this agreement in the Consolidated Statements of Operationstotaling approximately $10,787,000 and $9,539,000 for the three months ended September 30,2005 and 2004, respectively, and $31,891,000 and $28,087,000 for the ninemonths ended September 30, 2005 and 2004, respectively. Of these amounts,$2,154,000 and $1,922,000 for the three months ended September 30, 2005and 2004, respectively, and $7,172,000 and $10,264,000 for the nine monthsended September 30, 2005 and 2004, respectively, related to reimbursablecosts associated with supplying ERBITUX for use in clinical trials associatedwith this agreement. The majority of the related manufacturing costs in 2004and a portion in 2005 were expensed prior to February 13, 2004 before theCompany obtained approval to sell ERBITUX or, in the case of contractmanufacturing, when such services were performed. Reimbursable clinical andregulatory expenses were incurred and totaled approximately $3,467,000 and$3,071,000 for the three months ended September 30, 2005 and 2004,respectively, and $10,338,000 and $8,605,000 for the nine months ended September 30,2005 and 2004, respectively. These amounts have been recorded as clinical andregulatory expenses and also as collaborative agreement revenue in theConsolidated Statements of Operations. Reimbursable marketing and generalexpenses and royalty expenses were incurred and totaled approximately$5,166,000 and $4,546,000 for the three months ended September 30, 2005and 2004, respectively, and $14,381,000 and $9,218,000 for the nine monthsended September 30, 2005 and 2004, 

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respectively. Theseamounts have been recorded as marketing, general and administrative expenses,royalty expense, and also as collaborative agreement revenue in theConsolidated Statements of Operations.

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

| ** **                                | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |     |
|-------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|----------|
| ** **                                | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS:                                      |       |                                                 |       |                                                |       |     |   |   |   |
| ERBITUX license fee revenue               |       | $                                                    | 27,049     |                                                | $          | 22,861   |   | $ | 74,882 |   | $ | 108,257 |   |
| Merck KGaA:                               |       |                                                 |       |                                                |       |     |   |   |   |
| ERBITUX and BEC2 license fee revenue      |       | 97                                                   |       | 97                                                  |       | 1,289    |   | 289 |   |
| Other license fee  revenue                |       | —                                               |       | —                                              |       | —   |   | 58 |   |
| Total license fees and milestone  revenue |       | $                                                    | 27,146     |                                                | $          | 22,958   |   | $ | 76,171 |   | $ | 108,604 |   |
|                                           |            |                                                      |            |                                                     |            |          |  |  |  |  |  |  |  |  |  |

 

Royaltyrevenue consists of the following: (in thousands)

| ** **            | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **            | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS                   |       | $                                                    | 41,715     |                                                | $          | 32,804 |   | $ | 113,828 |   | $ | 67,474 |   |
| Merck KGaA            |       | 4,881                                                |       | 1,332                                               |       | 10,887 |   | 2,203 |   |
| Other                 |       | 51                                                   |       | 1                                                   |       | 95 |   | 65 |   |
| Total royalty revenue |       | $                                                    | 46,647     |                                                | $          | 34,137 |   | $ | 124,810 |   | $ | 69,742 |   |

 

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

| ** **                             | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| BMS                                    |       | $                                                    | 10,787     |                                                | $          | 9,539 |   | $ | 31,891 |   | $ | 28,087 |   |
| Merck KGaA                             |       | 11,194                                               |       | 875                                                 |       | 22,136 |   | 4,657 |   |
| Other                                  |       | 3                                                    |       | —                                              |       | 12 |   | 51 |   |
| Total collaborative  agreement revenue |       | $                                                    | 21,984     |                                                | $          | 10,414 |   | $ | 54,039 |   | $ | 32,795 |   |

 

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

| ** **                                 | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| BMS:                                       | ** ** |                         | ** ** | ** **                  |       |   | ** ** | ** ** |   |
| ERBITUX                                    |       |                         | $          | 46,312                      | ** ** |   |   | $ | 61,621 | ** ** |   |
| Merck KGaA:                                |       |                         |       | ** **                  |       |   |   | ** ** |   |
| ERBITUX and BEC2                           |       |                         | 20,178     | ** **                  |       |   | 8,132 | ** ** |   |
| Total amounts due from  corporate partners |       |                         | $          | 66,490                      | ** ** |   |   | $ | 69,753 | ** ** |   |

 

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Deferredrevenue consists of the following: (in thousands)

| ** **                                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| BMS:                                                        |       |                         |       |                        |       |   |   |   |   |
| ERBITUX commercial agreement                                |       |                         | $          | 375,487                     |       |   |   | $ | 450,368 |   |   |
| Merck KGaA:                                                 |       |                         |       |                        |       |   |   |   |   |
| ERBITUX development and license agreement                   |       |                         | 2,944      |                        |       |   | 3,111 |   |   |
| Prepayment of ERBITUX supplied for medical affairs  program |       |                         | —     |                        |       |   | 2,544 |   |   |
| Development and commercialization agreement                 |       |                         | 1,663      |                        |       |   | 1,785 |   |   |
| Total deferred revenue                                      |       |                         | 380,094    |                        |       |   | 457,808 |   |   |
| Less: current  portion                                      |       |                         | (101,679   | )                           |       |   | (108,994 | ) |   |
| Total long-term  deferred revenue                           |       |                         | $          | 278,415                     |       |   |   | $ | 348,814 |   |   |

 

**(C)**                                            *UCB S.A.*

In August 2005, theCompany entered into a Collaboration and License Agreement with UCB S.A., acompany registered in Belgium, for the development and commercialization of CDP-791,UCB’s novel, investigational PEGylated diFab antibody targeting the vascularendothelial growth factor receptor-2 (“VEGFR-2”). No upfront ormilestone payments are payable under the Agreement. The Agreement provides thatthe Company and UCB S.A will share equally all agreed upon development costsfor CDP-791 as well as worldwide profits derived from thecommercialization of CDP-791 in indications jointly pursued by theparties. The Company will also receive an incremental single-digit royalty onnet sales worldwide for such indications. Under certain circumstances, oneparty may be entitled to pursue (in its territory) an indication independentlyof the other party, which retains the option to join in the development orcommercialization at a later stage. The Company has exclusive commercializationrights to CDP-791 in North America, with UCB receiving such rights inEurope, Japan, and the rest of the world.

**(9)**                                              Discontinuationof Small Molecule Program

On May 11, 2005, theCompany announced a plan to discontinue its small molecule research program.This decision was made after evaluating the Company’s investment in suchprogram against the time horizon before commercial benefits would be realized.  As a result of this decision, the Company hasreflected in the Consolidated Statements of Operations for the nine monthsended September 30, 2005 approximately $6,200,000 of costs associated withthe discontinuation of this program. Such costs include approximately$2,260,000 of costs related to severance for 45 employees that were terminated,$3,880,000 of costs related to the write-off of fixed assets used in suchprogram and approximately $60,000 of contract termination costs related to thecancellation of the lease at the Brooklyn facility where the employees wereconducting such research. All of these costs were expensed as of June 30,2005. As of June 30, 2005, the Company had a liability of approximately$1,580,000 reflected in Accrued expenses, of which approximately $1,520,000related to termination benefits and approximately $60,000 related to contracttermination expenses.  As of September 30,2005, the Company has a liability of approximately $125,000 reflected inAccrued expenses, which relates to termination benefits. The reduction in theaccruals from June 30, 2005 as compared to September 30, 2005 is dueto payments made. The disposition of this program is substantially complete andthe Company expects the majority of the remaining termination benefits to bepaid by December 31, 2005.

**(10)**                                       Commitmentsand Contingencies

Beginning in January 2002,a number of complaints asserting claims under the federal securities lawsagainst the Company and certain of the Company’s directors and officers werefiled in the U.S. District Court for the Southern District of New York. Thoseactions were consolidated under the caption Irvine v. 

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ImCloneSystems Incorporated, et al., No. 02 Civ. 0109 (RO). In the correctedconsolidated amended complaint, plaintiffs asserted claims against the Company,its former President and Chief Executive Officer, Dr. Samuel D. Waksal,its former Chief Scientific Officer and then-President and Chief ExecutiveOfficer, Dr. Harlan W. Waksal, and several of the Company’s other presentor former officers and directors, for securities fraud under sections 10(b) and20(a) of the Securities Exchange Act of 1934 and Securities and ExchangeCommission Rule 10b5, on behalf of a purported class of persons whopurchased the Company’s publicly traded securities between March 27, 2001and January 25, 2002. The complaint also asserted claims against Dr. SamuelD. Waksal under section 20A of the Exchange Act on behalf of a separatepurported sub-class of purchasers of the Company’s securities between December 27,2001 and December 28, 2001. The complaint generally alleged that variouspublic statements made by or on behalf of the Company or the other defendantsduring 2001 and early 2002 regarding the prospects for FDA approval of ERBITUXwere false or misleading when made, that the individual defendants wereallegedly aware of material non-public information regarding the actualprospects for ERBITUX at the time that they engaged in transactions in theCompany’s common stock and that members of the purported stockholder classsuffered damages when the market price of the Company’s common stock declinedfollowing disclosure of the information that allegedly had not been previouslydisclosed. The complaint sought to proceed on behalf of the alleged classesdescribed above, sought monetary damages in an unspecified amount and soughtrecovery of plaintiffs’ costs and attorneys’ fees. On January 24, 2005,the Company announced that it had reached an agreement in principle to settlethe consolidated class action for a cash payment of $75 million, a portionof which would be paid by the Company’s insurers. The parties signed adefinitive stipulation of settlement as of March 9, 2005. As provided forunder the stipulation of settlement, on March 11, 2005, the Company paid$50 million into an escrow account, subject to Court approval of the proposedsettlement. On July 29, 2005 the Court approved the proposed settlement.On August 5, 2005, the Company paid the remaining $25 million into theescrow account, with such funds to be held in and distributed pursuant to theterms of the settlement. As of  September 30,2005, the Company has collected from its insurers all of the outstandingreceivable amounting to $20.5 million, which was reflected as a receivable inOther current assets, as of December 31, 2004. The amount received fromthe insurers includes $8.75 million, less attorneys fees of $875,000 that waspaid to the Company under the derivative settlement discussed below.

Separately, on September 17,2002, an individual purchaser of the Company’s common stock filed an action(Flynn v. ImClone Systems Incorporated, et al., No. 02 Civ 7499 (RO)) onhis own behalf in the U.S. District Court for the Southern District of New Yorkasserting claims against the Company, Dr. Samuel D. Waksal and Dr. HarlanW. Waksal under sections 10(b) and 20(a) of the Exchange Act andSecurities and Exchange Commission Rule 10b-5. This matter wassettled and dismissed with prejudice in a stipulation and order entered on March 21,2005.

Beginning on January 13,2002, and continuing thereafter, nine separate purported shareholder derivativeactions were filed against members of the Company’s board of directors, certainof the Company’s present and former officers, and the Company, as nominaldefendant, advancing claims based on allegations similar to the allegations inthe federal securities class action complaints. Four of these derivative caseswere filed in the Delaware Court of Chancery and have been consolidated in thatcourt under the caption In re ImClone Systems Incorporated DerivativeLitigation, Cons. C.A. No. 19341-NC. Three of these derivativeactions were filed in New York State Supreme Court in Manhattan. All of thesestate court actions have been stayed in deference to the proceedings in theU.S. District Court for the Southern District of New York, which have beenconsolidated under the caption In re ImClone Systems, Inc. ShareholderDerivative Litigation, Master File No. 02 CV 163 (RO). A supplementalverified consolidated amended derivative complaint in these consolidatedfederal actions was filed on August 8, 2003. It asserted, purportedly onbehalf of the Company, claims including breach of fiduciary duty by certaincurrent and former members of the Company’s board of directors, among others,based on allegations including that they failed to ensure that the Company’sdisclosures relating to the regulatory 

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andmarketing prospects for ERBITUX were not misleading and that they failed tomaintain adequate controls and to exercise due care with regard to the Company’sERBITUX application to the FDA. On January 9, 2004, the Company filed amotion to dismiss the complaint due to plaintiffs’ failure to make a pre-suitdemand on the Company’s board of directors to institute suit or to allegegrounds for concluding that such a demand would have been futile. Theindividual defendants filed motions on the same date, both joining in theCompany’s motion and seeking to dismiss the complaint for failure to state aclaim. On January 24, 2005, the Company announced that it had reached anagreement in principle to settle the consolidated derivative action. Theparties entered into a definitive stipulation of settlement on March 14,2005, which was approved by the Court on July 29, 2005. In August 2005,the Company received $8.75 million from its insurers, which was contributedtoward the settlement of the Irvine securities class action described above,after deducting $875,000 for Court awarded plaintiffs’ attorney’s fees andexpenses.

On October 8, 2003,certain mutual funds that are past or present common stockholders of BMS filedan action in New York State court against BMS, certain present or formerofficers and directors of BMS and the Company asserting that they were misledinto purchasing or holding their shares of BMS common stock as a result ofvarious public statements by BMS and certain present or former officers ordirectors of BMS, and that the Company allegedly aided and abetted certain ofthese misstatements. The action was styled FSS Franklin Global Health CareFund, et al. v. Bristol-Myers Squibb Co., et al., Index No. 603168/03. On June 1,2005, an agreement to settle this action was reached. Under the terms of thesettlement, BMS agreed to pay the plaintiffs $89 million in exchange for thetermination of the plaintiffs’ claims. The Company is not responsible to payany portion of the settlement amount and has made no admission of wrongdoing.Pursuant to the terms of the settlement agreement, the action was voluntarilydismissed with prejudice by a stipulation filed on June 16, 2005.

The Company received subpoenasand requests for information in connection with an investigation by the SECrelating to the circumstances surrounding the disclosure of the FDA “refusal tofile” letter dated December 28, 2001, and trading in the Company’ssecurities by certain ImClone Systems insiders in 2001. The Company alsoreceived subpoenas and requests for information pertaining to documentretention issues in 2001 and 2002, and to certain communications regardingERBITUX in 2000. On June 19, 2002, the Company received a written “WellsNotice” from the staff of the SEC, indicating that the staff of the SEC isconsidering recommending that the SEC bring an action against the Companyrelating to the Company’s disclosures immediately following the receipt of a “refusalto file” letter from the FDA on December 28, 2001 for the Company’s BLAfor ERBITUX. The Company filed a Wells submission on July 12, 2002 inresponse to the staff’s Wells Notice. There have been no recent developments inconnection with this SEC investigation.

On August 14, 2002,after the federal grand jury indictment of Dr. Samuel D. Waksal had beenissued but before Dr. Samuel D. Waksal’s guilty plea to certain counts ofthat indictment, the Company filed an action in New York State Supreme Courtseeking recovery of certain compensation, including advancement of certaindefense costs, that the Company had paid to or on behalf of Dr. Samuel D.Waksal and cancellation of certain stock options. That action was styledImClone Systems Incorporated v. Samuel D. Waksal, Index No. 02/602996.On July 25, 2003, Dr. Samuel D. Waksal filed a Motion to CompelArbitration seeking to have all claims in connection with the Company’s actionagainst him resolved in arbitration. By order dated September 19, 2003,the Court granted Dr. Samuel D. Waksal’s motion and the action was stayedpending arbitration. On September 25, 2003, Dr. Samuel D. Waksalsubmitted a Demand for Arbitration with the American Arbitration Association(the “AAA”), by which Dr. Samuel D. Waksal asserts claims to enforcethe terms of his separation agreement, including provisions relating toadvancement of legal fees, expenses, interest and indemnification, for which Dr. Samuel D.Waksal claims unspecified damages of at least $10 million. The Demand forArbitration also seeks to resolve the claims that the Company asserted in theNew York State Supreme Court action. On November 7, 2003, the Companyfiled an Answer and Counterclaims by which the Company denied Dr. SamuelD. Waksal’s entitlement to advancement of legal fees, expenses andindemnification, and 

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assertedclaims seeking recovery of certain compensation, including stock options, cashpayments and advancement of certain defense costs that the Company had paid toor on behalf of Dr. Samuel D. Waksal. In response, on December 15,2003, Dr. Samuel D. Waksal filed a Reply to Counterclaims.

On March 10, 2004,the Company commenced a second action against Dr. Samuel D. Waksal in theNew York State Supreme Court. That action is styled ImClone SystemsIncorporated v. Samuel D. Waksal, Index No. 04/600643. By this action, theCompany seeks the return of more than $21 million that the Company paid toDr. Samuel D. Waksal, as proceeds from stock option exercises, which theCompany alleges he was expected to pay over to federal, state and local taxauthorities in satisfaction of his tax obligations arising from certainexercises between 1999 and 2001 of warrants and non-qualified stock options.Specifically, by this action, the Company seeks to recover: (a) $4.5 millionthat the Company paid to the State of New York in respect of exercises ofnon-qualified stock options and certain warrants in 2000; (b) at least$16.6 million that the Company paid to Samuel D. Waksal in the form ofImClone common stock, in lieu of withholding federal income taxes fromexercises of non-qualified stock options and certain warrants in 2000; and (c) approximately$1.1 million that the Company paid in the form of ImClone common stock toSamuel D. Waksal and his beneficiaries, in lieu of withholding federal, stateand local income taxes from certain warrant exercises in 1999-2001. Thecomplaint asserts claims for unjust enrichment, common law indemnification,moneys had and received and constructive trust. On June 18, 2004, Dr. SamuelD. Waksal filed an Answer to the Company’s Complaint.

The Company and Dr. SamuelD. Waksal have entered into an agreement in principle to settle the foregoingactions, providing for, among other things, judgments in both actions to be obtained in the Company’s favor. Thesettlement would include the payment of director and officer legal fee expenseindemnification by the Company, for which the Company recorded a reserve ofapproximately $1.9 million in the third quarter of 2005.

The IRS has commencedaudits of the Company’s income tax and employment tax returns for tax years1999 through 2001. The Company has responded to all requests for informationand documents received to date from the IRS and is awaiting further requests oraction from the IRS.

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

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

On March 25, 2004, anaction was filed in the United Kingdom Patent Office entitled Referrer’s Statementrequesting transfer of co-ownership and amendment of patent EP (UK) 0 667 165to add three Yeda employees as inventors. Also on March 25, 2004, a Germanaction entitled Legal Action was filed in the Munich District Court I, PatentLitigation Division, seeking to add three Yeda employees as inventors on patentEP (DE) 0 667 165. The Company was not named as a party in these actions thatrelate to the European equivalent of U.S. Patent No. 6,217,866 discussedabove; accordingly, the Company has intervened in the German and the U.K.actions. On June 29, 2005, Yeda sought to amend their pleadings in theUnited Kingdom to seek sole inventorship. Additionally, on or about March 25,2005 and March 29, 2005, respectively, Yeda filed legal actions in Austriaand France against both Aventis and ImClone 

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Systemsseeking full inventorship of EP (AU) 0 667 165 and EP (FR) 0 667 165, as wellas payment of legal costs and fees.

On May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute of Technology(“MIT”) and Repligen Corporation (“Repligen”) in the U.S. District Court forthe District of Massachusetts (04-10884 RGS). This action alleges thatERBITUX infringes U.S. Patent No. 4,663,281, which is owned by MIT andexclusively licensed to Repligen. The Company is vigorously defending againstclaims asserted in this action. Fact discovery is ongoing. The Company isunable to predict the outcome of this action at the present time.

No reserve has beenestablished in the financial statements for any of the Yeda or MIT and Repligenactions because the Company does not believe that such a reserve is required tobe established at this time under Statement of Financial Accounting Standards No. 5.

The Company is developinga fully human monoclonal antibody, referred to as IMC-11F8, which itintends to commercialize outside the United States and Canada. The Companybelieves it has the right to do so under its existing development and licenseagreement with Merck KGaA. However, Merck KGaA has advised the Company that itbelieves that IMC-11F8 could be covered under the development and licenseagreement with Merck KGaA and that it could therefore have the exclusive rightsto market IMC-11F8 outside the United States and Canada and co-exclusivedevelopment rights in Japan, for which it would pay the same royalty as it paysfor ERBITUX. See “Corporate Collaborations—Collaborations with Merck KGaA” inthe Company’s Annual Report on Form 10-K for the year ended December 31,2004. The Company believes that IMC-11F8 is not covered under the MerckKGaA development and license agreement. In agreement with Merck KGaA, theCompany submitted this dispute to binding arbitration through an expeditedprocess outside of the provisions of the development and license agreement. Ifsuccessful in the arbitration, Merck KGaA averred that it is entitled tocertain unspecified damages under the development and license agreement. MerckKGaA has subsequently taken the position that the expedited arbitrationprovision is no longer valid and the Company has sued Merck KGaA in federalcourt in the Southern District of New York to either enforce the arbitrationprovisions 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. While the Company intends to vigorously defend itsposition as it relates to IMC-11F8 in arbitration, in federal court orany other form of dispute resolution, there can be no assurance that itsposition will prevail, and it is unable at this time to predict the outcome ofthese proceedings. No reserve has been established in the financial statementsfor these proceedings because the Company does not believe that such a reserveis required to be established at this time under Statement of FinancialAccounting Standards No. 5.

The Company has notrecognized withholding tax liabilities in respect of exercises of certainwarrants by Robert F. Goldhammer, one of the four former officers or directorsto whom warrants were issued and previously treated as non-compensatorywarrants. Based on the Company’s investigation, it believes that, although suchwarrants were compensatory, such warrants were received by Mr. Goldhammerin connection with the performance of services by him in his capacity as adirector, rather than as an employee, and, as such, are not subject to taxwithholding requirements. In addition, in 1999, Mr. Goldhammer erroneouslyreceived a portion of a stock option grant in the form of incentive stockoptions, which under federal law may only be granted to employees. There can beno assurance, however, that the taxing authorities will agree with the Company’sposition and will not assert that the Company is liable for the failure towithhold income and employment taxes with respect to the exercise of suchwarrants and any stock options by Mr. Goldhammer. If the Company becameliable for the failure to withhold taxes on the exercise of such warrants andany stock options by Mr. Goldhammer, the aggregate potential liability,exclusive of any interest or penalties, would be approximately $8,300,000.

The Company has notrecognized accruals for penalties and interest that may be imposed with respectto the withholding tax issues previously described and other relatedcontingencies, including the period 

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coveredby the statute of limitations and the Company’s determination of certainexercise dates, because it does not believe that losses from such contingenciesare probable, or in the event that any taxing authority makes a claim forpenalties or interest, the Company believes that it will be able to settle thetotal amount asserted (including any liability for taxes) for an amount not inexcess of the liability for taxes already accrued with respect to the relevantwithholding tax issue. With respect to the statute of limitations and theCompany’s determination of certain exercise dates, while the Company does notbelieve a loss is probable, there is a potential additional liability withrespect to these issues that may be asserted by a taxing authority. If taxingauthorities assert such issues and prevail related to these withholding taxissues and other related contingencies, including penalties, the liability thatcould be imposed by taxing authorities would be substantial. The potentialinterest on the withholding tax liabilities recorded on the ConsolidatedBalance Sheets could be up to a maximum amount of approximately $9,100,000 at September 30,2005. Potential additional withholding tax liability on other related contingenciesamounts to approximately $8,000,000, exclusive of any interest or penalties,and excluding the amount potentially attributable to Mr. Goldhammer notedabove.

In October 2001, theCompany entered into a sublease (the “Sublease”) for a four-story building at325 Spring Street, New York, New York, which includes approximately 100,000square feet of usable space. The Sublease has a term of 22 years, followed bytwo five-year renewal option periods. In order to induce the sublandlord toenter into the Sublease, the Company made a loan to the sublandlord in theprincipal amount of a $10,000,000 note receivable, of which $8,913,000 isoutstanding as of September 30, 2005. The loan is secured by a leaseholdmortgage on the prime lease as well as a collateral assignment of rents by thesublandlord. The loan is payable by the sublandlord over 20 years and bearsinterest at 5 1⁄2 % in years one through five, 6 1⁄2 % in years six through ten, 71⁄2 % in years eleven through fifteen and 8 1⁄2 % in years sixteen through twenty.In addition, the Company paid the owner a consent fee in the amount of$500,000. Effective March 1, 2005, the Company amended the Sublease to addan additional 6,500 square feet of space upon all the same terms and conditionsset forth in the Sublease. In connection with this amendment, the Company paidan up-front fee of $1,690,000 which is being amortized, as a reduction in leaseexpense, over the respective term of the Sublease. The future minimum leasepayments remaining at September 30, 2005, are approximately $49,282,000over the term of the Sublease. The Company is in the process of developing theproperty for occupancy by its Research department in late 2006.

The Company leases its researchand corporate headquarters in New York City. In August 2004, the Companymodified its existing operating lease for its corporate headquarters in NewYork City. The modification extends the term of the lease, which was to expireat December 31, 2004, for an additional ten years for a portion of thepremises and by an additional four years for the space that houses its Researchdepartment. As noted above, the Company plans to move its research departmentto its 325 Spring Street, New York location. The future minimum lease paymentsremaining at September 30, 2005, are approximately $10,757,000 over theterm of the lease.

In June 2004, theCompany entered into an operating lease for a building located at 59-61ImClone Drive in Branchburg, New Jersey. The building contains approximately54,247 square feet of floor area. The lease expires on December 31, 2022with no option to renew or extend beyond such date. The future minimum leasepayments at September 30, 2005 are $10,467,000.

In May 2001, theCompany entered into an operating lease for a 4,000 square foot portion of a15,000 square foot building and an adjacent 6,250 square foot building(collectively the “Brooklyn facility”) in Brooklyn, New York. Effective February 1,2005, the Company entered into an additional operating lease for approximately2,269 square feet of a building known as 760 Parkside Avenue in Brooklyn, NewYork. These facilities were used by our Small Molecule program, which theCompany decided in May 2005 to discontinue. The Company has terminatedthese lease agreements and has no further obligations to the landlord.

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In August 2005, theCompany entered into an operating lease for a portion of a building located at41A ImClone Drive in Branchburg, New Jersey. The Company is leasingapproximately 10,704 square feet of floor area. The lease expires on August 31,2010 with two options to renew for five additional years each. The futureminimum lease payments at September 30, 2005 are $512,000.

**(11)**                                       DefinedContribution Plan

All employees of theCompany who meet certain minimum age and period of service requirements areeligible to participate in a 401(k) defined contribution plan. The 401(k) planallows eligible employees to defer up to 25 percent of their annualcompensation, subject to certain limitations imposed by federal law. The amountscontributed by employees are immediately vested and non-forfeitable. Under the401(k) plan, the Company, at management’s discretion, may match employeecontributions and/or make discretionary contributions. Neither the employeecontributions nor voluntary matching contributions are invested in the Company’ssecurities. Total expense incurred by the Company was $463,000 and $127,000 forthe three months ended September 30, 2005 and 2004, respectively, and$1,473,000 and $431,000 for the nine months ended September 30, 2005 and2004, respectively.

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

The following discussionand analysis is provided to further the reader’s understanding of theconsolidated financial statements, financial condition and results ofoperations of ImClone Systems 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 theSecurities and Exchange Commission (“SEC”), including our Annual Report on Form 10-Kfor the year ended December 31, 2004. This discussion containsforward-looking statements based upon current expectations that involve riskand uncertainties. Our actual results and the timing of certain events coulddiffer materially from those anticipated in these forward-looking statements asa result of certain factors, including those set forth below as well as otherrisks detailed in our filings with the SEC.

**OVERVIEW**

ImClone Systems is a biopharmaceutical company whosemission is to advance oncology care by developing and commercializing aportfolio of targeted treatments designed to address the medical needs ofpatients with cancer. Our lead product, ERBITUX is a first-of-its-kind antibodyapproved by the United States Food and Drug Agency (“FDA”) for use incombination with irinotecan in the treatment of patients with EGFR-expressing,metastatic colorectal cancer who are refractory to irinotecan-basedchemotherapy and for use as a single agent in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are intolerant toirinotecan-based chemotherapy. ERBITUX binds specifically to epidermal growthfactor receptor (EGFR, HER1, c-ErbB-1) on both normal and tumor cells,and competitively inhibits the binding of epidermal growth factor (EGF) andother ligands, such as transforming growth factor-alpha. We are conducting, andin some cases have completed, potential registration studies evaluating ERBITUXfor the treatment of colorectal, head and neck, lung and pancreatic cancers, aswell as other indications.

On February 12, 2004, the FDA approved ERBITUXfor use in combination with irinotecan in the treatment of patients withEGFR-expressing, metastatic colorectal cancer who are refractory toirinotecan-based chemotherapy and for use as a single agent in the treatment ofpatients with EGFR-expressing, metastatic colorectal cancer who are intolerantto irinotecan-based chemotherapy. 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-basedchemotherapy. In August 2005, the Company filed an sBLA to seekapproval of ERBITUX for use as a single agent and in combination with radiationin Squamous Cell Carcinoma of the Head and Neck (SCCHN) with the FDA. InOctober 2005, the FDA notified us that it had accepted the sBLA for filing andhad granted it priority review.

On December 1, 2003, Swissmedic, the Swiss agencyfor therapeutic products, approved ERBITUX in Switzerland for the treatment ofpatients with colorectal cancer who no longer respond to standard chemotherapytreatment with irinotecan. On June 30, 2004, Merck KGaA received marketingapproval by the European Commission to sell ERBITUX for use in combination withirinotecan for the treatment of patients with EGFR-expressing metastaticcolorectal cancer after failure of irinotecan including cytotoxic therapy. Asof September 30, 2005, Merck KGaA has obtained approval for ERBITUX in 45countries, with Ecuador, Guatemala, Panama, Philippines and Malaysia approvingit during the third quarter of 2005.

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

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

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

·       the timing of recognitionof license fees and milestone revenues;

·       the status of developmentof our various product candidates;

·       whether or not we achievespecified research or commercialization milestones;

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

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

As a result of oursubstantial investment in research and development, we have incurredsignificant operating losses and have an accumulated deficit of approximately$443.2 million as of September 30, 2005. We anticipate that ouraccumulated deficit may continue to decrease in the future as we earn revenueson commercial sales of ERBITUX and generate net income. Although we havehistorically devoted most of our efforts and resources to research anddevelopment, we expect to devote greater efforts and resources to themanufacturing, marketing, and commercialization of ERBITUX. There is noassurance that we will be able to continue to successfully manufacture, marketor commercialize ERBITUX or that potential customers will buy ERBITUX. We relyentirely on third party manufacturers for filling and finishing services withrespect to ERBITUX. If our current third party manufacturers or critical rawmaterial suppliers fail to meet our expectations, we cannot be assured that wewill be able to enter into new agreements with other suppliers or third partymanufacturers without an adverse effect on our business.

**OUTLOOK**

We anticipate that our results in 2005 will reflectthe following: Royalty revenue will continue to reflect 39% of BMS’ in-marketnet sales and a range of 6.5%-7.5% of Merck KGaA’s in-market net sales. Dueto the delay in our sBLA filing for the treatment of SCCHN with the FDA, we nolonger expect to earn a milestone from BMS in 2005. Therefore, License fees andmilestone revenue in 2005 will include the continuing amortization, based onclinical development spending, of the $650 million received thus far fromBMS. At a comparable rate of spending from the current quarter, amortization ofmilestones received to date should slightly exceed $100 million in 2005.The selling price to our partners for Manufacturing revenue in 2005 isapproximately one-half of the price in 2004, since the 2004 price reflected asignificant component of materials sourced from Lonza at significantly highercosts than our own manufacturing costs. Collaborative agreement revenue willcontinue to include the purchase of ERBITUX for clinical use by our partners,as well as reimbursement of certain regulatory and clinical expenses incurredon behalf of ERBITUX, reimbursement for certain marketing and administrativeexpenses, and reimbursement for royalty expenses which will approximate 4.5% ofU.S. in-market net sales, and approximately 1% of  net sales outside the U.S.

We estimate that researchand development expenses for the full year of 2005 will range between $110-$115million reflecting higher than anticipated demand of ERBITUX for clinical useby Merck, based on their most recent inventory demand schedule. Clinical andregulatory expenses in 2005 are expected to be between $48-$50 millionfor the full year, as we embark on a number of studies in support of expandeduse of ERBITUX as well as Phase I clinical development programs for ourpipeline products. Marketing, general and administrative expenses shouldapproximate $68 million in 2005. As a result of a reduction in the royaltyobligation beginning in the third quarter of 2005, gross royalty expenses havedecreased from approximately 12.75% to 12.25% of U.S. in-market net sales; ofwhich approximately 4.5% of U.S. in-market net sales is reimbursed as acomponent of collaborative agreement revenue, resulting in a net royalty burdento ImClone of 7.75% related to U.S. in-market net sales. Cost of manufacturingrevenue 

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will notbe fully reflected on our statement of operations until such time as allpartially expensed ERBITUX has been sold through to our partners for eithercommercial or clinical use. We expect that cost of manufacturing revenue willcontinue to reflect increased costs as we consume inventory that was partiallyexpensed prior to February 13, 2004. We anticipate that the transitionperiod until we begin to reflect full absorption costs of manufacturingrevenue, may take, depending on the demand schedule from our partners,approximately one additional quarter. The effective tax rate for the full year of2005 (assuming no milestone is earned from Bristol-Myers Squibb) is estimatedto be 1% excluding the effect of an adjustment recorded in the third quarter of2005, of approximately $440,000, resulting from the reconciliation of the prioryears’ tax provision to our recently filed tax returns.

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

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

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

Revenues from license fees and milestone paymentsprimarily consist of up-front license fees and milestone payments receivedunder the Commercial Agreement with BMS and E.R. Squibb, relating to ERBITUX,and milestone payments received under the development and license agreementwith Merck KGaA. We recognize all non-refundable up-front license fees asrevenues in accordance with the guidance provided in the SEC’s Staff AccountingBulletin No. 104. Our most critical application of this policy, to date,relates to the $650,000,000 in license fees received from BMS and E.R. Squibbunder the Commercial Agreement which are being deferred and recognized asrevenue based upon the actual product research and development costs incurredsince September 19, 2001 to date by BMS and E.R. Squibb and ImClone as apercentage of the estimated total of such costs to be incurred over the17 year term of the Commercial Agreement. The estimated total of suchcosts is based on the clinical development budget which establishes jointresponsibilities that will be carried out by both the Company and BMS and E.R.Squibb for certain clinical and other studies. Of the $650,000,000 in paymentsreceived through September 30, 2005, $27,049,000 was recognized as revenuein the third quarter of 2005 and $274,513,000 from the commencement of theCommercial Agreement in 2001 through September 30, 2005. The methodologyused to recognize deferred revenue involves a number of estimates andjudgments, such as the estimate of total product research and development coststo be incurred under the Commercial Agreement. Changes in these estimates andjudgments can have a significant effect on the size and timing of revenuerecognition. In addition, if management had chosen a different methodology torecognize the license fee and milestone payments received under the CommercialAgreement, the Company’s financial position and results of operations couldhave differed materially. For example, if the Company were to recognize therevenues earned from the Commercial Agreement on a straight-line basis over thelife of the agreement, the Company would have recognized approximately$10,600,000 and $118,200,000 as revenue for the three months and from thecommencement of the Commercial Agreement, respectively, through September 30,2005. Management believes that the current methodology used to recognizerevenues under 

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the Commercial Agreement,which reflects the level of effort consistent with the product development activities,is the most appropriate methodology because it reflects the level ofexpenditure and activity in the period in which it is being spent as comparedto the total expected expenditure over the life of the Commercial Agreement.This cost to cost approach is systematic and rational, it provides a factuallysupportable pattern to track progress, and is reflective of the level ofeffort, 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 each milestonepayment represents the achievement of a substantive step in the research anddevelopment process and Merck KGaA has the right to evaluate the technology todecide whether to continue with the research and development program as eachmilestone is reached.

Manufacturing revenue consists of revenue earned onthe sale of ERBITUX to our corporate partners for subsequent commercial sale.The Company recognizes manufacturing revenue when the product is shipped, whichis when our partners take ownership and title has passed, collectibility isreasonably assured, the sales price is fixed or determinable, and there ispersuasive evidence of an arrangement. We are contractually obligated to sellERBITUX to BMS at our cost of production plus a 10% markup. We sell bulkinventory to Merck KGaA at our full absorption cost of production. The salesprice for ERBITUX to BMS in 2004 reflected the weighted average costs ofproduction for inventory produced by Lonza (which was exhausted in 2004) and atour BB36 manufacturing plant. The sales price to our corporate partners forERBITUX for commercial distribution in 2005, which is based solely on our coststo produce at our BB36 plant,  is significantly lower (i.e. roughlyone-half) than the price charged to BMS in 2004 since our unit cost tomanufacture ERBITUX is significantly lower than the cost paid to Lonza formanufacturing ERBITUX. The continuing level of manufacturing revenue in futureperiods may fluctuate significantly based on market demand, our cost of production,as well as BMS’s required level of safety stock inventory for ERBITUX.

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

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

*Withholding Taxes*—InJanuary 2003, New York State notified the Company that it was liable forthe New York State and City income taxes that were not withheld because one ormore of the Company’s employees who exercised certain non-qualified stockoptions in 1999 and 2000 failed to pay New York State and City income taxes forthose years. On March 13, 2003, the Company entered into a closingagreement with New York State, paying $4,500,000 to settle the matter.Subsequently, the Company became aware of another potential income andemployment tax withholding liability associated with the 

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exercise of certainwarrants granted in the early years of the Company’s existence that were heldby certain former officers, directors and employees. After the Company informedNew York State of the issue relating to the warrants, New York State, in June 2003,notified the Company that it was continuing the previously conducted audit ofthe Company and was evaluating the terms of the closing agreement to determinewhether or not it should be re-opened. On March 31, 2004, the Companyentered into a new closing agreement pursuant to which the Company paid NewYork State an additional $1,000,000 in full satisfaction of all thedeficiencies and determinations of withholding taxes for the years 1999-2001.As a result, we utilized $1,000,000 of the liability of $2,815,000 that wepreviously established for New York withholding taxes on stock options andwarrants exercised and recognized a benefit of $1,815,000 as a recovery in theConsolidated Statements of Operations for the nine months ended September 30,2004.

On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to thefederal income taxes applicable to the above noted issues. Although the IRS hasnot yet asserted that the Company is required to make a payment with respect tosuch failure to withhold, the IRS may assert that such a liability exists, andmay further assert that the Company is liable for interest and penalties. TheIRS has commenced audits of the Company’s income tax and employment tax returnsfor tax years 1999 through 2001. The Company is cooperating fully with the IRSwith respect to these audits, and intends to continue to do so.

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

The Company has not recognized accruals for penaltiesand interest that may be imposed with respect to the withholding tax issuespreviously described and other related contingencies, including the periodcovered by the statute of limitations and the Company’s determination ofcertain exercise dates, because it does not believe that losses from suchcontingencies are probable, or in the event that any taxing authority makes aclaim for penalties or interest, the Company believes that it will be able tosettle the total amount asserted (including any liability for taxes) for anamount not in excess of the liability for taxes already accrued with respect tothe relevant withholding tax issue. With respect to the statute of limitationsand the Company’s determination of certain exercise dates, while the Companydoes not believe a loss is probable, there is a potential additional liabilitywith respect to these issues that may be asserted by a taxing authority. Iftaxing authorities assert such issues and prevail related to these withholdingtax issues and other related contingencies, including penalties, the liabilitythat could be imposed by taxing authorities would be substantial. The potentialinterest on the withholding tax liabilities recorded on the ConsolidatedBalance Sheets could be up to a maximum amount of approximately $9,100,000 at September 30,2005. Potential additional withholding tax liability on other relatedcontingencies amounts to approximately $8,000,000, exclusive of any interest orpenalties, and excluding the amount potentially attributable to Mr. Goldhammernoted above.

*Inventories*—Until February 12,2004, all costs associated with the manufacturing of ERBITUX were included inresearch and development expenses when incurred. Effective February 13,2004, the date after 

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the Company receivedapproval from the FDA for ERBITUX, we began to capitalize in inventory the costof manufacturing ERBITUX for commercial sale and will expense such cost as costof manufacturing revenue at the time of sale. However, as we sell our existing inventorythat was previously expensed, there will be a period of time whereby theCompany will reflect manufacturing revenue with minimal cost. The cost ofmanufacturing revenue reflected in the Company’s operating expenses in 2004 andthrough the nine months of 2005 therefore, does not reflect full absorptioncost of production because a portion of the raw materials, labor and overheadcosts incurred to produce the product sold, were previously expensed.Therefore, consistent with 2004, we anticipate that our margin on sales ofERBITUX to our corporate partners will continue to fluctuate from quarter toquarter during 2005. If the Company had capitalized inventory prior toobtaining FDA approval of ERBITUX, the cost basis of the inventory sold wouldbe approximately 90% of manufacturing revenue or a gross margin ofapproximately 10%, depending on the relative level of sales to BMS and MerckKGaA. We expect that cost of manufacturing revenue will continue to reflectincremental costs as we consume inventory that was partially expensed prior to February 13,2004. We anticipate that the transition period until we begin to reflect fullabsorption costs of manufacturing revenue, may take, depending on the demandschedule from our partners, approximately one additional quarter.

*Litigation*—TheCompany is currently involved in certain legal proceedings as disclosed in theNotes to the Consolidated Financial Statements. Except for the reserveestablished as of September 30, 2005 of $1.9 million for legal fee expenseindemnification relating to a probable settlement of certain legal proceedingswith the Company’s former chief executive officer, no other significant reservehas been established in our financial statements because we do not believe thatsuch a reserve is required to be established at this time, in accordance withStatement of Financial Standards No. 5. However, if in a future period,events in any such legal proceedings render it probable that a loss will beincurred, and if such loss is reasonably estimable at that time, we willestablish such a reserve. Thus, it is possible that legal proceedings may havea material adverse impact on the operating results for that period, on ourbalance sheet or both**.**

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

*IncomeTaxes*—Income taxes are accounted for under the asset andliability method. Deferred tax assets and liabilities are recognized for thefuture tax consequences attributable to differences between the financialstatement carrying amounts of existing assets and liabilities and theirrespective tax bases and operating loss and tax credit carryforwards.Significant estimates are required in determining our provision for incometaxes. As of September 30, 2005, the Company continues to reflect avaluation allowance against its total net deferred tax assets because, morelikely than not, its net deferred tax assets will not be realized. Althoughmanagement believes that the valuation allowance as of September 30, 2005is appropriate, we expect that as we continue to sell ERBITUX to our corporatepartners for commercial use 

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and earnroyalties and income from operations from the expected commercial sales ofERBITUX, we will need to revise our conclusions regarding the realization ofour deferred tax assets due to expected changes in overall levels of pretaxearnings. In addition, there may be other factors such as changes in tax lawsand future levels of research and development spending that may impact oureffective tax rate in the future.

**RECENTLYISSUED STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS**

On November 24, 2004 the Financial AccountingStandards Board (“FASB”) issued FASB Statement No. 151*, Inventory Costs*, an amendment of ARB No. 43.This Statement amends the guidance in ARB No. 43, Chapter 4, “InventoryPricing”, to clarify the accounting for abnormal amounts of idle facilityexpense, freight, handling costs, and wasted material (spoilage). Theprovisions of this Statement are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005. The adoption of thisaccounting pronouncement is not expected to have a material effect on theCompany’s consolidated financial statements.

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

**RESULTS OF OPERATIONS**

Selectedfinancial and operating data for the three and nine months ended September 30,2005 and 2004 are as follows: (in thousands)

| ** **                          | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                          | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **Variance** | ** ** | **2005** | ** ** | **2004** | ** ** | **Variance** | ** ** |
| Revenues:                           |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| License fees and  milestone revenue |       | $                                                    | 27,146     |                                                | $          | 22,958 |   | $ | 4,188 |   | $ | 76,171 |   | $ | 108,604 |   | $ | (32,433 | ) |
| Manufacturing revenue               |       | 10,748                                               |       | 29,952                                              |       | (19,204 | ) | 29,661 |   | 70,252 |   | (40,591 | ) |
| Royalty revenue                     |       | 46,647                                               |       | 34,137                                              |       | 12,510 |   | 124,810 |   | 69,742 |   | 55,068 |   |
| Collaborative agreement  revenue    |       | 21,984                                               |       | 10,414                                              |       | 11,570 |   | 54,039 |   | 32,795 |   | 21,244 |   |
| Total revenues                      |       | $                                                    | 106,525    |                                                | $          | 97,461 |   | $ | 9,064 |   | $ | 284,681 |   | $ | 281,393 |   | $ | 3,288 |   |

 

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| ** **                                          | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                             | ** ** | **2004**                                            | ** ** | **Variance** | ** ** | **2005** | ** ** | **2004** | ** ** | **Variance** | ** ** |
| Operating Expenses:                                 |       |                                                 |       |                                                |       |   |   |   |   |   |   |   |   |
| Research and development                            |       | $                                                    | 28,958     |                                                | $          | 17,635 |   | $ | 11,323 |   | $ | 74,564 |   | $ | 56,682 |   | $ | 17,882 |   |
| Clinical and regulatory                             |       | 13,583                                               |       | 7,595                                               |       | 5,988 |   | 31,357 |   | 20,859 |   | 10,498 |   |
| Marketing, general and  administrative              |       | 19,463                                               |       | 14,816                                              |       | 4,647 |   | 53,919 |   | 40,021 |   | 13,898 |   |
| Royalty expense                                     |       | 15,165                                               |       | 9,661                                               |       | 5,504 |   | 42,069 |   | 19,340 |   | 22,729 |   |
| Cost of manufacturing  revenue                      |       | 3,099                                                |       | 223                                                 |       | 2,876 |   | 4,948 |   | 559 |   | 4,389 |   |
| Discontinuation of small  molecule research program |       | —                                               |       | —                                              |       | — |   | 6,200 |   | — |   | 6,200 |   |
| Other                                               |       | —                                               |       | —                                              |       | — |   | — |   | (1,815 | ) | 1,815 |   |
| Total operating expenses                            |       | $                                                    | 80,268     |                                                | $          | 49,930 |   | $ | 30,338 |   | $ | 213,057 |   | $ | 135,646 |   | $ | 77,411 |   |

 

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

**Revenues**

**License Fees and Milestone Revenue**

License fees and milestonerevenue for the three months ended September 30, 2005 of $27,146,000consists of the recognition of up-front and milestone payments received underthe Commercial Agreement with BMS and E.R. Squibb of $27,049,000 andrecognition of payments received under the development and license agreementswith Merck KGaA of $97,000. The increase of $4,188,000 from the comparableperiod in 2004 is due to increases in clinical development spending by BMS andus. License fees and milestone revenue in 2005 will include the continuingamortization, based on clinical development spending, of the $650 millionreceived thus far from BMS. At a comparable rate of spending from the thirdquarter of 2005, amortization of milestones received to date should slightlyexceed $100 million for the full year of 2005.

**Manufacturing Revenue**

Manufacturing revenue forthe three months ended September 30, 2005 of $10,748,000 consists of salesof ERBITUX to our corporate partners for commercial use. The decrease of$19,204,000 from the comparable period in 2004 is mainly due to lower sellingprice and lower volume purchases this quarter as compared to the prior period.  In accordance with the Commercial Agreement,we are contractually obligated to sell ERBITUX to BMS at our cost of productionplus a 10% markup. We sell bulk inventory to Merck KGaA at our full absorptioncost of production. There were no sales of ERBITUX to Merck KGaA for commercialsupply during the third quarters of 2005 or 2004. During 2004, the pricecharged to BMS reflected the weighted average costs of production for inventorypreviously produced by Lonza and at our BB36 manufacturing plant. During 2004,we depleted all inventory produced by Lonza, therefore our costs in 2005reflect only costs associated with manufacturing inventory at our BB36manufacturing facility. Therefore, the sales price to our corporate partners in2005 is significantly lower than the price we charged our partner in 2004 sinceour unit cost to manufacture ERBITUX is significantly lower than the cost paidto Lonza for manufacturing ERBITUX. The continuing level of manufacturingrevenue in future periods may fluctuate significantly based on market demand,our cost of production, as well as BMS’s required level of safety stockinventory for ERBITUX.

**Royalty Revenue**

Royalty revenue consistsprimarily of royalty payments earned on the sale of ERBITUX by our partners,BMS and Merck KGaA. Under our agreement with BMS, we are entitled to royaltypayments equal to 39% of BMS’s net sales of ERBITUX in the United States andCanada. Under our agreement with Merck KGaA, we are entitled to royalty paymentsbased on a percentage of gross margin of Merck 

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KGaA’ssales of ERBITUX outside the United States and Canada. The increase of$12,510,000 from the comparable period in 2004 is primarily due to an increasein royalty received from BMS of $8,911,000 and an increase in royalty receivedfrom Merck in 2005 of approximately $3,551,000. Royalty revenue in the fourthquarter of  2005 will continue to reflect39% of BMS’ net in-market net sales and a range of 6.5%-7.5% of MerckKGaA’s in-market net sales.

**Collaborative Agreement Revenue**

Collaborative agreementrevenue consists primarily of reimbursements from our partners BMS and E.R.Squibb and Merck KGaA under our collaborative agreements. There are certaincategories for which we receive reimbursement from our partners: clinical andregulatory expenses, the cost of ERBITUX supplied to our partners for use inclinical studies, certain marketing and administrative expenses and a portionof royalty expense. During the third quarter of 2005, we earned $21,984,000 in collaborativeagreement revenue, of which approximately $10,787,000 represents amounts earnedfrom BMS and E.R. Squibb and approximately $11,194,000 represents amountsearned from Merck KGaA, as compared to $10,414,000 earned in the comparableperiod in 2004, of which $9,539,000 was earned from BMS and E.R. Squibb and$875,000 was earned from Merck KGaA. The increase in collaborative agreementrevenue of $11,570,000 is principally due to an increase in reimbursement forclinical drugs of approximately $10.7 million and an increase of approximately$1.3 million in royalty expense reimbursed by our corporate partners as aresult of higher in-market sales. Collaborative agreement revenue in 2005 willcontinue to include the purchase of ERBITUX for clinical use by our partners,as well as reimbursement of certain regulatory and clinical expenses incurredon behalf of ERBITUX, reimbursement of certain marketing and administrativeexpenses and reimbursement for royalty expenses, which will approximate 4.5% ofUS in-market net sales and approximately 1% of net sales outside the U.S.

**Expenses**

**Research and Development**

Research and developmentexpenses in the third quarter of 2005 of $28,958,000 increased by approximately$11,323,000 from the comparable period in 2004. The increase is primarily dueto shipments of ERBITUX to our partners for clinical studies of approximately$8.0 million and an increase in costs associated with the development of ournon-ERBITUX pipeline. Research and development expenses include costs associatedwith our in-house and collaborative research programs, product and processdevelopment expenses, costs to manufacture ERBITUX (until February 12,2004) and other product candidates and quality assurance and quality controlcosts. Research and development includes costs that are reimbursable from ourcorporate partners. Approximately $12,702,000 and $2,014,000 of costsrepresenting research and development expenses for the three months ended September 30,2005 and 2004, respectively, were reimbursed and included under collaborativeagreement revenue since they represent inventory supplied to our partners foruse in clinical studies. We estimate that research and development expenses forthe full year of 2005 will range between $110-$115 million.

**Clinical and Regulatory**

Clinical and regulatoryexpenses in the third quarter of 2005 were $13,583,000, an increase of$5,988,000 from the comparable period in 2004. The increase is due to anincrease of approximately $5,170,000 due BMS for reimbursement of clinicalexpenses and an increase in salaries and benefits of approximately $1,120,000,slightly offset by a decrease in third party clinical trial costs. Clinical andregulatory expenses consist of costs to conduct our clinical studies andassociated regulatory activities. Approximately $3,337,000 and $3,399,000 ofthe costs included in this category for the three months ended September 30,2005 and 2004, respectively, are reflected as revenues under collaborativeagreement revenue since they represent costs that are reimbursable by ourcorporate partners. Clinical and regulatory 

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expensesare expected to be between $48-$50 million for the full year of2005, as we embark on a number of studies in support of expanded use of ERBITUXas well as Phase I clinical development programs for our pipeline products.

**Marketing,General and Administrative**

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

Marketing, general andadministrative expenses in the three months ended September 30, 2005amounted to $19,463,000, an increase of $4,647,000 or 31% from the comparableperiod in 2004. This increase is partly due to increases in salaries andbenefits of approximately $1,500,000 due to increased headcount and an increaseof approximately $900,000 in professional services fees related to legal, taxconsulting and marketing programs. This category also includes a charge relatedto establishing a legal reserve of approximately $1.9 million for legal feeexpense indemnification related to a probable settlement of certain legalproceedings with our former chief executive officer. Certain expenses in thiscategory are reimbursable from our corporate partners. Approximately $411,000and $812,000 of costs representing marketing and general expenses for the threemonths ended September 30, 2005 and 2004, respectively, are reimbursed andincluded in collaborative agreement revenue. Marketing, general andadministrative expenses should approximate $68 million in 2005.

**Cost of Manufacturing Revenue**

Effective February 13,2004, we began to capitalize in inventory the costs of manufacturing of ERBITUXfor sale and will expense such costs as cost of manufacturing revenue at thetime of commercial sale. However, as we continue to sell inventory that waspreviously expensed, we will continue to reflect minimum cost of manufacturingrevenue since the majority of the cost of such inventory has already beenexpensed in prior periods as research and development expenses. Consistent with2004, we anticipate that our manufacturing revenue margin on sales of ERBITUXto our corporate partners will continue to fluctuate from quarter to quarteruntil such time as we exhaust all inventory whose costs, or partial costs, wasexpensed as research and development prior to obtaining FDA approval forERBITUX. The costs of manufacturing revenue in the third quarter of 2005reflects a combination of inventory sold with costs consisting only of packaging, filling, labeling and shipping and certain inventory withpartial costs related to batches that were in work-in-process on February 13,2004. Cost of manufacturing revenue in the third quarter of 2005 as apercentage of manufacturing revenue increased to 29%, resulting in a  gross margin of approximately 71% as comparedto a gross margin in the second quarter of 2005 of 86%. As previouslydisclosed, as we consume more inventory that was partially expensed, the costof our inventory will continue to increase until we reach full absorptioncosts. Consistent with this quarter, the costs of manufacturing revenue in thefourth quarter of 2005 are expected to continue to reflect increased costs aswe consume most of the  inventory thatwas partially expensed prior to February 13, 2004. We expect that thetransition period until we begin to reflect full absorption costs ofmanufacturing revenue, may take, depending on the demand schedule from ourpartners, approximately one additional quarter.

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**Royalty Expense**

Royalty expense of $15,165,000 for the three monthsended September 30, 2005 increased by $5,504,000 from the comparableperiod in 2004 due to increases in in-market sales. Royalty expense consists ofobligations related to certain licensing agreements related toERBITUX. Prior to the third quarter of 2005, we were obligated to payroyalties of approximately 12.75% of North American in-market net sales and alow single digit royalty on sales outside of North America, which will increaseif sales outside of North America consist of ERBITUX produced in the UnitedStates. Beginning in the third quarter of 2005, gross royalty expense hasdecreased as a percentage of net sales in North America from 12.75% to 12.25%as the result of a reduction in the royalty obligation. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a minimum of 1% on net sales outside of North America. After the firstquarter of 2006, gross royalty expense due on North American net sales willdecrease to 9.25% and our reimbursement on such sales will decrease to 2.5%.Approximately $5,531,000 and $4,189,000 of royalty expense is reimbursable byour corporate partners and included as collaborative agreement revenue for thethree months ended September 30, 2005 and 2004, respectively. We expectthat royalty expenses in 2005 for ERBITUX will continue to reflect the samepercentages outlined above.

**InterestIncome and Interest Expense**

Interest income for the three months endedSeptember 30, 2005 amounted to $7,025,000, an increase of approximately$1.9 million from the comparable period in 2004. This increase is attributableto increases in interest rates from the comparable period in 2004.

Interest expense for thethree months ended September 30, 2005 amounted to $1,577,000, a decreaseof approximately $385,000. The decrease is due to the fact that we capitalizedmore interest in the third quarter of 2005 than in the comparable period of2004, as a result of an increase in the balance of assets qualifying forinterest capitalization.

**Provision for Income Taxes**

The estimated effective income tax rate for 2005 (assumingno milestone is earned from Bristol-Myers Squibb) is approximately 1.0%excluding the effect of the adjustment resulting from the reconciliation of theprior years’ tax provision to our recently filed tax returns. The estimatedeffective tax rate for the three months ended September 30, 2005 and forthe full year, including the adjustment of approximately $440,000 is approximately2.4% and 1.5%, respectively, which is less than the federal statutory rate of35%. The difference from the statutory rate results from the utilization offully reserved deferred tax assets, primarily the amortization of deferredrevenue associated with license fees and milestones, which were taxable inprior periods.

**Net Income**

For the three months endedSeptember 30, 2005 we had net income of $30,951,000 or $.37 per basiccommon share and $.35 per diluted common share, compared with net income of$39,783,000 or $.48 per basic and $.44 per diluted common share in thecomparable period in 2004. The fluctuation in results was due to the factorsnoted above.

***Nine Months Ended September 30, 2005 and 2004***

**Revenues**

**License Fees and Milestone Revenue**

License fees and milestonerevenue for the nine months ended September 30, 2005 of $76,171,000consists of the recognition of up-front and milestone payments received underthe Commercial Agreement with BMS and E.R. Squibb of $74,882,000 andrecognition of payments received under the development 

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andlicense agreements with Merck KGaA of $1,289,000. The decrease of $32,433,000from the comparable period in 2004 is due to the fact that we received amilestone payment from BMS of $250,000,000 in the first quarter of 2004, whenwe obtained FDA approval of ERBITUX resulting in incremental amortization ofdeferred revenue of approximately $43 million related to the actualproduct research and development costs incurred from inception through December 31,2003 as a percentage of the estimated total costs to be incurred over the termof the Commercial Agreement with BMS, partly offset by an increase in clinicalspend. License fees and milestone revenue in 2005 will include the continuingamortization, based on clinical development spending, of the $650 millionreceived thus far from BMS. At a comparable rate of spending from the thirdquarter of 2005, amortization of milestones received to date should slightlyexceed $100 million for the full year.

**Manufacturing Revenue**

Manufacturing revenue forthe nine months ended September 30, 2005 of $29,661,000 consists of salesof ERBITUX to our corporate partners for commercial use. The decrease of$40,591,000 from the comparable period in 2004 is due to a combination of lowerselling price in 2005, the absence of the initial stocking purchases by BMS asit was launching the product in the first quarter of 2004 and lower volumepurchases in the third quarter of 2005.  In accordance with the Commercial Agreement,we are contractually obligated to sell ERBITUX to BMS at our cost of productionplus a 10% markup. We sell bulk inventory to Merck KGaA at our full absorptioncost of production. There were no sales of ERBITUX to Merck KGaA for commercialsupply during the nine months ended September 30, 2005 and 2004. During2004, the price charged to BMS reflected the weighted average costs ofproduction for inventory previously produced by Lonza and at our BB36manufacturing plant. During 2004, we depleted all inventory produced by Lonza,therefore, our costs in 2005 reflect only costs associated with manufacturinginventory at our BB36 manufacturing facility. Therefore, the sales price to ourcorporate partners in 2005 is significantly lower than the price we charged ourpartner in 2004 since our unit cost to manufacture ERBITUX is significantlylower than the cost paid to Lonza for manufacturing ERBITUX. The continuinglevel of manufacturing revenue in future periods may fluctuate significantlybased on market demand, our cost of production, as well as BMS’s required levelof safety stock inventory for ERBITUX.

**Royalty Revenue**

Royalty revenue consistsprimarily of royalty payments earned on the sale of ERBITUX by our partners,BMS and Merck KGaA. Under our agreement with BMS, we are entitled to royaltypayments equal to 39% of BMS’s in-market net sales of ERBITUX in the UnitedStates and Canada. Under our agreement with Merck KGaA, we are entitled toroyalty payments based on a percentage of gross margin of Merck KGaA’s sales ofERBITUX outside the United States and Canada. The increase of $55,068,000 fromthe comparable period in 2004 is primarily due to an increase in royaltyreceived from BMS of $46,354,000 and an increase in royalty received from Merckin 2005 of approximately $8,684,000 as a result of an increase in  net sales. Royalty revenue in the fourthquarter of 2005 will continue to reflect 39% of BMS’ in-market net salesand  a range of 6.5%-7.5% of MerckKGaA’s in-market net sales.

**Collaborative Agreement Revenue**

Collaborative agreement revenueconsists primarily of reimbursements from our partners BMS and E.R. Squibb andMerck KGaA under our collaborative agreements. There are certain categories forwhich we receive reimbursement from our partners: clinical and regulatoryexpenses, the cost of ERBITUX supplied to our partners for use in clinicalstudies, certain marketing and administrative expenses and a portion of royaltyexpense. During the nine months ended September 30, 2005, we earned$54,039,000 in collaborative agreement revenue, of which approximately$31,891,000 represents amounts earned from 

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BMS andE.R. Squibb and approximately $22,136,000 represents amounts earned from MerckKGaA, as compared to $32,795,000 earned in the comparable period in 2004, ofwhich $28,087,000 was earned from BMS and E.R. Squibb and $4,657,000 was earnedfrom Merck KGaA. The increase in collaborative agreement revenue of $21,244,000is principally due to an increase in reimbursement for clinical drugs ofapproximately $13.7 million and an increase of approximately $6.7 million inroyalty expense reimbursed by our corporate partners as a result of higherin-market sales. Collaborative agreement revenue in 2005 will continue toinclude the purchase of ERBITUX for clinical use by our partners, as well asreimbursement of certain regulatory and clinical expenses incurred on behalf ofERBITUX, reimbursement of certain marketing and administrative expenses andreimbursement for royalty expenses, which will approximate 4.5% of US netin-market sales and approximately 1% of net sales outside the U.S.

**Expenses**

**Research and Development**

Research and developmentexpenses for the nine months ended September 30, 2005 of $74,564,000increased by approximately $17,882,000 from the comparable period in 2004. Theincrease is primarily due to shipments of ERBITUX to our partners for clinicalstudies of approximately $11.4 million and an increase in costs associated withthe development of our non-ERBITUX pipeline. Research and development expensesinclude costs associated with our in-house and collaborative research programs,product and process development expenses, costs to manufacture ERBITUX (until February 12,2004) and other product candidates and quality assurance and quality controlcosts. Research and development includes costs that are reimbursable from ourcorporate partners. Approximately $26,217,000 and $12,525,000 of costsrepresenting research and development expenses for the nine months ended September 30,2005 and 2004, respectively, were reimbursed and included under collaborativeagreement revenue since they represent inventory supplied to our partners foruse in clinical studies. We estimate that research and development expenses forthe full year of 2005 will range between $110-$115 million.

**Clinical and Regulatory**

Clinical and regulatoryexpenses in the nine months ended September 30, 2005 were $31,357,000, anincrease of $10,498,000 from the comparable period in 2004. The increase is dueto an increase of approximately $7.3 million due BMS for reimbursement ofclinical expenses, an increase in salaries and benefits of approximately $2.7million, and an increase of approximately $1.4 million associated with paymentsto third parties for clinical trials, partially offset by a decrease ofapproximately $1.3 million of stock option compensation expense. Clinical andregulatory expenses consist of costs to conduct our clinical studies andassociated regulatory activities. Approximately $11,266,000 and $9,746,000 ofthe costs included in this category for the nine months ended September 30,2005 and 2004, respectively, are reflected as revenues under collaborativeagreement revenue since they represent costs that are reimbursable by ourcorporate partners. Clinical and regulatory expenses in 2005 are expected to bebetween  $48-$50 million for thefull year, as we embark on a number of studies in support of expanded use ofERBITUX, as well as Phase I clinical development programs for our pipelineproducts.

**Marketing,General and Administrative**

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

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Marketing, general andadministrative expenses in the nine months ended September 30, 2005amounted to $53,919,000, an increase of $13,898,000 or 35.0% from thecomparable period in 2004. This increase is due to increases in salaries andbenefits of approximately $6,300,000 due to increased headcount, an increase ofapproximately $6,600,000 in professional services fees related to legal, taxconsulting and marketing programs and to a charge related to a legal reserverecorded in the third quarter of 2005, of approximately $1.9 million for legalfee expense indemnification related to a probable settlement of certain legal proceedingswith our former chief executive officer, partly offset by decreases in variousother administrative expenses. Certain expenses in this category arereimbursable from our corporate partners. Approximately $1,525,000 and$2,178,000 of costs representing marketing and general expenses for the ninemonths ended September 30, 2005 and 2004, respectively, are reimbursed andincluded in collaborative agreement revenue. Marketing, general andadministrative expenses should approximate $68 million in 2005.

**Cost of Manufacturing Revenue**

Effective February 13,2004, we began to capitalize in inventory the costs of manufacturing of ERBITUXfor sale and will expense such costs as cost of manufacturing revenue at thetime of commercial sale. However, as we continue to sell inventory that waspreviously expensed, we will continue to reflect minimum cost of manufacturingrevenue since the majority of the cost of such inventory has already beenexpensed in prior periods as research and development expenses. Consistent with2004, we anticipate that our manufacturing revenue margin on sales of ERBITUXto our corporate partners will continue to fluctuate from quarter to quarteruntil such time as we exhaust all inventory whose costs was expensed asresearch and development prior to obtaining FDA approval for ERBITUX. The costsof manufacturing revenue for the nine months ended September 30, 2005reflects costs associated with packaging, filling, labeling and shipping, witha portion of the inventory shipped particularly in the third quarter of 2005,reflecting incremental costs as we consume inventory that were inwork-in-process on February 13, 2004.  Gross margin for the nine months ended September 30,2005 amounted to 83% as compared to gross margin for the six months ended June 30,2005 which amounted to 90%, which is consistent with our expectation that costof manufacturing will gradually increase as we consume all inventory that waspartially expensed. Consistent with this quarter, the costs of manufacturingrevenue in the fourth quarter of 2005 are expected to continue to reflectincreased costs as we consume most of the inventory that was partially expensedprior to February 13, 2004. We expect that the transition period until webegin to reflect full absorption costs of manufacturing revenue, may take,depending on the demand schedule from our partners, approximately oneadditional quarter.

**Royalty Expense**

Royalty expense of$42,069,000 for the nine months ended September 30, 2005 increased by$22,729,000 from the comparable period in 2004 due to increases in in-marketsales. Royalty expense consists of obligations related to certain licensingagreements related to ERBITUX. Prior to the third quarter of 2005, we wereobligated to pay royalties of approximately 12.75% of North American net salesand a low single digit royalty on sales outside of North America, which willincrease if sales outside of North America consist of ERBITUX produced in theUnited States. Beginning in the third quarter of 2005, gross royalty expensehas decreased as a percentage of net sales in North America from 12.75% to12.25% as the result of a reduction in the royalty obligation. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a minimum of 1% on net sales outside of North America. After the firstquarter of 2006, gross royalty expense due on North American net sales willdecrease to 9.25% and our reimbursement on such sales will decrease to 2.5%.Approximately $15,019,000 and $8,292,000 of royalty expense is reimbursable byour corporate partners and included as collaborative agreement revenue for thenine months ended September 30, 2005 and 2004, respectively. We expectthat 

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royaltyexpenses in the fourth quarter of 2005 for ERBITUX will continue to reflect thesame percentages outlined above.

**Discontinuationof Small Molecule Research Program**

On May 11, 2005, theCompany announced a plan to discontinue its small molecule research program.This decision was made after evaluating the Company’s investment in suchprogram against the time horizon before commercial benefits would be realized.  As a result of this decision, the Companyrecorded in the second quarter of 2005 approximately $6,200,000 of costsassociated with the discontinuation of this program. Such costs includeapproximately $2,260,000 of costs related to severance for 45 employees thatwere terminated, $3,880,000 of costs related to the write-off of fixed assetsused in such program and approximately $60,000 of contract termination costsrelated to the cancellation of the lease at the Brooklyn facility where theemployees were conducting such research. The disposition of this program issubstantially complete and the Company expects the majority of the remainingtermination benefits to be paid by December 31, 2005.

**InterestIncome and Interest Expense**

Interest income for the nine months ended September 30,2005 amounted to $20,575,000, an increase of approximately $12.5 million fromthe comparable period in 2004. This increase is attributable to increases ininterest rates from the comparable period in 2004 as well as a higher averagecash and securities balance for the nine months ended September 30, 2005to the comparable period in 2004,as a result of receiving $600,000,000 from theissuance of convertible debt in May 2004 and receiving $250 million fromBMS in March of 2004.

Interest expense for thefirst nine months ended September 30, 2005 amounted to $5,073,000, adecrease of approximately $1.4 million. The decrease is due to lower interestrate than in the comparable period of 2004, partly offset by an increase indebt outstanding.

**Provision for Income Taxes**

The estimated effective income tax rate for 2005 (assumingno milestone is earned from Bristol-Myers Squibb) is approximately 1.0%excluding the effect of the adjustment resulting from the reconciliation of theprior years’ tax provision to our recently filed tax returns. The estimatedeffective tax rate for 2005 including the adjustment of approximately $440,000is approximately 1.5%, which is less than the federal statutory rate of 35%. Thedifference from the statutory rate results from the utilization of fullyreserved deferred tax assets, primarily the amortization of deferred revenueassociated with license fees and milestones, which were taxable in priorperiods.

**Net Income**

For the nine months ended September 30,2005 we had net income of $85,802,000 or $1.03 per basic common share and $.98per diluted common share, compared with net income of $126,831,000 or $1.62 perbasic and $1.45 per diluted common share in the comparable period in 2004. Thefluctuation in results was due to the factors noted above.

**LIQUIDITY AND CAPITAL RESOURCES**

At September 30,2005, our principal sources of liquidity consisted of cash and cash equivalentsand securities available for sale of approximately $790 million.Historically, we have financed our operations through a variety of sources,most significantly through the issuance of public and private equity andconvertible notes, license fees and milestone payments and reimbursements fromour corporate partners. Since the approval of ERBITUX on February 12,2004, we began to generate royalty revenue and 

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manufacturingrevenue from the commercial sale of ERBITUX by our corporate partners andgenerated income from operations in 2004 and in the nine months ended September 30,2005. As we continue to generate income, our cash flows from operatingactivities are expected to increase as a source to fund our operations.

***SUMMARY OF CASHFLOWS***

| ** **                                             | ** ** | **Nine Months  Ended September 30,** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------------|------------|------------|------------|
| ** **                                             | ** ** | **2005**                                            | ** ** | **2004**   | ** ** | **Variance** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                                  | ** ** | ** ** | ** ** |
| Cash provided by  (used in):                           |       |                                                |       |       |       |   |   |
| Operating  activities.                                 |       | $                                                   | (67,524    | )          | $          | 218,768 |   | $ | (286,292 | ) |
| Investing  activities                                  |       | (19,230                                             | )          | (799,822   | )          | 780,592 |   |
| Financing  activities.                                 |       | 14,096                                              |       | 657,850    |       | (643,754 | ) |
| Net (decrease) increase  in cash and cash equivalents. |       | $                                                   | (72,658    | )          | $          | 76,796 |   | $ | (149,454 | ) |

 

Historically our cash flows from operating activitieshave fluctuated significantly due to the nature of our operations and thetiming of our cash receipts. During the nine months ended September 30,2005, we did not generate positive cash flows from operations but usedapproximately $68 million of cash in operating activities mainly due to thepayment of $50 million related to the securities class action litigation thatwe settled in January 2005 and approximately $30 million of royalty andother license related payments to Genentech and Centocor related to 2004, forlicense agreements that we finalized during January 2005, partially offsetby cash generated from operations. As we have noted in the past, we expectsignificant fluctuations in our operating cash flows as we continue totransform from a research and development company to a commercial operatingentity.

Our primary sources and uses of cash under investingactivities consist of purchases and sales activity in our investment portfolio,which we manage based on our liquidity needs, and cash used for capitalexpenditures. During the nine months ended September 30, 2005, our netcash used for investing activities of $19.2 million consisted of  capital expenditures of $69.8 million, offsetby net cash generated from sales and maturities in our investment portfolio ofapproximately $50.6 million. During 2004, we invested a significant amount of cashin securities as a result of raising $600 million through the issuance ofconvertible bonds and also through the receipt of $250 million from BMS as aresult of obtaining approval of ERBITUX. In 2005, we used some of the proceedsfrom sales and maturities of securities, rather than re-invest such funds, inorder to pay for some operating expenses, such as the $50 million payment madein the first quarter, relating to the securities class action litigation. Weexpect that in 2005, capital spending will range from $90-$105 millionincluding approximately $22 million of validation and commissioning costsassociated with our multiple product manufacturing facility (“BB50”).

Net cash flows provided from financing activities inthe nine months ended September 30, 2005 decreased by approximately $644million mainly due to the fact that in 2004, we raised $600 million from theissuance of convertible bonds. In addition, this category has also decreaseddue to a decrease in the amount of cash generated from the exercise of stockoptions by employees.

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We believe that ourexisting cash and cash equivalents, securities available for sale and our cash generated from operatingactivities will provide us with sufficient liquidity to support our operationsat least through the fourth quarter of 2006. We are also entitled toreimbursement for certain marketing, royalty expense, and research anddevelopment expenditures and certain other payments, some of which are payablecontingent upon the achievement of research and development and regulatorymilestones. There can be no assurance that we will achieve these milestones.Our future working capital and capital requirements will depend upon numerousfactors, including, but not limited to:

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

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

·       our corporate partnersfulfilling their obligations to us;

·       timing and cost of seekingand obtaining additional regulatory approvals;

·       level of resources that wedevote to the development of marketing and field operations capabilities;

·       costs involved in filing,prosecuting and enforcing patent claims; and legal costs associated with theoutcome of outstanding legal proceedings and investigations;

·       status of competition; and

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

Thetable below presents our contractual obligations and commercial commitments asof September 30, 2005: (in thousands)

| ** **                     | ** ** | ** ** | ** ** | **Payments due by Year** | ** ** |
|--------------------------------|------------|------------|------------|-----------------------------------------|------------|
| ** **                     | ** ** | **Total**  | ** ** | **2005**                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** |
| Long-term debt.                |       | $          | 600,000    |                                    | $          | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest on  long-term debt    |       | 156,750    |       | 5,156                                   |       | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 118,594 |   |
| Operating leases  obligations. |       | 72,001     |       | 1,035                                   |       | 5,215 |   | 5,304 |   | 4,146 |   | 4,185 |   | 52,116 |   |
| Purchase  obligations.         |       | 4,487      |       | 4,487                                   |       | — |   | — |   | — |   | — |   | — |   |
| Contract services  obligations |       | 16,380     |       | 5,040                                   |       | 3,780 |   | 1,620 |   | 1,350 |   | 1,620 |   | 2,970 |   |
| Construction  obligations      |       | 9,525      |       | 9,525                                   |       | — |   | — |   | — |   | — |   | — |   |
| Total                          |       | $          | 859,143    |                                    | $          | 25,243 |   | $ | 17,245 |   | $ | 15,174 |   | $ | 13,746 |   | $ | 14,055 |   | $ | 773,680 |   |

 

**OFF-BALANCE SHEET ARRANGEMENTS**

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

**Item 3.****                        Quantitativeand Qualitative Disclosures About Market Risk**

Our holdings of financial instruments comprise a mixof U.S. dollar denominated securities that may include U.S. corporate debt,foreign corporate debt, U.S. government debt, foreign government debt, agencydebt and commercial paper. All such instruments are classified as securitiesavailable for sale. Generally, we do not invest in portfolio equity securities,commodities, foreign exchange contracts or use financial derivatives fortrading purposes. Our debt security portfolio represents funds held temporarilypending use in our business and operations. We manage these funds accordingly.We seek reasonable assuredness of the safety of principal and market liquidityby investing in investment grade fixed income 

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securities while at thesame time seeking to achieve a favorable rate of return. Our market riskexposure consists principally of exposure to changes in interest rates. Ourholdings are also exposed to the risks of changes in the credit quality ofissuers. We invest in securities that have a range of maturity dates.

Thetable below presents the principal amounts and related weighted averageinterest rates by year of maturity for our investment portfolio as of September 30,2005: (in thousands, except interest rates)

| ** **            | ** ** | **2005** | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and  Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|-----------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|-----------------|------------|
| Fixed Rate            |       | $        | 15,138     |     | $          | 160,004  |       | $        | 202,400    |     | $          | 100,000                       |       | $         | 55,000     |            |       | $ | 20,000 |   |   | $ | 552,542 |   | $ | 544,891 |   |
| Average Interest Rate |       | 2.25     | %          | 3.00     | %          | 3.49     | %          | 3.86     | %          | 4.33     | %          |                          | 4.54       | %         |       | 3.50            | %          |   |   |
| Variable Rate(1)      |       | 194,315  |       | 20,150   |       | 10,000   |       | 1,804    |       | —   |       |                          | 11,859     |      |       | 238,128         |       | 237,969 |   |
| Average Interest Rate |       | 3.76     | %          | 3.96     | %          | 4.00     | %          | 4.24     | %          | —   |       |                          | 4.05       | %         |       | 3.81            | %          |   |   |
|                  |       | $        | 209,453    |     | $          | 180,154  |       | $        | 212,400    |     | $          | 101,804                       |       | $         | 55,000     |            |       | $ | 31,859 |   |   | $ | 790,670 |   | $ | 782,860 |   |

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

Our outstanding 13/8% fixed rate convertible seniornotes in the principal amount of $600,000,000 due May 15, 2024 areconvertible into our common stock at a conversion price of $94.69 per share,subject to certain restrictions as outlined in the indenture agreement. Thefair value of fixed interest rate instruments is affected by changes ininterest rates and in the case of the convertible notes by changes in the priceof our common stock as well. The fair value of the convertible senior notes wasapproximately $500,250,000 at September 30, 2005.

**Item 4.****                     Controlsand Procedures**

*Disclosure Controlsand Procedures*

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

*Changes In InternalControl Over Financial Reporting*

There has been no change in our internal control overfinancial reporting during the three months ended September 30, 2005 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.****                                                    Litigation*

**1.**                                                     FederalSecurities Actions

As previously reported,beginning in January 2002, a number of complaints asserting claims underthe federal securities laws against the Company and certain of the Company’sdirectors and officers were filed in the U.S. District Court for the SouthernDistrict of New York. Those actions were consolidated under the caption Irvinev. ImClone Systems Incorporated, et al., No. 02 Civ. 0109 (RO). In thecorrected consolidated amended complaint plaintiffs asserted claims against theCompany, its former President and Chief Executive Officer, Dr. Samuel D.Waksal, its former Chief Scientific Officer and then-President and ChiefExecutive Officer, Dr. Harlan W. Waksal, and several of the Company’sother present or former officers and directors, for securities fraud undersections 10(b) and 20(a) of the Securities Exchange Act of 1934 andSecurities and Exchange Commission Rule 10b-5, on behalf of apurported class of persons who purchased the Company’s publicly tradedsecurities between March 27, 2001 and January 25, 2002. The complaintalso asserted claims against Dr. Samuel D. Waksal under section 20Aof the Exchange Act on behalf of a separate purported sub-class of purchasersof the Company’s securities between December 27, 2001 and December 28,2001. The complaint generally alleged that various public statements made by oron behalf of the Company or the other defendants during 2001 and early 2002regarding the prospects for FDA approval of ERBITUX® were false or misleadingwhen made, that the individual defendants were allegedly aware of materialnon-public information regarding the actual prospects for ERBITUX at the timethat they engaged in transactions in the Company’s common stock and thatmembers of the purported stockholder class suffered damages when the marketprice of the Company’s common stock declined following disclosure of theinformation that allegedly had not been previously disclosed. The complaintsought to proceed on behalf of the alleged classes described above, soughtmonetary damages in an unspecified amount and sought recovery of plaintiffs’costs and attorneys’ fees. On January 24, 2005, the Company announced thatit had reached an agreement in principle to settle the consolidated classaction for a cash payment of $75 million, a portion of which would be paidby the Company’s insurers. The parties signed a definitive stipulation ofsettlement as of March 9, 2005. As provided for under the stipulation ofsettlement, on March 11, 2005, the Company paid $50 million into an escrowaccount, subject to Court approval of the proposed settlement. On July 29,2005 the Court approved the proposed settlement. On August 5, 2005, theCompany paid the remaining $25 million into the escrow account, with such fundsto be held and distributed pursuant to the terms of the settlement documents.As of September 30, 2005, the Company had received from its insurers $20.5million with respect to these matters, and does not anticipate receiving anyfurther such amounts. The foregoing $20.5 million includes $8.75 million, lessattorneys fees of $875,000, that was paid to the Company under the derivativesettlement discussed below.

**2.**                                                     DerivativeActions

As previously reported,beginning on January 13, 2002, and continuing thereafter, nine separatepurported shareholder derivative actions were filed against members of theCompany’s board of directors, certain of the Company’s present and formerofficers, and the Company, as nominal defendant, advancing claims based onallegations similar to the allegations in the federal securities class actioncomplaints. Four of these derivative cases were filed in the Delaware Court ofChancery and have been consolidated in that court under the caption In reImClone Systems Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC.Three of these derivative actions were filed in New York State Supreme Court inManhattan. All of these state court actions have been stayed in deference tothe proceedings in the U.S. District Court for the Southern District of NewYork, which have been consolidated under the caption In 

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reImClone Systems, Inc. Shareholder Derivative Litigation, Master File No. 02CV 163 (RO). A supplemental verified consolidated amended derivative complaintin these consolidated federal actions was filed on August 8, 2003. Itasserted, purportedly on behalf of the Company, claims including breach offiduciary duty by certain current and former members of the Company’s board ofdirectors, among others, based on allegations including that they failed toensure that the Company’s disclosures relating to the regulatory and marketingprospects for ERBITUX were not misleading and that they failed to maintainadequate controls and to exercise due care with regard to the Company’s ERBITUXapplication to the FDA. On January 9, 2004, the Company filed a motion todismiss the complaint due to plaintiffs’ failure to make a pre-suit demand onthe Company’s board of directors to institute suit or to allege grounds forconcluding that such a demand would have been futile. The individual defendantsfiled motions on the same date, both joining in the Company’s motion andseeking to dismiss the complaint for failure to state a claim. On January 24,2005, the Company announced that it had reached an agreement in principle tosettle the consolidated derivative action. The parties entered into adefinitive stipulation of settlement on March 14, 2005, which was subjectto Court approval. On July 29, 2005, the Court approved the proposedsettlement. Thereafter, the Company was paid $8.75 million by itsinsurers, which the Company has contributed toward the settlement of the Irvinesecurities class action described above after deducting $875,000 for Court awardedplaintiffs’ attorney’s fees and expenses.

***B.****                                                    GovernmentInquiries and Investigations*

As previously reported, the Company received subpoenasand requests for information in connection with an investigation by the SECrelating to the circumstances surrounding the disclosure of the FDA “refusal tofile” letter dated December 28, 2001, and trading in the Company’ssecurities by certain ImClone Systems insiders in 2001. The Company alsoreceived subpoenas and requests for information pertaining to document retentionissues in 2001 and 2002, and to certain communications regarding ERBITUX in2000. On June 19, 2002, the Company received a written “Wells Notice” fromthe staff of the SEC, indicating that the staff of the SEC is consideringrecommending that the SEC bring an action against the Company relating to theCompany’s disclosures immediately following the receipt of a “refusal to file”letter from the FDA on December 28, 2001 for the Company’s BLA forERBITUX. The Company filed a Wells submission on July 12, 2002 in responseto the staff’s Wells Notice. There have been no recent developments inconnection with this SEC investigation.

In January 2003, New York State notified theCompany that the Company was liable for the New York State and City incometaxes that were not withheld because one or more the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payNew York State and City income taxes for those years. On March 13,2003, the Company entered into a closing agreement with New York State,paying $4,500,000 to settle the matter. The Company believes that substantiallyall of the underpayment of New York State and City income tax identified byNew York State is attributable to the exercise of non-qualified stockoptions by the Company’s former President and Chief Executive Officer, Dr. SamuelD. Waksal. At the same time, the Company informed the IRS, the SEC and theUnited States Attorney’s Office, responsible for the prosecution of Dr. SamuelD. Waksal, of this issue. In order to confirm whether the Company’s liabilityin this regard was limited to Dr. Samuel D. Waksal’s failure to pay incometaxes, the Company contacted current and former officers and employees who hadexercised non-qualified stock options to confirm that those individuals hadproperly reported and paid their personal income tax liabilities for the years1999 and 2000 in which they exercised options, which would reduce or eliminatethe Company’s potential liability for failure to withhold income taxes on theexercise of those options. In the course of doing so, the Company became awareof another potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees,including the Company’s former President and Chief Executive Officer, Samuel D.Waksal, the Company’s former General Counsel, John B. Landes, the Company’sformer Chief Scientific Officer, 

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Harlan W. Waksal, and theCompany’s former director and Chairman of the Board, Robert F. Goldhammer.Again, the Company promptly informed the IRS, the SEC and the United StatesAttorney’s Office of this issue. The Company also informed New York State ofthis issue. On June 17, 2003, New York State notified the Company thatbased on this issue, they were continuing a previously conducted audit and wereevaluating the terms of the closing agreement to determine whether it should bere-opened. On March 31, 2004, the Company entered into a new closingagreement pursuant to which the Company paid New York State an additional$1,000,000 in full satisfaction of all the deficiencies and determinations ofwithholding taxes for the years 1999-2001. Therefore, the Company haseliminated the liability of $2,815,000 primarily attributable to New York Statewithholding taxes on stock options and warrants exercised by Dr. Samuel D.Waksal and has recognized a benefit of $1,815,000 as a recovery in theConsolidated Statements of Operations in the first quarter of 2004.

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

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

The Company has not recognized withholding taxliabilities in respect of exercises of certain warrants by Robert F.Goldhammer, one of the four former officers or directors to whom warrants wereissued and previously treated as non-compensatory warrants. Based on theCompany’s investigation, it believes that, although such warrants werecompensatory, such warrants were received by Mr. Goldhammer in connectionwith the performance of services by him in his capacity as a director, ratherthan as an employee, and, as such, are not subject to tax withholdingrequirements. In addition, in 1999, Mr. Goldhammer erroneously received aportion of a stock option grant in the form of incentive stock options, whichunder federal law may only be granted to employees. There can be no assurance,however, that the taxing authorities will agree with the Company’s position andwill not assert that the Company is liable for the failure to withhold incomeand employment taxes with respect to the exercise of such warrants and anystock options by Mr. Goldhammer. If the Company became liable for thefailure to withhold taxes on the exercise of such warrants and any stockoptions by Mr. Goldhammer, the aggregate potential liability, exclusive ofany interest or penalties, would be approximately $8,300,000.

The Company has notrecognized accruals for penalties and interest that may be imposed with respectto the withholding tax issues previously described and other relatedcontingencies, including the period covered by the statute of limitations andthe Company’s determination of certain exercise dates, because it does notbelieve that losses from such contingencies are probable, or in the event thatany taxing authority makes a claim for penalties or interest, the Companybelieves that it will be able to settle the total amount asserted (includingany liability for taxes) for an amount not in excess of the liability for taxesalready accrued with respect to the relevant withholding tax issue. Withrespect to the statute of limitations and the Company’s determination ofcertain exercise dates, while the Company does not believe a loss is probable,there is a potential additional liability with respect to these issues that maybe asserted by a taxing authority. If taxing authorities assert such issues andprevail related to these withholding tax issues and other relatedcontingencies, including penalties, the liability that could be imposed bytaxing authorities would be substantial. The potential interest on thewithholding tax liabilities recorded on the Consolidated Balance Sheets couldbe up to a maximum amount of approximately $9,100,000 at September 30,2005. Potential additional withholding tax liability on other relatedcontingencies amounts to approximately $8,000,000, exclusive of any interest orpenalties, and excluding the amount potentially attributable to Mr. Goldhammernoted above.

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

As previously reported, on August 14, 2002, afterthe federal grand jury indictment of Dr. Samuel D. Waksal had beenissued but before Dr. Samuel D. Waksal’s guilty plea to certain counts ofthat indictment, the Company filed an action in New York State Supreme Courtseeking recovery of certain compensation, including advancement of certaindefense costs, that the Company had paid to or on behalf of Dr. Samuel D.Waksal and cancellation of certain stock options. That action was styledImClone Systems Incorporated v. Samuel D. Waksal, Index No. 02/602996.On July 25, 2003, Dr. Samuel D. Waksal filed a Motion to Compel Arbitrationseeking to have all claims in connection with the Company’s action against himresolved in arbitration. By order dated September 19, 2003, the Courtgranted Dr. Samuel D. Waksal’s motion and the action was stayedpending arbitration. On September 25, 2003, Dr. Samuel D. Waksalsubmitted a Demand for Arbitration with the American Arbitration Association(the “AAA”), by which Dr. Samuel D. Waksal asserts claims to enforce theterms of his separation agreement, including provisions relating to advancementof legal fees, expenses, interest and indemnification, for which Dr. Samuel D.Waksal claims unspecified damages of at least $10 million. The Demand forArbitration also seeks to resolve the claims that the Company asserted in theNew York State Supreme Court action. On November 7, 2003, the Companyfiled an Answer and Counterclaims by which the Company denied Dr. Samuel D.Waksal’s entitlement to advancement of legal fees, expenses andindemnification, and asserted claims seeking recovery of certain compensation,including stock options, cash payments and advancement of certain defense coststhat the Company had paid to or on behalf of Dr. Samuel D. Waksal. Inresponse, on December 15, 2003, Dr. Samuel D. Waksal filed aReply to Counterclaims.

As previously reported, on March 10, 2004, theCompany commenced a second action against Dr. Samuel D. Waksal in the NewYork State Supreme Court. That action is styled ImClone Systems Incorporated v.Samuel D. Waksal, Index No. 04/600643. By this action, the Company seeksthe return of more than $21 million that the Company paid to Dr. SamuelD. Waksal, as proceeds from stock option exercises, which the Company allegeshe was expected to pay over to federal, state and local tax authorities insatisfaction of his tax obligations arising from certain exercises between 1999and 2001 of warrants and non-qualified stock options. Specifically, by thisaction, the Company seeks to recover: (a) $4.5 million that theCompany paid to the State of New York in respect of exercises of non-qualifiedstock options and certain warrants in 2000; (b) at least$16.6 million that the Company paid to Samuel D. Waksal in the form ofImClone common stock, in lieu of withholding federal income taxes fromexercises of non-qualified stock options and certain warrants in 2000; and (c) approximately$1.1 million that the Company paid in the form of ImClone common stock toSamuel D. Waksal and his beneficiaries, in lieu of withholding federal, stateand local income taxes from certain warrant exercises in 1999-2001. Thecomplaint asserts claims for unjust enrichment, common law indemnification,moneys had and received and constructive trust. On June 18, 2004, Dr. SamuelD. Waksal filed an Answer to the Company’s Complaint.

The Company and Dr. SamuelD. Waksal have entered into an agreement in principle to settle the foregoingactions, providing for, among other things, judgments in both actions to be obtained in the Company’s favor. Thesettlement would include the payment of director and officer legal fee expenseindemnification by the Company, for which the Company recorded a reserve ofapproximately $1.9 million in the third quarter of 2005.

***D.***                                                   *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 actionalleges and seeks that three individuals associated with Yeda should also benamed as co-inventors on U.S. Patent No. 6,217,866. On June 7, 2005,Yeda amended their U.S. complaint to seek sole inventorship of the subjectpatent. On November 4, 2005, the Court denied the Company’s motion forsummary judgment with respect to this 

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matter, as filed with theCourt on June 24, 2005. The Company is vigorously defending against theclaims asserted in this action. The Company is unable to predict the outcome ofthis action at the present time.

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

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen. The Company is vigorouslydefending against claims asserted in this action. Fact discovery is ongoing.The Company is unable to predict the outcome of this action at the presenttime.

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

As previously disclosed,the Company is developing a fully human monoclonal antibody, referred to as IMC-11F8,which it intends to commercialize outside the United States and Canada. TheCompany believes it has the right to do so under its existing development andlicense agreement with Merck KGaA. However, Merck KGaA has advised the Companythat it believes that IMC-11F8 could be covered under the development andlicense agreement with Merck KGaA and that it could therefore have theexclusive rights to market IMC-11F8 outside the United States and Canadaand co-exclusive development rights in Japan, for which it would pay the sameroyalty as it pays for ERBITUX. See “Corporate Collaborations—Collaborationswith Merck KGaA” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.The Company believes that IMC-11F8 is not covered under the Merck KGaAdevelopment and license agreement. In agreement with Merck KGaA, the Companysubmitted this dispute to binding arbitration through an expedited processoutside of the provisions of the development and license agreement. Ifsuccessful in the arbitration, Merck KGaA averred that it is entitled tocertain unspecified damages under the development and license agreement. MerckKGaA has subsequently taken the position that the expedited arbitrationprovision is no longer valid and the Company has sued Merck KGaA in federalcourt in the Southern District of New York to either enforce the arbitrationprovisions 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. While the Company intends to vigorously defend itsposition as it relates to IMC-11F8 in arbitration, in federal court orany other form of dispute resolution, there can be no assurance that itsposition will prevail, and it is unable at this time to predict the outcome ofthese proceedings. No reserve has been established in the financial statementsfor these proceedings because the Company does not believe that such a reserveis required to be established at this time under Statement of FinancialAccounting Standards No. 5.

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

Not applicable

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

Not applicable

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

Not applicable

**Item 5.****                        *Other Information***

Although not required by the SEC’s rules andregulations to be disclosed in a current report on Form 8-K, Section 11of the Company’s Code of Business Conduct and Ethics (the “Code”) requires theCompany to disclose in this Quarterly Report on Form 10-Q that, on September 16,2005, the Board of Directors of the Company approved a limited waiver of theconflict of interest provisions of the Code to allow Mr. Ronald Martell,Senior Vice President, Commercial Operations of the Company, to join the Boardof Directors of Bioaccelerate Holdings, Inc., a pharmaceutical developmentorganization, while continuing to perform his current duties at the Company.

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**Item 6.**                        Exhibits

| Exhibit   No. | ** ** | **Description**                                                                                                                                                                                        | ** ** | **Incorporation   by Reference** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|
| 3.1           |       | Certificate  of Incorporation, as amended through December 31, 1998                                                                                                                               |       | D (3.1)                          |
| 3.2           |       | Amendment  dated June 4, 1999 to the Company’s Certificate of Incorporation, as  amended                                                                                                     |       | H (3.1A)                         |
| 3.3           |       | Amendment  dated June 12, 2000 to the Company’s Certificate of Incorporation, as  amended                                                                                                    |       | K (3.1A)                         |
| 3.4           |       | Amendment  dated August 9, 2002 to the Company’s Certificate of Incorporation, as  amended                                                                                                   |       | Q (3.1C)                         |
| 3.5           |       | Amended  and Restated By-Laws of the Company                                                                                                                                                           |       | S (3.2)                          |
| 4.1           |       | Rights  Agreement dated as of February 15, 2002 between the Company and  EquiServe Trust Company, N.A., as Rights Agent                                                                           |       | M (99.2)                         |
| 4.2           |       | Stockholder  Agreement, dated as of September 19, 2001, among Bristol-Myers Squibb  Company, Bristol-Myers Squibb Biologics Company and the Company                                               |       | L (99.2D2)                       |
| 4.3           |       | Indenture  dated as of May 7, 2004 by and between the Company and The Bank of New  York, as Trustee and Form of 13/8% Convertible Notes Due 2024                                             |       | V(4.5)                           |
| 4.4           |       | Registration  Rights Agreement dated as of May 7, 2004 by and between the Company, as  Issuer, and Morgan Stanley & Co., Incorporated and UBS Securities  LLC, as the Initial Purchasers |       | V(4.6)                           |
| 10.1          |       | Company’s  1986 Employee Incentive Stock Option Plan, including form of Incentive Stock  Option Agreement                                                                                         |       | A (10.1)                         |
| 10.2          |       | Company’s  1986 Non-qualified Stock Option Plan, including form of Non-qualified Stock  Option Agreement                                                                                          |       | A (10.2)                         |
| 10.3          |       | 1996  Incentive Stock Option Plan, as amended                                                                                                                                                          |       | O (99.1)                         |
| 10.4          |       | 1996  Non-Qualified Stock Option Plan, as amended                                                                                                                                                      |       | O (99.2)                         |
| 10.5          |       | ImClone  Systems Incorporated 1998 Non-Qualified Stock Option Plan, as amended                                                                                                                         |       | O (99.2)                         |
| 10.6          |       | ImClone  Systems Incorporated 2002 Stock Option Plan                                                                                                                                                   |       | Q (99.8)                         |
| 10.7          |       | ImClone  Systems Incorporated 1998 Employee Stock Purchase Plan                                                                                                                                        |       | I (99.4)                         |
| 10.8          |       | Option  Agreement, dated as of September 1, 1998, between the Company and Ron  Martell                                                                                                            |       | F (99.3)                         |
| 10.9          |       | Option  Agreement, dated as of January 4, 1999, between the Company and S.  Joseph Tarnowski                                                                                                      |       | J (99.4)                         |
| 10.10         |       | License  Agreement between the Company and the Regents of the University of California  dated April 9, 1993                                                                                       |       | B (10.48)                        |
| 10.11         |       | Collaboration  and License Agreement between the Company and the Cancer Research Campaign  Technology, Ltd., signed April 4, 1994, with an effective date of  April 1, 1994                  |       | B (10.50)                        |
| 10.12         |       | License  Agreement between the Company and Rhone-Poulenc Rorer dated June 13,  1994                                                                                                               |       | C (10.56)                        |
| 10.13         |       | Development  and License Agreement between the Company and Merck KGaA dated  December 14, 1998                                                                                                    |       | E (10.70)                        |
| 10.14         |       | Lease  dated as of December 15, 1998 for the Company’s premises at 180 Varick  Street, New York, New York                                                                                    |       | G (10.69)                        |
| 10.15         |       | Amendment  dated March 2, 1999 to Development and License Agreement between the  Company and Merck KGaA                                                                                           |       | G (10.71)                        |
| 10.16         |       | Acquisition  Agreement dated as of September 19, 2001, among the Company,  Bristol-Myers Squibb Company and Bristol-Myers Squibb Biologics Company                                                |       | L(99.D1)                         |

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| 10.17  |   | Development,  Promotion, Distribution and Supply Agreement, dated as of September 19,  2001, among the Company, Bristol-Myers Squibb Company and E.R.  Squibb & Sons, L.L.C.                                                                                                                                  |   | L (99.D3)  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|
| 10.20  |   | Employment  Agreement, dated as of March 19, 2004, between the Company and Daniel S.  Lynch                                                                                                                                                                                                                            |   | U (10.1)   |
| 10.21  |   | Agreement of  Sublease dated October 5, 2001, by and between 325 Spring Street LLC and  the Company                                                                                                                                                                                                                    |   | O (10.86)  |
| 10.22  |   | Promissory Note  in the principal amount of $10,000,000, dated October 5, 2001, executed  by 325 Spring Street LLC in favor of the Company                                                                                                                                                                             |   | O(10.86.1) |
| 10.23  |   | Amendment  No. 1 to Development, Promotion, Distribution and Supply Agreement,  dated as of March 5, 2002, among the Company, Bristol-Myers Squibb  Company and E.R. Squibb & Sons, L.L.C.                                                                                                               |   | N (99.2)   |
| 10.24  |   | Amendment, dated  as of August 16, 2001 to the Development and License Agreement between  the Company and Merck KGaA                                                                                                                                                                                                   |   | P (10.88)  |
| 10.25  |   | Agreement of Sale  and Purchase between 4/33  Building Associates, LP and ImClone Systems Incorporated pertaining to 33  Chubb Way, Branchburg, New Jersey executed as of March 1, 2002                                                                                                                                |   | Q (10.92)  |
| 10.26  |   | Target Price  Contract, dated as of July 15, 2002, between ImClone Systems  Incorporated and Kvaerner Process, a division of Kvaerner U.S. Inc., for the  Architectural, Engineering, Procurement Assistance, Construction Management  and Validation of a Commercial Manufacturing Project in Branchburg, New  Jersey |   | R(10.930)  |
| 10.27  |   | Modifications  Agreement dated as of December 15, 2000 by an between 180 Varick Street  Corporation and the Company                                                                                                                                                                                                    |   | S (10.94)  |
| 10.28  |   | Amendment number  4 to the Company’s lease at 180 Varick Street dated August 13, 2004 by  and between 180 Varick Street Corporation and the Company                                                                                                                                                               |   | V (10.28)  |
| 10.29  |   | ImClone Systems  Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                         |   | T (A.C)    |
| 10.30  |   | Supply Agreement  between the Company and Lonza Biologics PLC dated March 17, 2005                                                                                                                                                                                                                                     |   | Y (10.30)  |
| 10.31  |   | ImClone Systems  Incorporated Senior Executive Severance Plan                                                                                                                                                                                                                                                               |   | W (10.29)  |
| 10.32  |   | ImClone Systems  Incorporated Change in Control Plan                                                                                                                                                                                                                                                                        |   | W (10.30)  |
| 10.33  |   | Letter Agreement,  effective as of April 5, 2005, by and between S. Joseph Tarnowski and  ImClone Systems Incorporated                                                                                                                                                                                                 |   | X (10.1)   |
| 10.34  |   | Terms of  inducement stock option grants to Dr. Philip Frost and Dr. Eric  Rowinsky on March 1, 2005 and February 21, 2005, respectively, as  approved by the Compensation Committee of Board of Directors                                                                                              |   | Z          |
| 10.35* |   | Collaboration and  License Agreement between the Company and UCB S.A. dated August 15,  2005. Confidential Treatment has been requested for a portion of this Exhibit                                                                                                                                                  |   |       |
| 10.36  |   | Approval by Board  of Directors of certain compensation related matters and Company stock  repurchase program                                                                                                                                                                                                               |   | AA         |
| 31.1*  |   | Certification of  the Company’s Chief Executive Officer pursuant to Section 302 of the  Sarbanes- Oxley Act of 2002                                                                                                                                                                                               |   |       |
| 31.2*  |   | Certification of  the Company’s Chief Financial Officer pursuant to Section 302 of the  Sarbanes- Oxley Act of 2002                                                                                                                                                                                               |   |       |
| 32.1*  |   | Certification of  the Company’s Chief Executive Officer and Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                    |   |       |

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*                    Filedherewith.

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

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

(C)        Previously filed with theCommission; incorporated by reference to the Company’s Annual Report on Form 10-K,File No. 0-19612, for the fiscal year ended December 31, 1994.

(D)       Previously filed with theCommission; incorporated by reference to the Company’s Quarterly Report on Form 10-Q,File No. 0-19612, for the quarter ended June 30, 1997.

(E)        Previously filed with theCommission; incorporated by reference to the Company’s Registration Statementon Form S-3, File No. 333-67335. Confidential treatmentwas granted for a portion of this Exhibit.

(F)         Previously filed with theCommission; incorporated by reference to the Company’s Registration Statementon Form S-8, File No. 333-64827.

(G)      Previously filed with theCommission; incorporated by reference to the Company’s Annual Report on Form 10-K,File No. 0-19612, for the fiscal year ended December 31, 1998.

(H)      Previously filed with theCommission; incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 1999.

(I)            Previously filed withthe Commission; incorporated by reference to the Company’s Annual Report on Form 10-Kfor the year ended December 31, 1999.

(J)           Previously filed withthe Commission; incorporated by reference to the Company’s RegistrationStatement on Form S-8; File No. 333-30172.

(K)       Previously filed with theCommission; incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2000.

(L)         Previously filed with theCommission; incorporated by reference to the Company’s Schedule 14D-9filed on September 28, 2001.

(M)     Previously filed with theCommission; incorporated by reference to the Company’s Current Report on Form 8-Kdated February 19, 2002.

(N)       Previously filed with theCommission; incorporated by reference to the Company’s Current Report on Form 8-Kdated March 6, 2002.

(O)      Previously filed with theCommission; incorporated by reference to the Company’s Annual Report on Form 10-K,for the year ended December 31, 2001.

(P)         Previously filed with theCommission; incorporated by reference to the Company’s Annual Report on Form 10-K,for the year ended December 31, 2001, and Confidential Treatment has beenrequested for a portion of this exhibit.

(Q)      Previously filed with theCommission; incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended June 30, 2002.

(R)       Previously filed with theCommission; incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2002.

(S)          Previously filed withthe Commission; incorporated by reference to the Company’s Annual Report on Form 10-K,for the year ended December 31, 2002.

56

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(T)        Previously filed with theCommission; incorporated by reference to the Company’s Proxy Statement for its2003 Annual Meeting of Shareholders, filed August 21, 2003, asappendix C.

(U)      Previously filed with theCommission; incorporated by reference to the Company’s Current Report on Form 8-Kdated March 19, 2004.

(V)       Previously filed with theCommission; incorporated by reference to the Company’s Quarterly Report on Form 10-Qfor the quarter ended September 30, 2004

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

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

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

(Z)        Previously filed with theCommission; incorporated by reference to the Company’s Current Report on Form 8-Kdated July 15, 2005.

(AA)Previously filedwith the Commission; incorporated by reference to the Company’s Current Reporton Form 8-K dated September 16, 2005.

57

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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/  DANIEL S. LYNCH |
|                        |                                       | Daniel S. Lynch |
|                        |                                       | *Chief  Executive Officer* |
| Date: November 8, 2005 |                                       |   |
|                        |                                       |   |
|                        | By:                                        | /s/  MICHAEL J. HOWERTON |
|                        |                                       | Michael J.  Howerton |
|                        |                                       | *Chief  Financial Officer* |
| Date: November 8, 2005 |                                       |   |

 

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