**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**Form 10-Q**

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

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

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

**Forthe Transition period from                    to                    **

**Commissionfile number 0-19612**

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**ImClone Systems Incorporated**

(Exact name of registrantas specified in its charter)

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

**(212)645-1405**

(Registrant’s telephonenumber, including area code)

**Not Applicable**

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

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

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

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

 

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

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

| Class                          | ** ** | **Outstanding as of August 1, 2006** |
|--------------------------------|------------|-------------------------------------------|
| Common Stock, par  value $.001 |       | (84,217,766)  Shares                      |

 

 

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**IMCLONE SYSTEMSINCORPORATED**

**INDEX**
| PART I—FINANCIAL  INFORMATION |                                                                                                                              |   |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------|--------|
| Item 1.                                 | Financial Statements                                                                                                              |   | 1 |
|                                    | Unaudited Consolidated Balance  Sheets—June 30, 2006 and December 31, 2005                                         |   | 1 |
|                                    | Unaudited Consolidated  Statements of Income—Three months and Six months ended June 30,  2006 and 2005        |   | 2 |
|                                    | Unaudited Consolidated  Statement of Stockholders’ Equity and Comprehensive Income—Six months ended  June 30, 2006 |   | 3 |
|                                    | Unaudited Consolidated  Statements of Cash Flows—Six months ended June 30, 2006 and 2005                           |   | 4 |
|                                    | Notes to Unaudited  Consolidated Financial Statements                                                                             |   | 5 |
| Item 2.                                 | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                       |   | 33 |
| Item 3.                                 | Quantitative and Qualitative  Disclosures About Market Risk                                                                       |   | 50 |
| Item 4.                                 | Controls and Procedures                                                                                                           |   | 51 |
| PART II—OTHER  INFORMATION    |                                                                                                                              |   |
| Item 1.                                 | Legal Proceedings                                                                                                                 |   | 52 |
| Item 1A.                                | Risk Factors                                                                                                                      |   | 54 |
| Item 2.                                 | Unregistered Sales of Equity  Securities and Uses of Proceeds                                                                     |   | 55 |
| Item 3.                                 | Defaults upon Senior  Securities                                                                                                  |   | 55 |
| Item 4.                                 | Submission of Matters to a  Vote of Security Holders                                                                              |   | 55 |
| Item 5.                                 | Other Information                                                                                                                 |   | 55 |
| Item 6.                                 | Exhibits                                                                                                                          |   | 55 |
| Signatures                              |                                                                                                                              | 55     |

 

i

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**PART I. FINANCIAL INFORMATION**

**Item1.**                        *Financial Statements*

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

| ** **                                                                                                                                                                                                                                                             | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                                                             | ** ** | ** **              | ** ** |                        |       |   |   |
| Current assets:                                                                                                                                                                                                                                                        |       |                    |       |                        |       |   |   |
| Cash and cash equivalents                                                                                                                                                                                                                                              |       | $                       | 26,095     |                        |       | $ | 3,403 |   |   |
| Securities available for sale                                                                                                                                                                                                                                          |       | 937,684                 |       |                        | 752,973    |   |   |
| Prepaid expenses                                                                                                                                                                                                                                                       |       | 7,549                   |       |                        | 3,766      |   |   |
| Amounts due from corporate partners                                                                                                                                                                                                                                    |       | 90,001                  |       |                        | 59,271     |   |   |
| Inventories (excludes $10,539 at June 30, 2006  classified in Other assets)                                                                                                                                                                                       |       | 66,681                  |       |                        | 81,394     |   |   |
| Deferred income taxes, net                                                                                                                                                                                                                                             |       | 23,316                  |       |                        | —     |   |   |
| Other current assets                                                                                                                                                                                                                                                   |       | 10,167                  |       |                        | 8,311      |   |   |
| Total current assets                                                                                                                                                                                                                                                   |       | 1,161,493               |       |                        | 909,118    |   |   |
| Property, plant and  equipment, net                                                                                                                                                                                                                                    |       | 424,533                 |       |                        | 406,595    |   |   |
| Deferred financing costs,  net                                                                                                                                                                                                                                         |       | 10,675                  |       |                        | 12,531     |   |   |
| Deferred income taxes,  net                                                                                                                                                                                                                                            |       | 106,128                 |       |                        | —     |   |   |
| Other assets                                                                                                                                                                                                                                                           |       | 25,044                  |       |                        | 15,171     |   |   |
| Total assets                                                                                                                                                                                                                                                           |       | $                       | 1,727,873  |                        |       | $ | 1,343,415 |   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                          | ** ** | ** **              | ** ** |                        |       |   |   |
| Current  liabilities:                                                                                                                                                                                                                                                  |       |                    |       |                        |       |   |   |
| Accounts payable (including $2,624 and $4,610 due  Bristol-Myers Squibb Company (“BMS”) at June 30, 2006 and  December 31, 2005, respectively)                                                                                                |       | $                       | 32,461     |                        |       | $ | 35,530 |   |   |
| Accrued expenses (including $19,287 and $11,427 due  BMS at June 30, 2006 and December 31, 2005, respectively)                                                                                                                                               |       | 76,538                  |       |                        | 60,934     |   |   |
| Withholding tax liability                                                                                                                                                                                                                                              |       | 264                     |       |                        | 32,000     |   |   |
| Current portion of deferred revenue                                                                                                                                                                                                                                    |       | 145,881                 |       |                        | 112,624    |   |   |
| Other current liabilities                                                                                                                                                                                                                                              |       | 1,031                   |       |                        | 1,031      |   |   |
| Total current liabilities                                                                                                                                                                                                                                              |       | 256,175                 |       |                        | 242,119    |   |   |
| Deferred revenue, less  current portion                                                                                                                                                                                                                                |       | 285,285                 |       |                        | 246,401    |   |   |
| Long-term debt                                                                                                                                                                                                                                                         |       | 600,000                 |       |                        | 600,000    |   |   |
| Share based compensation                                                                                                                                                                                                                                               |       | 868                     |       |                        | —     |   |   |
| Deferred rent, less  current portion                                                                                                                                                                                                                                   |       | 2,831                   |       |                        | 2,491      |   |   |
| Total liabilities                                                                                                                                                                                                                                                      |       | 1,145,159               |       |                        | 1,091,011  |   |   |
| Commitments and  contingencies                                                                                                                                                                                                                                         |       |                    |       |                        |       |   |   |
| Stockholders’  equity:                                                                                                                                                                                                                                            |       |                    |       |                        |       |   |   |
| Preferred stock, $1.00 par value; authorized  4,000,000 shares; reserved 1,200,000 series B participating cumulative  preferred stock, none issued or outstanding                                                                                                 |       | —                  |       |                        | —     |   |   |
| Common stock, $.001 par value; authorized 200,000,000  shares; issued 85,145,933 and 84,412,408 at June 30, 2006 and  December 31, 2005, respectively; outstanding 84,141,259 and 83,407,734  at June 30, 2006 and December 31, 2005, respectively |       | 85                      |       |                        | 84         |   |   |
| Additional paid-in capital                                                                                                                                                                                                                                             |       | 798,581                 |       |                        | 733,069    |   |   |
| Accumulated deficit                                                                                                                                                                                                                                                    |       | (175,659                | )          |                        | (442,459   | ) |   |
| Treasury stock, at cost; 1,004,674 at June 30,  2006 and December 31, 2005, respectively                                                                                                                                                                     |       | (29,149                 | )          |                        | (29,149    | ) |   |
| Accumulated other  comprehensive loss:                                                                                                                                                                                                                                 |       |                    |       |                        |       |   |   |
| Net unrealized loss on securities available for sale                                                                                                                                                                                                                   |       | (11,144                 | )          |                        | (9,141     | ) |   |
| Total stockholders’ equity                                                                                                                                                                                                                                        |       | 582,714                 |       |                        | 252,404    |   |   |
| Total liabilities and stockholders’ equity                                                                                                                                                                                                                        |       | $                       | 1,727,873  |                        |       | $ | 1,343,415 |   |   |

 

See accompanying notes to consolidated financial statements.

1

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**IMCLONE SYSTEMSINCORPORATEDCONSOLIDATED STATEMENTS OFINCOME(in thousands, except per share data)(Unaudited)**

| ** **                                         | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                         | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenues:                                          |       |                                           |       |                                         |       |   |   |   |   |
| Royalty revenue                                    |       | $                                              | 74,614     |                                         | $          | 41,791 |   | $ | 134,884 |   | $ | 78,163 |   |
| License fees and milestone revenue                 |       | 33,456                                         |       | 24,491                                       |       | 177,859 |   | 49,025 |   |
| Manufacturing revenue                              |       | 28,356                                         |       | 7,894                                        |       | 47,705 |   | 18,913 |   |
| Collaborative agreement revenue                    |       | 13,430                                         |       | 18,209                                       |       | 34,539 |   | 32,055 |   |
| Total revenues                                     |       | 149,856                                        |       | 92,385                                       |       | 394,987 |   | 178,156 |   |
| Operating expenses:                                |       |                                           |       |                                         |       |   |   |   |   |
| Research and development                           |       | 27,583                                         |       | 24,433                                       |       | 60,576 |   | 45,606 |   |
| Clinical and regulatory                            |       | 14,929                                         |       | 8,376                                        |       | 30,010 |   | 17,774 |   |
| Marketing, general and administrative              |       | 22,963                                         |       | 16,833                                       |       | 40,964 |   | 34,456 |   |
| Royalty expense                                    |       | 18,414                                         |       | 14,338                                       |       | 38,480 |   | 26,904 |   |
| Cost of manufacturing revenue                      |       | 26,877                                         |       | 1,106                                        |       | 42,279 |   | 1,849 |   |
| Discontinuation of small molecule research program |       | —                                         |       | 6,200                                        |       | — |   | 6,200 |   |
| Total operating expenses                           |       | 110,766                                        |       | 71,286                                       |       | 212,309 |   | 132,789 |   |
| Operating income                                   |       | 39,090                                         |       | 21,099                                       |       | 182,678 |   | 45,367 |   |
| Other:                                             |       |                                           |       |                                         |       |   |   |   |   |
| Interest income                                    |       | (10,222                                        | )          | (6,793                                       | )          | (17,386 | ) | (13,550 | ) |
| Interest expense                                   |       | 1,914                                          |       | 1,687                                        |       | 3,376 |   | 3,496 |   |
| Loss on sales of securities                        |       | —                                         |       | —                                       |       | — |   | 16 |   |
| Other, net                                         |       | (8,308                                         | )          | (5,106                                       | )          | (14,010 | ) | (10,038 | ) |
| Income before income taxes.                        |       | 47,398                                         |       | 26,205                                       |       | 196,688 |   | 55,405 |   |
| Provision (benefit) for income taxes               |       | 10,189                                         |       | 174                                          |       | (70,112 | ) | 554 |   |
| Net income                                         |       | $                                              | 37,209     |                                         | $          | 26,031 |   | $ | 266,800 |   | $ | 54,851 |   |
| Income per common share:                           |       |                                           |       |                                         |       |   |   |   |   |
| Basic                                              |       | $                                              | 0.44       |                                         | $          | 0.31 |   | $ | 3.18 |   | $ | 0.66 |   |
| Diluted                                            |       | $                                              | 0.42       |                                         | $          | 0.30 |   | $ | 2.93 |   | $ | 0.63 |   |
| Shares used in  calculation of income per share    |       |                                           |       |                                         |       |   |   |   |   |
| Basic                                              |       | 84,072                                         |       | 83,616                                       |       | 83,849 |   | 83,448 |   |
| Diluted                                            |       | 92,184                                         |       | 92,074                                       |       | 92,001 |   | 92,362 |   |

 

See accompanying notes to consolidated financial statements.

2

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

| ** **                                                                       | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | **Additional  Paid-in** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|-------------------------|------------|-----------------|------------|--------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                                       | ** ** | **Shares**               | ** ** | **Amount**            | ** ** | **Shares**              | ** ** | **Amount**      | ** ** | **Capital**  | ** ** | **Deficit**                           | ** ** | **Stock**  | ** ** | **Loss** | ** ** | **Total** | ** ** |
| Balance at December 31,  2005                                     |       |                     | —     |                  |       |                    | $          | —          |       |         | 84,412,408 |                                  |       | $          | 84         |   |   |   | $ | 733,069 |   |   |   | $ | (442,459 | ) |   |   | $ | (29,149 | ) |   |   | $ | (9,141 | ) |   | $ | 252,404 |   |
| Options exercised                                                                |       |                     |       |                  |       |                    |       |            |       | 718,470      |       |                                  | 1          |       |       |   | 12,592 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 12,593 |   |
| Issuance of shares  through employee stock purchase plan                         |       |                     |       |                  |       |                    |       |            |       | 15,055       |       |                                  | —     |       |       |   | 460 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 460 |   |
| Share based  compensation expense                                                |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   | 3,965 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 3,965 |   |
| Tax benefit of stock  options                                                    |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   | 48,495 |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 48,495 |   |
| Comprehensive income:                                                            |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net income                                                                       |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   | 266,800 |   |   |   |   |   |   |   |   |   |   | 266,800 |   |
| Other  comprehensive loss:                                                       |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized loss on  marketable securities arising during the  period        |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,003 | ) |   | (2,003 | ) |
| Less:  Reclassification adjustment for realized loss included in net income |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | — |   |   | — |   |
| Total other  comprehensive loss                                                  |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   | (2,003 | ) |   | (2,003 | ) |
| Comprehensive income                                                             |       |                     |       |                  |       |                    |       |            |       |         |       |                                  |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 264,797 |   |
| Balance at  June 30, 2006                                                   |       |                     | —     |                  |       |                    | $          | —          |       |         | 85,145,933 |                                  |       | $          | 85         |   |   |   | $ | 798,581 |   |   |   | $ | (175,659 | ) |   |   | $ | (29,149 | ) |   |   | $ | (11,144 | ) |   | $ | 582,714 |   |

 

See accompanying notes to consolidated financial statements.

3

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

| ** **                                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| Cash flows from operating activities:                                                        |       |                                          |       |   |   |
| Net income                                                                                   |       | $                                             | 266,800    |   | $ | 54,851 |   |
| Adjustments to reconcile  net income to net cash provided by (used in) operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                               |       | 14,573                                        |       | 6,659 |   |
| Amortization of  deferred financing costs                                                    |       | 1,856                                         |       | 1,856 |   |
| Share based  compensation                                                                    |       | 3,965                                         |       | — |   |
| Tax benefit from  share based compensation                                                   |       | (48,495                                       | )          | — |   |
| Loss on disposal  of fixed assets                                                            |       | —                                        |       | 3,880 |   |
| Other                                                                                        |       | —                                        |       | 82 |   |
| Deferred income  taxes                                                                       |       | (129,444                                      | )          | — |   |
| Changes in:                                                                                  |       |                                          |       |   |   |
| Prepaid expenses                                                                             |       | (3,783                                        | )          | (3,670 | ) |
| Amounts due from  corporate partners                                                         |       | (30,730                                       | )          | 18,525 |   |
| Inventories                                                                                  |       | 14,713                                        |       | (25,794 | ) |
| Other current  assets                                                                        |       | (1,856                                        | )          | (827 | ) |
| Other assets                                                                                 |       | (9,934                                        | )          | 981 |   |
| Accounts payable                                                                             |       | (3,069                                        | )          | (2,232 | ) |
| Accrued expenses                                                                             |       | 64,099                                        |       | (17,358 | ) |
| Share based  compensation                                                                    |       | 868                                           |       | — |   |
| Withholding tax  liability                                                                   |       | (31,736                                       | )          | — |   |
| Litigation  settlement                                                                       |       | —                                        |       | (50,025 | ) |
| Deferred rent,  less current portion                                                         |       | 340                                           |       | (1,327 | ) |
| Deferred revenue                                                                             |       | 72,141                                        |       | (50,569 | ) |
| Net cash provided  by (used in) operating activities                                         |       | 180,308                                       |       | (64,968 | ) |
| Cash flows from investing activities:                                                        |       |                                          |       |   |   |
| Acquisitions of  property, plant and equipment                                               |       | (32,450                                       | )          | (52,115 | ) |
| Purchases of  securities available for sale                                                  |       | (741,409                                      | )          | (212,544 | ) |
| Proceeds from sale  of securities available for sale                                         |       | 546,370                                       |       | 190,309 |   |
| Maturities of  securities available for sale                                                 |       | 8,325                                         |       | 52,217 |   |
| Net cash used in  investing activities                                                       |       | (219,164                                      | )          | (22,133 | ) |
| Cash flows from financing activities:                                                        |       |                                          |       |   |   |
| Proceeds from  exercise of stock options                                                     |       | 12,593                                        |       | 11,870 |   |
| Proceeds from  issuance of common stock under the employee stock purchase plan               |       | 460                                           |       | 498 |   |
| Tax benefit from  share based compensation                                                   |       | 48,495                                        |       | — |   |
| Net cash provided  by financing activities                                                   |       | 61,548                                        |       | 12,368 |   |
| Net increase  (decrease) in cash and cash equivalents                                        |       | 22,692                                        |       | (74,733 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 3,403                                         |       | 79,321 |   |
| Cash and cash equivalents  at end of period                                                  |       | $                                             | 26,095     |   | $ | 4,588 |   |
| Supplemental cash flow information:                                                          |       |                                          |       |   |   |
| Cash paid for:                                                                               |       |                                          |       |   |   |
| Interest, net of  amounts capitalized                                                        |       | $                                             | 1,519      |   | $ | 1,639 |   |
| Income taxes                                                                                 |       | $                                             | 2,408      |   | $ | 1,400 |   |
| Non-cash investing and financing activity:                                                   |       |                                          |       |   |   |
| Change in net  unrealized loss in securities available-for-sale                              |       | $                                             | 2,003      |   | $ | 3,188 |   |

 

See accompanying notes to consolidated financial statements.

4

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

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

The accompanyingconsolidated financial statements of ImClone Systems Incorporated (“ImCloneSystems” or the “Company”) as of June 30, 2006 and for the three and sixmonths ended June 30, 2006 and 2005 are unaudited. The accompanyingunaudited consolidated balance sheets, statements of income, statement ofstockholders’ equity and comprehensive income and statements of cash flows havebeen prepared in accordance with U.S. generally accepted accounting principles(“GAAP”) for interim financial information and in conjunction with the rules andregulations of the Securities and Exchange Commission (“SEC”). Accordingly,they do not include all of the disclosures required by GAAP for completefinancial statements. The financial statements reflect all adjustments,consisting only of normal, recurring adjustments, which are in the opinion ofmanagement, necessary for a fair presentation for the interim periods.Management of the Company has made a number of estimates and assumptionsrelating to the reporting of assets and liabilities and related revenue andexpense accounts and the disclosure of contingent assets and liabilities toprepare these consolidated financial statements in conformity with GAAP. Actualresults 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, 2005, 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.

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 is devoted to research and development conductedon its own behalf and through collaborations with corporate partners andacademic 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 separateproduct areas or by location and does not have separately reportable segments.

On January 24, 2006,the Company announced that the Board of Directors had engaged the investmentbank Lazard to conduct, in conjunction with management, a full review of theCompany’s strategic alternatives to maximize shareholder value. Thesealternatives could include a merger, sale or strategic alliance. There can beno assurances, however, that any particular strategic alternative will bepursued or that any transaction will occur, or on what terms.

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. On March 1, 2006, the FDA approved ERBITUX for use incombination with radiation therapy for the treatment of locally or regionallyadvanced squamous cell carcinoma of the head and neck (“SCCHN”) and as a singleagent in recurrent or metastatic SCCHN where prior platinum-based chemotherapyhas failed. Reference full 

5

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

prescribinginformation, available at www.ERBITUX.com, for important safety informationrelating to ERBITUX, including boxed warnings.

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

**Impact of Recent Accounting Pronouncements**

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

**Comprehensive Income**

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

| ** **                                                                  | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                                  |       | $                                              | 37,209     |                                         | $          | 26,031 |   | $ | 266,800 |   | $ | 54,851 |   |
| Other comprehensive  (loss) income:                                         |       |                                           |       |                                         |       |   |   |   |   |
| Unrealized gain  (loss) on marketable securities during the period          |       | (670                                           | )          | 3,896                                        |       | (2,003 | ) | (3,188 | ) |
| Less: Reclassification adjustment for realized loss  included in net income |       | —                                         |       | —                                       |       | — |   | 16 |   |
| Total other comprehensive (loss) income                                     |       | (670                                           | )          | 3,896                                        |       | (2,003 | ) | (3,172 | ) |
| Total  comprehensive income                                                 |       | $                                              | 36,539     |                                         | $          | 29,927 |   | $ | 264,797 |   | $ | 51,679 |   |

 

The tax benefit (expense)on the items included in other comprehensive loss assuming they were recognizedin income would be approximately $126,000 and ($60,000) for the three monthsended June 30, 

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

2006 and2005, respectively, and $299,000 and $32,000 for the six months ended June 30,2006 and 2005, respectively.

**Fair Value of Financial Instruments**

The fair value of theCompany’s 13¤8%convertible senior notes of $600,000,000 was approximately $541,500,000 and$502,500,000 at June 30, 2006 and December 31, 2005, respectively,based on their quoted market price.

**(2)**   Inventories

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

| ** **                  | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials and  supplies |       | $                       | 19,370     |                        |       | $ | 22,664 |   |   |
| Work in process             |       | 48,190                  |       |                        | 49,149     |   |   |
| Finished goods              |       | 9,660                   |       |                        | 9,581      |   |   |
| Total                       |       | $                       | 77,220     |                        |       | $ | 81,394 |   |   |

 

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

During the second quarter of 2006, certainmanufacturing improvements were made to the equipment in the Company’s singleproduct manufacturing facility that requires regulatory action. The Companyplans to file a supplemental biologics license application (“sBLA”) with theFDA in the middle of August 2006, and we expect to be able to distributeERBITUX produced with the improved equipment approximately thirty days after thesubmission date. As of June 30, 2006, there was approximately $16.2million of inventory produced using this equipment.

In June 2006, the Company began producing ERBITUXfor commercial use at its multiple product manufacturing facility (“BB50”),located in Branchburg, New Jersey. The Company expects to file a sBLA with theFDA for approval of BB50 in the first quarter of 2007. Until such time as theCompany receives approval of BB50 from the FDA, the ERBITUX inventory producedin BB50 cannot be used for commercial distribution. Based on management’scurrent expectations, the Company expects that the costs of such inventory willbe fully realizable once the Company obtains approval of BB50. Therefore, in June 2006,the Company capitalized the costs of producing ERBITUX in BB50, which amountedto approximately $10.5 million. This amount is classified in Other assets inthe Company’s Consolidated Balance Sheets as it is not expected to be soldwithin one year. The Company will continue to capitalize the costs of producingERBITUX in BB50 as long as management can conclude that the costs of suchinventory will be fully realizable in the future.

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

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

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

| ** **                                      | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Land                                            |       | $                       | 4,899      |                        |       | $ | 4,899 |   |   |
| Building.                                       |       | 280,205                 |       |                        | 67,597     |   |   |
| Leasehold  improvements                         |       | 13,966                  |       |                        | 13,969     |   |   |
| Machinery and  equipment                        |       | 158,726                 |       |                        | 62,806     |   |   |
| Furniture and  fixtures                         |       | 5,671                   |       |                        | 4,596      |   |   |
| Construction in  progress                       |       | 41,296                  |       |                        | 318,446    |   |   |
| Total Cost                                      |       | 504,763                 |       |                        | 472,313    |   |   |
| Less accumulated  depreciation and amortization |       | (80,230                 | )          |                        | (65,718    | ) |   |
| Property, plant  and equipment, net             |       | $                       | 424,533    |                        |       | $ | 406,595 |   |   |

 

In June 2006, the Company began to use a portionof BB50 for the commercial production of ERBITUX. BB50 is a 250,000 square footmultiple product manufacturing facility located in Branchburg, New Jersey, withcapacity of up to 110,000 liters (production volume). BB50 has the capacity forthree distinct suites capable of producing up to three different productsconcurrently. The Company completed validation and commissioning of Suite 1during the second quarter of 2006, where it is now producing ERBITUX forcommercial distribution. Suite 2 has been fitted with equipment and it isestimated that commissioning and validation of this suite will begin in2007. We expect that Suite 2 will be used for purposes of producing ourpipeline products. At this point, Suite 3 remains vacant until furtherdetermination of its ultimate use. In June 2006, the Company transferred,from construction in progress, the cost associated with BB50 into theappropriate categories, with the exception of certain costs, primarily relatedto the equipment that resides in Suite 2. Such equipment will be put intoservice once the Company commissions and validates such equipment for theeventual manufacturing of our pipeline products. The total cost of constructingBB50 through June 30, 2006 amounted to approximately $330 million,including approximately $34.8 million of costs related to the commissioning andvalidation of Suite 1 and $22.7 million of capitalized interest.

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

**(4)**   WithholdingTax Assets and Liability

On March 13, 2003, the Company initiateddiscussions with the Internal Revenue Service (the “IRS”) relating to federalincome taxes not withheld because one or more of the Company’s employees whoexercised certain non-qualified stock options in 1999 and 2000 failed to payfederal income taxes for those years. Subsequently, the Company became aware ofanother potential income and employment tax withholding liability associatedwith the exercise of certain warrants granted in the early years of the Company’sexistence that were held by certain former officers, directors and employees.After disclosure to 

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

the IRS in 2003, the IRScommenced audits of the Company’s income tax and employment tax returns for theyears 1999-2001. On February 8, 2006, the Company received a draftof the IRS’s report of its preliminary findings which indicated that the IRS,in addition to imposing liability on the Company for taxes not withheld,intended to assert penalties with respect to both the failure to withhold onnon-qualified stock options and the failure to report and withhold on thewarrants described above. On March 14, 2006, the Company reached anagreement in principle with the IRS to resolve the employment tax audit, whichincludes the Company’s agreement to the imposition of an accuracy-relatedpenalty under Section 6662 of the Internal Revenue Code. Under thisagreement, the Company’s liability to the IRS was calculated to beapproximately $32,000,000. The Company had previously recorded a withholdingtax liability of $18,096,000 and a withholding tax asset of $274,000 in itsconsolidated Balance Sheet as of December 31, 2004. Based on the agreementin principle reached with the IRS, the Company eliminated the withholding taxasset of $274,000 and recorded an additional withholding tax liability of$13,904,000, or a total of $32,000,000, in its consolidated Balance Sheet as ofDecember 31, 2005. As a result, the Company recorded in the fourth quarterof 2005 a net withholding tax expense of $14,178,000. On April 19, 2006,the Company signed an agreement with the IRS to resolve the employment taxaudit. Pursuant to such agreement the Company paid $28,655,509 to the IRS on April 21,2006, and on April 28, 2006, the Company paid the IRS $3,080,789consisting of interest.

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

**(5)**   Share-BasedCompensation Plans

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

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

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

***Stock Option Plans***

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

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

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

Combined, the 96 Plans, as amended, the 98 Plan, asamended, and the 02 Plan, as amended, and the Inducement Plan (the “StockOptions Plans”) provide as of June 30, 2006 for the granting of options topurchase up to 34,500,000 shares of common stock to employees, directors,consultants and advisors of the Company. Incentive stock options may notbe granted at a price less than the fair market value of the stock at the dateof grant and may not be granted to non-employees. Options under all theplans, unless earlier terminated, expire ten years from the date of grant.Options granted under these plans generally vest over one-to-four-year periods.

On December 16, 2005,the Company’s Board of Directors approved the acceleration of vesting ofunvested stock options with exercise prices equal to or greater than $33.44 pershare outstanding as of December 16, 2005 that had been previously awardedto Company employees and other eligible participants, including officers andnon-employee directors. Options to purchase approximately 2,805,169 

10

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

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

***Employee Stock Purchase Plan***

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

***Retention Plan***

In January 2006, the Compensation Committee ofthe Board of Directors approved a Retention Plan, effective as of January 1,2006, for performance periods ending December 31, 2007 and****December 31, 2008 (each, a “Performance Period”). ThePlan is intended to reward employees for achieving specified performance goalsover specified performance periods. Specifically, the Compensation Committeeapproved the share performance criteria that will be used to determine cashbonus awards under the Retention Plan, and the terms of the individual awardsto eligible employees under the Retention Plan for each of the two PerformancePeriods. Cash awards under the Retention Plan will depend on the performance ofthe Company’s common stock against specified targets, generally measured bycomparing 

11

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

the Company’s share priceat the beginning of the Performance Period to the Company’s share price at theconclusion of the Performance Period, in each case based on a 30-dayaverage. In particular, at the end of an applicable Performance Period, thepercentage of the cash award earned (if any) and, correspondingly, the amountof the actual award payouts to an employee for such Performance Period will be (i) equalto the employee’s target award opportunity, (ii) greater than the targetaward opportunity (but in no event more than 150% of the target awardopportunity), or (iii) zero, in each case directly corresponding to actualCompany common stock performance at the conclusion of the Performance Periodcompared to the beginning of the Performance Period. No awards will be payablein respect of a Performance Period if the Company’s share price at theconclusion of the Performance Period is less than the share price at thebeginning of the Performance Period. The Company’s share price at the beginningof the Performance Periods was calculated to be $32.99. Special measurementdates and payment conditions apply in the event of a change in control of theCompany occurring during a Performance Period. The Company has determined thatawards granted under this plan should be classified as liability awards.

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

| ** **                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                             | ** ** | **June 30,  2006**          | ** ** | **June 30,  2005**        | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** |
| ** **                             | ** ** | **(In Thousands)**          | ** ** |
| Research and  development              |       | $                                | 508,000    |                           |       | $ | — |   |   | $ | 1,023,000 |   |   | $ | — |   |   |
| Clinical and  regulatory               |       | 351,000                          |       |                           | —     |   |   | 669,000 |   |   | — |   |   |
| Marketing,  general and administrative |       | 1,355,000                        |       |                           | —     |   |   | 2,413,000 |   |   | — |   |   |
| Total                                  |       | $                                | 2,214,000  |                           |       | $ | — |   |   | $ | 4,105,000 |   |   | $ | — |   |   |

 

In addition, the Company capitalized, during the threeand six months ended June 30, 2006, $355,000 and $524,000, respectively,as part of the cost of inventory and $78,000 and $204,000, respectively,in property, plant and equipment.

As a result of adopting SFAS 123R, the Company’sincome before income taxes and net income for the three months ended June 30,2006 was $2,214,000 and $1,840,000 lower, respectively, than if it hadcontinued to account for share-based compensation in accordance with theprovisions of APB Opinion 25. The Company’s income before income taxes and netincome for the six months ended June 30, 2006 was $4,105,000 and$3,491,000 lower, respectively, than if it had continued to account forshare-based compensation in accordance with the provisions of APB Opinion 25.Basic and diluted income per share for the three months ended June 30,2006, would have been $0.46 and $0.44, respectively, if the Company had notadopted SFAS 123R, compared to reported basic and diluted income per share of$0.44 and $0.42, respectively. Basic and diluted income per share for the sixmonths ended June 30, 2006, would have been $3.22 and $2.97, respectively,if the Company had not adopted SFAS 123R, compared to reported basic anddiluted income per share of $3.18 and $2.93, respectively. In addition, for thesix months ended June 30, 2006, the adoption of SFAS 123R resulted innet cash provided by operating activities being lower and net cash provided byfinancing activities being higher by approximately $48,495,000.

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

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

adoptionof SFAS 123R, cash flows resulting from the tax benefits of tax deductions areclassified as financing cash flows.

***Determining Fair Value***

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

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

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

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

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

*Forfeitures:**  *The Company uses historical data to estimate pre-vestingoption forfeitures. Share-based compensation expense is recorded only for thoseawards that are expected to vest. The Company’s pre-vesting forfeiture rateused was 10.7%.

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

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

| ** **               | ** ** | **Stock Options**           | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **               | ** ** | **June 30, 2006**      | ** ** | **June 30,  2005** | ** ** | **June 30, 2006** | ** ** | **June 30,  2005** | ** ** |
| Expected term  (years)   |       | 3.95-4.56                        |       |   | 4.97 |   |   | 3.95-5.72 |   |   | 4.31 |   |   |
| Expected  volatility     |       | 27.45                            | %          |   | 82.76 | % |   | 27.45%-42.70 | % |   | 83.00 | % |   |
| Risk free  interest rate |       | 5.19%-5.21                       | %          |   | 3.67 | % |   | 4.31%-5.21 | % |   | 3.52 | % |   |
| Expected dividend rate   |       | 0                                | %          |   | 0 | % |   | 0 | % |   | 0 | % |   |

 

The assumptions used inthe Monte-Carlo simulation modeling to estimate the fair value of awards underthe Retention Plan for the three and six months ended June 30, 2006 were:expected volatility of 28.25%, risk free interest rate ranging from 5.28% to5.35% and expected dividend yield of 0%. The fair value of the Company’s ESPPawards was calculated using the intrinsic value of the common stock purchasedon June 30, 2006 based on the fact that the Company’s offering period isthree months and the ESPP does not contain a look-back provision.

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

Stockoption activity for the six months ended June 30, 2006 is summarized asfollows:

| ** **                             | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise Price  Per Share** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|----------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| ** **                             | ** ** | ** **                 | ** ** | ** **                                                 | ** ** | **(Years)**                                         | ** ** | **(in thousands)**             | ** ** |
| Outstanding at  December 31, 2005 |       | 12,619,193                 |       |                                                       | $          | 37.38                                               |       |                                |       |   |   |   |   |   |   |   |
| Granted                                |       | 1,395,282                  |       |                                                       | 35.05      |                                                |       |                                |       |   |   |   |   |   |   |
| Exercised                              |       | (718,470                   | )          |                                                       | 17.53      |                                                |       |                                |       |   |   |   |   |   |   |
| Forfeitures                            |       | (799,626                   | )          |                                                       | 47.26      |                                                |       |                                |       |   |   |   |   |   |   |
| Expired                                |       | (436                       | )          |                                                       | 6.01       |                                                |       |                                |       |   |   |   |   |   |   |
| Outstanding at  June 30, 2006     |       | 12,495,943                 |       |                                                       | $          | 37.63                                               |       |                                |       | 6.46 |   |   |   | $ | 75,620 |   |   |
| Vested and  expected to vest           |       | 12,262,217                 |       |                                                       | $          | 37.69                                               |       |                                |       | 6.34 |   |   |   | $ | 74,575 |   |   |
| Exercisable at  June 30, 2006     |       | 10,939,108                 |       |                                                       | $          | 38.32                                               |       |                                |       | 6.06 |   |   |   | $ | 66,282 |   |   |

 

The weighted average fair value of options grantedduring the three months ended June 30, 2006 and 2005 was $12.26 and$21.16, respectively. The weighted average fair value of options granted duringthe six months ended June 30, 2006 and 2005 was $14.82 and $26.34,respectively. The aggregate intrinsic value of options outstanding atJune 30, 2006 is calculated as the difference between the exercise priceof the underlying options and the market price of the Company’s common stockfor the 5,890,011 shares that had exercise prices that were lower than the$38.64 market price of our common stock at June 30, 2006. The totalintrinsic value of options exercised during the three months ended June 30,2006 and 2005 was $3,167,000 and $4,739,000, respectively, determined as of thedate of exercise. The total intrinsic value of options exercised during the sixmonths ended June 30, 2006 and 2005 was $13,222,000 and $12,791,000,respectively, determined as of the date of exercise.

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

The Company recognized for the three and six monthsended June 30, 2006 approximately $1,728,000 and $3,299,000, respectivelyin share-based compensation expense, net of amounts capitalized, for stockoptions granted under the Company’s Stock Option Plans. As of June 30,2006, there was $15,280,000 of total unrecognized compensation cost related tonon-vested share-based compensation arrangements granted under the Company’sStock Option Plans. This amount assumes the Company’s expected forfeiture rate.That cost is expected to be recognized over a weighted average period of 2.3years. The Company utilizes newly issued shares to satisfy the exercise ofstock options.

Upon issuance of the awards, the grant date fair valuefor the Retention Plan was approximately $3.7 million. The fair value (basedon the June 30, 2006 valuation) of the Retention Plan awards outstandingat June 30, 2006 was approximately $5,111,000. The combined fair value ofthe Retention Plan awards that were cancelled during the six months ended June 30,2006 was approximately $477,000 (based on the June 30, 2006 valuation).The aggregate intrinsic value of the awards outstanding at June 30, 2006,all of which are not vested, is approximately $7,258,000 which is calculatedbased on the percentage that the 30 day average closing stock price preceding June 30,2006 exceeded the trigger price of $32.99. The aggregate intrinsic value of theawards expected to vest at June 30, 2006 is approximately $5,795,000. Theweighted average remaining contractual term for both the awards outstanding andthe awards that are vested and expected to vest at June 30, 2006 is twoyears.

The Company recognized for the three and six monthsended June 30, 2006 approximately $456,000 and $737,000, respectively inshare-based compensation expense, net of amounts capitalized, for the RetentionPlan. As of June 30, 2006, there was $3,221,000 of total unrecognizedcompensation cost related to non-vested share-based compensation arrangementsgranted under the Retention Plan. This amount assumes the Company’s expectedforfeiture rate. The costs associated with the awards are expected to berecognized over the Performance Periods.

During the three and sixmonths ended June 30, 2006, the Company granted 6,245 and 15,055 shares,respectively for the ESPP for a total of 198,450 shares that have been issuedunder the plan and recognized approximately $30,000 and $69,000, respectively,in share-based compensation expense, net of amounts capitalized. The Companyutilizes newly issued shares to satisfy the issuance of shares under the ESPP.

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

*ComparableDisclosures*

Thefollowing table illustrates the pro forma effect on the Company’s net incomeand net income per share as if the Company had adopted the fair value basedmethod of accounting for stock-based compensation under Statement of FinancialAccounting Standards No. 123 “*Accounting for Stock-BasedCompensation*” for the three and six months ended June 30, 2005.See the assumptions disclosed previously in this note that were used to estimatethe fair value of options granted under the stock option plans for the threeand six months ended June 30, 2005.

| ** **                                                                                                                            | ** ** | **Three Months  Ended  June 30, 2005**             | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                                            | ** ** | **(In thousands, except  per share amounts)** | ** ** |
| **Net  Income**                                                                                                                       | ** ** |                                                              | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Net Income, as  reported                                                                                                              |       |                                                              | $          | 26,031                                              |       |   |   | $ | 54,851 |   |   |
| Add: Stock-based  employee compensation expense included in net income, tax effected                                                  |       |                                                              | —     |                                                |       |   | — |   |   |
| Deduct: Total  share-based employee compensation expense determined under fair value method  for all awards, net of income taxes |       |                                                              | (13,096    | )                                                   |       |   | (29,045 | ) |   |
| Pro forma net  income                                                                                                                 |       |                                                              | $          | 12,935                                              |       |   |   | $ | 25,806 |   |   |
| **Net  income per share**                                                                                                             | ** ** |                                                              | ** ** | ** **                                          |       |   | ** ** | ** ** |   |
| Basic—as reported                                                                                                                |       |                                                              | $          | 0.31                                                |       |   |   | $ | 0.66 |   |   |
| Basic—pro forma                                                                                                                  |       |                                                              | $          | 0.15                                                |       |   |   | $ | 0.31 |   |   |
| Diluted—as  reported                                                                                                             |       |                                                              | $          | 0.30                                                |       |   |   | $ | 0.63 |   |   |
| Diluted—pro forma                                                                                                                |       |                                                              | $          | 0.15                                                |       |   |   | $ | 0.31 |   |   |

 

The calculation of dilutedpro forma income per common share for the three and six months ended June 30,2005 excludes the effect of the 13¤8% convertiblenotes because their inclusion would have had an anti-dilutive effect.

**(6)**   IncomePer Common Share

Basic income per common share is computed by dividingnet income by the weighted-average number of common shares outstanding duringthe period. Diluted income per common share is computed by dividing net incomeby the weighted-average number of common shares outstanding during the periodincreased to include all additional common shares that would have beenoutstanding assuming potentially dilutive common share equivalents had beenissued. Dilutive common share equivalents include 1) the dilutive effect ofin-the-money shares related to stock options, which is calculated based on theaverage share price for each period using the treasury stock method. Under thetreasury stock method, the exercise price of an option, the average amount ofcompensation cost, if any, for future service that the Company has not yetrecognized, and the amount of benefits that would be recorded in additionalpaid-in capital, if any, when the option is exercised, are assumed to be usedto repurchase shares in the current period and 2) the conversion ofconvertible debt which is done on an “if-converted” basis. In addition, incomputing the dilutive effect of convertible debt, the numerator is adjusted toadd back the after-tax amount of interest recognized in the period. For thethree months ended June 30, 2006 and 2005, there were an 

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

aggregate of**8,080,000 and 8,956,000, respectively, potential commonshares, excluded from the diluted income per share computation because theirinclusion would have had an anti-dilutive effect. For the six months ended June 30,2006 and 2005, there were an aggregate of 8,295,000 and 7,742,000,respectively, potential common shares, excluded from the diluted income pershare computation because their inclusion would have had an anti-dilutiveeffect.

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

| ** **                                                                 | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| EPS  Numerator—Basic:                                                 |       |                                           |       |                                         |       |   |   |   |   |
| Net Income                                                                 |       | $                                              | 37,209     |                                         | $          | 26,031 |   | $ | 266,800 |   | $ | 54,851 |   |
| EPS  Denominator—Basic:                                               |       |                                           |       |                                         |       |   |   |   |   |
| Weighted-average number of shares of common stock  outstanding        |       | 84,072                                         |       | 83,616                                       |       | 83,849 |   | 83,448 |   |
| EPS  Numerator—Diluted:                                               |       |                                           |       |                                         |       |   |   |   |   |
| Net Income                                                                 |       | $                                              | 37,209     |                                         | $          | 26,031 |   | $ | 266,800 |   | $ | 54,851 |   |
| Adjustment for  interest, net of amounts capitalized and income tax effect |       | 1,597                                          |       | 1,676                                        |       | 2,871 |   | 3,461 |   |
| Net income, adjusted                                                       |       | $                                              | 38,806     |                                         | $          | 27,707 |   | $ | 269,671 |   | $ | 58,312 |   |
| EPS  Denominator—Diluted:                                             |       |                                           |       |                                         |       |   |   |   |   |
| Weighted-average number of shares of common stock  outstanding             |       | 84,072                                         |       | 83,616                                       |       | 83,849 |   | 83,448 |   |
| Effect of  dilutive securities:                                            |       |                                           |       |                                         |       |   |   |   |   |
| Stock options                                                              |       | 1,776                                          |       | 2,122                                        |       | 1,816 |   | 2,578 |   |
| Convertible subordinated notes                                             |       | 6,336                                          |       | 6,336                                        |       | 6,336 |   | 6,336 |   |
| Dilutive potential common shares                                           |       | 8,112                                          |       | 8,458                                        |       | 8,152 |   | 8,914 |   |
| Weighted-average  common shares and dilutive potential common shares       |       | 92,184                                         |       | 92,074                                       |       | 92,001 |   | 92,362 |   |
| Basic income per  common share                                             |       | $                                              | 0.44       |                                         | $          | 0.31 |   | $ | 3.18 |   | $ | 0.66 |   |
| Diluted income per  common share                                           |       | $                                              | 0.42       |                                         | $          | 0.30 |   | $ | 2.93 |   | $ | 0.63 |   |

 

**(7)**   Taxes

The Company’s estimated annual effective income taxrate for 2006 is approximately 15% which excludes the effect of the partialrelease of our valuation allowance described below. The estimated effective taxrate used for the first quarter of 2006 was 13%; as a result, our effective taxrate for the second quarter of 2006 is 21%. The estimates for the quarter andfull-year rates are higher than the Company’s previous estimate of 13% due tohigher projected income for the full-year 2006 than previously estimated withno additional operating tax attributes to utilize.

In the first quarter of2006, the Company released a portion of its valuation allowance against ourtotal deferred tax assets because we determined, based on revised expectationsof our projected future earnings, that it is more likely than not that we willrealize the benefit of these deferred tax assets, which 

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

amountedto approximately $99.5 million. Our conclusion to release a portion of ourvaluation allowance against our deferred tax assets is supported by severalevents that transpired during the first quarter of 2006. In addition toobtaining approval from the FDA for ERBITUX in a second indication in March of2006, the in-market sales for ERBITUX during this period exceeded our expectationsand have continued to show strong growth in the marketplace. Most importantly,a potential competitor released certain clinical data on their competingproduct, which gave us the ability to further understand the competitivethreats posed by this potential product. Therefore, our decision is supportedby a combination of better than expected in-market sales that we believe willbe sustainable in the future coupled with the ability to further refine ourfuture financial projections and assumptions related to our competition. Thefinancial projections supporting our conclusion to release a portion of ourvaluation allowance contain significant assumptions based on current factsabout our market share and our competitive landscape. If such assumptions wereto differ significantly, it may have a material impact on our ability torealize our deferred tax assets. The projected tax rate for 2006 is less thanthe federal statutory rate of 35%, mainly due to the utilization of fullyreserved deferred tax assets.

**(8)**   CollaborativeAgreements

***(a) Merck KGaA***

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

·       wegranted 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;

·       wegranted Merck KGaA a license, without the right to sublicense, to use, sell, orhave sold, but not to make, BEC2 within North America in conjunction withImClone Systems;

·       weretained the rights, (1) without the right to sublicense, to make, havemade, use, sell, or have sold BEC2 in North America in conjunction with MerckKGaA and (2) with the right to sublicense, to make, have made, use, sell,or have sold gp75 antigen in North America;

·       wewere required to give Merck KGaA the opportunity to negotiate a license inNorth America to gp75 antigen before granting such a license to any thirdparty.

In return, MerckKGaA:

·       maderesearch support payments to us totaling $4,700,000;

·       wasrequired to make milestone payments to us of up to $22,500,000, of which$5,000,000 was received through June 30, 2006 based on milestones achievedin the product development of BEC2;

·       wasrequired to make royalty payments to us on all sales of the licensed productsoutside North America, if any, with a portion of the earlier funding receivedunder the agreement being creditable against the amount of royalties due.

Following an analysis of the results of variousclinical studies involving BEC2 and work on the recombinant gp75 antigen, theCompany and Merck KGaA determined to discontinue their further development andterminated the related agreement in the fourth quarter of 2005. Approximately $1.6million of deferred revenue related to this agreement was recorded as revenueupon the cancellation of the 

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

contract. The Companyincurred expenses of $0 and approximately $7,000 for the three months ended June 30,2006 and 2005, respectively, and expenses of $0 and approximately $29,000 forthe six months ended June 30, 2006 and 2005, respectively related to thiscontract.

In December 1998, the Company entered into adevelopment and license agreement with Merck KGaA with respect to ERBITUX . Inexchange for granting Merck KGaA exclusive rights to market ERBITUX outside ofthe United States and Canada and co-exclusive development rights in Japan, theCompany has received $30,000,000 through June 30, 2006 in up-front cashfees and early cash payments based on the achievement of defined milestones. Anadditional $30,000,000 has been received through June 30, 2006 based uponthe achievement of further milestones for which Merck KGaA received equity inthe Company. The equity interests underlying the milestone payments were pricedat varying premiums to the then-market price of the common stock depending uponthe timing of the achievement of the respective milestones.

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

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

In July 2006, the Company and Merck KGaA enteredinto agreements amending and supplementing the 1998 development and license agreement.As part of the agreements, the Company consented to Merck KGaA’s sublicense ofcertain intellectual property rights relating to the development andcommercialization of an anti-EGFR antibody to Takeda Pharmaceutical Company.Merck KGaA and Takeda signed an alliance in September 2005 for thedevelopment and commercialization of matuzumab (EMD72000), a humanizedEGFR-targeting monoclonal antibody. In consideration for the Company’s consent,Merck KGaA agreed to pay the Company EUR 2.5 million within 30 days of theexecution of the agreements and a further EUR 5 million within 30 days of theCompany’s written consent to the sublicense. In addition, Merck KGaA agreed toincrease its fixed royalty to 9.5% on net sales of ERBITUX outside the U.S. andCanada, effective July 1, 2006. The agreements also promote freedom tooperate in the development and commercialization of matuzumab outside theUnited States and Canada and of IMC-11F8 (a fully human EGFR-targetedIgG1 monoclonal antibody being developed by ImClone 

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

Systems) within the UnitedStates and Canada through the granting of certain reciprocal rights, includingthe sharing of confidential technical information. This is in addition to theexclusive rights held by the Company to develop and commercialize IMC-11F8outside of the United States and Canada as recently confirmed in arbitrationproceedings described in greater detail under “Part II- Item 1. LegalProceedings”. The agreements do not extend to key intellectual property rightsin the U.S. and Canada, where the Company and its partner Bristol-Myers Squibbcontinue to hold exclusive licenses to key patents covering certain uses ofEGFR-targeted monoclonal antibodies.

Amounts due from Merck KGaA related to thesearrangements totaled approximately $8,819,000 and $7,768,000 at June 30,2006 and December 31, 2005, respectively, and are included in amounts duefrom corporate partners in the Consolidated Balance Sheets. The Company has aliability due Merck KGaA of $0 and approximately $2,532,000 as of June 30,2006 and December 31, 2005, respectively.

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

On September 19, 2001, the Company entered intoan acquisition agreement (the “Acquisition Agreement”) with BMS andBristol-Myers Squibb Biologics Company, a Delaware corporation (“BMSBiologics”), which is a wholly-owned subsidiary of BMS, providing for thetender offer by BMS Biologics to purchase up to 14,392,003 shares of theCompany’s common stock for $70.00 per share, net to the seller in cash. BMSaccepted these shares for payment on October 29, 2001 on a pro rata basisfrom all tendering shareholders and those conditionally exercising stockoptions. In connection with the Acquisition Agreement, the Company entered intoa stockholder agreement with BMS and BMS Biologics, dated as ofSeptember 19, 2001 (the “Stockholder Agreement”), pursuant to which allparties agreed to various arrangements regarding the respective rights andobligations of each party with respect to, among other things, the ownership ofshares of the Company’s common stock by BMS and BMS Biologics. Concurrent withthe execution of the Acquisition Agreement and the Stockholder Agreement, theCompany entered into the Commercial Agreement with BMS and E.R. Squibb,relating to ERBITUX, pursuant to which, among other things, BMS and E.R. Squibbare co-developing and co-promoting ERBITUX in the United States and Canada withthe Company, and are co-developing and co-promoting ERBITUX in Japan with theCompany and either together or co-exclusively with Merck KGaA.

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

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

***CommercialAgreement***

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

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

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

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

*Development of the Product—**Responsibilities*associatedwith clinical and other ongoing studies is apportioned between the parties asdetermined by the product development committee described below. The CommercialAgreement provides for the establishment of clinical development plans settingforth the activities to be undertaken by the parties for the purpose ofobtaining marketing approvals, providing market support and developing newindications and formulations of the product. After transition ofresponsibilities for certain clinical and other studies, each party isprimarily responsible for performing the studies designated to it in theclinical development plans. In the United States and Canada, the CommercialAgreement provides that E.R. Squibb is responsible for 100% of the cost of allclinical studies other than those studies undertaken post-launch which are notpursuant to an IND (e.g. Phase IV studies), the cost of which is shared equallybetween E.R. Squibb and ImClone Systems. As between E.R. Squibb and ImCloneSystems, each is responsible for 50% of the costs of all studies in Japan. TheCompany has 

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

also agreed, andmay agree in the future, to share with E.R. Squibb, on terms other thanthe foregoing, costs of clinical trials that the Company believes are notpotentially registrational but should be undertaken prior to launch in theUnited States, Canada or Japan. In addition, to the extent that in 2005 and2006 the Company and BMS exceed the contractual maximum registrational costsfor clinical development, the Company has agreed to share such cost withBMS. The Company has recorded expenses of $6,718,000 and $2,459,000 pursuantto such cost sharing agreements for the three months ended June 30, 2006and 2005, respectively and $13,639,000 and $5,289,000 for the six months ended June 30,2006 and 2005, respectively. The Company has also incurred $662,000 and$347,000 for the three months ended June 30, 2006 and 2005, respectively,and $1,193,000 and $666,000 for the six months ended June 30, 2006 and2005, respectively, related to the agreement with respect to Japan. Except asotherwise agreed upon by the parties, the Company will own all registrationsfor the product and is primarily responsible for the regulatory activitiesleading to registration in each country. E.R. Squibb will be primarilyresponsible for the regulatory activities in each country after the product hasbeen registered in that country. Pursuant to the terms of the CommercialAgreement, as amended, Andrew G. Bodnar, M.D., J.D., Senior Vice President,Strategy and Medical & External Affairs of BMS, and a member of theCompany’s Board of Directors, is entitled to oversee the implementation of theclinical and regulatory plan for ERBITUX.

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

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

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

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

processing API intothe finished form of the product. Sales of ERBITUX to BMS for commercialuse are reflected in the Company’s Consolidated Statements of Operations asManufacturing revenue.

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

•     aJoint Executive Committee (the “JEC”), which consists of certain seniorofficers of each party. The JEC is co-chaired by a representative of each 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. TheJCC is responsible for, among other things, overseeing the preparation andimplementation of the marketing plans, coordinating the sales efforts of E.R.Squibb and the Company, and reviewing and approving the marketing andpromotional plans for the product in the territory; and

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

Any matter that is thesubject of a deadlock (i.e., no consensus decision) in the PDC, the JCC or theJMC will be referred to the JEC for resolution. Subject to certain exceptions,deadlocks in the JEC will be resolved as follows: (1) if the matter wasalso the subject of a deadlock in the PDC, by the co-chairperson of the JECdesignated by the Company, (2) if the matter was also the subject of adeadlock in the JCC, by the co-chairperson of the JEC designated by BMS, or (3) ifthe matter was also the subject of a deadlock in the JMC, by the co-chairpersonof the JEC designated by the Company. All other deadlocks in the JEC will beresolved by arbitration.

*Right of First Offer—**E.R.*Squibb has aright of first offer with respect to the Company’s investigational KDRmonoclonal antibodies (such as IMC-1121B) should the Company decide toenter into a partnering arrangement with a third party with respect to IMC-KDRantibodies at any time prior to the earlier to occur of September 19, 2006and the first anniversary of the date which is 45 days after any date onwhich BMS’s ownership interest in ImClone Systems is less than 5%. If theCompany decides to enter into a partnering arrangement during such period, theCompany must notify E.R. Squibb. If E.R. Squibb notifies the Company that it isinterested in such an arrangement, the Company will provide its proposed termsto E.R. Squibb and the parties will negotiate in good faith for 90 days toattempt to agree on the terms and 

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

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

*Right of First Negotiation—**If*at any time duringthe restricted period (as defined below), the Company is interested inestablishing a partnering relationship with a third party involving certaincompounds or products not related to IMC-KDR antibodies, the Company mustnotify E.R. Squibb and E.R. Squibb will have 90 days to enter into anon-binding agreement with the Company with respect to such a partnering relationship.In the event that E.R. Squibb and ImClone Systems do not enter into anon-binding agreement, the Company is free to negotiate with third partieswithout further obligation to E.R. Squibb. The “restricted period” means theperiod from September 19, 2001 until the earliest to occur of (1) September 19,2006, (2) a reduction in BMS’s ownership interest in ImClone Systems tobelow 5% for 45 consecutive days, (3) a transfer or other disposition ofshares of the Company’s common stock by BMS or any of its affiliates such thatBMS and its affiliates own or have control over less than 75% of the maximumnumber of shares of the Company’s common stock owned by BMS and its affiliatesat any time after September 19, 2001, (4) an acquisition by a thirdparty of more than 35% of the outstanding shares, (5) a termination of theCommercial Agreement by BMS due to significant regulatory or safety concernsregarding ERBITUX, or (6) the Company’s termination of the CommercialAgreement due to a material breach by BMS.

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

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

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

*Mandatory Transfer—**Each*of BMS and E.R.Squibb has agreed under the Commercial Agreement that in the event it sells orotherwise transfers all or substantially all of its pharmaceutical business or 

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

pharmaceuticaloncology business, it must also transfer to the transferee its rights andobligations under the Commercial Agreement.

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

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

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

•     byE.R. Squibb, if the JEC determines that there exists a significant concernregarding a regulatory or patient safety issue that would seriously impact thelong-term viability of all products.

***StockholderAgreement***

Pursuant to theStockholder Agreement, the Company’s Board was increased from ten to twelvemembers in October 2001. BMS received the right to nominate two directorsto the Company’s Board (each a “BMS director”) so long as its ownershipinterest in ImClone Systems is 12.5% or greater. If BMS’ ownership interest is5% or greater but less than 12.5%, BMS will have the right to nominate oneBMS director, and if BMS’ ownership interest is less than 5%, BMS willhave no right to nominate a BMS director. If the size of the Board is increasedto a number greater than twelve, the number of BMS directors would beincreased, subject to rounding, such that the number of BMS directors isproportionate to the lesser of BMS’ then-current ownership interest and 19.9%.Notwithstanding the foregoing, BMS will have no right to nominate any BMSdirectors if (1) the Company has terminated the Commercial Agreement dueto a material breach by BMS or (2) BMS’ ownership interest were to remainbelow 5% for 45 consecutive days.

Based on the number ofshares of common stock acquired pursuant to the tender offer, BMS has the rightto nominate two directors. BMS designated Andrew G. Bodnar, M.D., J.D., BMS’Senior Vice President, Strategy and Medical & External Affairs, as oneof the initial BMS directors. The nomination of Dr. Bodnar was approved bythe Board on November 15, 2001. The other BMS director position wasinitially filled by Peter S. Ringrose, M.A, and Ph.D. Dr. Ringrose retiredin 2002 from his position of Chief Scientific Officer and President,Pharmaceutical Research Institute at BMS, and also resigned from his directorposition with the Company. BMS has not yet designated a replacement to fill Dr. Ringrose’svacated Board seat.

*Voting of Shares—**During*the period inwhich BMS has the right to nominate up to two BMS directors, BMS and itsaffiliates are required to vote all of their shares in the same proportion asthe votes cast by all of the Company’s other stockholders with respect to theelection or removal of non-BMS directors.

*Committees of the Board ofDirectors—**During*the period in which BMS hasthe right to nominate up to two BMS directors, BMS also has the right, subjectto certain exceptions and limitations, to have one member of each committee ofthe Board be a BMS director.

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

*Approval Required for CertainActions—**The*Company may not take anyaction that constitutes a prohibited action under the Stockholder Agreementwithout the consent of the BMS directors, until September 19, 2006 orearlier, if any of the following occurs: (1) a reduction in BMS’s ownershipinterest to below 5% for 45 consecutive days, (2) a transfer or otherdisposition of shares of the Company’s common stock by BMS or any of itsaffiliates such that BMS and its affiliates own or have control over less than75% of the maximum number of shares of the Company’s common stock owned by BMSand its affiliates at any time after September 19, 2001, (3) anacquisition by a third party of more than 35% of the outstanding shares of theCompany’s common stock, (4) a termination of the Commercial Agreement byBMS due to significant regulatory or safety concerns regarding ERBITUX, or (5) atermination of the Commercial Agreement due to a material breach byBMS. Such prohibited actions include (1) issuing additional shares orsecurities convertible into shares in excess of 21,473,002 shares of theCompany’s common stock in the aggregate, subject to certain exceptions; (2) incurringadditional indebtedness if the total of (A) the principal amount ofindebtedness incurred since September 19, 2001 and then-outstanding, and (B) thenet proceeds from the issuance of any redeemable preferred stockthen-outstanding, would exceed the Company’s amount of indebtedness forborrowed money outstanding as of September 19, 2001 by more than$500 million; (3) acquiring any business if the aggregateconsideration for such acquisition, when taken together with the aggregateconsideration for all other acquisitions consummated during the previous twelvemonths, is in excess of 25% of the Company’s aggregate value at the time thebinding agreement relating to such acquisition was entered into; (4) disposingof all or any substantial portion of the Company’s non-cash assets; (5) enteringinto non-competition agreements that would be binding on BMS, its affiliates orany BMS director; (6) taking certain actions that would have adiscriminatory effect on BMS or any of its affiliates as a stockholder; and (7) issuingcapital stock with more than one vote per share.

*Limitation on AdditionalPurchases of Shares and Other Actions—**Subject*to theexceptions set forth below, until September 19, 2006 or, if earlier, theoccurrence of any of (1) an acquisition by a third party of more than 35%of the Company’s outstanding shares, (2) the first anniversary of areduction in BMS’s ownership interest in the Company to below 5% for 45consecutive days, or (3) the Company’s taking a prohibited action underthe Stockholder Agreement without the consent of the BMS directors, neither BMSnor any of its affiliates will acquire beneficial ownership of any shares ofthe Company’s common stock or take any of the following actions: (1) encourageany proposal for a business combination with the Company’s or an acquisition ofour shares; (2) participate in the solicitation of proxies from holders ofshares of the Company’s common stock; (3) form or participate in any “group”(within the meaning of Section 13(d)(3) of the Securities ExchangeAct of 1934) with respect to shares of the Company’s common stock; (4) enterinto any voting arrangement with****respect toshares of the Company’s common stock; or (5) seek any amendment to orwaiver of these restrictions.

The following areexceptions to the standstill restrictions described above: (1) BMSBiologics may acquire beneficial ownership of shares of the Company’scommon stock either in the open market or from the Company pursuant to theoption described below, so long as, after giving effect to any such acquisitionof shares, BMS’ ownership interest would not exceed 19.9%; (2) BMSmay make, subject to certain conditions, a proposal to the Board toacquire shares of the Company’s common stock if the Company provides materialnon-public information to a third party in connection with, or begins activenegotiation of, an acquisition by a third party of more than 35% of theoutstanding shares; (3) BMS may acquire shares of the Company’scommon stock if such acquisition has been approved by a majority of the non-BMSdirectors; and (4) BMS may make, subject to certain conditions,including that an acquisition 

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

ofshares be at a premium of at least 25% to the prevailing market price,non-public requests to the Board to amend or waive any of the standstillrestrictions described above. Certain of the exceptions to the standstillprovisions described above will terminate upon the occurrence of: (1) areduction in BMS’s ownership interest in the Company to below 5% for 45consecutive days, (2) a transfer or other disposition of shares of theCompany’s common stock by BMS or any of its affiliates such that BMS and itsaffiliates own or have control over less than 75% of the maximum number ofshares owned by BMS and its affiliates at any time after September 19,2001, (3) a termination of the Commercial Agreement by BMS due tosignificant regulatory or safety concerns regarding ERBITUX, or (4) atermination of the Commercial Agreement by the Company due to a material breachby BMS.

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

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

*Registration Rights—**The* Company grantedBMS customary registration rights with respect to shares of common stock ownedby BMS or any of its affiliates. Amounts due from BMS related to this agreementtotaled approximately $81,182,000 and $51,503,000 at June 30, 2006 andDecember 31, 2005, respectively, and are included in amounts due fromcorporate partners in the Consolidated Balance Sheets.

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

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

In August 2005, the Company entered into aCollaboration and License Agreement with UCB S.A., a company registered inBelgium, for the development and commercialization of CDP-791, UCB’snovel, investigational PEGylated di-Fab antibody targeting the vascularendothelial growth factor receptor-2 (“VEGFR-2”). No upfront ormilestone payments are payable under the Agreement. The Agreement provides thatthe Company and UCB S.A. will share equally all agreed upon development costsfor CDP-791 as well as worldwide profits derived from thecommercialization of CDP-791 in indications jointly pursued by theparties. The Company will also receive an incremental single-digit royalty onnet sales worldwide for such indications. Under certain circumstances, oneparty may be entitled to pursue (in its territory) an indicationindependently of the other party, which retains the option to join in thedevelopment or commercialization at a later stage. The Company has exclusivecommercialization rights to CDP-791 in North America, with UCB receivingsuch rights in Europe, Japan, and the rest of the world. The Company did notincur any expenses related to this agreement in the three and six months ended June 30,2006. The Company has a liability of $2,493,000 in accrued expenses as of June 30,2006 and December 31, 2005 related to this agreement.

Royaltyrevenue consists of the following: (in thousands)

| ** **             | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **             | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS                    |       | $                                              | 67,226     |                                         | $          | 38,132 |   | $ | 121,058 |   | $ | 72,113 |   |
| Merck KGaA             |       | 7,337                                          |       | 3,615                                        |       | 13,613 |   | 6,006 |   |
| Other                  |       | 51                                             |       | 44                                           |       | 213 |   | 44 |   |
| Total royalty  revenue |       | $                                              | 74,614     |                                         | $          | 41,791 |   | $ | 134,884 |   | $ | 78,163 |   |

 

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

| ** **                                | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS:                                      |       |                                           |       |                                         |       |   |   |   |   |
| ERBITUX license fee revenue               |       | $                                              | 33,401     |                                         | $          | 24,395 |   | $ | 177,748 |   | $ | 47,833 |   |
| Merck KGaA:                               |       |                                           |       |                                         |       |   |   |   |   |
| ERBITUX and BEC2 license fee revenue      |       | 55                                             |       | 96                                           |       | 111 |   | 1,192 |   |
| Total license  fees and milestone revenue |       | $                                              | 33,456     |                                         | $          | 24,491 |   | $ | 177,859 |   | $ | 49,025 |   |

 

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

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

| ** **                                              | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS:                                                    |       |                                           |       |                                         |       |   |   |   |   |
| Drug                                                    |       | $                                              | 1,011      |                                         | $          | 3,385 |   | $ | 4,393 |   | $ | 5,018 |   |
| ERBITUX clinical and regulatory expenses                |       | 2,773                                          |       | 3,383                                        |       | 6,142 |   | 6,871 |   |
| ERBITUX marketing, general and administrative  expenses |       | 300                                            |       | 380                                          |       | 551 |   | 894 |   |
| ERBITUX royalty expenses                                |       | 7,757                                          |       | 4,400                                        |       | 13,968 |   | 8,321 |   |
| Total BMS                                               |       | 11,841                                         |       | 11,548                                       |       | 25,054 |   | 21,104 |   |
| Merck KGaA:                                             |       |                                           |       |                                         |       |   |   |   |   |
| Drug                                                    |       | 127                                            |       | 5,490                                        |       | 5,564 |   | 8,497 |   |
| ERBITUX clinical and regulatory expenses                |       | —                                         |       | 386                                          |       | — |   | 1,058 |   |
| ERBITUX marketing, general and administrative  expenses |       | 36                                             |       | 164                                          |       | 99 |   | 220 |   |
| ERBITUX royalty expenses                                |       | 1,419                                          |       | 620                                          |       | 3,806 |   | 1,167 |   |
| Total Merck KGaA                                        |       | 1,582                                          |       | 6,660                                        |       | 9,469 |   | 10,942 |   |
| Other                                                   |       | 7                                              |       | 1                                            |       | 16 |   | 9 |   |
| Total  collaborative agreement revenue                  |       | $                                              | 13,430     |                                         | $          | 18,209 |   | $ | 34,539 |   | $ | 32,055 |   |

 

**Manufacturing revenue fromcorporate partners consists of the following: (in thousands)**

| ** **                   | ** ** | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** | ** ** |
|------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                   | ** ** | **2006**                                       | ** ** | **2005**                                     | ** ** | **2006** | ** ** | **2005** | ** ** |
| BMS                          |       | $                                              | 27,605     |                                         | $          | 7,894 |   | $ | 44,236 |   | $ | 18,913 |   |
| Merck KGaA                   |       | 751                                            |       | —                                       |       | 3,469 |   | — |   |
| Total  Manufacturing revenue |       | $                                              | 28,356     |                                         | $          | 7,894 |   | $ | 47,705 |   | $ | 18,913 |   |

 

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

| ** **                                 | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| BMS:                                       | ** ** | ** **              | ** ** |                        | ** ** | ** ** |   |
| ERBITUX                                    |       | $                       | 81,182     |                        |       | $ | 51,503 | ** ** |   |
| Merck KGaA                                 |       |                    |       |                        |       | ** ** |   |
| ERBITUX and BEC2                           |       | 8,819                   |       |                        | 7,768      | ** ** |   |
| Total amounts due  from corporate partners |       | $                       | 90,001     |                        |       | $ | 59,271 | ** ** |   |

 

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

Deferredrevenue consists of the following: (in thousands)

| ** **                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| BMS:                                      |       |                    |       |                        |       |   |   |
| ERBITUX commercial agreement              |       | $                       | 428,388    |                        |       | $ | 356,136 |   |   |
| Merck KGaA                                |       |                    |       |                        |       |   |   |
| ERBITUX development and license agreement |       | 2,778                   |       |                        | 2,889      |   |   |
| Total deferred revenue                    |       | 431,166                 |       |                        | 359,025    |   |   |
| Less current  portion                     |       | (145,881                | )          |                        | (112,624   | ) |   |
| Total long term  deferred revenue         |       | $                       | 285,285    |                        |       | $ | 246,401 |   |   |

 

**(9)**   Commitmentsand Contingencies

On October 28, 2003, a complaint was filed byYeda Research and Development Company Ltd. (“Yeda”) against ImCloneSystems and Aventis Pharmaceuticals, Inc. in the U.S. District Court forthe Southern District of New York (03 CV 8484). This action does not seekdamages, but rather alleges and seeks that three individuals associated withYeda should also be named as co-inventors on U.S. Patent No. 6,217,866. OnJune 7, 2005, Yeda amended its U.S. complaint to seek sole inventorship ofthe subject patent. On November 4, 2005, the Court denied the Company’smotion for summary judgment with respect to this matter, as filed with theCourt on June 24, 2005. Hearings on this matter concluded in July 2006;a determination is forthcoming. The Company is vigorously defending againstclaims 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 ofpatent EP (UK) 0 667 165 to add three Yeda employees asinventors. Also on March 25, 2004, a German action entitled Legal Actionwas filed in the Munich District Court I, Patent Litigation Division, seekingto add three Yeda employees as inventors on patent EP (DE) 0 667 165. TheCompany was not named as a party in these actions that relate to the Europeanequivalent of U.S. Patent No. 6,217,866 discussed above; accordingly, theCompany intervened in the U.K. and German actions. Yeda sought to amend itspleadings in the United Kingdom and Germany to seek sole inventorship.Following hearings, both the U.K. and German courts held that Yeda was notentitled to amend its pleadings. Additionally, on or about March 25, 2005and March 29, 2005, respectively, Yeda filed legal actions in Austria andFrance against both Aventis and ImClone Systems seeking full inventorship of EP(AU) 0 667 165 and EP (FR) 0 667 165, as well as payment of legalcosts and fees. The Company is vigorously defending against claims asserted inthese actions. The Company is unable to predict the outcome of these actions atthe present time.

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen and that the Company shouldtherefore pay damages. On July 28, 2006, the Court denied the Company’smotion for summary judgment seeking to dismiss all claims on the basis that thepatent rights at issue were exhausted as a matter of law and granted MIT andRepligen’s cross motion that their patent rights were not exhausted. The casewill now proceed to trial on the merits of the Company’s other defenses. TheCompany is vigorously defending 

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

against claims asserted inthis action. The Company is unable to predict the outcome of this action at thepresent time.

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

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

In October 2001, theCompany entered into a sublease (the “Sublease”) for a four-story building at325 Spring Street, New York, 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 $8,538,000 isoutstanding as of June 30, 2006. The loan is secured by a leaseholdmortgage on the prime lease as well as a collateral assignment of rents by thesublandlord. The loan is payable by the sublandlord over 20 years and bearsinterest at 51¤2%in years one through five, 61¤2%in years six through ten, 71¤2%in years eleven through fifteen and 81¤2%in years sixteen through twenty. In addition, the Company paid the owner aconsent fee in the amount of $500,000. Effective March 1, 2005, theCompany amended the Sublease to add an additional 6,500 square feet of spaceupon all the same terms and conditions set forth in the Sublease. In connectionwith this amendment, the Company paid an up-front fee of $1,690,000 which isbeing amortized, as a reduction in lease expense, over the respective term ofthe Sublease. The future minimum lease payments remaining at June 30,2006, are approximately $47,545,000. The Company is in the process ofdeveloping the property for occupancy by its research department.

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

**(10)**   EmployeeBenefit Plans

***Defined Contribution Plan***

All employees of the Company who meet certain minimumage and period of service requirements are eligible to participate in a 401(k) definedcontribution plan. The 401(k) plan allows eligible employees to defer upto 25 percent of their annual compensation, subject to certain limitationsimposed by federal law. The amounts contributed by employees are immediatelyvested and non-forfeitable. Under the 401(k) plan, the Company, at management’sdiscretion, may match employee contributions and/or make discretionarycontributions. Neither the employee contributions nor voluntary matchingcontributions are invested in the Company’s securities. Total expense incurredby the Company was $484,000 and $499,000 for the three months ended June 30,2006 and 2005, respectively, and $1,166,000 and $1,011,000 for the six monthsended June 30, 2006 and 2005, respectively.

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**Item 2.**                        *Management’s Discussion 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 the SEC,including our 2005 Annual Report on Form 10-K. This discussioncontains forward-looking statements based upon current expectations thatinvolve risk and uncertainties. Our actual results and the timing of certainevents could differ materially from those anticipated in these forward-lookingstatements as a result of certain factors, including those set forth below andunder “Risk Factors” set forth in Part II, Item 1A of this report and Item1A and elsewhere in our 2005 Annual Report on Form 10-K.

**OVERVIEW**

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

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

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:

·       theamount and timing of revenues earned from commercial sales of ERBITUX;

·       thetiming of recognition of license fees and milestone revenues;

·       thestatus of development of our various product candidates;

·       whetheror not we achieve specified research or commercialization objectives;

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

·       legalcosts and the outcome of outstanding legal proceedings; and

·       theaddition or termination of research programs or funding support and variationsin the level of expenses related to our proprietary product candidates duringany given period.

As a result of oursubstantial investment in research and development, we have incurredsignificant operating losses and have an accumulated deficit of approximately$176 million as of June 30, 2006. We anticipate that our accumulateddeficit will continue to decrease in the future as we earn revenues oncommercial sales of ERBITUX and generate net income. Although prior to 2004 wedevoted most of our efforts and resources to research and development, weexpect that we will continue to devote greater efforts and resources to themanufacturing, marketing, and commercialization of ERBITUX. There is noassurance that we will be able to continue to successfully manufacture, marketor commercialize ERBITUX or that potential customers will buy ERBITUX. We relyentirely on 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.

**HIGHLIGHTS AND OUTLOOK**

As previously noted in our 2005 Annual Report on Form 10-K,on January 24, 2006, we announced that our Board of Directors had engagedthe investment bank Lazard to conduct, in conjunction with management, a fullreview of the Company’s strategic alternatives to maximize shareholder value. This review was initiated to ensurethat we could benefit from our long-term, high-value investments in the shortterm, realizing immediate shareholder value while mitigating the impact onprofitability associated with the development of ERBITUX and our productcandidates. Among the alternatives we may ultimately pursue are a merger,sale or strategic alliance. The process is still ongoing at this point and wewill make an announcement as soon as any decisions have been made. It should benoted that while this process is ongoing, we continue to execute a program offocused investment in order to ensurethat we sustain our competitive position and that we are adequately positionedfor sustainable, longer-term growth. While it is our intention toexecute an appropriate transaction, we cannot make assurances that anyparticular alternative will be pursued or that a transaction will occur. Tothat end, we will continue to operate in the ordinary course, and we will continuea program of robust investment in the future of our products.

The second quarter of 2006 represented the first fullquarter with FDA approval to sell ERBITUX in two tumor types. Domesticin-market sales during the second quarter of 2006 continued to grow, reaching$172.8 million, an increase of 25% over the first quarter of 2006, and anincrease of 77% from the second quarter of 2005. This growth is, in largemeasure, attributable to a rapid uptake of ERBITUX in head and neck cancersince the launch in March 2006. This quarter we were also successful inamending and supplementing our 1998 development and license agreement with ourpartner, Merck KGaA. Merck and Takeda Pharmaceutical Company signed an alliancein September 2005 for the development and commercialization of matuzumab,a humanized EGFR-targeting monoclonal antibody. As part of the amendedagreements between us and Merck KGaA, we have consented to Merck KGaA’ssublicense of certain intellectual property rights relating to the developmentand commercialization of matuzumab to Takeda Pharmaceutical Company. Inconsideration for our consent, Merck KGaA agreed****to pay us 2.5 million euros upon execution of theagreements and an additional 5 million euros upon our written consent to thesublicense. In addition, Merck KGaA agreed to increase its royalty payment onsales of ERBITUX from a percentage of gross margin to 9.5% of net sales ofERBITUX outside the US and 

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Canada, effective July 1,2006. This replaces a tiered royalty percentage of gross margin that recentlyapproximated 7.0 to 7.5% of net sales. The amended agreements do not extend tokey intellectual property rights in the U.S. and Canada, where we continue tohold exclusive licenses to key patents covering certain uses of EGFR-targetedmonoclonal antibodies. The amended agreements also promote freedom to operatein the development and commercialization of matuzumab outside the United Statesand Canada and of IMC-11F8 (a fully human EGFR-targeted IgG1 monoclonalantibody) within the United States and Canada through the grant of certainreciprocal rights, including the sharing of confidential technical information.These amended agreements mark an important step toward resolving issuesrelevant to each company’s ongoing development of future generationEGFR-targeted therapies. In addition, they provide us with added financialvalue from our commercial agreement with Merck KGaA as it relates to ERBITUX.

From an operating perspective, during the secondquarter of 2006, our second commercial-scale manufacturing facility, BB50,began commercial production of ERBITUX in anticipation of a registrationalfiling in early 2007. As previously noted, during the remainder of 2006, wewill continue to execute a program of focused investments. The following guidancehas been provided on our expected results for 2006:

Royalty revenue in 2006 will continue to reflect 39%of BMS’s net sales and beginning July 1, 2006, 9.5% of Merck KGaA netsales. License fees and milestone revenue in 2006 will include the continuingamortization, based on clinical development spending, of the $900 millionreceived from BMS. At the anticipated rates of clinical spending for 2006,amortization of milestones for the full year should approximate $250 million.Manufacturing revenue in 2006 will continue to reflect ERBITUX shipped to ourpartners for commercial use. The price charged for commercial material is basedon our actual cost to manufacture the product, plus, in the case of BMS only, a10% mark-up on bulk manufacturing costs. Collaborative agreement revenue in2006 will continue to include the purchase of ERBITUX for clinical use by ourpartners, reimbursement by our corporate partners of certain regulatory,clinical and marketing expenses incurred on behalf of ERBITUX, and reimbursementof royalty expenses of 4.5% of North American net sales in accordance with theexisting terms of the BMS agreement, as well as a low single digit amount fromMerck KGaA.

Effective January 1,2006, we adopted Financial Accounting Standards Statement No. 123 (revised2004),*Share-Based Payment,* whichprovides that the expense associated with share-based payment transactions berecognized in the financial statements. We estimate that the total expense forstock options in 2006 will be approximately $9.6 million. Compensationexpense for the three and six months ended June 30, 2006 amounted toapproximately $2.2 million and $4.1 million, respectively and this expense isreflected in each expense category where the employee benefits are categorized.Research and development expenses include costs to support our pre-clinicalresearch efforts as well as development costs (including process scale-up,toxicology and production of non-ERBITUX clinical materials) for our pipelineproducts. These costs are expected to approximate $130 million in 2006,including approximately $3.1 million attributable to share based compensationexpense. The increase from 2005 reflects additional efforts in support of ournon-ERBITUX pipeline, including third-party manufacturing costs, costsassociated with producing clinical supplies of ERBITUX for use by us and ourpartners (which are reimbursed as a component of collaborative agreementrevenue). Clinical and regulatory expenses in 2006 are expected to increase aswe embark on a number of studies in support of expanded use of ERBITUX as wellas later-stage clinical development programs for our pipeline products. Inaddition, we are enhancing our medical affairs programs, and expanding ourregulatory capabilities. As a result, total clinical and regulatory expensesare expected to reach approximately $80 million in 2006, includingapproximately $1.3 million attributable to share based compensationexpense. Marketing, general and administrative expenses should approximate $75million in 2006, including approximately $5.2 million attributable to sharebased compensation expense. Royalty expense for the remainder of 2006 willconsist of 

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approximately9.25% of North American net sales, with 4.5% of North American net salesexpected to be reimbursed by BMS as a component of collaborative agreementrevenue, resulting in a net royalty burden to us of 4.75%. In addition, royaltyexpense at a single-digit percentage of international net sales will also beincurred. Cost of manufacturing revenue for the remainder of 2006 will reflectfull absorption costs since we sold all previously expensed inventory. The effective tax rate in 2006 is estimatedto be approximately 15%, which excludes the effect of the partial release ofour valuation allowance in the first quarter of 2006. The estimated tax rate of15% increased slightly from our original estimate in the first quarter of 2006of 13%, due to higher projected income for the full-year 2006 than previouslyestimated. The most significant reason for the increase in projected taxableincome is due to the expected receipt of the up-front payments from Merck KGaAas a result of amending, in July 2006, the 1998 development and licenseagreement with Merck KGaA.

**CRITICAL ACCOUNTINGPOLICIES**

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

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

Revenues from license fees and milestone paymentsprimarily consist of up-front license fees and milestone payments receivedunder the Commercial Agreement with BMS, relating to ERBITUX, and milestonepayments received under the development and license agreement with Merck KGaA.We recognize all non-refundable up-front license fees as revenues in accordancewith the guidance provided in the SEC’s Staff Accounting Bulletin No. 104.Our most critical application of this policy, to date, relates to the$900,000,000 in license fees received from BMS under the Commercial Agreementwhich are being deferred and recognized as revenue based upon the actualproduct clinical and development costs incurred since September 19, 2001to date by BMS and ImClone as a percentage of the estimated total of such coststo be incurred over the 17 year term of the Commercial Agreement. Theestimated total of such costs is based on the clinical development budget whichestablishes joint responsibilities that will be carried out by both the Companyand BMS for certain clinical and other studies. Of the $900,000,000 in paymentsreceived through June 30, 2006, $33.4 million was recognized as revenue inthe second quarter of 2006 and $471.6 million from the commencement of theCommercial Agreement in 2001 through June 30, 2006. The methodology used torecognize deferred revenue involves a number of estimates and judgments, suchas the estimate of total product clinical and development costs to be incurredunder the Commercial Agreement. Changes in these estimates and judgments canhave a significant effect on the size and timing of revenue recognition. Inaddition, if management had chosen a different methodology to recognize thelicense fee and milestone payments received under the Commercial Agreement, theCompany’s financial position and results of operations could have differedmaterially. For example, if the Company were to recognize the revenues earnedfrom the Commercial Agreement on a straight-line basis over the life of theagreement, the Company would have recognized approximately $15.9 million and$157.2 million as revenue in the second quarter of 2006 and from thecommencement of the Commercial Agreement, 

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respectively, through June 30,2006. Management believes that the current methodology used to recognizerevenues under the Commercial Agreement, which reflects the level of effortconsistent with the product development activities, is the most appropriatemethodology because it reflects the level of expenditure and activity in theperiod in which it is being spent as compared to the total expected expenditureover the life of the Commercial Agreement. This cost to cost approach issystematic and rational, it provides a factually supportable pattern to trackprogress, and is reflective of the level of effort, which varies over time.

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

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

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

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

*Inventories—**Until*February 12,2004, all costs associated with the manufacturing of ERBITUX were included inresearch and development expenses when incurred. Effective February 13,2004, the date after we received approval from the FDA for ERBITUX, we began tocapitalize in inventory the cost of manufacturing ERBITUX and have expensedsuch costs as cost of manufacturing revenue at the time of sale. Since we hadpreviously expensed all inventory produced, the costs of manufacturing revenuein 2004 reflected minimal costs primarily consisting of shipping and storagecharges. In 2005, we continued to sell inventory that was previously expensedand gradually began to sell inventory that was partially expensed, since therewas inventory in process on the date that we received FDA approval of ERBITUX.In the fourth quarter of 2005, we sold substantially all inventory with partialcosts. As a result, our cost of 

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manufacturing revenue inthe remainder of 2006 will reflect full absorption costs of production sincethe remaining partially expensed inventory was fully recognized in the firstquarter of 2006. We expect that our quarterly margins on sales of ERBITUX willtherefore begin to stabilize in 2006 and reflect an average margin that willrange between 5%- 8% depending on various circumstances such as the level ofdemand from our partners and the costs of filling and finishing the product(which does not include a markup when selling to BMS), relative to the overallcosts of the bulk.

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

In June 2006, we began producing ERBITUX forcommercial use at our BB50 manufacturing facility. Based on our currenttimeline, we expect to file a sBLA with the FDA for approval of our BB50facility in the first quarter of 2007. Until such time as we receive approvalof BB50 from the FDA, we will not be able to sell the ERBITUX inventoryproduced in BB50. Based on management’s current expectations, we expect thatthe costs of such inventory will be fully realizable once we obtain approval ofBB50. Therefore, in June 2006 we began to capitalize the costs of producingERBITUX in BB50 and will continue to do so, as long as we can conclude that thecosts of such inventory will be fully realizable.

During the second quarter of 2006, certainmanufacturing improvements were made to the equipment in the Company’s singlemanufacturing facility that requires regulatory action. The Company plans tofile a sBLA with the FDA in the middle of August 2006, and we expect to beable to distribute ERBITUX produced with the improved equipment approximatelythirty days after the submission date. As of June 30, 2006, there wasapproximately $16.2 million of inventory produced using this equipment.

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

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

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*Income Taxes—**Income*taxes areaccounted for under the asset and liability method. Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases and operating loss and taxcredit carryforwards. Significant estimates are required in determining ourprovision for income taxes. In the first quarter of 2006, we released a portionof our valuation allowance against our deferred tax assets because wedetermined, based on revised expectations of our projected future earnings,that it is more likely than not that we will realize the benefit of thesedeferred tax assets, which amounted to approximately $99.5 million. Ourconclusion to release a portion of our valuation allowance against our deferredtax assets is supported by several events that transpired during the firstquarter of 2006. In addition to obtaining approval from the FDA for ERBITUX asa second indication in March of 2006, the in-market sales for ERBITUXduring this period exceeded our expectations and have continued to show stronggrowth in the marketplace. Most importantly, a potential competitor releasedcertain clinical data on their competing product, which gave us the ability tofurther understand the competitive threats posed by this potential product.Therefore, our decision is supported by a combination of better than expectedin-market sales that we believe will be sustainable in the future coupled withthe ability to further refine our future financial projections and assumptionsrelated to our competition. The financial projections supporting our conclusionto release a portion of our valuation allowance contain significant assumptionsbased on current facts about our market share and our competitive landscape. Ifsuch assumptions were to differ significantly, it may have a materialimpact on our ability to realize our deferred tax assets.

**Impact of Recent AccountingPronouncements**

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

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**RESULTS OFOPERATIONS**

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

| ** **                                          |   | **Three Months Ended  June 30** | ** ** | **Six Months Ended  June 30** |       |
|-----------------------------------------------------|--------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                          |   | **2006**                             | ** ** | **2005**                           | ** ** | **Variance** | ** ** | **2006** | ** ** | **2005** | ** ** | **Variance** |   |
| **Results of Operations:**                          |   |                                 |       |                               |       |   |   |   |   |   |   |   |   |
| Royalty revenue                                     |   | $                                    | 74,614     |                               | $41,791    |   | 32,823 |   | $134,884 |   | $ | 78,163 |   | 56,721 |   |
| License fees and  milestone revenue                 |   | 33,456                               |       | 24,491                             |       | 8,965 |   | 177,859 |   | 49,025 |   | 128,834 |   |
| Manufacturing  revenue                              |   | 28,356                               |       | 7,894                              |       | 20,462 |   | 47,705 |   | 18,913 |   | 28,792 |   |
| Collaborative  agreement   revenue                  |   | 13,430                               |       | 18,209                             |       | (4,779 | ) | 34,539 |   | 32,055 |   | 2,484 |   |
| Total revenues                                      |   | 149,856                              |       | 92,385                             |       | 57,471 |   | 394,987 |   | 178,156 |   | 216,831 |   |
| Research and  development                           |   | 27,583                               |       | 24,433                             |       | 3,150 |   | 60,576 |   | 45,606 |   | 14,970 |   |
| Clinical and  regulatory                            |   | 14,929                               |       | 8,376                              |       | 6,553 |   | 30,010 |   | 17,774 |   | 12,236 |   |
| Marketing,  general and administrative              |   | 22,963                               |       | 16,833                             |       | 6,130 |   | 40,964 |   | 34,456 |   | 6,508 |   |
| Royalty expense                                     |   | 18,414                               |       | 14,338                             |       | 4,076 |   | 38,480 |   | 26,904 |   | 11,576 |   |
| Cost of  manufacturing revenue                      |   | 26,877                               |       | 1,106                              |       | 25,771 |   | 42,279 |   | 1,849 |   | 40,430 |   |
| Discontinuation  of small molecule research program |   | —                               |       | 6,200                              |       | (6,200 | ) | — |   | 6,200 |   | (6,200 | ) |
| Total operating expenses                            |   | 110,766                              |       | 71,286                             |       | 39,480 |   | 212,309 |   | 132,789 |   | 79,520 |   |
| Operating income                                    |   | 39,090                               |       | 21,099                             |       | 17,991 |   | 182,678 |   | 45,367 |   | 137,311 |   |
|                                                     |        |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

 

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

**Revenues**

**Royalty Revenue**

Royalty revenue consists primarily of royalty paymentsearned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under ouragreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA we were entitled to royalty based on a percentage of gross margin ofMerck KGaA’s sales of ERBITUX outside the United States and Canada. Beginningin July of 2006, we are entitled to 9.5% of Merck’s KGaA’s net sales outsideof the United States and Canada. In the second quarter of 2006, our royaltyrevenue increased by approximately $32.8 million from the comparable period in2005 due to an increase in net sales of ERBITUX. In North America, net sales byBMS in the second quarter of 2006 amounted to $172.8 million compared to netsales in the comparable period in 2005 of $97.8 million, an increase of $75million, or 77%. Outside of North America, net sales of ERBITUX by Merck KGaAin the second quarter of 2006 amounted to approximately $102.5 million, anincrease of $40.6 million or 66% from the comparable period in 2005.

Royalty revenue for thesecond half of 2006 will reflect 39% of BMS’ net sales and 9.5% of Merck KGaA’snet sales.

**License Fees andMilestone Revenue**

License fees and milestone revenue in the secondquarter of 2006 of $33.5 million consists of the recognition of up-frontlicense fees and milestone payments received under the Commercial Agreement 

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with BMS of $33.4 millionand recognition of payments received under the development and licenseagreements with Merck KGaA of $55,000. The increase of $9.0 million, or 37%from the comparable period in 2005, is due to an increase in the clinicaldevelopment spend as well as the higher amount of deferred revenue beingamortized as the result of the receipt of the $250 million milestone from BMSin the first quarter of 2006.

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

**ManufacturingRevenue**

Manufacturing revenue in the second quarter of 2006 of$28.4 million consists of sales of ERBITUX to BMS and Merck KGaA for commercialuse. The increase from the comparable period in 2005 of $20.5 million is due toan increase in sales to BMS of approximately $19.7 million and sales to MerckKGaA of $0.8 million. The increase in sales of ERBITUX to our partners forcommercial use is directly associated with the increase in in-market sales (asdescribed above under royalty revenue) both in North America andinternationally. In accordance with the Commercial Agreement, we sell ERBITUXto BMS at our cost of production plus a 10% markup on bulk. We sell bulkinventory to Merck KGaA at our full absorption cost of production.

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

**CollaborativeAgreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursementfrom our partners: clinical and regulatory expenses, the cost of ERBITUXsupplied to our partners for use in clinical studies, certain marketing andadministrative expenses, and a portion of royalty expense. During the secondquarter of 2006, we earned $13.4 million in collaborative agreement revenue, ofwhich approximately $11.8 million represents amounts earned from BMS andapproximately $1.6 million represents amounts earned from Merck KGaA, ascompared to $18.2 million earned in the comparable period in 2005, of which$11.5 million was earned from BMS and approximately $6.7 million was earnedfrom Merck KGaA. The decrease in collaborative agreement revenue of $4.8million is principally due to a decrease in reimbursement for clinical drugs ofapproximately $7.7 million, and a decrease in reimbursement of clinical andmarketing and general administrative expenses of approximately $1.2 million,partially offset by an increase in royalty expense reimbursement ofapproximately $4.1 million as a result of higher sales by our partners.

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

**Expenses**

**Research andDevelopment**

Research and development expenses in the secondquarter of 2006 of $27.6 million increased by approximately $3.2 million, or13% from the comparable period in 2005. The increase is primarily due to 

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an increase in third partycosts associated with the development of our non-ERBITUX pipeline ofapproximately $4.0 million, an increase in share based compensation ofapproximately $500,000 and an increase in depreciation expense of $2.7 million,related to our BB50 manufacturing facility that became operational in June 2006.It is our policy that assets placed into service prior to July 1st receive a full year of depreciation. SinceBB50 became operational in June of 2006, we reflected six months ofdepreciation expense in the second quarter of 2006. These increases werepartially offset by a decrease in shipments of ERBITUX to our partners forclinical studies of approximately $1.8 million, a decrease in repair andmaintenance expenses of approximately $1.0 million and additional decreases ina number of other categories such as relocation expense, and postage anddelivery expenses. Research and development expenses include costs associatedwith our in-house and collaborative research programs, product and processdevelopment expenses, cost to manufacture our product candidates and qualityassurance and quality control costs. Research and development includes coststhat are reimbursable from our corporate partners. Approximately $1.1 millionand $8.9 million of costs representing research and development expenses in thesecond quarters of 2006 and 2005, respectively, were reimbursable and includedunder collaborative agreement revenue since they represent inventory suppliedto our partners for use in clinical studies.

We expect that researchand development expenses will approximate $130 million in 2006, includingapproximately $3.1 million attributable to share based compensation expense.The increase from 2005 reflects additional efforts in support of ournon-ERBITUX pipeline, including third-party manufacturing costs, costsassociated with clinical supplies of ERBITUX for use by us and our partners(which are reimbursed as a component of collaborative agreement revenue).

**Clinical andRegulatory**

Clinical and regulatory expenses consist of costs toconduct our clinical studies and associated regulatory activities. Clinical andregulatory expenses in the second quarter of 2006 amounted to$14.9 million, an increase of $6.6 million or 78% from the comparableperiod in 2005. The increase is primarily due to an increase of $4.4 milliondue BMS for reimbursement of clinical expenses related to ERBITUX and anincrease in salaries and benefits of approximately $1.1 million, which includes$351,000 of share based compensation expense. During 2005, we graduallyincreased the headcount in our clinical and regulatory department in order tosupport the continued growth of ERBITUX and to develop other productcandidates. Approximately $2.8 million and $3.8 million of the costs includedin this category for the second quarters of 2006 and 2005, respectively, arereflected as revenues under collaborative agreement revenue since theyrepresent costs that are reimbursable by our corporate partners.

Clinical and regulatory expensesin 2006 are expected to increase as we embark on a number of studies in supportof expanded use of ERBITUX as well as later-stage clinical development programsfor our pipeline products. In addition, we are enhancing our medical affairsprograms, and expanding our regulatory capabilities. As a result, totalclinical and regulatory expenses are expected to reach approximately $80million in 2006, including approximately $1.3 million attributable to sharebased compensation expense. A contractually determined portion of theERBITUX-related expenses will continue to be reimbursed as a component ofcollaborative agreement revenue.

**Marketing, Generaland Administrative**

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

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Marketing, general andadministrative expenses in the second quarter of 2006 amounted to $23.0 millionas compared to $16.8 million in the comparable period in 2005, an increaseof $6.1 million or 36%. The increase in the second quarter of 2006 is mainlydue to an increase in bonus to the field force of $2.4 million, which isdirectly correlated to the increase in ERBITUX in-market net sales for thequarter, an increase in marketing expenses associated with the launch ofERBITUX for use in head and neck cancer (approved by the FDA in March 2006)of approximately $1.1 million, and $1.4 million of share based compensationexpense. Except for the above, expenses in this category have remained fairlystable from the comparable period in 2005, mainly due to having no increases inheadcount and spending consistently in legal, accounting and consultingexpenses. Certain expenses in this category are reimbursable from our corporatepartners. Approximately $336,000 and $544,000 of costs representing marketingand general expenses in the second quarters of 2006 and 2005, respectively,were reimbursable and included in collaborative agreement revenue. Marketing,general and administrative expenses should approximate $75 million in 2006,including approximately $5.2 million attributable to share based compensationexpense. The increase versus 2005 is principally attributable to increasedmarketing efforts in support of launching ERBITUX as a second indication and toshared based compensation expense.

**Royalty Expense**

Royalty expense consists of obligations related tocertain licensing agreements related to ERBITUX. We are obligated to payroyalties of approximately 9.25% of North American net sales and a single digitroyalty on sales outside of North America, which will increase if sales outsideof North America consist of ERBITUX produced in the United States. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a single digit percentage on net sales outside of North America, which isreflected in collaborative agreement revenue. In the second quarter of 2006, weincurred royalty expense of $18.4 million as compared to $14.3 million, anincrease of $4.1 million, or 29%. The increase is directly associated withthe increase in net sales of ERBITUX in North America and outside of NorthAmerica, as previously described. Approximately $9.2 million and$5.0 million of royalty expense were reimbursable by our corporatepartners and included as collaborative agreement revenue in the second quartersof 2006 and 2005, respectively.

Royalty expenses for theremainder of 2006 will consists of approximately 9.25% of North American netsales with 4.5% of North American net sales expected to be reimbursed as acomponent of collaborative agreement revenue, resulting in a net royalty burdenof approximately 4.75%. In addition, a single-digit percentage of internationalnet sales is also expected to be incurred.

**Cost of ManufacturingRevenue**

Cost of manufacturingrevenue in the second quarter of 2006 amounted to $26.9 million representing agross margin of approximately 5% compared to costs of manufacturing revenue inthe comparable period of 2005 of approximately $1.1 million, or a gross marginof 86%. The fluctuation in our gross margin is due to the fact that prior toobtaining approval from the FDA for ERBITUX, we had previously expensed allERBITUX inventory produced as research and development expense. We began tocapitalize in inventory the cost of manufacturing ERBITUX after we receivedapproval in February of 2004. It has taken us two years to sell allinventory that was previously expensed or partially expensed. In the firstquarter of 2006, we exhausted the remaining batches of ERBITUX with partialcosts and we expect our margins to normalize going forward. We sell ERBITUX toBMS at our costs of production plus a 10% mark-up on bulk and to Merck KGaA atour cost of production. Therefore, depending on certain circumstances, such asthe mix of demand from our partners, and the costs of filling and finishingERBITUX bulk (for which we do not charge a 10% markup when selling to BMS), weexpect that our quarterly margins on sales of ERBITUX will reflect a grossmargin that will range between 5%-8%.

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**Interest Income andInterest Expense**

Interest income in the second quarter of 2006 amountedto $10.2 million, an increase of approximately $3.4 million or 50% fromthe comparable period in 2005. This increase is attributable to increases ininterest rates from the comparable period in 2005, and an increase in theaverage balance of our investment portfolio, which increased in the secondquarter, due to the fact that we invested the majority of the $250 millionreceived from BMS in March of 2006.

Interest expense in thesecond quarter of 2006 amounted to $1.9 million, an increase of $227,000or 13% from the comparable period in 2005. The increase is due to the fact thatwe finalized construction of our BB50 manufacturing facility in May of2006, and therefore, ceased capitalizing interest on the construction of thisfacility.

**Provision forIncome Taxes**

The estimated effectivetax rate used in calculating the full year 2006 is approximately 15% whichexcludes the effect of a partial release of our valuation allowance. Theestimated effective tax rate used for the first quarter of 2006 was 13%; as aresult, our effective tax rate for the second quarter of 2006 is 21%. Theestimates for the quarter and full-year rates are higher than the Company’sprevious estimate of 13% due to higher projected income for the full-year 2006than previously estimated with no additional operating tax attributes toutilize. The most significant reasonfor the increase in projected taxable income is due to the expected receipt ofthe up-front payments from Merck KGaA as a result of amending, in July 2006,the 1998 development and license agreement with Merck KGaA. Theprojected tax rate for 2006 is less than the federal statutory rate of 35%,mainly due to the utilization of fully reserved deferred tax assets.

**Net Income**

We had net income of $37.2million or $0.44 per basic common share and $0.42 per diluted common share inthe second quarter of 2006, compared with net income of $26.0 million or $0.31per basic common share and $0.30 per diluted common share for the comparableperiod in 2005. The fluctuation in results was due to the factors noted above.

***Six Months Ended June 30, 2006 and 2005***

**Revenues**

**Royalty Revenue**

Royalty revenue consists primarily of royalty paymentsearned on the sales of ERBITUX by our partners, BMS and Merck KGaA. Under ouragreement with BMS, we are entitled to royalty payments equal to 39% of BMS’snet sales of ERBITUX in the United States and Canada. Under our agreement withMerck KGaA we were entitled to royalty based on a percentage of gross margin ofMerck KGaA’s sales of ERBITUX outside the United States and Canada. Beginningin July of 2006, we are entitled to 9.5% of Merck’s KGaA’s net salesoutside of the United States and Canada. For the six months ended June 30,2006, royalty revenue amounted to $134.9 million, an increase of $56.7 millionor 73% from the comparable period in 2005 due to an increase in net sales ofERBITUX. In North America, net sales by BMS for the first six months of 2006amounted to $310.8 million compared to net sales in the comparable period in2005 of $184.9 million, an increase of $125.9 million, or 68%. Outside of NorthAmerica, net sales of ERBITUX by Merck KGaA in the first half of 2006 amountedto $192.3 million, an increase of $75.6 million or 65% from the comparableperiod in 2005.

Royalty revenue for theremainder of 2006 will reflect 39% of BMS’ net sales and 9.5% of Merck KGaA’snet sales.

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**License Fees andMilestone Revenue**

License fees and milestone revenue for the six monthsended June 30, 2006 of $177.9 million consists of the recognition ofup-front license fees and milestone payments received under the CommercialAgreement with BMS of $177.7 million and recognition of payments received underthe development and license agreements with Merck KGaA of $111,000. Theincrease of $128.8 million from the comparable period in 2005 is mainly due tothe fact that in March 2006, we earned the last milestone payment from BMSof $250 million, as a result of obtaining approval from the FDA for ERBITUX ina second indication. The milestone earned in the first quarter of 2006therefore includes a “catch-up” adjustment of approximately $112.7 millionrelated to the actual product clinical development costs incurred frominception through December 31, 2005 as a percentage of the estimated totalcosts to be incurred over the term of the Commercial Agreement.

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

**ManufacturingRevenue**

Manufacturing revenue for the six months ended June 30,2006 of $47.7 million consists of sales of ERBITUX to BMS and Merck KGaA forcommercial use. The increase from the comparable period in 2005 of $28.8million is due to an increase in sales to BMS of approximately $25.3 millionand sales to Merck KGaA of $3.5 million. The increase in sales of ERBITUXto our partners for commercial use is directly associated with the increase inin-market sales (as described above under royalty revenue) both in NorthAmerica and internationally. In accordance with the Commercial Agreement, wesell ERBITUX to BMS at our cost of production plus a 10% markup on bulk. Wesell bulk inventory to Merck KGaA at our full absorption cost of production.

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

**CollaborativeAgreement Revenue**

Collaborative agreement revenue consists primarily ofreimbursements from our partners BMS and Merck KGaA under our collaborativeagreements. There are certain categories for which we receive reimbursement fromour partners: clinical and regulatory expenses, the cost of ERBITUX supplied toour partners for use in clinical studies, certain marketing and administrativeexpenses, and a portion of royalty expense. During the six months ended June 30,2006, we earned $34.5 million in collaborative agreement revenue, of whichapproximately $25.1 million represents amounts earned from BMS andapproximately $9.5 million represents amounts earned from Merck KGaA, ascompared to $32.1 million earned in the comparable period in 2005, of which$21.1 million was earned from BMS and approximately $10.9 million was earnedfrom Merck KGaA. The increase in collaborative agreement revenue of $2.5million is principally due to an increase in reimbursement for royalty expenseof $8.2 million, as a result of higher sales by our partners, partially offsetby a decrease in reimbursement for clinical drugs of approximately $3.5 millionand in the reimbursement of clinical and marketing, general and administrativeexpenses of approximately $2.2 million.

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

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**Expenses**

**Research andDevelopment**

Research and development expenses for the six monthsended June 30, 2006 of $60.6 million increased by approximately $15.0million or 33% from the comparable period in 2005. The increase is primarilydue to an increase in third party costs associated with the development of ournon-ERBITUX pipeline of approximately $6.7 million, an increase in shipments ofERBITUX sold to our partners for clinical studies of approximately $5.8million, an increase in shared based compensation of approximately $1.0million, and an increase in depreciation expense of $2.7 million, related toour BB50 manufacturing facility that became operational in June 2006. Itis our policy that assets placed into service prior to July 1st receive a full year depreciation. Since BB50became operational in June of 2006, we reflected six months ofdepreciation expense in the second quarter of 2006. These increases werepartially offset by decreases in several categories such as repair andmaintenance, relocation expenses, and postage and delivery expenses. Researchand development expenses include costs associated with our in-house andcollaborative research programs, product and process development expenses, costto manufacture our product candidates and quality assurance and quality controlcosts. Research and development includes costs that are reimbursable from ourcorporate partners. Approximately $9.9 million and $13.5 million of costsrepresenting research and development expenses in the first half of 2006 and2005, respectively, were reimbursable and included under collaborativeagreement revenue since they represent inventory supplied to our partners foruse in clinical studies.

We expect that researchand development expenses will approximate $130 million in 2006, includingapproximately $3.1 million attributable to share based compensation expense.The increase from 2005 reflects additional efforts in support of ournon-ERBITUX pipeline, including third-party manufacturing costs, costsassociated with clinical supplies of ERBITUX (which are reimbursed as acomponent of collaborative agreement revenue).

**Clinical andRegulatory**

Clinical and regulatory expenses consist of costs toconduct our clinical studies and associated regulatory activities. Clinical andregulatory expenses for the six months ended June 30, 2006 amounted to$30.0 million, an increase of $12.2 million or 69% from the comparableperiod in 2005. The increase is primarily due to an increase of $8.5 milliondue BMS for reimbursement of clinical expenses related to ERBITUX and anincrease in salaries and benefits of approximately $2.1 million, which includes$669,000 of share based compensation expense. During 2005, we graduallyincreased our headcount in our clinical and regulatory department in order toinvest in the continued growth of ERBITUX and to develop other productcandidates. Approximately $6.2 million and $7.9 million of the costs includedin this category for the first half of 2006 and 2005, respectively, arereflected as revenues under collaborative agreement revenue since theyrepresent costs that are reimbursable by our corporate partners.

Clinical and regulatoryexpenses in 2006 are expected to increase as we embark on a number of studiesin support of expanded use of ERBITUX as well as later-stage clinicaldevelopment programs for our pipeline products. In addition, we are enhancingour medical affairs programs, and expanding our regulatory capabilities. As aresult, total clinical and regulatory expenses are expected to reachapproximately $80 million in 2006, including approximately $1.3 millionattributable to share based compensation expense. A contractually determinedportion of the ERBITUX-related expenses will continue to be reimbursed as acomponent of collaborative agreement revenue.

**Marketing, Generaland Administrative**

Marketing, general and administrative expenses includemarketing and administrative personnel costs, including related facility costs,additional costs to develop internal marketing and field operations 

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capabilities and expensesassociated with applying for patent protection for our technology and products.Marketing, general and administrative expenses also include amountsreimbursable from our corporate partners.

Marketing, general andadministrative expenses for the six months ended June 30, 2006 amounted to$40.9 million, an increase of $6.5 million or 19% from the comparable period in2005. The increase is mainly due to an increase in bonus to the field force of$2.4 million, which is directly correlated to the increase in ERBITUX in-marketnet sales, an increase in marketing expenses associated with the launch ofERBITUX for use in head and neck cancer (approved by the FDA in March 2006)of approximately $1.2 million, and $2.4 million of shared based compensationexpense. The remaining expenses in this category have remained fairly stablefrom the comparable period in 2005, mainly due to having no increases inheadcount and spending consistently in legal, accounting and consultingexpenses. Certain expenses in this category are reimbursable from our corporatepartners. Approximately $650,000 and $1.1 million of costs representingmarketing and general expenses for the six months ended June 30, 2006 and2005, respectively, were reimbursable and included in collaborative agreementrevenue. Marketing, general and administrative expenses should approximate $75million in 2006, including approximately $5.2 million attributable to sharebased compensation expense. The increase versus 2005 is principallyattributable to increased marketing efforts in support of launching ERBITUX asa second indication.

**Royalty Expense**

Royalty expense consists of obligations related tocertain licensing agreements related to ERBITUX. We are obligated to payroyalties of approximately 9.25% of North American net sales and a single digitroyalty on sales outside of North America, which will increase if sales outsideof North America consist of ERBITUX produced in the United States. We receivereimbursements from our corporate partners of 4.5% on North American net salesand a single digit percentage on net sales outside of North America, which isreflected in collaborative agreement revenue. During the six months ended June 30,2006, we incurred royalty expense of $38.5 million as compared to $26.9million, an increase of $11.6 million, or 43%. The increase is directlyassociated with the increase in net sales of ERBITUX in North America andoutside of North America, as previously described. Approximately$17.8 million and $9.5 million of royalty expense was reimbursable byour corporate partners and included as collaborative agreement revenue in thefirst half of 2006 and 2005, respectively.

Royalty expenses for theremainder of 2006 will consists of approximately 9.25% of North Americanin-market net sales with 4.5% of North American net sales expected to bereimbursed as a component of collaborative agreement revenue, resulting in anet royalty burden of approximately 4.75%. In addition, a single-digitpercentage of international net sales is also expected to be incurred.

**Cost ofManufacturing Revenue**

Cost of manufacturingrevenue for the six months ended June 30, 2006 amounted to $42.3 millionrepresenting a gross margin of approximately 11% compared to costs ofmanufacturing revenue in the comparable period of 2005 of approximately $1.8million, or a gross margin of 90%. The fluctuation in our gross margin is dueto the fact that prior to obtaining approval from the FDA for ERBITUX, we had previouslyexpensed all ERBITUX inventory produced as research and development. We beganto capitalize in inventory the cost of manufacturing ERBITUX after we receivedapproval in February of 2004. It has taken us two years to sell allinventory that was previously expensed or partially expensed. In the firstquarter of 2006, we exhausted the remaining batches of ERBITUX with partialcosts and we expect our margins to normalize going forward. We sell ERBITUX toBMS at our costs of production plus a 10% mark-up on bulk and to Merck KGaA atour cost of production. Therefore, depending on certain circumstance such asthe mix of demand from our partners, and the costs of filling and finishing 

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ERBITUXbulk (for which we do not charge a 10% markup when selling to BMS), we expectthat our quarterly margins on sales of ERBITUX will reflect a gross margin thatwill range between 5%-8%.

**Interest Income andInterest Expense**

Interest income for the six months ended June 30,2006 amounted to $17.4 million, an increase of approximately $3.8 millionor 28% from the comparable period in 2005. This increase is attributable toincreases in interest rates from the comparable period in 2005, and an increasein the average balance of our investment portfolio, which increased in thesecond quarter, due to the fact that we invested the majority of the $250million received from BMS in March of 2006.

Interest expense for thesix months ended June 30, 2006 amounted to $3.4 million, which isconsistent with the comparable period in 2005.

**Provision forIncome Taxes**

The Company’s estimated annual effective income taxrate for 2006 is approximately 15% which excludes the effect of the partialrelease of our valuation allowance described below. The estimate for thefull-year rates is higher than the Company’s previous estimate of 13% due tohigher projected income for the full-year 2006 than previously estimated with noadditional operating tax attributes to utilize. The most significant reason for the increase in projected taxable incomeis due to the expected receipt of the up-front payments from Merck KGaA as aresult of amending, in July 2006, the 1998 development and licenseagreement with Merck KGaA. The projected tax rate for 2006 is less thanthe federal statutory rate of 35%, mainly due to the utilization of fullyreserved deferred tax assets.

In the first quarter of2006, we released a portion of its valuation allowance against our totaldeferred tax assets because we determined, based on revised expectations of ourprojected future earnings, that it is more likely than not that we will realizethe benefit of these deferred tax assets, which amounted to approximately $99.5million. Our conclusion to release a portion of our valuation allowance againstour deferred tax assets is supported by several events that transpired duringthe first quarter of 2006. In addition to obtaining approval from the FDA forERBITUX in a second indication in March of 2006, the in-market sales forERBITUX during this period exceeded our expectations and have continued to showstrong growth in the marketplace. Most importantly, a potential competitorreleased certain clinical data on their competing product, which gave us theability to further understand the competitive threats posed by this potentialproduct. Therefore, our decision is supported by a combination of better thanexpected in-market sales that we believe will be sustainable in the futurecoupled with the ability to further refine our future financial projections andassumptions related to our competition. The financial projections supportingour conclusion to release a portion of our valuation allowance containsignificant assumptions based on current facts about our market share and ourcompetitive landscape. If such assumptions were to differ significantly, itmay have a material impact on our ability to realize our deferred taxassets.

**Net Income**

We had net income of$266.8 million or $3.18 per basic common share and $2.93 per diluted commonshare for the six months ended June 30, 2006, compared with net income of$54.9 million or $0.66 per basic common share and $0.63 per diluted commonshare for the comparable period in 2005. The fluctuation in results was due tothe factors noted above.

**LIQUIDITY ANDCAPITAL RESOURCES**

At June 30, 2006, ourprincipal sources of liquidity consisted of cash and cash equivalents andsecurities available for sale of approximately $963.8 million.Historically, we have financed our operations through a variety of sources,most significantly through the issuance of public and private equity and 

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convertiblenotes, license fees and milestone payments and reimbursements from ourcorporate partners. Since the approval of ERBITUX on February 12, 2004, webegan to generate royalty revenue and manufacturing revenue from the commercialsale of ERBITUX by our corporate partners and we have generated income fromoperations in 2004, 2005 and in the first half of 2006. As we continue togenerate income, our cash flows from operating activities are expected toincrease as a source to fund our operations. Therefore, we anticipate that ourfuture financial condition and our future operating performance will continueto experience significant changes and that past performance will not likely beindicative of our future performance.

**SUMMARY OF CASH FLOWS**

| ** **                                            | ** ** | **June 30,  2006** | ** ** | **June 30,  2005** | ** ** | **Variance** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|--------------|------------|
| Cash provided by (used)  in:                          |       |                    |       |                    |       |         |       |
| Operating activities                                  |       | $                       | 180,308    |                    | $          | (64,968      | )          | $ | 245,276 |   |
| Investing activities                                  |       | (219,164                | )          | (22,133                 | )          | (197,031     | )          |
| Financing activities                                  |       | 61,548                  |       | 12,368                  |       | 49,180       |       |
| Net increase  (decrease) in cash and cash equivalents |       | $                       | 22,692     |                    | $          | (74,733      | )          | $ | 97,425 |   |

 

Historically our cash flows from operating activitieshave fluctuated significantly due to the nature of our operations and thetiming of our cash receipts. During the first half of 2006, we generatedapproximately $180.3 million in cash from operating activities, as compared tonet cash used in operating activities in the comparable period of 2005 of$65 million. The increase in operating cash flows in the first half of2006 is primarily due to the receipt of $250 million milestone payment from ourcorporate partner BMS, as a result of obtaining approval from the FDA forERBITUX in a second indication, partly offset by a payment to the IRS ofapproximately $32 million for withholding taxes related to an employment taxaudit for the years 1999-2001.

Our primary sources and uses of cash from investingactivities consist of purchases and sales activity in our investment portfolio,which we manage based on our liquidity needs, possible business developmenttransactions and amounts used for capital expenditures. During the first halfof 2006, we used net cash from investing activities of $219.2 million comprisedof approximately $32.5 million in acquisition of fixed assets, and we made netpurchases of securities of approximately $186.7 million by investing themajority of the milestone payment received from BMS at the end of the firstquarter of 2006.

We generated net cash flows from financing activitiesin the first half of 2006 of approximately $61.5 million as compared to $12.4million in the comparable period of 2005. Cash flows from financing activities weregenerated from employees exercising stock options and from the issuance ofcommon stock under our employee stock purchase plan. In addition, this categoryreflects the benefit of equity net operating losses that will be taken as areduction in our tax liability on our tax return and therefore, saving us cashby reducing our federal and state taxes due.

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

| ** **                          | ** ** | **Payments due by Year(1)** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|
| ** **                          | ** ** | **Total**                                  | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** |
| Long-term debt(2)                   |       | $                                          | 600,000    |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 600,000 |   |
| Interest on  long-term debt         |       | 147,469                                    |       | 4,125 |   | 8,250 |   | 8,250 |   | 8,250 |   | 8,250 |   | 110,344 |   |
| Operating leases                    |       | 68,473                                     |       | 2,410 |   | 5,385 |   | 4,227 |   | 4,263 |   | 4,174 |   | 48,014 |   |
| Purchase  obligations               |       | 8,449                                      |       | 8,449 |   | — |   | — |   | — |   | — |   | — |   |
| Contract services  obligations      |       | 19,800                                     |       | 10,080 |   | 3,510 |   | 1,350 |   | 1,620 |   | 3,240 |   | — |   |
| Total contractual cash  obligations |       | $                                          | 844,191    |   | $ | 25,064 |   | $ | 17,145 |   | $ | 13,827 |   | $ | 14,133 |   | $ | 15,664 |   | $ | 758,358 |   |

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

(2)          OnMay 15, 2009, 2014 and 2019, or upon the occurrence of certain designatedevents, holders may require the Company to repurchase the notes at a repurchaseprice equal to 100% of the principal amount of the notes plus accrued and unpaidinterest.

**OFF-BALANCE SHEETARRANGEMENTS**

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

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

Our holdings of financial instruments comprise a mixof U.S. dollar denominated securities that may include U.S. corporate debt,foreign corporate debt, U.S. government debt, foreign government debt,asset-backed securities, agency debt and commercial paper. All such instrumentsare classified as securities available for sale. Generally, we do not invest inportfolio equity securities, commodities, foreign exchange contracts or use financialderivatives for trading purposes. Our debt security portfolio represents fundsheld temporarily pending use in our business and operations. We manage thesefunds accordingly. We seek reasonable assuredness of the safety of principaland market liquidity by investing in investment grade fixed income securitieswhile at the same time seeking to achieve a favorable rate of return. Ourmarket risk exposure consists principally of exposure to changes in interestrates. Our holdings are also exposed to the risks of changes in the creditquality of issuers. We invest in securities that have a range of maturitydates.

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The table below presentsthe principal amounts and related weighted average interest rates by year ofmaturity for our investment portfolio as of June 30, 2006: (in thousands,except interest rates)

| ** **             | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011 and  Thereafter** | ** ** | **Total** | ** ** | **Fair  Value** | ** ** |
|------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-------------------------------|------------|-----------|------------|-----------------|------------|
| Fixed Rate             |       | $        | 150,000    |     | $          | 212,400  |       | $        | 100,000    |     | $          | 55,000                        |       | $         | 20,000     |            |       | $ | — |   |   | $ | 537,400 |   | $ | 526,506 |   |
| Average Interest  Rate |       | 2.97     | %          | 3.51     | %          | 3.86     | %          | 4.33     | %          | 4.54     | %          |                          | —     |      |       | 3.55            | %          |   |   |
| Variable Rate(1)       |       | —   |       | —   |       | 1,803    |       | —   |       | 10,000   |       |                          | 399,625    |      |       | 411,428         |       | 411,178 |   |
| Average Interest  Rate |       | —   |       | —   |       | 4.85     | %          | —   |       | 4.00     | %          |                          | 5.25       | %         |       | 5.22            | %          |   |   |
|                   |       | $        | 150,000    |     | $          | 212,400  |       | $        | 101,803    |     | $          | 55,000                        |       | $         | 30,000     |            |       | $ | 399,625 |   |   | $ | 948,828 |   | $ | 937,684 |   |

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

Our outstanding 13¤8%fixed rate convertible senior notes in the principal amount of $600,000,000 dueMay 15, 2024 are convertible into our common stock at a conversion priceof $94.69 per share, subject to certain restrictions as outlined in theindenture agreement. The fair value of fixed interest rate instruments isaffected by changes in interest rates and in the case of the convertible notesby changes in the price of our common stock as well. The fair value of theconvertible senior notes was approximately $541,500,000 at June 30, 2006.

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

*Disclosure Controlsand Procedures*

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

*Changes In InternalControl Over Financial Reporting*

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

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**PART II**

**OTHER INFORMATION**

**Item 1.**                        *Legal Proceedings*

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

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

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

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

52

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

***B.   Intellectual Property Litigation***

As previously reported, on October 28, 2003, acomplaint was filed by Yeda Research and Development Company Ltd. (“Yeda”)against ImClone Systems and Aventis Pharmaceuticals, Inc. in the U.S.District Court for the Southern District of New York (03 CV 8484). This actiondoes not seek damages, but rather alleges and seeks that three individualsassociated with Yeda should also be named as co-inventors on U.S. Patent No. 6,217,866.On June 7, 2005, Yeda amended its U.S. complaint to seek sole inventorshipof the subject patent. On November 4, 2005, the Court denied the Company’smotion for summary judgment with respect to this matter, as filed with theCourt on June 24, 2005. Hearings on this matter concluded in July 2006;a determination is forthcoming. The Company is vigorously defending againstclaims 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 ofpatent EP (UK) 0 667 165 to add three Yeda employees asinventors. Also on March 25, 2004, a German action entitled Legal Actionwas filed in the Munich District Court I, Patent Litigation Division, seekingto add three Yeda employees as inventors on patent EP (DE) 0 667 165. TheCompany was not named as a party in these actions that relate to the Europeanequivalent of U.S. Patent No. 6,217,866 discussed above; accordingly, theCompany intervened in the U.K. and German actions. Yeda sought to amend itspleadings in the United Kingdom and Germany to seek sole inventorship.Following hearings, both the U.K. and German courts held that Yeda was notentitled to amend its pleadings. Additionally, on or about March 25, 2005and March 29, 2005, respectively, Yeda filed legal actions in Austria andFrance against both Aventis and ImClone Systems seeking full inventorship of EP(AU) 0 667 165 and EP (FR) 0 667 165, as well as payment of legal costsand fees. The Company is vigorously defending against claims asserted in theseactions. The Company is unable to predict the outcome of these actions at thepresent time.

As previously reported, on May 4, 2004, acomplaint was filed against the Company by Massachusetts Institute ofTechnology (“MIT”) and Repligen Corporation (“Repligen”) in the U.S. DistrictCourt for the District of Massachusetts (04-10884 RGS). This actionalleges that ERBITUX infringes U.S. Patent No. 4,663,281, which is ownedby MIT and exclusively licensed to Repligen and that the Company shouldtherefore pay damages. On July 28, 2006, the Court denied the Company’smotion for summary judgment seeking to dismiss all claims on the basis that thepatent rights at issue were exhausted as a matter of law and granted MIT andRepligen’s cross motion that their patent rights were not exhausted. The casewill now proceed to trial on the merits of the Company’s other defenses. TheCompany is vigorously defending against claims asserted in this action. TheCompany is unable to predict the outcome of this action at the present time.

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

As previously disclosed,the Company is developing 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 had advised the Companythat it believed that IMC-11F8 was 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, 

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forwhich it would pay the same royalty as it pays for ERBITUX. See “CorporateCollaborations—Collaborations with Merck KGaA”. In agreement with Merck KGaA,the Company submitted this dispute to binding arbitration through an expeditedprocess outside of the provisions of the development and license agreement.Merck KGaA subsequently took the position that the expedited arbitrationprovision was no longer valid and the Company sued Merck KGaA in federal courtin the Southern District of New York to either enforce the arbitrationprovision previously agreed to or to have the court decide the question ofwhether IMC-11F8 is or is not covered under the development and licenseagreement with Merck KGaA. On November 29, 2005, the Court granted the Company’smotion to enforce the expedited arbitration provision previously agreed to, andsubsequently appointed a new arbitrator to hear and decide this dispute. On March 31,2006, the arbitrator decided the matter in favor of the Company, finding thatMerck KGaA had no rights to IMC-11F8. That decision is binding andunappealable pursuant to the parties’ arbitration agreement and the partieshave subsequently confirmed the arbitration award.

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

**Supplemental Risks Relating to Intellectual Property**

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

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

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

The existence of patents or other proprietary rightsbelonging to other parties may lead to our termination of the research anddevelopment of a particular product or cause us to obtain third-party licensesat potentially material costs. We believe that we have strong patent protectionor the potential for strong patent protection for our product and productcandidates. However, it is for the courts and/or other governmental agencies inthe U.S. and in other jurisdictions ultimately to determine the strength ofthat patent protection. We hold patents or licenses to patents relating tomurine antibodies as well as patents and licenses relating to the therapeuticuse of EGFR antibodies. These patents expire on various dates, the earliest ofwhich is in 2007. Risks related to our patent position with respect to ERBITUXand our product candidates are more fully discussed under “Item 1—Business—Patentsand Trademarks” in our 2005 Annual Report on Form 10-K.

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**Severallawsuits have been filed against us, including certain challenges to theinventorship of our licensed patent relating to the therapeutic use of EGFRantibodies, which have resulted, and will likely continue to result, inlitigation that is costly to defend and the outcome of which is uncertain andmay harm our business.**

Litigations or arbitrations to which we are currently,or have been in the past, subjected relate to, among other things, our patentand other intellectual property rights, licensing arrangements with otherpersons and those other claims more fully described under “Part II—Item 1.Legal Proceedings”, including proceedings currently pending in the U.S.District Court for the Southern District of New York alleging and seeking thatthree individuals associated with Yeda Research and DevelopmentCompany Ltd. be named as sole or co-inventors on U.S. PatentNo. 6,217,866 relating to the therapeutic use of EGFR antibodies, withrelated actions pending in the United Kingdom, Germany, France and Austria.

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

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

Not applicable

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

Not applicable

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

Not applicable

**Item 5.**                        *Other Information*

Not applicable

**Item 6.**                     *Exhibits*
| Exhibit No. | ** ** | ** **                                                                                                                                                | ** ** | **Description** | ** ** | **Incorporated   by   Reference** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------------------------|
| 3.1              |       | Certificate of Incorporation, as amended through  December 31, 1998                                                                                  |       | D(3.1)          |
| 3.2              |       | Amendment dated June 4, 1999 to the Company’s  Certificate of Incorporation, as amended                                                         |       | H(3.1A)         |
| 3.3              |       | Amendment dated June 12, 2000 to the Company’s  Certificate of Incorporation, as amended                                                        |       | K(3.1A)         |
| 3.4              |       | Amendment dated August 9, 2002 to the Company’s  Certificate of Incorporation, as amended                                                       |       | Q(3.1C)         |
| 3.5              |       | Amended and Restated By-Laws of the Company                                                                                                               |       | Z(3.1)          |
| 4.1              |       | Rights Agreement dated as of February 15, 2002  between the Company and EquiServe Trust Company, N.A., as Rights Agent, as  amended May 4, 2006 |       | JJ(EX-2)        |

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| 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)     |
| 10.3  |   | 1996 Incentive Stock Option Plan, as amended                                                                                                                                                                |   | O(99.1)    |
| 10.4  |   | 1996 Non-Qualified Stock Option Plan, as amended                                                                                                                                                            |   | O(99.2)    |
| 10.5  |   | ImClone Systems Incorporated 1998 Non-Qualified  Stock Option Plan, as amended                                                                                                                              |   | O(99.2)    |
| 10.6  |   | ImClone Systems Incorporated 2002 Stock Option Plan                                                                                                                                                         |   | Q(99.8)    |
| 10.7  |   | ImClone Systems Incorporated 1998 Employee Stock  Purchase Plan                                                                                                                                             |   | I(99.4)    |
| 10.8  |   | Option Agreement, dated as of September 1,  1998, between the Company and Ron Martell                                                                                                                  |   | F(99.3)    |
| 10.10 |   | License Agreement between the Company and the  Regents of the University of California dated April 9, 1993                                                                                             |   | B(10.48)   |
| 10.12 |   | 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 Agreement dated as of December 15, 1998  for the Company’s premises at 180 Varick Street, New York, New York                                                                           |   | G(10.69)   |
| 10.15 |   | Amendment dated March 2, 1999 to Development  and License Agreement between the Company and Merck KGaA                                                                                                 |   | G(10.71)   |
| 10.16 |   | Acquisition Agreement dated as of September 19,  2001, among the Company, Bristol-Myers Squibb Company and Bristol-Myers  Squibb Biologics Company                                                     |   | L(99.D1)   |
| 10.17 |   | Development, Promotion, Distribution and Supply  Agreement, dated as of September 19, 2001, among the Company,  Bristol-Myers Squibb Company and E.R. Squibb & Sons, L.L.C                    |   | L(99.D3)   |
| 10.20 |   | Employment Agreement, dated as of March 19,  2004, between the Company and Daniel S. Lynch                                                                                                             |   | U(10.1)    |
| 10.21 |   | Agreement of Sublease dated October 5, 2001, by  and between 325 Spring Street LLC and the Company                                                                                                |   | O(10.86)   |
| 10.22 |   | Promissory Note in the principal amount of  $10,000,000, dated October 5, 2001, executed by 325 Spring Street LLC in  favor of the Company                                                             |   | O(10.86.1) |
| 10.23 |   | Amendment No. 1 to Development, Promotion,  Distribution and Supply Agreement, dated as of March 5, 2002, among the  Company, Bristol-Myers Squibb Company and E.R. Squibb & Sons, L.L.C |   | N(99.2)    |
| 10.24 |   | Amendment, dated as of August 16, 2001 to the  Development and License Agreement between the Company and Merck KGaA                                                                                    |   | P (10.88)  |
| 10.25 |   | Agreement of Sale and Purchase between Building  Associates, LP and ImClone Systems Incorporated pertaining to 33 Chubb Way,  Branchburg, New Jersey executed as of March 1, 2002                      |   | Q(10.92)   |

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| 10.26 |   | Target Price Contract, dated as of July 15,  2002, between ImClone Systems Incorporated and Kvaerner Process, a division  of Kvaerner U.S. Inc., for the Architectural, Engineering, Procurement  Assistance, Construction Management and Validation of a Commercial  Manufacturing Project in Branchburg, New Jersey |   | R(10.930)  |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|
| 10.27 |   | Modifications Agreement dated as of  December 15, 2000 by an between 180 Varick Street Corporation and the  Company                                                                                                                                                                                                   |   | S(10.94)   |
| 10.28 |   | Amendment Number 4 to the Company’s lease at 180  Varick Street dated August 13, 2004 by and between 180 Varick Street  Corporation and the Company                                                                                                                                                              |   | V(10.28)   |
| 10.29 |   | ImClone Systems Incorporated Annual Incentive Plan                                                                                                                                                                                                                                                                         |   | T(A.C)     |
| 10.30 |   | Supply Agreement between the Company and Lonza  Biologics PLC dated March 17, 2005                                                                                                                                                                                                                                    |   | Y(10.30)   |
| 10.31 |   | ImClone Systems Incorporated Senior Executive  Severance Plan                                                                                                                                                                                                                                                              |   | W(10.29)   |
| 10.32 |   | ImClone Systems Incorporated Change in Control Plan,  as amended                                                                                                                                                                                                                                                           |   | FF (10.32) |
| 10.34 |   | Terms of inducement stock option grants to  Drs. Philip Frost and Eric Rowinsky on March 1, 2005 and  February 21, 2005, respectively, as approved by the Compensation  Committee of Board of Directors                                                                                                |   | AA         |
| 10.35 |   | Collaboration and License Agreement between the  Company and UCB S.A. dated August 15, 2005. Confidential Treatment has  been requested for a portion of this Exhibit                                                                                                                                                 |   | CC (10.35) |
| 10.36 |   | Approval by Board of Directors of certain  compensation related matters and Company stock repurchase program                                                                                                                                                                                                               |   | BB         |
| 10.37 |   | ImClone Systems Incorporated 2005 Inducement Stock  Option Plan                                                                                                                                                                                                                                                            |   | DD(10.1)   |
| 10.38 |   | Terms of accelerated Company stock options and form  of lock-up agreement                                                                                                                                                                                                                                                  |   | EE(10.1)   |
| 10.39 |   | ImClone Systems Incorporated 2006-2008  Retention Plan                                                                                                                                                                                                                                                                     |   | GG(10.1)   |
| 10.40 |   | ImClone Systems Incorporated Transition Severance  Plan                                                                                                                                                                                                                                                                    |   | FF(10.40)  |
| 10.41 |   | Approval by the Compensation Committee of Board of  Directors of performance criteria for executive officer cash bonus awards  under the Company’s Annual Incentive Plan for the year ended  December 31, 2006, together with maximum permitted bonuses under the  plan                                          |   | HH         |
| 10.42 |   | Letter Agreement, dated March 21, 2006, by and  between Joseph L. Fischer and ImClone Systems Incorporated                                                                                                                                                                                                            |   | II(10.42)  |
| 31.1* |   | Certification of the Company’s Interim Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                       |   |       |
| 31.2* |   | Certification of the Company’s Chief Financial  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                |   |       |
| 32*   |   | Certification of the Company’s Interim Chief  Executive Officer and Chief Financial Officer pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002                                                                                                                                                           |   |       |

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| *   |   | Filed herewith.                                                                                                                                                                                                                                                      |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (B) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, File  No. 0-19612, for the fiscal year ended December 31, 1993.  Confidential Treatment was granted for a portion of this Exhibit. |
| (C) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, File  No. 0-19612, for the fiscal year ended December 31, 1994.                                                                    |

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| (D)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q, File  No. 0-19612, for the quarter ended June 30, 1997.                                                      |
|------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (E)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Registration Statement on Form S-3,  File No. 333-67335. Confidential treatment was granted for a  portion of this Exhibit.                      |
| (F)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Registration Statement on Form S-8,  File No. 333-64827.                                                                                         |
| (G)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, File  No. 0-19612, for the fiscal year ended December 31, 1998.                                                 |
| (H)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 1999.                                                                              |
| (I)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K for the  year ended December 31, 1999.                                                                                |
| (K)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2000.                                                                              |
| (L)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Schedule 14D-9 filed on  September 28, 2001.                                                                                                     |
| (N)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  March 6, 2002.                                                                                                 |
| (O)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2001.                                                                               |
| (P)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2001, and Confidential Treatment has been  requested for a portion of this exhibit. |
| (Q)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended June 30, 2002.                                                                              |
| (R)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2002.                                                                         |
| (S)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K, for the  year ended December 31, 2002.                                                                               |
| (T)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Proxy Statement for its 2003 Annual Meeting of  Shareholders, filed August 21, 2003, as appendix C.                                                   |
| (U)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  March 19, 2004.                                                                                                |
| (V)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Quarterly Report on Form 10-Q for  the quarter ended September 30, 2004.                                                                         |
| (W)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2004.                                                                                |
| (Y)  |   | Previously filed with the Commission; incorporated  by reference to the Quarterly Report on Form 10-Q for the quarter  ended March 31, 2005.                                                                                            |
| (Z)  |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  June 21, 2005.                                                                                                 |
| (AA) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  July 15, 2005.                                                                                                 |
| (BB) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  September 19, 2005.                                                                                            |
| (CC) |   | Previously filed with the Commission, incorporated  by reference to the Quarterly Report on Form 10-Q for the quarter  ended September 30, 2005.                                                                                        |
| (DD) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  October 21, 2005.                                                                                              |

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| (EE) |   | Previously filed with the Commission, incorporated  by reference to the Company’s Current Report on Form 8-K dated  December 21, 2005.              |
|------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (FF) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Annual Report on Form 10-K for the  year ended December 31, 2005. |
| (GG) |   | Previously filed with the Commission; incorporated  by reference to the Company’s Current Report on Form 8-K dated  January 23, 2006.               |
| (HH) |   | Previously filed with the Commission, incorporated  by reference to the Company’s Current Report on Form 8-K dated  March 22, 2006.                 |
| (II) |   | Previously filed with the Commission, incorporated  by reference to the Company’s Current Report on Form 10-K/A dated  May 1, 2006.                 |
| (JJ) |   | Previously filed with the Commission, incorporated  by reference to The Company’s Current Report on Form 8-A/A dated  May 4, 2006.                  |

 

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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/ JOSEPH  L.FISCHER             |   |
|                       |                                        | Joseph  L. Fischer                |   |
|                       | * *                                    | *Interim Chief Executive Officer* | * * |
| Date:  August 4, 2006 |                                        |                              |   |
|                       | By:                                         | /s/  MICHAEL J. HOWERTON          |   |
|                       |                                        | Michael  J. Howerton              |   |
|                       | * *                                    | *Chief Financial Officer*         | * * |
| Date: August 4, 2006  |                                        |                              |   |

 

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