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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)



|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarter ended September 30, 2005 or



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from
 to
.



Commission File Number: 000-50677



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IMMUNICON CORPORATION

(Exact name of registrant as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 23-2269490                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



3401 Masons Mill
Road, Suite 100

Huntingdon Valley, Pennsylvania 19006

(Address of principal executive offices and zip code)



(215) 830-0777

(Registrants telephone number including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.



Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No  x



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes ̈No  x



Include the number of shares outstanding of each of the issuers classes of common stock, as of the latest possible date. As of November 5, 2005, there were
27,533,369 shares of Common Stock, $0.001 par value, outstanding.



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##### Table of Contents



IMMUNICON CORPORATION



INDEX



|         |  |                                                                                                                                                                                            |  |           
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------
|         |  |                                                                                                                                                                                            |  | PageNumber
|PART I.  |  | FINANCIAL INFORMATION                                                                                                                                                                      |  |           
|         |  |                                                                                                                                                                                           
|Item 1.  |  | Condensed Consolidated Financial Statements (Unaudited):                                                                                                                                   |  |           
|         |  |                                                                                                                                                                                           
|         |  | Condensed Consolidated Balance Sheets: September 30, 2005 and December 31, 2004                                                                                                            |  | 3         
|         |  |                                                                                                                                                                                           
|         |  | Condensed Consolidated Statements of Operations: Three and nine months ended September 30, 2005 and 2004 and for the period from August 25, 1983 (date of inception) to September 30, 2005 |  | 4         
|         |  |                                                                                                                                                                                           
|         |  | Condensed Consolidated Statements of Cash Flows: Nine months ended September 30, 2005 and 2004 and for the period from August 25, 1983 (date of inception) to September 30, 2005           |  | 5         
|         |  |                                                                                                                                                                                           
|         |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                       |  | 6         
|         |  |                                                                                                                                                                                           
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                      |  | 14        
|         |  |                                                                                                                                                                                           
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                 |  | 46        
|         |  |                                                                                                                                                                                           
|Item 4.  |  | Controls and Procedures                                                                                                                                                                    |  | 46        
|         |  |                                                                                                                                                                                           
|PART II. |  | OTHER INFORMATION                                                                                                                                                                          |  |           
|         |  |                                                                                                                                                                                           
|Item 6.  |  | Exhibits                                                                                                                                                                                   |  | 47        



Immunicon is a registered trademark of
Immunicon Corporation. The Immunicon logo is a registered trademark of Immunicon Corporation. CellSave, CellTracks, CellSpotter, MagNest, the CellTracks AutoPrep System logo and the CellSpotter Analyzer logo are registered trademarks of Immunivest
Corporation, a wholly owned subsidiary of Immunicon Corporation. CellTracks EasyCount, EasyCount, CellTracks MagNest, CellPrep, AutoPrep, CellTracks Analyzer II, the CellTracks Analyzer logo, the CellTracks MagNest logo, and the CellSave
Preservative Tube logo are trademarks of Immunivest Corporation, a wholly owned subsidiary of Immunicon Corporation. CellSearch is a registered trademark of Johnson & Johnson. All other trademarks appearing in this filing are the property
of their respective holders. Unless the context provides otherwise, the words Immunicon, we, Company, us and our appearing in this filing refer to Immunicon Corporation and its
subsidiaries.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)



|PART | I. FINANCIAL INFORMATION
|---- | ------------------------



|Item 1. | Condensed Consolidated Balance Sheets (Unaudited)
|------- | -------------------------------------------------

| | (In thousands, except for share and per share amounts)
| | ------------------------------------------------------



|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ---------------- | - | ------- | -
|                                                                                                                                                                             |  | September 30,2005 |          |   | December 31,2004 |  
|ASSETS                                                                                                                                                                       |  |                   |          |   |                  |   |         |  
|Current Assets:                                                                                                                                                              |  |                   |          |   |                  |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 25,574   |   |                  | $ | 27,552  |  
|Short-term investments                                                                                                                                                       |  |                   | 23,754   |   |                  |   | 25,551  |  
|Accounts receivable                                                                                                                                                          |  |                   | 336      |   |                  |   | 255     |  
|Receivable from related party                                                                                                                                                |  |                   | 452      |   |                  |   | 249     |  
|Inventory                                                                                                                                                                    |  |                   | 3,010    |   |                  |   | 1,076   |  
|Prepaid assets                                                                                                                                                               |  |                   | 557      |   |                  |   | 591     |  
|Other current assets                                                                                                                                                         |  |                   | 352      |   |                  |   | 509     |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Total current assets                                                                                                                                                         |  |                   | 54,035   |   |                  |   | 55,783  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Property and equipment, net                                                                                                                                                  |  |                   | 6,008    |   |                  |   | 4,380   |  
|Long-term investments                                                                                                                                                        |  |                   | 757      |   |                  |   | 530     |  
|Other assets                                                                                                                                                                 |  |                   | 332      |   |                  |   | 371     |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Total assets                                                                                                                                                                 |  | $                 | 61,132   |   |                  | $ | 61,064  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |                   |          |   |                  |   |         |  
|Current Liabilities:                                                                                                                                                         |  |                   |          |   |                  |   |         |  
|Current portion of long-term debt                                                                                                                                            |  | $                 | 2,869    |   |                  | $ | 3,012   |  
|Accounts payable                                                                                                                                                             |  |                   | 1,181    |   |                  |   | 840     |  
|Payable to related party                                                                                                                                                     |  |                   | 414      |   |                  |   | 229     |  
|Current portion of deferred revenue                                                                                                                                          |  |                   | 1,692    |   |                  |   | 1,398   |  
|Accrued expenses                                                                                                                                                             |  |                   | 4,449    |   |                  |   | 3,263   |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Total current liabilities                                                                                                                                                    |  |                   | 10,605   |   |                  |   | 8,742   |  
|Long-term debt, less current portion                                                                                                                                         |  |                   | 2,914    |   |                  |   | 2,587   |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Deferred revenue                                                                                                                                                             |  |                   | 502      |   |                  |   | 897     |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Commitments and contingencies                                                                                                                                                |  |                   |          |   |                  |   |         |  
|Shareholders equity:                                                                                                                                                        |  |                   |          |   |                  |   |         |  
|Common stock, $0.001 par value 100,000,000 authorized, 27,492,708 and 23,165,741 shares issued and outstanding as of September 30,
2005 and December 31, 2004, respectively |  |                   | 27       |   |                  |   | 23      |  
|Additional paid in capital                                                                                                                                                   |  |                   | 162,037  |   |                  |   | 142,670 |  
|Deferred stock-based compensation                                                                                                                                            |  |                   | (2,180   | ) |                  |   | (2,345  | )
|Accumulated other comprehensive income                                                                                                                                       |  |                   | 13       |   |                  |   | 29      |  
|Deficit accumulated during the development stage                                                                                                                             |  |                   | (112,786 | ) |                  |   | (91,539 | )
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Total shareholders equity                                                                                                                                                   |  |                   | 47,111   |   |                  |   | 48,838  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  
|Total liabilities and shareholders equity                                                                                                                                   |  | $                 | 61,132   |   |                  | $ | 61,064  |  
|                                                                                                                                                                             |  |                   |          |   |                  |   |         |  



See notes to condensed
consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



Condensed Consolidated Statements of Operations (Unaudited)

Three and nine months ended
September 30, 2005 and 2004, and for the period from August 25, 1983

(date of inception) to September 30,
2005

(in thousands, except for share and per share amounts)



|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|-------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ------------------------------------------------------------------- |  | - | ---------- | - |  | - | ---------- | - |  | - | -------- | -
|                                                               |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |   |            | Period from August 25, 1983(date of inception)to September 30, 2005 | 
|                                                               |  | 2005                            |            |   | 2004                           |   |            | 2005                                                                |  |   | 2004       |   | 
|Revenue:                                                       |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Revenue from related party                                     |  | $                               | 767        |   |                                | $ | 148        |                                                                     |  | $ | 1,962      |   |  | $ | 340        |   |  | $ | 7,270    |  
|Product revenue                                                |  |                                 | 341        |   |                                |   | 5          |                                                                     |  |   | 858        |   |  |   | 18         |   |  |   | 1,116    |  
|Other revenue                                                  |  |                                 | 175        |   |                                |   | 1          |                                                                     |  |   | 277        |   |  |   | 14         |   |  |   | 4,190    |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Total revenue                                                  |  |                                 | 1,283      |   |                                |   | 154        |                                                                     |  |   | 3,097      |   |  |   | 372        |   |  |   | 12,576   |  
|Cost of goods sold                                             |  |                                 | 835        |   |                                |   |           |                                                                     |  |   | 1,645      |   |  |   |           |   |  |   | 1,645    |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Gross margin                                                   |  |                                 | 448        |   |                                |   | 154        |                                                                     |  |   | 1,452      |   |  |   | 372        |   |  |   | 10,931   |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Expenses:                                                      |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Research and development                                       |  |                                 | 5,761      |   |                                |   | 6,856      |                                                                     |  |   | 17,246     |   |  |   | 17,984     |   |  |   | 95,331   |  
|General and administrative                                     |  |                                 | 2,064      |   |                                |   | 1,699      |                                                                     |  |   | 6,081      |   |  |   | 4,366      |   |  |   | 30,585   |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Total operating expenses                                       |  |                                 | 7,825      |   |                                |   | 8,555      |                                                                     |  |   | 23,327     |   |  |   | 22,350     |   |  |   | 125,916  |  
|Operating loss                                                 |  |                                 | (7,377     | ) |                                |   | (8,401     | )                                                                   |  |   | (21,875    | ) |  |   | (21,978    | ) |  |   | (114,985 | )
|Other income from related party                                |  |                                 |           |   |                                |   |           |                                                                     |  |   |           |   |  |   |           |   |  |   | 250      |  
|Interest and other income                                      |  |                                 | 429        |   |                                |   | 238        |                                                                     |  |   | 995        |   |  |   | 459        |   |  |   |          |  
|Interest expense                                               |  |                                 | (122       | ) |                                |   | (153       | )                                                                   |  |   | (367       | ) |  |   | (484       | ) |  |   |          |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Interest income (expense), net                                 |  |                                 | 307        |   |                                |   | 85         |                                                                     |  |   | 628        |   |  |   | (25        | ) |  |   | 1,949    |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Net loss attributable to common stockholders                   |  | $                               | (7,070     | ) |                                | $ | (8,316     | )                                                                   |  | $ | (21,247    | ) |  | $ | (22,003    | ) |  | $ | (112,786 | )
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Net loss per common share  basic and diluted                  |  | $                               | (0.26      | ) |                                | $ | (0.36      | )                                                                   |  | $ | (0.86      | ) |  | $ | (1.56      | ) |  |   |          |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  
|Weighted average common shares outstanding  basic and diluted |  |                                 | 27,488,789 |   |                                |   | 22,970,191 |                                                                     |  |   | 24,717,798 |   |  |   | 14,126,326 |   |  |   |          |  
|                                                               |  |                                 |            |   |                                |   |            |                                                                     |  |   |            |   |  |   |            |   |  |   |          |  



See notes to condensed
consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended
September 30, 2005 and 2004, and for the period from

August 25, 1983 (date of inception) to September 30,
2005

(in thousands)



|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | --------------------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |         |   | Period from August 25, 1983 (date of inception) to September 30, 2005 |  
|                                                                                  |  | 2005                           |         |   | 2004                                                                  |   |        
|Operating activities:                                                             |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Net loss                                                                          |  | $                              | (21,247 | ) |                                                                       | $ | (22,003 | ) |  | $ | (112,786 | )
|Adjustment to reconcile net loss to net cash used in operating activities:        |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Depreciation and amortization                                                     |  |                                | 1,433   |   |                                                                       |   | 1,088   |   |  |   | 7,576    |  
|Interest expense on warrants                                                      |  |                                | 5       |   |                                                                       |   | 27      |   |  |   | 132      |  
|Loss on disposal of property and equipment                                        |  |                                | 27      |   |                                                                       |   |        |   |  |   | 31       |  
|Compensation expense related to the issuance of stock, stock options and warrants |  |                                | 1,142   |   |                                                                       |   | 1,321   |   |  |   | 3,868    |  
|Change in:                                                                        |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Accounts receivable                                                               |  |                                | (81     | ) |                                                                       |   | 1       |   |  |   | (332     | )
|Receivable from related party                                                     |  |                                | (203    | ) |                                                                       |   | (1,343  | ) |  |   | (364     | )
|Inventory                                                                         |  |                                | (1,933  | ) |                                                                       |   |        |   |  |   | (3,009   | )
|Prepaid expenses and other                                                        |  |                                | 34      |   |                                                                       |   | (367    | ) |  |   | (725     | )
|Other assets                                                                      |  |                                | 151     |   |                                                                       |   | (53     | ) |  |   | (1,231   | )
|Accounts payable                                                                  |  |                                | 340     |   |                                                                       |   | 257     |   |  |   | 1,180    |  
|Payable to related party                                                          |  |                                | 185     |   |                                                                       |   | 37      |   |  |   | 414      |  
|Accrued expenses                                                                  |  |                                | 1,178   |   |                                                                       |   | 1,006   |   |  |   | 5,178    |  
|Deferred revenue                                                                  |  |                                | (101    | ) |                                                                       |   | 2,523   |   |  |   | 2,183    |  
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Net cash used in operating activities                                             |  |                                | (19,070 | ) |                                                                       |   | (17,506 | ) |  |   | (97,885  | )
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Investing activities:                                                             |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Purchase of investments                                                           |  |                                | (34,000 | ) |                                                                       |   | (25,279 | ) |  |   | (126,559 | )
|Proceeds from maturities of investments                                           |  |                                | 35,565  |   |                                                                       |   | 500     |   |  |   | 101,564  |  
|Cash proceeds from disposals of property and equipment                            |  |                                |        |   |                                                                       |   |        |   |  |   | 1        |  
|Purchases of property and equipment                                               |  |                                | (3,050  | ) |                                                                       |   | (1,577  | ) |  |   | (13,065  | )
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Net cash used in investing activities                                             |  |                                | (1,485  | ) |                                                                       |   | (26,356 | ) |  |   | (38,059  | )
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Financing activities:                                                             |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Proceeds from term debt                                                           |  |                                | 2,817   |   |                                                                       |   | 1,489   |   |  |   | 20,519   |  
|Proceeds from sale of preferred stock                                             |  |                                |        |   |                                                                       |   |        |   |  |   | 84,115   |  
|Proceeds from sale of common stock, net of issuance costs                         |  |                                | 17,981  |   |                                                                       |   | 49,427  |   |  |   | 69,074   |  
|Proceeds from exercise of stock options and warrants                              |  |                                | 421     |   |                                                                       |   | 476     |   |  |   | 1,636    |  
|Loan for stock options                                                            |  |                                |        |   |                                                                       |   | 19      |   |  |   | 19       |  
|Loan issue fees                                                                   |  |                                | 5       |   |                                                                       |   | (2      | ) |  |   | (122     | )
|Payments on term debt                                                             |  |                                | (2,632  | ) |                                                                       |   | (2,654  | ) |  |   | (13,737  | )
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Net cash provided by financing activities                                         |  |                                | 18,592  |   |                                                                       |   | 48,755  |   |  |   | 161,504  |  
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Effect of exchange rate changes on cash                                           |  |                                | (15     | ) |                                                                       |   |        |   |  |   | 14       |  
|Net increase in cash and cash equivalents                                         |  |                                | (1,963  | ) |                                                                       |   | 4,893   |   |  |   | 25,560   |  
|Cash and cash equivalents, beginning of period                                    |  |                                | 27,552  |   |                                                                       |   | 30,601  |   |  |   |         |  
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                              | 25,574  |   |                                                                       | $ | 35,494  |   |  | $ | 25,574   |  
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Supplemental cash flow information:                                               |  |                                |         |   |                                                                       |   |         |   |  |   |          |  
|Cash paid for interest                                                            |  | $                              | 588     |   |                                                                       | $ | 286     |   |  |   |          |  
|                                                                                  |  |                                |         |   |                                                                       |   |         |   |  |   |          |  



See notes to condensed
consolidated unaudited financial statements.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)



Notes to Condensed Consolidated Unaudited Financial Statements



(1) Background and basis of presentation



The accompanying unaudited condensed consolidated financial statements of Immunicon Corporation and its subsidiaries (we, or the Company) have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the Form 10-Q General Instructions and Article 10 of Regulation S-X of the Securities and Exchange Commission (the SEC). Accordingly, they do not include all of
the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying condensed consolidated financial statements
reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly our financial position at September 30, 2005 and results of operations and cash flows for the three and nine month periods ended
September 30, 2005 and 2004 and for the period from inception to September 30, 2005. Certain items have been reclassified to conform to current period presentation.



Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be
read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Results of operations for the three and nine months ended
September 30, 2005 and 2004 are not necessarily indicative of results anticipated for the full year.



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates or
assumptions. The more significant estimates reflected in these financial statements include judgmentally accrued expenses and the valuation of stock-based compensation.



We have generated limited revenues from product sales and have incurred substantial losses since our inception. We anticipate incurring
additional losses over at least the next several years and such losses may increase as we expand our research and development activities. Accordingly, we are considered to be in the development stage as of September 30, 2005, as defined in
Statement of Financial Accounting Standards (SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises. Although our initial cancer diagnostic products have been launched, we have not yet generated a significant
amount of revenue from the sales of these products. We believe that we will need to demonstrate that we can generate substantial and sustainable revenue, particularly reagent revenue, in order to consider ourselves a fully operational company.



On August 29, 2005, we announced that we were reducing staff and other
expenses in order to align costs with our commercialization strategy and anticipated revenue ramp and we reduced our workforce by approximately 25% as of that date. We anticipate recording total charges of up to $1 million related to the staff and
other cost reductions. We expect to make all severance-related payments, totaling approximately $400,000, before the end of 2005. These severance costs have been recorded as operating expenses in the quarter ended September 30, 2005. We expect
to incur charges of up to an estimated additional $600,000, such as those related to space consolidation, among others, in the first half of 2006.



We completed the initial public offering (IPO) of shares of our common stock on April 21, 2004. The proceeds from the IPO were $49.4 million, net of fees
and expenses. In the IPO, we sold 6.9 million shares of our common stock, including the underwriters over allotment option, at $8.00 per share. In addition, on March 9, 2004, we completed a 2-for-3 reverse stock split of our common
stock. All share and per share amounts included in these unaudited condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to the reverse stock split.



On June 29, 2005, we sold 4.1 million shares of our common stock at $4.75 per share
and received total proceeds of $19.7 million and net proceeds, net of fees and expenses, of $18.0 million. These shares were sold pursuant to a shelf registration statement filed in May 2005.



We will need substantial financing to fund our operations and to continue developing our
product candidates for sale. There can be no assurance that such financing will be available when we need it. Our operations are subject to certain additional risks and uncertainties including, among others, our dependence on Veridex, LLC
(Veridex), a Johnson & Johnson company, to market our cancer diagnostic product candidates, the uncertainty of product development (including clinical trial results and further development of new instrument and reagent
products), regulatory clearance and approval, supplier and manufacturing dependence, competition,



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



reimbursement availability, our dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary rights, dependence
on key personnel and other risks related to governmental regulations. We believe, however, that cash and cash equivalents available at September 30, 2005 will be sufficient to maintain operations through at least September 30, 2006.



Recent Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board, or FASB, issued Statement of
Financial Accounting Standards, or SFAS, No. 151 Inventory Costsan amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires all entities to allocate overhead costs to inventory based on a calculation of normal
manufacturing capacity. The Statement notes that this calculation is difficult because of the variety of considerations encountered in the allocation of costs and charges. This statement is effective for the first fiscal year beginning
after June 15, 2005. We will adopt SFAS No. 151 beginning with the first quarter of fiscal 2006. We are currently evaluating the impact of the adoption of this statement will have on our consolidated financial statements.



In December 2004, the FASB, issued SFAS, No. 123(R), Share Based Payment. SFAS
No. 123(R) requires all entities to recognize compensation expense in an amount equal to the fair value of share based payment transactions with employees. This statement is effective for the first fiscal year beginning after June 15,
2005. We will adopt SFAS No. 123(R) beginning with the first quarter of fiscal 2006. Adoption of the statement will require us to record compensation expense relating to the issuance of employee stock options. Currently, we follow Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, which does not require the recognition of compensation expense relating to the issuance of stock options so long as the quoted market price of
our stock at the date of grant is less than or equal to the amount an employee must pay to acquire the stock. We are currently evaluating the impact of the adoption of this statement will have on our consolidated financial statements.



(2) Accounting for stock-based compensation



We account for stock-based compensation based on the provisions of APB No. 25, which
states that, for fixed plans, no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of our common stock on the
grant date. In the event that stock options are granted with an exercise price below the estimated fair value of our common stock at the grant date, the difference between the fair value of our common stock and the exercise price of the stock option
is recorded as deferred compensation. Deferred compensation is amortized to compensation expense on a straight-line basis over the vesting period of the stock option. We have adopted the disclosure requirements of SFAS No. 123, Accounting
for Stock-Based Compensation (SFAS No. 123) and SFAS No. 148, Accounting for Stock Based Compensation-Transition and Disclosure-an Amendment of FASB Statement No. 123 (SFAS No. 148), which
requires compensation expense to be disclosed based on the fair value of the options granted at the date of the grant.



Had compensation cost for our stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method required
by SFAS No. 123, we would have reported the pro forma net loss amounts indicated below:



|                                                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                 |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|(in thousands, except per share data)                                                            |  | 2005                             |        |   | 2004                            |   |        | 2005 |  |   | 2004    |  
|Net loss, as reported                                                                            |  | $                                | (7,070 | ) |                                 | $ | (8,316 | )    |  | $ | (21,247 | ) |  | $ | (22,003 | )
|Add: Stock-based compensation expense included in reported net loss                              |  |                                  | 347    |   |                                 |   | 645    |      |  |   | 1,142   |   |  |   | 1,321   |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards |  |                                  | (659   | ) |                                 |   | (724   | )    |  |   | (1,999  | ) |  |   | (1,521  | )
|                                                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss                                                                               |  | $                                | (7,382 | ) |                                 | $ | (8,395 | )    |  | $ | (22,104 | ) |  | $ | (22,203 | )
|                                                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Net loss per share - basic and diluted as reported                                               |  | $                                | (0.26  | ) |                                 | $ | (0.36  | )    |  | $ | (0.86   | ) |  | $ | (1.56   | )
|                                                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Pro forma net loss per share - basic and diluted                                                 |  | $                                | (0.27  | ) |                                 | $ | (0.37  | )    |  | $ | (0.89   | ) |  | $ | (1.57   | )
|                                                                                                 |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



The fair value of each option is estimated on the date of grant using the fair value method with the following
weighted average assumptions: risk-free interest rate of 3.9% and 4.0% and volatility rate of 60.9% and 70.1% for the periods ended September 30, 2005 and 2004, respectively; an expected life of five years and a dividend yield of zero for all
periods presented. Stock compensation arrangements with non-employees are accounted for in accordance with SFAS No. 123, as amended by SFAS No. 148, and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other
than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, using a fair value approach.



(3) Restructuring



On August 29, 2005, we announced actions to align staff levels and other expenses with our current commercialization strategy and expectations for near-term revenue growth. This initiative included a workforce
reduction of approximately 25% of full-time equivalent domestic staff principally in research and development, operations and certain support functions. We note that a significant component of the workforce reduction involved employees who were
engaged in platform development programs that are now essentially completed, such as the Companys next generation cell analysis platform, the CellTracks Analyzer II. Additionally, we had completed development of certain core reagents and
ancillary components incorporated in cell analysis kits, most notably the CellSearch Circulating Tumor Cell (CTC) Kit, sold by Veridex. We also note that we continue to pursue important development projects such as clinical trials in
metastatic colorectal and prostate cancer and research and development efforts on circulating endothelial cells and certain molecular analysis products. The clinical trials in metastatic colorectal and prostate cancer are intended to lead to
regulatory submissions for expanded claims for the CellSearch CTC Kit. As a result, we recorded the full charge of approximately $384,000 associated with the termination in the third quarter of 2005. We have paid approximately $229,000 as of
September 30, 2005, and will pay the remaining severance of $155,000 before the end of 2005. We expect to incur charges of up to an estimated additional $600,000 such as those related to space consolidation, among others, in the first half of
2006.



(4) Net loss per share



Basic and diluted net loss per common share is calculated in accordance with SFAS
No. 128, Earnings Per Share (SFAS No. 128) and SEC Staff Accounting Bulletin No. 98 (SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is
calculated by dividing the net loss applicable to common stockholders by the weighted-average number of unrestricted common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, since
the effects of potentially dilutive securities are anti-dilutive for all periods presented. Fully diluted shares outstanding for the three months ended September 30, 2005 and 2004 would have been 28,552,862 and 24,531,966, respectively. Fully
diluted shares outstanding for the nine months ended September 30, 2005 and 2004 would have been 26,018,645 and 15,684,210, respectively.



The following table sets forth the computation of net income (numerator) and shares (denominator) for earnings per share:



|                                                                      |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                      |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|(in thousands)                                                        |  | 2005                             |        |   | 2004                            |   |        | 2005 |  |   | 2004    |  
|Numerator:                                                            |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                              |  | $                                | (7,070 | ) |                                 | $ | (8,316 | )    |  | $ | (21,247 | ) |  | $ | (22,003 | )
|Denominator:                                                          |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding used for basic income per share   |  |                                  | 27,489 |   |                                 |   | 22,970 |      |  |   | 24,718  |   |  |   | 14,126  |  
|Common stock equivalents                                              |  |                                  |       |   |                                 |   |       |      |  |   |        |   |  |   |        |  
|                                                                      |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding used for diluted income per share |  |                                  | 27,489 |   |                                 |   | 22,970 |      |  |   | 24,718  |   |  |   | 14,126  |  
|                                                                      |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



(5) Inventory



Inventory consisted of the following:



|                |  |                    |       |                   |   |      
|--------------- |  | ------------------ | ----- | ----------------- | - | -----
|(in thousands)  |  | September 30, 2005 |       | December 31, 2004
|Raw materials   |  | $                  | 1,798 |                   | $ | 976  
|Work-in-process |  |                    | 117   |                   |   |     
|Finished goods  |  |                    | 1,095 |                   |   | 100  
|                |  |                    |       |                   |   |      
|Inventory       |  | $                  | 3,010 |                   | $ | 1,076
|                |  |                    |       |                   |   |      



(6) Property and equipment



Property and equipment consisted of the following:



|                               |  |                    |        |   |                   |   |        |  
|------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|(in thousands)                 |  | September 30, 2005 |        |   | December 31, 2004 |  
|Laboratory equipment           |  | $                  | 2,455  |   |                   | $ | 1,844  |  
|Office furniture and equipment |  |                    | 1,185  |   |                   |   | 945    |  
|Leasehold improvements         |  |                    | 5,736  |   |                   |   | 4,139  |  
|Manufacturing equipment        |  |                    | 774    |   |                   |   | 688    |  
|Computer equipment             |  |                    | 1,185  |   |                   |   | 1,634  |  
|                               |  |                    |        |   |                   |   |        |  
|Property and equipment, gross  |  |                    | 11,335 |   |                   |   | 9,250  |  
|Less Accumulated depreciation  |  |                    | (5,327 | ) |                   |   | (4,870 | )
|                               |  |                    |        |   |                   |   |        |  
|Property and equipment, net    |  | $                  | 6,008  |   |                   | $ | 4,380  |  
|                               |  |                    |        |   |                   |   |        |  



Depreciation expense was $502,000 and
$372,000 for the three months ended September 30, 2005 and 2004, respectively; and $1.4 million and $1.1 million for the nine months ended September 30, 2005 and 2004, respectively.



(7) Accrued expenses



Accrued expenses consisted of the following:



|                                  |  |                    |       |                   |   |      
|--------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|(in thousands)                    |  | September 30, 2005 |       | December 31, 2004
|Salaryrelated expense            |  | $                  | 1,144 |                   | $ | 777  
|Clinical research and trial costs |  |                    | 1,569 |                   |   | 943  
|Contracted research costs         |  |                    | 153   |                   |   | 91   
|Accrued interest                  |  |                    |      |                   |   | 222  
|Accounting and legal fees         |  |                    | 354   |                   |   | 142  
|Leasehold improvements            |  |                    | 412   |                   |   | 331  
|Other                             |  |                    | 817   |                   |   | 757  
|                                  |  |                    |       |                   |   |      
|Accrued expenses                  |  | $                  | 4,449 |                   | $ | 3,263
|                                  |  |                    |       |                   |   |      



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



(8) Debt



As of September 30, 2005 we had an aggregate of $5.8 million of bank debt outstanding with two lending institutions, including $2.7 million to Silicon Valley Bank,
or SVB, and $3.1 million to General Electric Capital Corporation, or GE, as described below. The carrying value of long-term debt is as follows:



|                                        |  |                    |        |   |                   |   |        |  
|--------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|(in thousands)                          |  | September 30, 2005 |        |   | December 31, 2004 |  
|SVB credit facility                     |  | $                  | 2,692  |   |                   | $ | 2,170  |  
|GE credit facility                      |  |                    | 3,091  |   |                   |   | 3,411  |  
|Other                                   |  |                    |       |   |                   |   | 18     |  
|                                        |  |                    |        |   |                   |   |        |  
|                                        |  |                    | 5,783  |   |                   |   | 5,599  |  
|Less: current portion of long-term debt |  |                    | (2,869 | ) |                   |   | (3,012 | )
|                                        |  |                    |        |   |                   |   |        |  
|Longterm debt                          |  | $                  | 2,914  |   |                   | $ | 2,587  |  
|                                        |  |                    |        |   |                   |   |        |  



As of September 30, 2005 and
2004, interest rates in effect for outstanding obligations under the credit facilities ranged from 7.25% to 9.61% and 6.75% to 9.25%, respectively.



All of the credit facilities are subject to certain covenants, including maintaining a minimum level of earnings before interest, taxes, depreciation and amortization, as
defined in the loan agreement, maintaining a minimum percentage of our cash available for investing with the lending institution, and providing audited financial statements within 120 days after the close of the fiscal year. We were in
compliance with all covenants for the three and nine month periods ended September 30, 2005 and 2004.As of September 30, 2005, we had $9.5 million and $4.1 million in available credit under our SVB and GE credit agreements,
respectively. The availability under our SVB credit facility expires on June 30, 2006 and availability on our GE credit facility expires April 30, 2006.



(9) Commitments and contingencies



In the ordinary course of our business, we make certain indemnities, commitments and guarantees under which we may be required to make payments in relation to certain
transactions. These include indemnities of clinical investigators, consultants and contract research organizations involved in the development of our clinical stage products. The duration of these indemnities, commitments and guarantees varies, and
in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments we could be obligated to make. We have not recorded any liability for these
indemnities, commitments and guarantees in the accompanying consolidated balance sheets. However, we accrue for losses for any known contingent liability, including those that may arise from indemnification provisions, when future payment is
probable. No such losses have been recorded to date.



On June 13, 2005 we
announced that we, along with the Fox Chase Cancer Center were awarded a Small Business Technology Transfer grant totaling approximately $587,000 by the National Institutes of Health (NIH). The grant may provide approximately $1.1
million over two years. The NIH grant is intended to fund the development of a new strategy to actively monitor the effectiveness of cancer drugs in clinical trials.



(10) Shareholders equity



In June 2005, we received net proceeds, net of fees and expenses, of $18.0 million from the sale of 4,137,902 shares of our common stock, pursuant to our effective shelf
registration statement filed in May 2005. The shares were sold to certain institutional investors at $4.75 per share.



On January 28, 2005, our board of directors made restricted stock grants to two of our officers. We granted 100,000 restricted shares to our Senior Vice President
 Research and Development and 60,000 restricted shares to our Senior Vice President  Finance and Administration and Chief Financial Officer. The shares underlying both grants will fully vest on the third anniversary of the date of grant.
If either of the officers employment terminates for any reason before the restricted stock is fully vested, except as provided by such officers Change of Control Agreement with us, the shares of restricted stock that are not then vested
will be forfeited. If the



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



provisions of each officers Change of Control Agreement are triggered, the restricted stock will vest in accordance with the officers Change of
Control agreement.The restricted stock grant had a fair market value of $979,000 as of the close of business on January 28, 2005. Compensation related to the grant is recorded as deferred stock based compensation and recognized over the
three year service period. We have recognized $81,600 and $218,000 as compensation expense related to these two grants for the three and nine month periods ended September 30, 2005.



(11) Related parties



In August 2000, we entered into a development, license and supply agreement (the Development Agreement) with Ortho Clinical Diagnostics, Inc.
(Ortho), a subsidiary of Johnson and Johnson, Inc., whereby we licensed certain rights to our technology and assumed certain development obligations for our cancer diagnostic product candidates. In exchange, Ortho agreed to market
and distribute our cancer diagnostic product candidates. On November 10, 2003, we executed an amendment to the Development Agreement whereby all of the rights and responsibilities of Ortho were transferred to Veridex. In addition, we and
Veridex re-negotiated certain clinical development and regulatory milestones. The Development Agreement has a term of 20 years and may be terminated earlier by either party under certain conditions. We are not aware of any intentions by Veridex
to terminate the Development Agreement.



In connection with the Development
Agreement, Veridex made a $1.5 million up-front, non-refundable license fee payment to us. Under the Development Agreement, Veridex is obligated to pay us approximately 30% of their net sales from the sale of reagents, test kits and certain
other consumable products and disposable items. In addition, we will receive additional payments from Veridex if we achieve certain development and sales milestones as defined in the Development Agreement. Under the terms of the Development
Agreement, we are required to invest in related research based on a percentage of sales as defined in the Development Agreement. In connection with the Development Agreement, Johnson & Johnson Development Corporation, also a wholly-owned
subsidiary of Johnson and Johnson (J&J Sub), purchased $5 million of our Series E Preferred Stock. In December 2001 and July 2003, J&J Sub purchased $3 million and $3.3 million of additional
Series F Preferred Stock, respectively.



We have earned a total of
$6,167,000 in license and milestone payments under the terms of the Development Agreement from August 1, 2000 to September 30, 2005. During the period from August 1, 2000 until December 31, 2003, we received $4.0 million and
recognized the entire amount as license revenue from related party during that period.



We were paid a total of $1,833,000 in license and milestone payments during 2004. These payments will be recognized as revenue over the estimated product development period for the corresponding product, which we estimated will end at
various points through June 30, 2008.



In February 2005, we entered into
an amendment to the Development Agreement. This amendment modifies two previous milestones entitled Colorectal or Breast Cancer Adjuvant Prognosis and Recurrence Monitoring and Metastatic Colorectal or Prostate Cancer Therapy
Monitoring. We believe that the modifications to these milestones are beneficial to both parties and were arrived at through mutual assessment of scientific and market data available at this time.



The first milestone cited above for the adjuvant/recurrence setting previously had
prospective payments to us totaling approximately $1.1 million. While the total of the milestone payments remains the same, the amendment changes the basis of the milestone and achievement requirements to the development of an assay using our
proprietary technology for analysis of disseminated tumor cells in the bone marrow of cancer patients.



The second milestone cited above previously had prospective payments to us totaling $1 million. The total of the milestone payments and the overall achievement requirements remain the same, but the amendment provides
for progress payments triggered by certain events in the development program. A payment of $250,000 is now payable upon accrual of an adequate number of metastatic colorectal cancer patients to support a regulatory submission to the US Food and Drug
Administration and an additional $250,000 is payable upon completion of a draft regulatory submission that is acceptable to the joint Immunicon Corporation and Veridex Steering Committee. The superseded milestone had provided for payment of $500,000
only on Steering Committee approval of the final regulatory submission. As noted above, we received $500,000 in June 2004 as a result of the enrollment of the first patient in this trial.



On June 14, 2005, we entered into a letter agreement amending the terms of our development, license and supply agreement with OCD dated
as of August 17, 2000, as amended and assigned to Veridex, whereby we appointed OCD KK, also an affiliate of Johnson & Johnson, as sales agent in Japan.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



In January 2005, we completed a planned interim analysis of data from our ongoing trial for monitoring of patients
with metastatic colorectal cancer. The interim analysis looked at data from the first 100 evaluable patients in the study. The results were sufficiently encouraging to warrant study continuation and indicated that expansion of the study to a total
of approximately 400 patients was appropriate.



In March 2005, we and Veridex
agreed that we had successfully completed the criteria for another development milestone relating to the enrollment of the first patient into a study of the effects of disseminated tumor cells (DTCs) in bone marrow. Veridex has paid us
$334,000 for this milestone. We will recognize this receipt as revenue over the estimated life of the bone marrow study, which we estimate will conclude in the second quarter of 2006.



We recognized $240,000 and $92,000 as milestone and other license related revenue in the three months ended September 30, 2005 and
2004, respectively and $820,000 and $175,000 for the nine months ended September 30, 2005 and 2004, respectively. As of September 30, 2005 and December 31, 2004, we had receivables from Veridex of $452,000 and $249,000, respectively
and payables to Veridex of $411,000 and $229,000, respectively. These receivables are recorded in Receivable from related party and the payables are recorded in Payable from related party in the consolidated balance sheet.



We recognized revenue for the sale of 12 complete instrument systems (includes
an AutoPrep system and an analyzer) in the nine months ended September 30, 2005, of which four instrument systems sales were to Veridex. In addition, we separately sold 5 CellTracks Analyzers II Systems and one AutoPrep System to various
affiliates of Johnson and Johnson (JNJ affiliates) and recognized $832,000 in instrument revenue from these sales. We sold one instrument system to Veridex in the period ended September 30, 2004 and recognized revenue of $129,000.
This revenue is shown as Revenues from related party in the consolidated statement of operations.



In August 2003, we sold 80,000 shares of Series F Preferred Stock to and entered into a License and Supply Agreement (License and Supply Agreement) with another company. We received $400,000 in
proceeds for the combined transaction. Because shares of our Series F Preferred Stock were valued at $4.00 per share in a similar transaction, the same value was applied to the shares in this transaction. The amount above the $4.00 per share
value of the shares of our Series F Preferred Stock was deemed attributable to the License and Supply Agreement and recorded as deferred license revenue. We recorded this $80,000 premium as deferred license revenue and have amortized it into
income over the two year term of the exclusive supply arrangement with this company which ended in August 2005. The unamortized deferred license revenue related to this arrangement amounted to $0, and $35,000 as of September 30, 2005 and 2004,
respectively. We recognized revenue of $5,000 and $10,000 and $25,000 and $30,000 related to the arrangement for the three and nine months ended September 30, 2005 and 2004, respectively, and recorded it as Revenue from related
party in the consolidated statement of operations.



The following table
summarizes the revenue from related parties recognized for the three and nine month periods ended September 30, 2005 and 2004:



|                                             |      |                                 |      |                                |      |     |      |   |       |  |   |    
|-------------------------------------------- | ---- | ------------------------------- | ---- | ------------------------------ | ---- | --- | ---- | - | ----- |  | - | ---
|Revenue from related parties: (in thousands) |      | Three Months EndedSeptember 30, |      | Nine Months EndedSeptember 30,
|                                             | 2005 |                                 | 2004 |                                | 2005 |     | 2004
|Contract revenue from related party          |      | $                               | 240  |                                | $    | 92  |      | $ | 820   |  | $ | 175
|Product revenue from related party           |      |                                 | 527  |                                |      | 56  |      |   | 1,142 |  |   | 165
|                                             |      |                                 |      |                                |      |     |      |   |       |  |   |    
|                                             |      | $                               | 767  |                                | $    | 148 |      | $ | 1,962 |  | $ | 340
|                                             |      |                                 |      |                                |      |     |      |   |       |  |   |    



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



(12) Supplemental expense information



The supplemental expense information below provides additional information about the amounts shown as research and development expenses and
general and administrative expenses in the accompanying statements of operations:



Research and development expenses



Research and development
expenses consisted of the following:



|                                 |      |                                 |       |                                |      |       |      |   |        |  |   |       
|-------------------------------- | ---- | ------------------------------- | ----- | ------------------------------ | ---- | ----- | ---- | - | ------ |  | - | ------
|(in thousands)                   |      | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                                 | 2005 |                                 | 2004  |                                | 2005 |       | 2004
|Salaries, benefits and taxes     |      | $                               | 3,049 |                                | $    | 2,906 |      | $ | 9,114  |  | $ | 7,602 
|Laboratory supplies and expenses |      |                                 | 105   |                                |      | 1,227 |      |   | 603    |  |   | 3,600 
|Instrument development costs     |      |                                 | 67    |                                |      | 284   |      |   | 452    |  |   | 607   
|Clinical trial expenses          |      |                                 | 983   |                                |      | 882   |      |   | 2,942  |  |   | 1,762 
|Contracted research costs        |      |                                 | 205   |                                |      | 340   |      |   | 651    |  |   | 1,122 
|Depreciation expense             |      |                                 | 427   |                                |      | 297   |      |   | 1,186  |  |   | 842   
|Insurance expense                |      |                                 | 172   |                                |      | 187   |      |   | 550    |  |   | 421   
|All others                       |      |                                 | 753   |                                |      | 733   |      |   | 1,748  |  |   | 2,028 
|                                 |      |                                 |       |                                |      |       |      |   |        |  |   |       
|                                 |      | $                               | 5,761 |                                | $    | 6,856 |      | $ | 17,246 |  | $ | 17,984
|                                 |      |                                 |       |                                |      |       |      |   |        |  |   |       



General and administrative expenses



General and administrative expenses consisted of the following:



|                             |      |                                 |       |                                |      |       |      |   |       |  |   |      
|---------------------------- | ---- | ------------------------------- | ----- | ------------------------------ | ---- | ----- | ---- | - | ----- |  | - | -----
|(in thousands)               |      | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|                             | 2005 |                                 | 2004  |                                | 2005 |       | 2004
|Salaries, benefits and taxes |      | $                               | 1,043 |                                | $    | 902   |      | $ | 3,199 |  | $ | 2,368
|Depreciation                 |      |                                 | 75    |                                |      | 74    |      |   | 209   |  |   | 210  
|Legal and professional fees  |      |                                 | 605   |                                |      | 407   |      |   | 1,545 |  |   | 1,024
|Insurance expense            |      |                                 | 48    |                                |      | 47    |      |   | 133   |  |   | 101  
|All other expenses           |      |                                 | 293   |                                |      | 269   |      |   | 995   |  |   | 663  
|                             |      |                                 |       |                                |      |       |      |   |       |  |   |      
|                             |      | $                               | 2,064 |                                | $    | 1,699 |      | $ | 6,081 |  | $ | 4,366
|                             |      |                                 |       |                                |      |       |      |   |       |  |   |      



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------



Forward-Looking Statements



The information contained in this quarterly report on Form 10-Q includes forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are often preceded by words such as hope, may, believe, anticipate, plan, expect, intend, assume,
will and similar expressions. We caution investors not to place undue reliance on the forward-looking statements contained in this report. Forward-looking statements included in this report relate to financing and capital needs and
resources, product development, regulatory submissions to the FDA, our relationship with Twente University, our relationship with Veridex, research, development and sales-based milestones and related payments from Veridex, expansion of research and
development activities and increases in research and development costs, instrument system and platform improvement activities and costs, expansion of clinical trials and related costs, use of IPO net proceeds and other funds, and other statements
regarding matters that are not historical facts. Forward-looking statements speak only as of the date of this report, reflect managements current expectations and involve certain factors, such as risks and uncertainties, that may cause actual
results to be far different from those suggested by our forward-looking statements. These factors include, but are not limited to, risks associated with our dependence on Veridex; our capital and financing needs; research and development and
clinical trial expenditures; commercialization of our product candidates; our ability to use licensed products and to obtain new licenses from third parties; our ability to manage growth; making regulatory submission and obtaining necessary
regulatory approvals or clearances; reliance on third party manufacturers and suppliers; reimbursement by third party payors to our customers for our products; compliance with applicable manufacturing standards; the ability to earn license and
milestone payments under our agreement with Veridex; retaining key management or scientific personnel; delays in the development of new products or to planned improvements to our products; effectiveness of our products compared to competitors
products; protection of our intellectual property and other proprietary rights; conflicts with the intellectual property of third parties; product liability lawsuits that may be brought against us; labor, contract or technical difficulties;
competitive pressures in our industry; other risks and uncertainties discussed under the caption Factors That may Affect Future Results and elsewhere in this report; and other risks and uncertainties, as may be detailed from time to time
in our public announcements and SEC filings.



We do not intend to update
any of these factors or to publicly announce the results of any revisions to any of these forward-looking statements other than as required under the federal securities laws.



OVERVIEW



Our business principally involves the development, manufacture, marketing and sale of proprietary cell- and molecular-based diagnostic and research products with a
primary focus on cancer. We believe that our products can provide significant clinical benefits by giving physicians better information to understand, treat, monitor and diagnose cancer. Our technologies can identify, count and characterize a small
number of circulating tumor cells, or CTC, and other rare cells present in a blood sample from a patient. Our collaborator, Veridex, LLC, or Veridex, a Johnson & Johnson company, received 510(k) clearance from the Food and Drug
Administration, or FDA, in January 2004 for use of the Veridex CellSearch CTC Kit, which incorporates our technologies, in the management of metastatic breast cancer (breast cancer that has spread beyond the primary breast tumor). In addition,
in October 2005, Veridex received clearance from the FDA of a 510(k) regulatory submission in which Veridex provided additional data from our clinical trial in metastatic breast cancer for inclusion in the package insert of the CTC Kit. These data,
relating to the relationship between CTCs and progression free survival and overall survival at additional time points during therapy, were presented at the 2005 Annual Meeting of the American Society of Clinical Oncology, or ASCO, in May of this
year. In August 2000, we entered into a development, license and supply agreement with Ortho-Clinical Diagnostics, or OCD, a Johnson & Johnson company, which subsequently assigned all rights and obligations under the agreement to Veridex,
also a Johnson & Johnson company. Under the terms of this agreement, we granted to Veridex a worldwide exclusive license within the field of cancer to commercialize cell analysis products incorporating our technologies.



In August 2004, we announced that the CellSearch Circulating Tumor Cell Kit, Immunicon
CellTracks AutoPrep System, and Immunicon CellSpotter Analyzer were released for sale for in vitrodiagnostic, or IVD, use in metastatic breast cancer. In June 2005 we announced the release for sale of our second generation cell analysis
instrument, the CellTracks Analyzer II. Our products are currently being sold to hospitals, reference laboratories, clinical research organizations (CROs), and pharmaceutical and biotechnology companies and other customers under the terms of our
agreement with Veridex, and have been shipped to sites in the US, Europe and Japan. As of September 30, 2005, we had shipped 38 cell analyzers (13 CellTracks Analyzer II Systems and 25 CellSpotter Analyzers) and 33 CellTracks AutoPrep Systems
and recognized revenue from the sale of 28 cell analyzers and 24 CellTracks AutoPrep Systems.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Our recognition of revenue related to instrument shipments is typically delayed for a period of several months due to final evaluation of these systems at
customer locations.



Our products are primarily intended for use as an
integrated system, consisting of kits containing reagents for use with our instruments and other system components that enable scientists, physicians and laboratories to collect, isolate, label, count and analyze CTCs and other rare cells. CTCs can
appear in extremely low number, sometimes as few as one or two CTCs in a test tube of blood that contains billions of cells of various types. Our clinical trials suggest that the presence of even a few CTCs in a blood sample is biologically and
clinically important, as it predicts whether a therapy is likely to offer benefit to the patient.



We were incorporated in 1983. Since our inception, we have focused our activities on product development and life science research. In March 1999, we obtained $10.6 million in financing from the sale of our
convertible preferred stock. As a result, we substantially increased investment in our cancer-related products and technologies, hired additional key management team members and redefined our business strategy. Since 1999, we have devoted
substantially all of our efforts to the development of our cell analysis platforms and diagnostic tools for application in cancer. We completed the initial public offering, or the IPO, of shares of our common stock on April 21, 2004. In the
IPO, we sold 6.9 million shares of our common stock, including the underwriters over allotment option, at $8.00 per share and received proceeds of $49.4 million, net of fees and expenses. On June 29, 2005, we sold 4.1 million
shares of our common stock at $4.75 per share and received $18.0 million, net of fees and other expenses. These shares were sold pursuant to a shelf registration statement filed in May 2005.



We are a development stage company and have incurred losses in the last five fiscal years. As
of September 30, 2005, we had an accumulated deficit of $112.8 million. We expect to incur substantial losses, which may increase over the next several years as we:



| |  |  | conduct clinical trials to expand the uses of our technologies in metastatic cancers other than metastatic breast cancer and to earlier stages of the disease in breast and other
cancers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | incur costs to place our cell analysis systems with customers and to support other commercialization activities;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | improve and support our manufacturing capability for instruments, bulk reagents, reagent kits and other consumable products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | develop applications, including reagent and instrument products, based on our technologies for cancer and other diseases, such as cardiovascular, inflammatory and infectious
diseases and for products to support drug development in cancer.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Although our initial cancer diagnostic products have been launched, we have not yet generated a significant amount of revenue from the sales of these products. We believe that we will need to demonstrate that we can generate substantial and
sustainable revenue particularly reagent revenue in order to consider ourselves a fully operational company.



We are highly dependent on our collaboration with Veridex. In addition, we expect to continue to generate substantial losses for at least the next two years. We will need to obtain additional funding to support the
activities described above.



On August 29, 2005, we announced that we were
reducing staff and other expenses in order to align costs with our commercialization strategy and revenue ramp and we reduced our workforce by approximately 25% as of that date. We anticipate recording total charges of up to $1 million related to
the staff and other cost reductions. We expect to make all severance-related payments, totaling approximately $400,000, before the end of 2005. These severance costs have been recorded as operating expenses in the quarter ended September 30,
2005. We expect to incur charges of up to an estimated additional $600,000 such as those related to space consolidation, among others, in the first half of 2006.



This workforce reduction was of approximately 25% of full-time equivalent domestic staff principally in research and development, operations
and certain support functions. A significant component of the workforce reduction involved employees who were engaged in platform development programs that are now essentially completed, such as our next generation cell analysis platform, the
CellTracks Analyzer II. Additionally, we have completed development of core reagents and ancillary components incorporated in cell analysis kits, most notably the CellSearch Circulating Tumor Cell (CTC) Kit, sold by Veridex. We also
continue to pursue important development projects such as clinical trials in metastatic colorectal and prostate cancer and research and development efforts on circulating endothelial cells and certain molecular analysis products. The clinical trials
in metastatic colorectal and prostate cancer are intended to lead to regulatory submissions for expanded claims for the CellSearch CTC Kit.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Veridex collaboration



We expect that substantially all of our revenues from product sales for at least the years 2005 and 2006 will be derived from our
relationship with Veridex. Our Development Agreement with Veridex provides Veridex with exclusive worldwide rights to commercialize cell analysis products based on our technologies in the field of cancer. Veridex received 510(k) clearance from the
FDA for the use of the CellSearch Circulating Tumor Cell Kit in the management of metastatic breast cancer on January 21, 2004 and for the CellSearch Circulating Tumor Cell Control Kit in September 2004. We are responsible for all cellular
research and development, including the costs of clinical development. Upon any sale by Veridex of certain of our products, including reagents, test kits, consumable products and disposable items, Veridex is obligated to pay us approximately 30% of
net sales.



Commercialization of the first product under the Development
Agreement occurred in August 2004. Beginning therewith, we became obligated to invest at least 10% of Veridexs net sales from these products, excluding revenues from instrument sales, in certain research and development activities. However,
beginning with the first calendar year after the amount of these net sales exceeds $250 million, we are only required to invest an amount equal to at least 8.5% of these net sales. We are also responsible for manufacturing reagents for CellSearch
kits in bulk and delivering them to Veridex. We are responsible for all instrument manufacturing and certain ancillary products. We believe that we have manufacturing capacity available at our existing facilities to satisfy commercial demand through
2006. Veridex is responsible for filling and packaging costs for the reagents, as well as sales, marketing, distribution, customer and technical support and field service of our cancer products, including instrumentation. We have retained worldwide
commercialization rights to all non-cancer applications of our technologies.



The pace and outcome of both our commercialization efforts and clinical development programs are difficult to predict. As a result, we anticipate that our quarterly results will fluctuate for the foreseeable future. In view of this
variability and of our limited operating history, we believe that period-to-period comparisons of our operating results are not meaningful and should not be relied upon as being indicative of our future performance.



Revenues



We have not generated any significant product revenues since our inception. We initiated sales activities for instrument platforms and
reagent kits for research use only, or RUO, in the first quarter of 2004 and for in vitro diagnostic, or IVD, use in the third quarter of 2004. As of September 30, 2005, we had shipped 38 cell analyzers (13 CellTracks Analyzer II Systems
and 25 CellSpotter Analyzers) and 33 CellTracks AutoPrep Systems and recognized revenue from the sale of 28 cell analyzers and 24 CellTracks AutoPrep Systems. We recognized revenue from the sale of 9 cell analyzers and 5 CellTracks AutoPrep Systems
in the three months ended September 30, 2005. We have shipped instruments to customers in the USA, Europe and Japan. The recognition of revenue related to instrument shipments is typically delayed for a period of several months due to final
validation and testing of these systems at customer locations.



We have earned
a total of $6,167,000 in license and milestone payments under the terms of the Development Agreement from August 1, 2000 to September 30, 2005. During the period from August 1, 2000 until December 31, 2003, we received
$4.0 million and recognized the entire amount as license revenue from related party during that period.



We were paid a total of $1,833,000 in license and milestone payments during 2004. These payments will be recognized as revenue over the estimated product development period for the corresponding product, which we
estimate will end at various points through June 30, 2008.



In March 2005,
we and Veridex agreed that we had successfully completed the criteria for another development milestone relating to the enrollment of the first patient into the bone marrow study. Veridex has paid us $334,000 for this achievement. We will recognize
this receipt as revenue over the estimated life of the bone marrow study, which we estimate will conclude in the second quarter of 2006.



We recognized $234,000 and $793,000 as milestone and license revenue from Veridex in the three and nine month periods ended September 30, 2005, respectively and
$81,000 and $144,000 for the three and nine month periods ended September 30, 2004, respectively.



As of September 30, 2005, we can earn up to an additional $4.3 million in license revenue from Veridex for research-related milestones. We estimate that we will earn these license revenues from research
milestones over the next three to five years. Therefore, we expect that the trend of license revenue will fluctuate. Also, we expect to continue to invest significant amounts in research and



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



development, particularly in clinical trials and manufacturing development and therefore we do not believe that these expenses will correspond to the periods
in which we expect to earn the milestone revenue referenced above.



Under the
Development Agreement with Veridex, we also can earn up to $10.0 million in revenue for achieving defined sales targets. Our agreement with Veridex provides for payments to us by Veridex of $2.0 million, $3.0 million and
$5.0 million in the first year that sales recognized by Veridex of the CellSearch reagent products to third parties, excluding sales of instruments, reach $250 million, $500 million and $1 billion, respectively. We do not
estimate that we will reach any of these sales targets until at least 2008 and therefore do not anticipate earning any sales-based milestone revenues until then.



Research and development expenses



Our research and development expenses consist of expenses incurred in developing reagents and instrument platforms and ancillary products, as well as the clinical
research and trial costs to test these kits and systems. These expenses consist primarily of:



| |  |  | salaries and related expenses for personnel;
| | - |  | --------------------------------------------



| |  |  | fees paid to professional service providers in conjunction with independently monitoring our clinical trials and acquiring and evaluating data in conjunction with our clinical
trials; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | payments to third parties for instrument development activities and for research related support, expenses for materials consumed in research experiments and clinical research and
clinical trials.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We are responsible for making royalty payments
of 1% of sales of our reagents incorporating intellectual property licensed to us under a license agreement with the University of Texas.



We expense research and development costs as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue these
investments in order to realize the potential of our product candidates and proprietary technologies. We expect to continue to incur significant costs for clinical research and for trials and to make investments to improve our instrument platforms
and reagents. From inception through September 30, 2005, we have incurred $95.3 million in total research and development expenses, the majority of which relate to our cell-based research and diagnostic products.



General and administrative expenses



Our general and administrative expenses consist primarily of salaries and other related
costs for personnel in executive, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in research and development expense and professional fees for legal and
accounting services. From inception through September 30, 2005, we incurred $30.6 million in general and administrative expenses.



Stock-based compensation expenses



Stock-based compensation expense, which is a non-cash charge to expenses, results from stock option grants to employees at exercise prices below the fair value of the
underlying common stock resulting in our recording stock-based compensation expense associated with such grants. Stock-based compensation expense also is recorded for stock option and warrant grants to non-employees and for restricted stock grants
provided to directors and advisors in lieu of cash compensation. We amortize the deferred stock-based compensation to operating expenses over the vesting periods of the options and grants, subject to adjustment for forfeiture during the vesting
period. Since our inception, we recognized $6.0 million in deferred stock-based compensation expense. For the period from inception through September 30, 2005, we have recognized cumulative stock-based compensation expense of
$3.9 million.



Interest income and expense



Interest income consists of interest earned on our cash, cash equivalents and investments.
Investment holdings as of September 30, 2005 consist primarily of mortgage and asset backed notes, federal agency notes and investment grade debt securities. We have the intent and the ability to hold all of our debt securities until maturity
and have recorded them at amortized cost. Interest expense consists of interest incurred on debt financings.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Intellectual property



Protection of our intellectual property is a strategic priority for our business, and we rely on a combination of patent, trademark,
copyright and trade secret laws to protect our interests. Our ability to protect and use our intellectual property rights in the continued development and commercialization of our technologies and products, to operate without infringing the
proprietary rights of others and to prevent others from infringing our proprietary rights is crucial to our continued success. We will be able to protect our products and technologies from unauthorized use by third parties only to the extent that
our products and technologies are covered by valid and enforceable patents, trademarks or copyrights, or are effectively maintained as trade secrets, know-how or other proprietary information.



In connection with the commercial distribution of our products, we also have obtained
trademark registrations in the US for Immunicon and the Immunicon logo. Trademark registrations were also obtained for CellSave, CellTracks, CellSpotter, Magnest, and the CellTracks
AutoPrep System logo, and the CellSpotter Analyzer logo by Immunivest Corporation, our wholly owned subsidiary. We have filed a number of trademark registration applications in preparation for commercial distribution activities with respect to
future products. Much of the proprietary software and related information utilized in our instrument systems is protected by the copyright rights or by rights that we have licensed.



We devote significant resources to obtaining, enforcing and defending patents and other intellectual property and protecting our other
proprietary information.



We have a portfolio of issued patents and patent
applications, which we believe provides patent coverage for our proprietary technologies and products. As of October 26, 2005, our intellectual property estate consisted of 57 issued patents, 134 pending patent applications, 14 registered
trademarks and 11 pending trademarks registrations.



CRITICAL ACCOUNTING
POLICIES



We prepare our consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses.
We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies include:



| |  |  | revenue recognition;
| | - |  | --------------------



| |  |  | inventory capitalization;
| | - |  | -------------------------



| |  |  | accounting for research and development expenses;
| | - |  | -------------------------------------------------



| |  |  | estimating the value of our equity instruments for use in deferred stock-based compensation calculations; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | accounting for income taxes.
| | - |  | ----------------------------



In accordance with the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure about Critical Accounting Policies ,we have determined the critical principles by considering accounting
policies that involve the most complex or subjective decisions or assessments. There were no significant changes to our critical accounting policies during the three months ended September 30, 2005.



Revenue recognition



We derive revenues from three primary sources: license revenue, instrument product sales and reagent product sales. We recognize revenue on
product sales in accordance with the SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, or SAB No. 104, when persuasive evidence of an arrangement exists, the contract price is fixed or determinable,
the product or accessory has been delivered, title and risk of loss have passed to the customer, and collection of the resulting receivable is reasonably assured. We recognize revenue for instrument placements at the time that all necessary
conditions for the recognition of



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



revenue have been met. Specifically, we may place instruments with customers and allow the customer a period of time for training and validation as is common
in our industry. Therefore, there may be a delay between the time that an instrument is placed with a customer and the point at which the revenue for the instrument placement is recognized. Also in certain instances the customer may be provided with
an opportunity to return the instrument to us prior to acceptance. We therefore recognize the revenue associated with these instrument placements only at the point when it is clear that all revenue recognition criteria have been met and that no
continuing right of return remains.



In accordance with SAB No.104,
up-front non-refundable license fees are recorded as deferred revenue and recognized over the estimated development period. Since August 2000, we have received $6.2 million in license and milestone payments from Veridex. License and milestone
payments are deferred and amortized on a straight-line basis over the product development period as defined for each specific product. Amounts received as reimbursement for research and development expenses are recorded as a reduction in research
and development expense as the related costs are incurred.



Inventory
capitalization



In August 2004, we initiated sales for IVD use of our
initial cancer diagnostic products, which had received FDA clearance in January 2004. We determined that this represented the initiation of the commercialization of our products. We completed our first instrument sale to a third party laboratory
customer during the fourth quarter of 2004. Therefore, effective October 1, 2004 we adopted a policy for capitalizing inventory and recognizing cost of sales. Prior to October 1, 2004, all costs associated with manufacturing were included
in research and development expenses. In the fourth quarter of 2004, we began to capitalize in inventory the cost of manufactured products for commercial sale and to expense such costs as cost of products sold at the time of sale. However, as we
sell that portion of our existing inventory that had previously been expensed as part of research and development expenses, there will be a period of time where we will recognize manufacturing revenue with minimum corresponding cost. Therefore, we
anticipate that our gross margin on sales of our instruments and reagents will fluctuate from quarter to quarter and will not be comparable between reporting periods during 2005.



Inventories are stated at the lower of cost or market with cost determined under the first-in/first-out, or FIFO method. We include in
inventory the raw materials that can be used in both production and clinical products. These clinical product costs are expensed as part of research and development costs when consumed.



The valuation of inventory requires us to estimate obsolete or excess inventory and inventory that is not of saleable quality. The
determination of obsolete or excess inventory requires us to estimate the demand for our products. If our estimates for specific products is less than actual demand of products and we fail to reduce manufacturing output accordingly, we could be
required to write down additional inventory, which would have a negative impact on our gross margin. The write-down for estimated obsolete and excess inventory is therefore based on our collective judgment regarding the realistic and potential
future demand for each product and is inherently subjective. We believe that our reserves for obsolete, excess and out-of-date inventory are adequate as of September 30, 2005.



Accounting for research and development expenses



Our research and development expenses consist primarily of costs associated with product development for our cancer diagnostic tests. These
expenses include the development costs for instrument platforms, clinical trial and development costs and the costs associated with non-clinical support activities such as manufacturing process development and regulatory services. Clinical
development costs represent internal costs for personnel; external costs incurred at clinical sites and contracted payments to third party clinical research organizations to perform certain clinical trials. We have a discovery research effort, which
is conducted in part on our premises by our scientists and in part through collaborative agreements with academic laboratories. Most of our research and development expenses are the result of the internal costs related directly to our employees. We
accrue external costs for clinical trials based on the progress of the clinical trials, including patient enrollment, progress by the enrolled patients through the trial, and contracted costs with clinical research organizations and clinical sites.
We record internal costs primarily related to personnel in clinical development and external costs related to non-clinical trials and basic research when incurred. Significant judgments and estimates must be made and used in determining the accrued
balance in any accounting period. Actual costs incurred may or may not match the estimated costs for a given accounting period. We expect that expenses in the research and development category will increase for the foreseeable future as we add
personnel, expand our clinical trial activities and increase our discovery research capabilities. The amount of the increase is difficult to predict due to the uncertainty inherent in the timing of clinical trial initiations, progress in our
discovery research program,



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



the rate of patient enrollment and the detailed design of future trials. In addition, the results from each of our trials will influence the number, size and
duration of both planned and unplanned trials.



Estimating the value of our
equity instruments for use in deferred stock-based compensation calculations



We record compensation expense related to options issued to consultants and options issued to employees at less than the fair value. These expenses are based on the fair value of the options and common stock. Because, prior to our IPO,
there was no public market for our common stock, we have estimated the fair value of equity instruments issued prior to our IPO using various valuation methods, including the minimum value and the Black-Scholes methods. Where stock options were
granted with an exercise price below the estimated fair value of our common stock at the grant date, the difference between the fair value of our common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred
compensation is amortized to compensation expense on a straight-line basis over the vesting period of the stock option.



Accounting for income taxes



We must make significant management judgments when determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. At September 30, 2005, we recorded a full valuation allowance of $44.5 million against our net deferred tax asset balance, due to uncertainties related to our deferred tax assets as a result of our
history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from
these estimates or if we adjust these estimates in future periods we may need to change the valuation allowance, which could materially impact our financial position and results of operations.



Development Stage Enterprise



Although our initial cancer diagnostic products have been launched, we have not yet
generated a significant amount of revenue from the sales of these products. Our activities have consisted primarily of developing and licensing products, raising capital and recruiting personnel. Accordingly, we are considered to be in the
development stage as of September 30, 2005, as defined by Statement of Financial Accounting Standards, or SFAS No. 7, Accounting and Reporting by Development Stage Enterprise.



RESULTS OF OPERATIONS



Three months ended September 30, 2005 and 2004



Revenue



We segregate revenue into product revenue, revenue from related party and other revenue. Revenue from related party is composed of license and milestone revenue,
instrument and reagent product revenue and other revenue.



|                                                              |  |                                 |       |      |   |    
|------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | ---
|                                                              |  | Three Months EndedSeptember 30,
|Revenue (dollars in thousands)                                |  | 2005                            |       | 2004
|Product revenue including product revenue from related party: |  |                                 |       |      |   |    
|Instrument revenue:                                           |  |                                 |       |      |   |    
|Veridex                                                       |  | $                               | 391   |      | $ | 25 
|Other                                                         |  |                                 | 324   |      |   |   
|Reagents and other product revenue:                           |  |                                 |       |      |   |    
|Veridex                                                       |  |                                 | 136   |      |   | 31 
|Other                                                         |  |                                 | 17    |      |   | 6  
|                                                              |  |                                 |       |      |   |    
|Total product revenue                                         |  | $                               | 868   |      | $ | 62 
|License and milestone revenue:                                |  |                                 |       |      |   |    
|Veridex and other related party                               |  |                                 | 240   |      |   | 91 
|Other revenue                                                 |  |                                 | 175   |      |   | 1  
|                                                              |  |                                 |       |      |   |    
|Total revenue                                                 |  | $                               | 1,283 |      | $ | 154
|                                                              |  |                                 |       |      |   |    



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



We earned $868,000 in product revenue in the three months ended September 30, 2005, of which $391,000 was earned
from Veridex, a related party. Instrument revenue was $715,000 and reagent revenue was $153,000. Our CellSearch Circulating Tumor Cell Kit, CellSpotter Analyzer and CellTracks AutoPrep System were released for sale for IVD use in metastatic breast
cancer in August 2004. Therefore, instrument and reagent revenue increased in 2005 compared to 2004. Included in the three months ended September 30, 2005 revenue is approximately $318,000 of product revenue with no corresponding cost of goods
sold.



License and milestone revenue from related party increased by $149,000
to $240,000 for the three months ended September 30, 2005 from $91,000 for the three months ended September 30, 2004. Since June 2004, we received $1.1 million in license and milestone receipts under our Development Agreement with
Veridex. License and milestone receipts have been deferred and are amortized on a straight-line basis over the product development period as defined for each product.



In March 2005, we and Veridex agreed that we had successfully completed the criteria for another development milestone relating to the
enrollment of the first patient into the bone marrow study and Veridex paid us $334,000. We will recognize this receipt as revenue over the estimated life of the bone marrow study, which we estimate will be completed in the second quarter of 2006.



In August 2003, we sold 80,000 shares of Series F Preferred Stock and
entered into a License and Supply Agreement (License and Supply Agreement) with another company. We received $400,000 in proceeds for the combined transaction. Because shares of our Series F Preferred Stock were valued at $4.00 per
share in a similar transaction, the same value was applied to the shares in this transaction. The amount above the $4.00 per share value of the shares of our Series F Preferred Stock was deemed attributable to the License and Supply Agreement
and recorded as deferred license revenue. We recorded this $80,000 premium as deferred license revenue and we have amortized it into income over the two year period of the exclusive supply arrangement with this company which ended in August 2005. We
recognized revenue of $6,000 and $11,000 related to the arrangement and recorded it as Revenue from related party in the consolidated statement of operations for the three month periods ended September 30, 2005 and 2004
respectively.



As a result of the above, total revenue increased by $1.1
million to $1.3 million in the three months ended September 30, 2005 compared to $154,000 in the corresponding period in 2004.



Costs of goods sold



Costs of goods sold increased to $835,000 in the three months ended September 30, 2005 from zero in the corresponding period in 2004. We began capitalizing inventory and recognizing the corresponding cost of
goods sold in October 2004 after the launch of our initial IVD products. Instrument cost of goods sold was $755,000 and reagent cost of goods was $80,000 for the three months ended September 30, 2005. The instrument cost of goods sold includes
estimated warranty service costs and other costs related to initial installation.



|                    |  |                                 |     |   |      |   |   
|------------------- |  | ------------------------------- | --- | - | ---- | - | --
|                    |  | Three Months EndedSeptember 30,
|                    |  | 2005                            |     |   | 2004
|Instruments:        |  |                                 |     |   |      |   |   
|Revenue             |  | $                               | 715 |   |      | $ | 25
|Cost of goods sold  |  |                                 | 755 |   |      |   |  
|                    |  |                                 |     |   |      |   |   
|Gross profit (loss) |  | $                               | (40 | ) |      | $ | 25
|                    |  |                                 |     |   |      |   |   
|Reagents:           |  |                                 |     |   |      |   |   
|Revenue             |  | $                               | 153 |   |      | $ | 37
|Cost of goods sold  |  |                                 | 80  |   |      |   |  
|                    |  |                                 |     |   |      |   |   
|Gross profit        |  | $                               | 73  |   |      | $ | 37
|                    |  |                                 |     |   |      |   |   



Research and development expenses



Research and development (R&D) expenses decreased by $1.1
million, or 16.0%, to $5.8 million in the third quarter of 2005 from $6.9 million in the corresponding quarter in 2004. Salary and salary-related costs were $3.0 million in the third quarter of 2005 compared to $2.9 million in the
corresponding quarter in 2004. This increase of $0.1 million, or 4.9%, is due principally to higher staff levels necessary to complete the development of the initial instrument systems and the CellTracks Analyzer II and to complete the



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



development of our CellSearch kit which were launched for IVD use in August 2004. We hired additional personnel during the second half of 2004 to support the
commercial launch of our initial products, to support clinical development for clinical trials initiated to monitor metastatic colorectal and metastatic prostate cancer, to expand applications of our cancer diagnostic technology and to expand uses
of our technology beyond cancer to other disease states. This increase was offset by the decrease in the portion of stock-based compensation expenses recognized as part of research and development salaries of $253,000 in the third quarter of 2005
versus $577,000 in the third quarter of 2004.



Laboratory supplies and expenses
were $105,000, or $1.1 million lower, in the third quarter of 2005 than in 2004. As of October 1, 2004 we began capitalizing inventory on the balance sheet. Prior thereto we had recorded all product-related purchases as part of laboratory
supplies and expenses. As a result laboratory supplies purchased and expensed in 2004 but recorded as product inventory effective October 1, 2004 are being used in 2005, thereby lowering the cost of laboratory supplies in 2005. For these
reasons, laboratory supply costs are lower in the three months September 30, 2005 compared to the corresponding quarter in 2004.



Clinical trial expenses increased in the third quarter of 2005 by $101,000 to $983,000 from $882,000 in the third quarter of 2004. In the second half of 2004, we
initiated a clinical trial for the monitoring of metastatic colorectal cancer. In January 2005 based on encouraging interim data we decided to increase the number of patients to be included in the trial from the original trial size of 200 patients
up to 400. We increased our enrollment efforts in order to attempt to complete our patient accrual by December 31, 2005. Also, in October 2004, we initiated a pivotal clinical trial for the monitoring of metastatic prostate cancer, which we
believe, if successful, should result in a regulatory submission to the FDA. We anticipate that this level of clinical trial expenditures will continue for the remainder of 2005 and beyond in order to expand the uses of our technology to other
cancers, to earlier stages of the cancer disease state and to other disease states where our technology may represent an improvement over current diagnostic techniques.



Contracted research costs were $135,000 lower in the third quarter of 2005 than in the third quarter of 2004. We incurred higher costs
associated with manufacturing validation efforts in the third quarter of 2004 as we prepared for the launch of our initial IVD products in August 2004. Therefore, these expenses were not as high in the second quarter of 2005.



Depreciation expense increased in the third quarter of 2005 by $130,000 to $427,000 from
$297,000 in the third quarter of 2004. This increase is related primarily to capital expenditures for equipment and facilities related costs incurred in preparation for the launch of our initial commercial products.



A summary of the principal components of our research and development costs for the three
months ended September 30, 2005 and 2004 are shown below:



|                                        |  |                                 |       |      |   |      
|--------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                        |  | Three months endedSeptember 30,
|Research and development expenses       |  | 2005                            |       | 2004
|                                        |  | (in thousands)                 
|Salaries, benefits and taxes            |  | $                               | 3,049 |      | $ | 2,906
|Laboratory supplies and expenses        |  |                                 | 105   |      |   | 1,227
|Instrument development costs            |  |                                 | 67    |      |   | 284  
|Clinical trial expenses                 |  |                                 | 983   |      |   | 882  
|Contracted research costs               |  |                                 | 205   |      |   | 340  
|Depreciation expense                    |  |                                 | 427   |      |   | 297  
|Insurance expense                       |  |                                 | 172   |      |   | 187  
|All others                              |  |                                 | 753   |      |   | 733  
|                                        |  |                                 |       |      |   |      
|Total research and development expenses |  | $                               | 5,761 |      | $ | 6,856
|                                        |  |                                 |       |      |   |      



Each of our research and development
programs is subject to risks and uncertainties, including the requirement to obtain regulatory approval, that are outside of our control. As a result of these risks and uncertainties, we are unable to predict the period in which we will achieve
profitability. For example, our clinical trials may be subject to delays or rejections for a variety of reasons, such as our inability to obtain applicable clearances from the FDA or institutional or ethical review boards or to enroll patients at
the rate that we expect. Moreover, the product candidates we are developing must overcome significant technological and marketing challenges before they can be successfully commercialized.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



General and administrative expenses



General and administrative expenses increased by $365,000, or 21.5%, to $2.1 million in the third quarter of 2005 from
$1.7 million in 2004. The increase is attributable to staff increases related to commercialization activities as well as to costs related to public company filing and reporting requirements, the certification of our system of internal control
related to the Sarbanes-Oxley Act and in support of operating activities.



Interest and other income



Interest and other income increased
by $191,000, or 80.3%, to $429,000 in the quarter ended September 30, 2005 from $238,000 in the quarter ended September 30, 2004. The increase in interest income was primarily a result of an interest rate hikes from the federal reserve in
the past year.



Interest expense



Interest expense decreased by $30,000, or 20.0%, to $122,000 for the third quarter of 2005
from $153,000 for third quarter of 2004. The decrease was due to lower average debt outstanding in the third quarter of 2005 compared to 2004.



Stock-based compensation expenses



Stock-based compensation expenses were $347,000 and $645,000 for the third quarter ended September 30, 2005 and 2004, respectively. In 2004 we granted common stock
options to consultants for services completed as of the option issue date. Therefore we recognized compensation expense related to these option issuances in the three month period ended September 30, 2004. We did not make option grants to
consultants in the corresponding period in 2005. Therefore the expense related to stock-based compensation expenses was lower in the quarter ended September 30, 2005 compared to the corresponding period in 2004.



We recognized these expenses as part of research and development expenses and general and
administrative expenses as shown below.



|                                               |  |                                 |     |      |   |    
|---------------------------------------------- |  | ------------------------------- | --- | ---- | - | ---
|                                               |  | Three Months EndedSeptember 30,
|Stock-based compensation expenses included
in: |  | 2005                            |     | 2004
|                                               |  | (in thousands)                 
|Research and development expenses              |  | $                               | 253 |      | $ | 577
|General and administrative expenses            |  |                                 | 94  |      |   | 68 
|                                               |  |                                 |     |      |   |    
|Total stock-based compensation expenses        |  | $                               | 347 |      | $ | 645
|                                               |  |                                 |     |      |   |    



Income taxes



We have incurred net operating losses since our inception and have consequently not paid any
federal, state or foreign taxes. As of September 30, 2005, we had approximately $44.5 million of net operating loss carryforwards and approximately $3.7 million in research and development tax credit carryforwards available to offset future
regular and alternative taxable income. If not utilized, these net operating loss carryforwards and tax credits will begin to expire in 2018. If we do not achieve profitability, we may lose our net operating loss carryforwards. In addition, the
Internal Revenue Code places certain limitations on the annual amount of net operating loss carryforwards that can be utilized if certain changes in our ownership occur. We are currently not subject to these limitations.



Net loss and net loss per common share



As a result of the above, the net loss of $7.1 million in the third quarter of 2005 was
$1.2 million, or 15.0%, lower than the loss of $8.3 million in the third quarter of 2004.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



The net loss per common share of $0.26 in the third quarter of 2005 was $0.10 per share lower than the loss per
common share of $0.36 in the second quarter of 2004. Weighted average common shares outstanding during the three months ended September 30, 2005 were approximately 27.5 million compared to 23.0 million for the same period in 2004. We
completed the sale of 4.1 million common shares in June 2005 thereby increasing the weighted average number of common shares outstanding in the three months ended September 30, 2005.



Nine months ended September 30, 2005 and 2004



Revenue



We segregate revenue into product revenue, revenue from related party and other revenue. Revenue from related party is composed of license
and milestone revenue, instrument and reagent product revenue and other revenue.



|                                                              |  |                                |       |      |   |    
|------------------------------------------------------------- |  | ------------------------------ | ----- | ---- | - | ---
|                                                              |  | Nine Months EndedSeptember 30,
|Revenue (dollars in thousands)                                |  | 2005                           |       | 2004
|Product revenue including product revenue from related party: |  |                                |       |      |   |    
|Instrument revenue:                                           |  |                                |       |      |   |    
|Veridex                                                       |  | $                              | 832   |      | $ | 129
|Other                                                         |  |                                | 803   |      |   |   
|Reagents and other product revenue:                           |  |                                |       |      |   |    
|Veridex                                                       |  |                                | 301   |      |   | 31 
|Other                                                         |  |                                | 64    |      |   | 23 
|                                                              |  |                                |       |      |   |    
|Total product revenue                                         |  | $                              | 2,000 |      | $ | 183
|License and milestone revenue:                                |  |                                |       |      |   |    
|Veridex and other related party                               |  |                                | 820   |      |   | 175
|Other revenue                                                 |  |                                | 277   |      |   | 14 
|                                                              |  |                                |       |      |   |    
|Total revenue                                                 |  | $                              | 3,097 |      | $ | 372
|                                                              |  |                                |       |      |   |    



We recognized $2.0 million in product
revenue in the nine months ended September 30, 2005, of which $1.1 million was earned from Veridex, a related party. Instrument revenue was $1.6 million and reagent revenue was $365,000. We recognized revenue from the sale of twelve CellTracks
AutoPrep Systems and sixteen cell analyzers in the nine months ended September 30, 2005. Four CellTracks AutoPrep Systems and nine cell analyzers were sold to JNJ affiliates. In the corresponding period of 2004, one Celltracks AutoPrep System
and one cell analyzer were sold. Included in the 2005 revenue is approximately $932,000 of product revenue with no corresponding cost of goods sold. As noted above, we began capitalizing inventory as of October 1, 2004. The manufacturing cost
of goods sold for these products were previously expensed as research and development expense.



License and milestone revenue from related party increased by $645,000 to $820,000 for the nine months of 2005 from $175,000 for the corresponding 2004 period. From August 1, 2000 to September 30, 2005, we
received $6.2 million in license and milestone receipts under our Development Agreement with Veridex. License and milestone receipts have been deferred and are amortized on a straight-line basis over the product development period as defined
for each specific product.



In March 2005, we and Veridex agreed that we had
successfully completed the criteria for another development milestone relating to the enrollment of the first patient into the bone marrow study and Veridex paid us $334,000. We will recognize this receipt as revenue over the estimated life of the
bone marrow study, which we estimate will be completed in the second quarter of 2006.



In August 2003, we sold 80,000 shares of Series F Preferred Stock and entered into a License and Supply Agreement (License and Supply Agreement) with another company. We received $400,000 in proceeds for the combined
transaction. Because shares of our Series F Preferred Stock were valued at $4.00 per share in a similar transaction, the same value was applied to the shares in this transaction. The amount above the $4.00 per share value of the shares of our
Series F Preferred Stock was deemed attributable to the License and Supply Agreement and recorded as deferred license revenue. We recorded this $80,000 premium as deferred license revenue and we have amortized it into income over the two year
period of the exclusive supply arrangement with this company which ended in August 2005. We recognized revenue of $27,000 and $31,000 related to the arrangement and recorded it as Revenue from related party in the consolidated statement
of operations for the nine month periods ended September 30, 2005 and 2004, respectively.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Therefore, total revenue increased by $2.7 million to $3.1 million in the nine months ended September 30, 2005
as compared to $372,000 in the corresponding period in 2004.



Costs of goods
sold



Costs of goods sold increased to $1.6 million in the nine months
ended September 30, 2005 from zero in the corresponding period in 2004. We initiated the practice of recording costs of goods sold and capitalizing inventory in October 2004 after the launch of our initial IVD products.



Instrument cost of goods sold was $1.5 million and reagent cost of goods was $168,000 for the
nine months ended September 30, 2005.



|                   |  |                                |       |      |   |    
|------------------ |  | ------------------------------ | ----- | ---- | - | ---
|                   |  | Nine Months EndedSeptember 30,
|                   |  | 2005                           |       | 2004
|Instruments:       |  |                                |       |      |   |    
|Revenue            |  | $                              | 1,635 |      | $ | 129
|Cost of goods sold |  |                                | 1,477 |      |   |   
|                   |  |                                |       |      |   |    
|Gross profit       |  | $                              | 158   |      | $ | 129
|                   |  |                                |       |      |   |    
|Reagents:          |  |                                |       |      |   |    
|Revenue            |  | $                              | 365   |      | $ | 54 
|Cost of goods sold |  |                                | 168   |      |   |   
|                   |  |                                |       |      |   |    
|Gross profit       |  | $                              | 197   |      | $ | 54 
|                   |  |                                |       |      |   |    



Research and development expenses



Research and development expenses decreased by $737,000, or 4.1%, to
$17.2 million in the nine months of 2005 from $18.0 million in the corresponding 2004 period. Salary and salary-related costs were $9.1 million in the nine months of 2005 compared to $7.6 million in the corresponding 2004 period. This
increase of $1.5 million or 19.9% is due principally to higher staff levels necessary to complete the development of certain instrument platforms and complete the development of our initial cancer monitoring test. We hired additional personnel
during the second half of 2004 to support the commercial launch of our initial products, to support clinical development to expand applications of our cancer diagnostic technology and to expand uses of our technology beyond cancer to other disease
states. The portion of stock-based compensation expenses recognized as part of research and development salaries was $869,000 in the nine months of 2005 versus $1.0 million in the nine months of 2004.



Laboratory supplies and expenses were $603,000, or $3.0 million lower, in the nine months of
2005 than in 2004. As of October 1, 2004 we began capitalizing inventory. Prior thereto, we had recorded all inventory related costs as part of laboratory supplies and expenses. The costs incurred in the first half of 2004 were initial
inventory purchases made in preparation for product launch but recorded as laboratory supplies and expenses. These purchases in 2005 were capitalized as inventory.



Instrument development costs decreased by $155,000 to $452,000 in the nine months of 2005 from $607,000 in the corresponding period in 2004.
This decrease was a result of the launch of the CellTracks Analyzer II in June of 2005.



Clinical trial expenses increased in the nine months of 2005 by $1.1 million to $2.9 million from $1.8 million in the corresponding period of 2004. In the second half of 2004, we initiated a clinical trial for the monitoring of metastatic
colorectal cancer. In January 2005, based on encouraging interim data we decided to increase the number of patients to be included in the trial from the original trial size of 200 patients up to 400. We increased our enrollment efforts in order to
attempt to complete our patient accrual by December 31, 2005. Also, in October 2004, we initiated a pivotal clinical trial for the monitoring of metastatic prostate cancer, which we believe, if it is successful, should result in a regulatory
submission to the FDA. We anticipate increasing our clinical trial expenditures in the remainder of 2005 and beyond in order to expand the uses of our technology to other cancers, to earlier stages of the cancer disease state and to other
disease states where our technology may represent an improvement over current diagnostic techniques.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Contracted research costs were $470,000 lower in the nine months of 2005 than in the corresponding period of 2004. We
incurred higher costs associated with manufacturing validation efforts in the first half of 2004 as we prepared for the launch of our initial IVD products in August 2004. Therefore, these expenses were not as high in 2005.



Depreciation expense increased in the nine months of 2005 by $343,000 to $1.2 million from
$842,000 in the nine months of 2004. This increase is primarily related to capital expenditures for equipment and facilities related costs incurred in preparation for the launch of our initial commercial products.



Insurance expenses increased by $129,000 in the nine months of 2005 over the same period in
2004 related principally to allocated costs of directors and officers liability insurance which increased as a result of our completion of our IPO in April 2004.



A summary of the principal components of our research and development costs for the nine months ended September 30, 2005 and 2004 are
shown below:



|                                        |  |                                |        |      |   |       
|--------------------------------------- |  | ------------------------------ | ------ | ---- | - | ------
|                                        |  | Nine months endedSeptember 30,
|Research and development expenses       |  | 2005                           |        | 2004
|                                        |  | (in thousands)                
|Salaries, benefits and taxes            |  | $                              | 9,114  |      | $ | 7,602 
|Laboratory supplies and expenses        |  |                                | 603    |      |   | 3,600 
|Instrument development costs            |  |                                | 452    |      |   | 607   
|Clinical trial expenses                 |  |                                | 2,942  |      |   | 1,762 
|Contracted research costs               |  |                                | 651    |      |   | 1,122 
|Depreciation expense                    |  |                                | 1,186  |      |   | 842   
|Insurance expense                       |  |                                | 550    |      |   | 421   
|All others                              |  |                                | 1,748  |      |   | 2,028 
|                                        |  |                                |        |      |   |       
|Total research and development expenses |  | $                              | 17,246 |      | $ | 17,984
|                                        |  |                                |        |      |   |       



Each of our research and development
programs is subject to risks and uncertainties, including the requirement to obtain regulatory approval, that are outside of our control. As a result of these risks and uncertainties, we are unable to predict the period in which we will achieve
profitability. For example, our clinical trials may be subject to delays or rejections for a variety of reasons, such as our inability to obtain applicable clearances from the FDA or institutional or ethical review boards or to enroll patients at
the rate that we expect. Moreover, the product candidates we are developing must overcome significant technological and marketing challenges before they can be successfully commercialized.



General and administrative expenses



General and administrative expenses increased by $1.7 million, or 39.3%, to
$6.1 million in the nine months of 2005 from $4.4 million in 2004. The increase is attributable principally to staff increases related to commercialization activities as well as to costs related to public company filing and reporting
requirements, the certification of our system of internal control related to the Sarbanes-Oxley Act and in support of operating activities. Salary related costs increased by $832,000 in the nine months of 2005, due principally to increases in
personnel throughout the period from April 2004 through March 2005.



Insurance
expenses increased by $32,000 as a result of the allocated portion of the higher directors and officers liability insurance which increased as a result of our completion of our IPO in April 2004.



Interest and other income



Interest and other income increased by $536,000, or 116.9%, to $995,000 in the nine months
of 2005 from $459,000 in the corresponding 2004 period. The increase in interest income was primarily a result of an increase in average invested cash balances in 2005 and the increases in interest rates over the past year.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Interest expense



Interest expense decreased by $116,000, or 24.0%, to $367,000 for the nine months of 2005 from $484,000 for nine month period of 2004. The decrease was due to lower
average interest rates on our debt outstanding in the first half of 2005 compared to the 2004 period.



Stock-based compensation expenses



Stock-based compensation expenses were $1.1 million and $1.3 million for the nine months ended September 30, 2005 and 2004, respectively. In August 2004, we granted common stock options to consultants for services completed as of the
option issue date. Therefore, we recognized compensation expense related to these option issuances in the nine month period ended September 30, 2004. We have not made option grants to consultants in the corresponding period in 2005 but have
recognized certain stock-based compensation expenses for grants of restricted common stock which were made in January 2005 to certain of our executives. Therefore the expense related to stock-based compensation expenses was lower in the nine months
ended September 30, 2005 compared to the corresponding period in 2004.



We
recognized these expenses as part of research and development expenses and general and administrative expenses as shown below.



|                                               |  |                                |       |      |   |      
|---------------------------------------------- |  | ------------------------------ | ----- | ---- | - | -----
|                                               |  | Nine Months EndedSeptember 30,
|Stock-based compensation expenses included
in: |  | 2005                           |       | 2004
|                                               |  | (in thousands)                
|Research and development expenses              |  | $                              | 870   |      | $ | 1,039
|General and administrative expenses            |  |                                | 272   |      |   | 282  
|                                               |  |                                |       |      |   |      
|Total stock-based compensation expenses        |  | $                              | 1,142 |      | $ | 1,321
|                                               |  |                                |       |      |   |      



Income taxes



We have incurred net operating losses since our inception and have consequently not paid any
federal, state or foreign taxes. As of September 30, 2005, we had approximately $44.5 million of net operating loss carryforwards and approximately $3.7 million in research and development tax credit carryforwards available to offset future
regular and alternative taxable income. If not utilized, these net operating loss carryforwards and tax credits will begin to expire in 2018. If we do not achieve profitability, we may lose our net operating loss carryforwards. In addition, the
Internal Revenue Code places certain limitations on the annual amount of net operating loss carryforwards that can be utilized if certain changes in our ownership occur. We are currently not subject to these limitations.



Net loss and net loss per common share



The net loss of $21.2 million in the nine months ending September 30, 2005 was
$755,000, or 3.4%, lower than the loss of $22.0 million in the corresponding 2004 period.



At the completion of our IPO on April 21, 2004 approximately 52.1 million preferred shares were converted into 15.5 million shares of common stock. In addition, we completed the sale of 4.1 million
shares of common stock in June 2005. As the result, the net loss per common share of $0.86 in the nine months of 2005 was $0.70 per share lower than the loss per common share of $1.56 in the corresponding 2004 period. Weighted average common shares
outstanding during the nine months ended September 30, 2005 were approximately 24.7 million compared to 14.1 million for the same period in 2004.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



LIQUIDITY AND CAPITAL RESOURCES



We are a development stage company. Although our initial cancer diagnostic products have been launched, we have not yet generated a
significant amount of revenue from the sales of these products. We believe that we will need to demonstrate that we can generate substantial and sustainable revenue, particularly reagent revenue, in order to consider ourselves a fully operational
company. We have financed our operations since inception through private and public equity, debt financings, license and milestone revenues from corporate collaborations, capital equipment and leasehold financing, government grants and interest
earned on cash and investments. Since our inception, we have generated net losses of $112.8 million from operations.



Cash and short-term investments decreased by $3.8 million in the nine month period ended September 30, 2005 to $49.3 million from $53.1 million as of
December 31, 2004. This decrease was principally the result of the net loss of $21.2 million for the nine months ended September 30, 2005 which was offset by the receipt of $18.0 in net proceeds from the sale of 4.1 million shares of
common stock in June 2005.



We used $19.1 million in our operating activities
in the nine months ended September 30, 2005 compared to $17.5 million in same period in 2004 and $97.9 million from inception through September 30, 2005. Our operating activities during these periods consisted principally of
research and development and clinical trials expenses incurred in the development and launch of our initial cancer diagnostic products.



We used cash of $1.5 million in our investing activities in the nine months ended September 30, 2005. We received net proceeds from maturities of our investments of
$1.6 million and invested $3.1 million on capital expenditures. We used approximately $26.4 million in investing activities in the nine months ended September 30, 2004 principally as a result of investing the cash proceeds from our IPO in
various investments. We have used $38.1 million in investing activities from inception through September 30, 2005. The principal uses have been the net investment purchases of $25.0 million and purchases of $13.1 million of property and
equipment.



We generated cash of $18.6 million from our financing activities in
the nine months ended September 30, 2005 and $48.8 million in the same period in 2004. From inception to September 30, 2005 we have generated cash from financing activities of $161.5 million. In June 2005 we raised $18.0 million in
proceeds, net of expenses, through the sale of 4.1 million shares of common stock pursuant to shelf registration statement filed in May 2005. We received proceeds from bank borrowings of $2.8 million and made principal payments of $2.6 million
in the nine months ended September 30, 2005 compared to proceeds from bank borrowings of $1.5 million and principal payments of $2.7 million in the nine months ended September 30, 2004. From inception to September 30, 2005, we have
received $20.5 million in proceeds from borrowings and made principal payments of $13.7 million. On April 21, 2004, we completed our IPO. In the IPO, we sold 6.9 million shares of our common stock at $8.00 per share. We raised a total of
$49.4 million, net of fees and expenses totaling $1.9 million.



From inception
to September 30, 2005 we have raised $70.7 million from the sale of our common stock, net of offering fees and expenses and $85.1 million, net of issuance costs, from the sale of our preferred stock.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



Since March 1999, we have also borrowed $20.5 million through equipment lines of credit and have received
$6.2 million in milestone receipts from Veridex. Our liquidity requirements are the result primarily of research and development and other operating expenditures, capital equipment expenditures and payments on outstanding indebtedness. Sales of our
common and preferred stock, since inception, are summarized below:



|                                                                 |  |            |  |                 |  |                 |        |                             |   |                         |  |           
|---------------------------------------------------------------- |  | ---------- |  | --------------- |  | --------------- | ------ | --------------------------- | - | ----------------------- |  | ----------
|Summary of all sales of common and convertible preferred stock   |  | Year(s)    |  | Number ofshares |  | Price per share |        | Net proceeds (in thousands) |   | Equivalent commonshares
|Initial sale of common stock (private)                           |  | 1984       |  | 10,000          |  | $               | 150.00 |                             | $ | 1,500                   |  | 10,000    
|Convertible preferred stock                                      |  |            |  |                 |  |                 |        |                             |   |                         |  |           
|Series A                                                         |  | 1988       |  | 36,350          |  |                 | 10.00  |                             |   | 364                     |  | 669,343   
|Series B                                                         |  | 1989       |  | 30,000          |  |                 | 10.00  |                             |   | 300                     |  | 236,952   
|Series C                                                         |  | 1990       |  | 30,000          |  |                 | 10.00  |                             |   | 300                     |  | 296,016   
|Series D                                                         |  | 1999, 2004 |  | 33,971,098      |  |                 | 0.32   |                             |   | 10,597                  |  | 2,216,742 
|Series E                                                         |  | 2000       |  | 4,588,612       |  |                 | 4.74   |                             |   | 21,612                  |  | 3,059,083 
|Series F                                                         |  | 2001, 2003 |  | 13,454,500      |  |                 | 4.00   |                             |   | 51,942                  |  | 8,969,677 
|Initial public offering                                          |  | 2004       |  | 6,900,000       |  |                 | 8.00   |                             |   | 49,427                  |  | 6,900,000 
|Secondary sale of common stock                                   |  | 2005       |  | 4,137,902       |  |                 | 4.75   |                             |   | 17,981                  |  | 4,137,902 
|Exercise of options and warrants and other sales of common stock |  | various    |  |                 |  |                 |        |                             |   | 1,802                   |  | 996,993   
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                         |  |           
|                                                                 |  |            |  |                 |  |                 |        |                             | $ | 155,825                 |  | 27,492,708
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                         |  |           



As of September 30, 2005, we did
not have any off balance sheet financing arrangements.



The following table
summarizes our contractual obligations and related interest charges on lines of credit at September 30, 2005 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.



|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |      
|----------------------------------- |  | --------------- | ------ | ---- | - | ------------- |  | ------------- | ----- | ---------- | - | ----- |  | - | -----
|                                    |  | Payments due in
|Contractual obligations             |  | Total           |        | 2005 |   | 2006 and 2007 |  | 2008 and 2009 |       | After 2009
|                                    |  | (in thousands) 
|Lines of credit                     |  | $               | 6,388  |      | $ | 901           |  | $             | 4,312 |            | $ | 1,175 |  | $ |     
|Operating leases                    |  |                 | 5,342  |      |   | 244           |  |               | 1,991 |            |   | 2,029 |  |   | 1,078
|Open purchase order commitments (1) |  |                 | 8,007  |      |   | 8,007         |  |               |      |            |   |      |  |   |     
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |      
|Total contractual obligations       |  | $               | 19,737 |      | $ | 9,152         |  | $             | 6,303 |            | $ | 3,204 |  | $ | 1,078
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |      



|(1) | The amounts included in open purchase order commitments are subject to performance under the purchase order by the supplier of the goods or services and do not become our obligation
until such performance is rendered. The amount shown is principally for the purchase of materials for our instrument platforms, which we anticipate will be sold by us to customers and for various items such as contingent patient accrual commitments
related to our clinical trials. Most patient accrual costs are payable only after successful completion of patient accrual.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We also have contingent obligations for research and development and clinical trial expenditures under our Development Agreement with Veridex. Specifically, we must pay
the first $5.0 million in clinical trial costs for the first cellular analysis product for general population screening for a major cancer, and Veridex is responsible for the next $5.0 million of such clinical trial costs. We have agreed
to negotiate in good faith for the allocation of costs in excess of $10.0 million. As of September 30, 2005 we have not incurred any costs related to clinical trials for a product for general population screening, and we do not anticipate
spending any funds on clinical trials toward such a product through 2005.



In
addition, if we achieve certain levels of sales of our reagents, we may receive up to an additional $10.0 million in milestone payments from Veridex, although we do not expect to receive any milestone payments related to sales goals until at
least 2008.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



The Development Agreement with Veridex provides for a total of up to $10.5 million in non-refundable license and
milestone payments related to research and development activities including up to $1.5 million for the initial license and up to $9.0 million related to the completion of certain instrument and clinical trial milestones. We have received
$6.2 million of these milestone payments as of September 30, 2005. We expect to earn the remaining $4.3 million over the next three to five years.



We currently do not expect that any of the milestone payments discussed above will be materially delayed beyond their applicable target
dates. However, because these milestone payments are related to the successful completion of the payment criteria included in our agreement with Veridex, including completion of clinical trials, development activities and receipt of regulatory
clearances, we may be unable to successfully complete the payment criteria in a timely manner, if at all. Veridex is responsible under the Development Agreement for obtaining all regulatory clearances for indications related to the CellSearch kit,
in consultation with us, for these cell analysis products in the field of cancer. Also, we and Veridex will continue to evaluate our development program in cancer, particularly clinical development and may negotiate changes to milestones that have
not yet been achieved, although we do not expect that the aggregate amount of the milestones will change.



If we do not successfully complete the criteria as defined for a given future milestone, we will not receive the applicable milestone payment. If we do not successfully complete the criteria as defined by the target
date for a given milestone, we will continue to be entitled to receive the milestone payment in the future upon successful completion of the criteria. However, Veridexs obligation to pay us a percentage of the net sales for the cell analysis
product to which the milestone relates would be reduced by 0.5% for the ten year period beginning with the shipment for commercial sale of the first product resulting from this agreement. In no event, however, would reductions due to missed target
dates reduce our proportionate percentage share of net sales that we would otherwise be entitled to receive from Veridex for sales of all cell analysis products by Veridex under this Development Agreement by more than 0.5% in the aggregate.



We also have established a sales agency arrangement with Veridex with respect
to our sample preparation and cell analysis systems. Under this arrangement, Veridex is our exclusive sales, invoicing and collecting agent and exclusive instrument and technical service provider for these systems in the field of cancer. Veridex is
responsible for all expenses for marketing, sales and training, and we are responsible for all software development and validation as well as quality control and quality assurance. We are responsible for shipping systems pursuant to purchase orders
received by Veridex. We are obligated to pay Veridex a commission on each sale or lease of these sample preparation and cell analysis systems of up to 15% of the invoice price, subject to a minimum gross profit margin received by us on each system
of 27.5%. Some customers may enter into a reagent rental agreement with Veridex, whereby the reagent price also carries an amortized cost of the instrument, based on an agreed test volume. In these cases, Veridex will pay us a percentage of the
fully loaded cost of the instrument when it is placed in the account. We are responsible for the costs associated with the one-year warranty period. Veridex has the option under the agreement to convert the sales agency relationship to a sole
distributorship arrangement upon 12-months written notice. However, we do not anticipate earning significant gross margins or incurring significant losses on the sale, lease or rental of our CellTracks AutoPrep System, our CellSpotter Analyzer
or our CellTracks Analyzer II. We anticipate that the majority of our future gross margins and future profits derived under our agreement with Veridex will result from the sales of reagents and ancillary products.



Under this distributor arrangement, we would be required to supply Veridex based on the
forecasts provided to us by Veridex and the actual orders for these systems placed with us by Veridex. The allocation of costs and expenses between us and Veridex would remain substantially the same and we would remain responsible for the costs
associated with the one-year warranty period. In addition, instead of Veridex receiving up to a 15% commission after deducting the 27.5% gross profit margin on each sale or lease, these systems would be sold to Veridex at a transfer price that
provides a 27.5% gross profit margin to us, and Veridex would retain the proceeds from their sales of these systems, but would be required to remit to us any proceeds from their sales to the extent that the proceeds of such sales, after deducting
15%, exceed the transfer price for these systems.



Following commercialization,
if we and Veridex are able to generate product sales under the Development Agreement, we are required to invest an amount ranging from between 8.5% and 10% of total net product sales by Veridex, excluding revenue from cell analysis system sales, in
research and development activities for cancer-related cell analysis products. These research and development activities may consist of any activities, such as product improvements, product line extensions and clinical trials, conducted to achieve
the milestones described above, to advance the development program designed by the steering committee for this agreement, or to enhance the cancer-related cell analysis products or sample preparation and cell analysis systems based on our
technologies.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



As of September 30, 2005, we had $13.6 million in available credit under our credit agreements, respectively.
The available borrowing capacity under our SVB credit facility was $9.5 million and it expires on June 30, 2006 and available borrowing capacity under our GE credit facility was $4.1 million and it expires April 30, 2006. We were in
compliance with all provisions of our various loans as of and for the three and nine month periods ended September 30, 2005 and 2004.



On May 6, 2005, we filed a shelf registration statement on Form S-3 with the SEC. The shelf registration statement permits the offer, sale and issuance by us from
time to time, in one or more offerings, of up to an aggregate of $75 million of our common stock, preferred stock, debt securities, warrants, depositary shares, stock purchase contracts and stock purchase units. The terms of any offering will be
established at the time of the offering. On June 29, 2005, we sold 4,137,902 shares of our common stock at $4.75 per share pursuant to this shelf registration statement and received $18.0 million in proceeds, net of expenses.



In June 2005, we announced that we, along with the Fox Chase Cancer Center were awarded a
Small Business Technology Transfer grant totaling approximately $587,000 by the National Institutes of Health (NIH). Under the provisions of the grant we can receive up to approximately $1.1 million over two years. The NIH grant is
intended to fund the development of a new strategy to actively monitor the effectiveness of cancer drugs in clinical trials.



On August 29, 2005, we announced that we were reducing staff and other expenses in order to align costs with our commercialization strategy and revenue ramp and we
reduced our workforce by approximately 25% as of that date. We anticipate recording total charges of up to $1 million related to the staff and other cost reductions. We expect to make all severance-related payments, totaling approximately $400,000,
before the end of 2005. These severance costs have been recorded as operating expenses in the quarter ended September 30, 2005. We expect to incur charges of up to an estimated additional $600,000 such as those related to space consolidation,
among others, in the first half of 2006.



This workforce reduction represented
approximately 25% of full-time equivalent domestic staff principally in research and development, operations and certain support functions. A significant component of the workforce reduction involved employees who were engaged in platform
development programs that are now essentially completed, such as our next generation cell analysis platform, the CellTracks Analyzer II. Additionally, we have completed development of core reagents and ancillary components incorporated in cell
analysis kits, most notably the CellSearch Circulating Tumor Cell (CTC) Kit, sold by Veridex. We also continue to pursue important development projects such as clinical trials in metastatic colorectal and prostate cancer and research and
development efforts on circulating endothelial cells and certain molecular analysis products. The clinical trials in metastatic colorectal and prostate cancer are intended to lead to regulatory submissions for expanded claims for the CellSearch CTC
Kit.



Based on our operating plans, we believe that our available cash will be
sufficient to finance operations and capital expenditures until at least September 30, 2006. Our future capital requirements include, but are not limited to, supporting our research and development efforts and our clinical trials, although we
are not obligated to meet any absolute minimum dollar spending requirements under our current operating agreements. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development
activities, our clinical trials and capital requirements related to our commercialization efforts. We had $50.1 million in cash on hand and investments of which $49.3 million was in cash and short term investments, and approximately $13.6
million in available lines of credit as of September 30, 2005. We plan to use our cash on hand and our available lines of credit to continue to develop our cancer diagnostic products beyond breast cancer to other types of solid tissue cancers
and to explore the uses of our technology in earlier stages of the cancer disease process. Also, we plan to explore development of uses for our technology outside of cancer such as in cardiovascular disease. We plan to use our cash on hand,
anticipated funds generated from the sales of our products as well as additional equity or debt-related offerings to finance our future development efforts. We may not be successful in generating sufficient product sales or raising sufficient funds
from the sale of equity or debt securities to support the research and development expenses necessary to expand the uses of the technology into other cancers and in non-cancer diseases. In addition, if we are unsuccessful in our product development
efforts, additional financing may not be available in sufficient amounts or on terms acceptable to us, if at all. If we are unable to obtain additional financing, we may elect to reduce the scope of, delay or eliminate some or all of our planned
research, development and commercialization activities, which could have a material adverse effect on our financial condition and operating results.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

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



RECENT ACCOUNTING PRONOUNCEMENTS



In November 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS,
No. 151 Inventory Costsan amendment of ARB No. 43, Chapter 4. SFAS No. 151 requires all entities to allocate overhead costs to inventory based on a calculation of normal manufacturing capacity. The Statement notes that
this calculation is difficult because of the variety of considerations encountered in the allocation of costs and charges. This statement is effective for the first fiscal year beginning after June 15, 2005. We will adopt SFAS
No. 151 beginning with the first quarter of fiscal 2006. We are currently evaluating the impact of the adoption of this statement will have on our consolidated financial statements.



In December 2004, the FASB issued SFAS No. 123(R), Share Based Payment. Statement No. 123(R) requires all entities to
recognize compensation expense in an amount equal to the fair value of share based payments granted to employees. This statement is effective for the first fiscal year beginning after June 15, 2005. We will adopt Statement No. 123(R)
beginning with the first quarter of fiscal 2006. Adoption of the statement will require us to record compensation expense relating to the issuance of employee stock options. Currently, we follow APB No. 25 which does not require the recognition
of compensation expense relating to the issuance of stock options so long as the quoted market price of our stock at the date of grant is less than or equal to the amount an employee must pay to acquire the stock. We are currently evaluating the
impact of the adoption of this statement will have on our consolidated financial statements.



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Risk Factors



FACTORS THAT MAY AFFECT FUTURE RESULTS



In addition to other information contained in this report you should carefully consider the following factors in evaluating our company.
Any of the following factors could materially and adversely affect our business, financial position and results of operations.



RISKS RELATING TO OUR BUSINESS



We have a history of operating losses, expect to continue to incur substantial losses, and might never achieve or maintain profitability.



We are a development stage company with limited operating history. We have incurred
significant net losses since we began operations in 1983. As of September 30, 2005, we had a deficit accumulated during our development stage of $112.8 million. For the three months ended September 30, 2005 and 2004 we had net losses
of $7.1 million and $8.3 million, respectively. For the nine months ended September 30, 2005 and 2004 we had net losses of $21.2 million and $22.0 million, respectively. These losses have resulted primarily from costs incurred in our
research and development programs and from our general and administrative expenses. Because our operating expenses may increase in the near term, we will need to generate significant additional revenue to achieve profitability. As we do not as yet
have sufficient operating revenue from the sales of our products to offset our losses, we do not expect to have any significant operating income from the sale of our products until at least 2008. We will continue to incur research and development
and clinical trial expenses, as well as increased manufacturing, sales and marketing expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders equity.
Because of the numerous risks and uncertainties associated with our product development efforts, market acceptance and uncertainties concerning the success of sales efforts by us and Veridex, we are unable to predict when we will become profitable,
and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, the market value of our
common stock will decline.



If our relationship with Veridex is terminated
or does not function effectively, we may be unable to continue to commercialize effectively certain of our products based on our technologies in the field of cancer.



We entered into a development, license and supply agreement with Veridex, under which we granted to Veridex a worldwide exclusive license in
the field of cancer to commercialize cell analysis products based on our technologies. We also appointed Veridex as our exclusive sales, invoicing and collection agent for our cell analysis instrumentation in cancer. Veridex may terminate this
agreement with or without reason at any time by providing us with 24 months prior written notice. Veridex also may terminate this agreement if we are in material breach or are acquired by a competitor in the IVD field. In addition, while
we have granted Veridex the exclusive right to market, distribute and conduct field, technical, customer service and certain manufacturing finishing operations for these products, this agreement provides that Veridex has very limited obligations to
perform these functions. For example, the agreement does not require Veridex to meet any minimum levels with respect to sales, marketing personnel or other marketing expenditures. If Veridex were to terminate, or fail to meet its obligations under
this agreement or fail to deploy adequate resources to commercialize products under this agreement:



| |  |  | we would incur significant delays and expense in the commercialization of these products;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | we might be unable to enter into a similar agreement with another company with similar resources to commercialize these products and perform these functions on acceptable terms, if
at all; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we might be unable to commercialize these products or perform these functions successfully ourselves.
| | - |  | -----------------------------------------------------------------------------------------------------



Any of these outcomes could result in delays in our ability to generate revenues from the sales of these products, an increase in our
expenses and a resulting adverse impact on our operations and financial results, and the value of our common stock would likely decline.



If we and Veridex are able to generate product sales under our agreement, we are required to invest an amount ranging from between 8.5% and 10% of total net product sales
by Veridex, excluding revenue from cell analysis system sales, in research and development for cancer-related cell analysis products.



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Risk Factors



If our products and Veridexs products do not achieve market acceptance, we will be unable to generate
significant revenues from them.



The future commercial success of our
products and of Veridexs products based on our technologies will depend primarily on:



| |  |  | convincing research, reference and clinical laboratories to conduct validation studies using these products and to offer these products as research tools for scientists and clinical
investigators and as diagnostic products to physicians, laboratory professionals and other medical practitioners; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | convincing physicians to order tests for their patients, and laboratory professionals and other medical practitioners to use our technologies.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



To accomplish this, we and Veridex will need to convince oncologists, primary care
physicians, surgeons, laboratory professionals and other members of the medical and biotechnology communities of the benefits of these products through published papers, presentations at scientific conferences and additional clinical trials. If we
and Veridex are not successful in these efforts, the market acceptance for these products could be limited. Additionally, if ongoing or future clinical trials result in unfavorable or inconsistent results, these products may not achieve market
acceptance. Other factors that might influence market acceptance of these products include the following:



| |  |  | evidence of clinical utility;
| | - |  | -----------------------------



| |  |  | ability to obtain sufficient third-party coverage or reimbursement;
| | - |  | -------------------------------------------------------------------



| |  |  | convenience and ease of administration;
| | - |  | ---------------------------------------



| |  |  | availability of alternative and competing diagnostic products;
| | - |  | --------------------------------------------------------------



| |  |  | cost-effectiveness;
| | - |  | -------------------



| |  |  | effectiveness of marketing, distribution and pricing strategy; and
| | - |  | ------------------------------------------------------------------



| |  |  | publicity concerning these products or competitive products.
| | - |  | ------------------------------------------------------------



If these products do not gain broad market acceptance, our business will suffer.



If we or Veridex are not able to obtain all of the regulatory approvals and clearances required to commercialize our products, our business would be significantly
harmed.



The products based on our technologies are generally regulated as
medical devices by the FDA and comparable agencies of other countries. In particular, FDA regulations govern, among other things, the activities that we and Veridex perform, including product development, product testing, product labeling, product
storage, pre-market notification clearance (or 510(k)) or pre-market approval (or PMA), manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution.



Most of the products that we plan to develop and commercialize in the US will require either
510(k) clearance, or PMA approval from the FDA prior to marketing. The 510(k) clearance process usually takes from two to twelve months from submission, but can take longer. The PMA process is much more costly, lengthy and uncertain and generally
takes from one to two years or longer from submission.



All of the products
that we or Veridex intend to submit for FDA clearance or approval will be subject to substantial restrictions, including, among other things, restrictions on the indications for which we and Veridex may market these products, which could result in
lower revenues. The marketing claims we and Veridex will be permitted to make in labeling or advertising regarding our cancer diagnostic products, if cleared or approved by the FDA, will be limited to those specified in any clearance or approval. We
expect that initially many of these products will be limited to research use only. In addition, both we and Veridex are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA
finds that we or Veridex have failed to comply with these requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including:



| |  |  | fines, injunctions and civil penalties;
| | - |  | ---------------------------------------



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Risk Factors



| |  |  | recall or seizure of our products or Veridexs products;
| | - |  | --------------------------------------------------------



| |  |  | operating restrictions, partial suspension or total shutdown of production;
| | - |  | ---------------------------------------------------------------------------



| |  |  | denial of requests for 510(k) clearances or PMAs of product candidates;
| | - |  | -----------------------------------------------------------------------



| |  |  | withdrawal of 510(k) clearances already granted;
| | - |  | ------------------------------------------------



| |  |  | disgorgement of profits; and
| | - |  | ----------------------------



| |  |  | criminal prosecution.
| | - |  | ---------------------



Any of these enforcement actions could affect our ability or Veridexs ability to commercially distribute our products in the US and may also harm our ability to conduct the clinical trials necessary to support
the marketing, clearance or approval of these products.



If the third-party
manufacturers we rely on either refuse or are unable to successfully manufacture certain of our products, we may be unable to commercialize these products.



We have limited commercial manufacturing experience and capabilities. We currently assemble or perform final assembly, test and release of the CellSpotter System, the
CellTracks Analyzer II and CellTracks AutoPrep System, as well as bulk reagents and other associated products used with the CellTracks AutoPrep System, at our facility located in Huntingdon Valley, Pennsylvania. We currently have adequate
manufacturing capacity to meet anticipated demand for 2005 and 2006. However, in order to meet anticipated demand thereafter, we will likely have to expand our manufacturing processes and facilities or increase our reliance on third-party
manufacturers. Under our agreement with Veridex, we might be required to establish a third manufacturing facility or qualify a contract manufacturer in the future. We might encounter difficulties in expanding our manufacturing processes and
facilities or in expanding our relationships with third-party manufacturers and might be unsuccessful in overcoming these difficulties. In that event, our ability to meet product demand could be impaired or delayed.



We face additional risks inherent in operating a single manufacturing facility for those
products we manufacture ourselves. We do not have alternative production plans in place or alternative facilities available at this time. If there are unforeseen shutdowns to our facility, we will be unable to satisfy customer orders on a timely
basis with respect to these products. We rely currently and intend to continue to rely significantly in the future on third-party manufacturers to produce some of our products. For example, we are dependent on a small, private contract design,
engineering and manufacturing company, Astro Instrumentation, LLC, or Astro, for our CellTracks AutoPrep System. If Astro loses key personnel or encounters financial or other difficulties, they may be unable to continue to manufacture this system
and provide ongoing design and engineering support for commercialization and future enhancements of this system, and we may have difficulty replacing them. In addition, we currently use a third-party manufacturer for our CellSave Preservative Tube.
We are dependent on these third-party manufacturers to perform their obligations in a timely and effective manner and in compliance with FDA and other regulatory requirements. If these third-party manufacturers fail to perform their obligations, our
competitive position and ability to generate revenue could be adversely affected in a number of ways, including:



| |  |  | we might not be able to initiate or continue clinical trials on products that are under development;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | we might be delayed in submitting applications for regulatory approvals and clearances for products; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | we might not be able to meet commercial demands for any approved or cleared products.
| | - |  | -------------------------------------------------------------------------------------



Any failures in manufacturing these products may also result in a breach of our agreement with Veridex.



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##### Table of Contents

Risk Factors



If third-party payors do not reimburse customers for our products and Veridexs products, they might not be
used or purchased, which would adversely affect our revenues.



The
majority of the sales of our products and Veridexs products based on our technologies in the US and other markets will depend, in large part, on the availability of adequate reimbursement to users of these products from government insurance
plans, including Medicare and Medicaid in the US, managed care organizations, private insurance plans and other third-party payors. Because these products have only recently been commercially introduced, third-party payors have no history of
reimbursing for the cost of these products. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical diagnostic products incorporating new technology. In addition, third-party payors are increasingly limiting
reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical products suppliers to reduce their prices. Consequently, third-party reimbursement might not be consistently available or adequate to
cover the cost of our products. This could limit our ability or Veridexs ability to sell these products or cause the prices of these products to be reduced, which would adversely affect our operating results.



Because each third-party payor individually approves reimbursement, obtaining these approvals
is a time-consuming and costly process that will require us and Veridex to provide scientific and clinical support for the use of each of these products to each third-party payor separately with no assurance that approval will be obtained. This
process could delay the market acceptance of new products and could have a negative effect on our revenues and operating results.



If we or any of our third-party manufacturers do not maintain high standards of manufacturing in accordance with Quality System Regulations, our ability to develop,
and Veridexs and our ability to commercialize our products, could be delayed or curtailed.



We and any third-party manufacturers that we currently rely on or will rely on in the future, including those we rely on to produce our CellTracks AutoPrep System and CellSave Preservative Tube, must continuously
adhere to the current good manufacturing practices, or cGMP, set forth in the FDAs Quality System Regulations, or QSR, and enforced by the FDA through its facilities inspection program. In complying with QSR, we and any of our third-party
manufacturers must expend significant time, money and effort in design and development, testing, production, record-keeping and quality control to assure that our products meet applicable specifications and other regulatory requirements. The failure
to comply with these specifications and other requirements could result in an FDA enforcement action, including the seizure of products and shutting down production. We or any of these third-party manufacturers also may be subject to comparable or
more stringent regulations of foreign regulatory authorities, which include compliance with ISO 13485 2003 and the European Unions in vitro Diagnostic Directive 98/97/EC. If we or any of our third-party manufacturers fail to comply with
these regulations, we might be subject to regulatory action, which could delay or curtail our ability to develop, and Veridexs and our ability to commercialize, products based on our technologies.



If we fail to obtain necessary funds for our operations, we will be unable to continue to
develop and commercialize new products and technologies.



We expect
capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing, clinical trials and research and development activities. Specifically, we will need to raise
additional capital to, among other things:



| |  |  | sustain commercialization with Veridex of our initial products;
| | - |  | ---------------------------------------------------------------



| |  |  | pursue regulatory approvals and clearances;
| | - |  | -------------------------------------------



| |  |  | expand our technologies into other areas of cancer and medicine;
| | - |  | ----------------------------------------------------------------



| |  |  | expand our research and development activities;
| | - |  | -----------------------------------------------



| |  |  | acquire or license technologies;
| | - |  | --------------------------------



| |  |  | fund our clinical trial activities;
| | - |  | -----------------------------------



| |  |  | expand our manufacturing activities; and
| | - |  | ----------------------------------------



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Risk Factors



| |  |  | finance capital expenditures and our general and administrative expenses.
| | - |  | -------------------------------------------------------------------------



To date, we have raised capital through private equity, public equity and debt financings, license and milestone revenues from corporate collaborations, capital equipment
and leasehold financing, government grants and interest earned on cash and investments. However, our present and future funding requirements will depend on many factors, including, among other things:



| |  |  | the level of research and development investment required to maintain and improve our technology position;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | costs of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | our need or decision to acquire or license complementary technologies or acquire complementary businesses;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | changes in product development plans needed to address any difficulties in manufacturing or commercialization;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | competing technological and market developments; and
| | - |  | ----------------------------------------------------



| |  |  | changes in regulatory policies or laws that affect our operations.
| | - |  | ------------------------------------------------------------------



We do not know whether additional financing will be available on commercially acceptable terms when needed. If adequate funds are not available or are not available on
commercially acceptable terms, our ability to fund our operations, develop products or technologies or otherwise respond to competitive pressures could be significantly delayed or limited, and we might need to downsize or halt our operations.



If we raise additional funds by issuing equity securities, further dilution to
our stockholders could result, and new investors could have rights superior to those of our existing shareholders. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. If
we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant
restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable
to us. If adequate funds are not available, we may have to delay or may be unable to continue to develop our products.



If the third parties we intend to contract with for clinical trials do not perform in an acceptable manner, or if we suffer setbacks in these clinical trials, our
business may suffer.



We do not have the ability to conduct independently
the clinical trials required to obtain regulatory clearances for our products. We intend to rely on third-party expert clinical investigators and clinical research organizations to perform these functions. If we cannot locate and enter into
favorable agreements with acceptable third parties, or if these third parties do not successfully carry out their contractual obligations, meet expected deadlines or follow regulatory requirements, including clinical laboratory, manufacturing and
good clinical practice guidelines, then we may be the subject of an enforcement action by the FDA or some other regulatory body, and may be unable to obtain clearances for our products or to commercialize them on a timely basis, if at all.



The completion of clinical trials of our products may be delayed by many other
factors, including the rate of enrollment of patients. Neither we nor any third-party clinical investigators and clinical research organizations can control the rate of patient enrollment, and this rate might not be consistent with our expectations
or sufficient to enable clinical trials of our products to be completed in a timely manner or to be completed at all. In addition, regulatory authorities might not permit us to undertake additional clinical trials for one or more of these products.
Currently, we have two important labeling trials underway in colorectal and prostate cancer. If we suffer any significant delays, setbacks or negative results in, or termination of, these clinical trials or our other clinical trials for our
products, we may be unable to generate product sales from these products in the future.



If we lose key management or scientific personnel, scientific collaborators or other advisors, our business would suffer.



Our success depends, in large part, on the efforts and abilities of Edward L. Erickson, who is our Chairman and Chief Executive Officer, Byron D. Hewett, who is our
President and Chief Operating Officer, Leon W.M.M. Terstappen, who is our Senior Vice President of Research and Development and Chief Scientific Officer, and James G. Murphy, who is our Senior Vice President of



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Finance and Administration and Chief Financial Officer, as well as the other members of our senior management and our scientific and technical personnel. In
April 2005, Mr. Erickson notified our board of directors of his intention to step down as Chief Executive Officer on March 31, 2006. Given that the pool of individuals with relevant experience in biotechnology and diagnostic products in
particular is limited, it would be costly and time-consuming to replace any of our senior management or scientific personnel. Although we maintain key-person life insurance on Mr. Erickson and Dr. Terstappen, we do not maintain key-person
life insurance on any of our other officers, employees or consultants. We also depend on our scientific collaborators and other advisors, particularly with respect to our research and development efforts. If we lose the services of one or more of
our key officers, employees or consultants, or are unable to retain the services of our scientific collaborators and other advisors, our research and development and product development efforts could be delayed or curtailed.



If Veridex and the other third parties we intend to rely on to perform marketing, sales
and distribution services for our products do not successfully perform these services, our business will be harmed.



We have limited marketing, sales and distribution experience and capabilities. In order to commercialize any of our products, we must either internally develop sales,
marketing and distribution capabilities or make arrangements with third parties to perform these services. We intend to rely for the foreseeable future on sales, marketing and distribution arrangements with third parties for the commercialization of
our products. Specifically, we will rely on Veridex for the commercialization of the initial cancer diagnostic products based on our technologies. We may be unable to enter into sales, marketing and distribution agreements with third parties on
acceptable terms, if at all. Also, the sales, marketing, and distribution efforts of these third parties might not be successful. Any sales through these third parties might be less profitable to us than direct sales.



If we decide to perform any sales, marketing and distribution functions ourselves, we might
face a number of risks, including:



| |  |  | our ability to attract and build the significant and skilled marketing staff or sales force necessary to commercialize and gain market acceptance for our products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the amount of time and cost of establishing a marketing staff or sales force might not be justifiable by the revenues generated by any particular product; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the failure of our direct sales and marketing personnel to initiate and execute successful commercialization activities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



If the limited number of suppliers we rely on fail to supply the raw materials we use in
the manufacturing of our reagent products, we might be unable to satisfy product demand, which would negatively impact our business.



Some of the raw materials used in the manufacturing of our reagent products used in several of our platforms and instruments currently are available only from a limited
number of suppliers. We acquire all of these raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities of these raw materials over a certain period of time or to set aside part of
its inventory for our forecasted requirements. Additionally, for certain of these raw materials, we have not arranged for alternative suppliers, and it might be difficult to find alternative suppliers in a timely manner and on terms acceptable to
us. Consequently, as we continue our commercialization efforts, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we might not have access to
sufficient quantities of these raw materials on a timely basis and might not be able to satisfy product demand.



In addition, if any of these components and raw materials are no longer available in the marketplace, we will be forced to further develop our technologies to incorporate
alternate components and to do so in compliance with QSR and other quality standards, such as ISO 13485. If we incorporate new components or raw materials into our products we might need to seek and obtain additional approvals or clearances from the
FDA or foreign regulatory agencies, which could delay the commercialization of these products.



If our competitors develop and market technologies or research and diagnostic products faster than we or Veridex do or if those products are more effective than our products, our commercial opportunities will be
reduced or eliminated.



The extent to which any of our technologies and
products achieve market acceptance will depend on many competitive factors, many of which are beyond our control. Competition in the pharmaceutical and biotechnology industries, and the medical devices and diagnostic products segments in particular,
is intense and has been accentuated by the rapid pace of technological development. Our competitors include large diagnostics and life sciences companies. Most of these entities have substantially greater research and



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development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do. Some of them also have more experience
than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales. These organizations also compete with us to:



| |  |  | pursue acquisitions, joint ventures or other collaborations;
| | - |  | ------------------------------------------------------------



| |  |  | license proprietary technologies that are competitive with our technologies;
| | - |  | ----------------------------------------------------------------------------



| |  |  | attract funding; and
| | - |  | --------------------



| |  |  | attract and hire scientific talent.
| | - |  | -----------------------------------



If we or Veridex cannot successfully compete with new or existing products or technologies, sales of our products will suffer and we may never achieve profitability.
Because of their greater experience with commercializing their technologies and larger research and development capabilities, our competitors might succeed in developing and commercializing technologies or products earlier and obtaining regulatory
approvals and clearances from the FDA more rapidly than Veridex or us. Our competitors also might develop more effective technologies or products that are more predictive, more highly automated or more cost-effective, which may render our
technologies or products obsolete or non-competitive.



If we experience
delays in the development of new products or delays in planned improvements to our products, our commercial opportunities will be reduced.



To improve our competitive position, we believe that we will need to develop new products as well as improve our existing instruments, reagents and ancillary products.
Improvements in operator workflow, automation and throughput (the number of tests that can be performed in a specified period of time) for our products will be important to maintain a competitive position of our products as we market to a broader,
perhaps less technically proficient, group of customers. Our ability to develop new products and make improvements in our products may face difficult technological challenges leading to development delays. For example, we had experienced delays in
connection with the development of our laser-based CellTracks Analyzer cell analysis instrument for use in cancer diagnostic testing. These delays were the result of technical problems associated with reliability of the system to detect cancer
cells. In response, in June 2005, we introduced a second generation instrument, the CellTracks Analyzer II, which, among other improvements over our current CellSpotter Analyzer, implements enhancements such as the automation of data acquisition and
enhanced detection of CTCs and other types of cells. We are also continuing to develop our analyzer platforms further because we believe that some of the planned features, such as foreign language capability and the ability to quantify cellular
markers using ASRs, may be required to remain competitive and address future potential research and clinical applications and to remain competitive. If we are unable to successfully complete development of new products or planned enhancements to our
products, in each case without significant delays, our future competitive position may be adversely affected.



If product liability lawsuits are successfully brought against us, we might incur substantial liabilities and could be required to limit the commercialization of our products.



Our business exposes us to potential product liability risks that are inherent in the
testing, manufacturing, marketing and sale of diagnostic products. We might be unable to avoid product liability claims. Product liability insurance generally is expensive for our industry. If we are unable to maintain sufficient insurance coverage
on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products. A successful product liability claim brought against us in excess of any insurance coverage we have at that time
could cause us to incur substantial liabilities and our business to fail.



If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.



Our research and development activities sometimes involve the controlled use of potentially harmful biological materials, hazardous materials and chemicals. We cannot
completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any
liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these
materials and specified waste products. The cost of compliance with these laws and regulations might be significant and could negatively affect our profitability.



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If we are unable to manage growth in connection with our transition from an early-stage development company to a
company that commercializes research and diagnostic products, our operations will suffer.



We will need to add a significant number of new personnel and expand our capabilities in order to successfully pursue our commercialization strategy for our initial IVD products as well as our research and development
efforts. Certain aspects of our operations must be scaled up, for example, to increase the batch sizes of antibodies and other bulk components that we will need to provide for use in the test kits manufactured by Veridex and the number of instrument
systems we can manufacture per quarter. Organizational growth and scale-up of operations could strain our existing managerial, operational, financial and other resources. If we fail to manage this growth effectively, we may not be able to achieve
our research and development and commercialization goals.



RISKS RELATED TO
OUR INTELLECTUAL PROPERTY



If we are unable to protect our proprietary
rights, we may not be able to compete effectively.



We have obtained
patents in the US and in foreign countries relating to many of the technologies that are the basis of our products, such as the basic technologies relating to the separation and isolation of cells for the detection of cancer and the various aspects
of the reagents, methods and instrument platforms that we are commercializing or plan to commercialize. In addition, we maintain trade secrets, especially where we believe patent protection is not appropriate or obtainable, on various aspects of our
technologies and that we do not wish to become publicly known. However, obtaining, defending and enforcing our patents and other intellectual property rights involve complex legal and factual questions. For example, many of our key patents relating
to our basic technologies for the separation and isolation of cells for the detection of cancer contain claims covering our processes for manufacturing and using our magnetic separation particles, or ferrofluids. If a competitor were to practice or
use these processes without our knowledge or consent, these patents may be particularly difficult to defend or enforce because it may not be apparent from examination of the competitors products that the competitor is using our patented
processes. In particular, if we were not able successfully to defend or enforce our patents that cover our ferrofluids, which are utilized as a key component of our CellTracks AutoPrep System, competitors could more easily produce systems that might
be able to perform separation of CTCs from blood samples in a manner substantially equivalent to our CellTracks AutoPrep System without compensating us, resulting in substantial damage to our business.



Because the issuance of a patent is not conclusive of its validity or enforceability and can
be challenged, we do not know how much protection, if any, our patents will provide to us if we attempt to enforce them or if others challenge their validity or enforceability in court. For example, if our patents relating to the separation of CTCs
from blood samples were challenged and invalidated, we would not be able to prevent others from utilizing these key aspects of our technologies, which would substantially harm our business. Moreover, our patent applications may not result in issued
patents, and even if issued, our patents may not contain claims that are sufficiently broad to prevent others from practicing our technologies or developing competing products. Accordingly, we cannot assure you that we will be able to obtain, defend
or enforce our patent rights covering our technologies in the US or in foreign countries. In addition, if others discover or misappropriate the technologies that we have chosen to maintain as trade secrets, we may not be able to effectively maintain
our technologies as unpatented trade secrets. Although we have taken measures to protect our unpatented trade secrets and other non-public information such as know-how, including the use of confidentiality and invention assignment agreements with
our employees, consultants and some of our contractors, it is possible that these persons may unintentionally or willingly breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets and know-how.



A challenge to one or more of our pending patent applications, or issued
patents, may result in limiting the coverage of our patents so that a competitor can effectively avoid our patent claims. In addition, competitors may avoid our patents by using technologies that perform in substantially the same manner as our
technologies, but avoid infringing our patent claims. For example, if a competitor were to use a cell separation technology that performs as well, or nearly as well, as our patented ferrofluids, the competitor may be able to market products that may
be functionally equivalent and perform as well or nearly as well as our products, thereby diminishing the competitive advantage afforded by our issued patents.



Although we may initiate litigation to stop the infringement of our patent claims or to attempt to force an unauthorized user of our patented inventions or trade
secrets to compensate us for the infringement or unauthorized use, patent and trade secret litigation is complex and often difficult and expensive, and would consume the time of our management and other significant resources. If the outcome of
litigation is adverse to us, third parties may be able to use our technologies without payments to us. Moreover, some of our competitors may be better able to sustain the costs of litigation because they have substantially greater resources. Because
of these factors relating to litigation, we may be unable effectively to prevent misappropriation of our patent and other proprietary rights.



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If the use of our technologies conflicts with the intellectual property rights of third-parties, we may incur
substantial liabilities and we may be unable to commercialize products based on these technologies in a profitable manner, if at all.



Our competitors or others may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our technologies, pay licensing
fees or cease activities. If our technologies conflict with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, customers or collaborators, claiming damages and seeking to enjoin manufacturing and
marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products. A required license
under the related patent may not be available on acceptable terms, if at all.



We may be unaware of issued patents that our technologies infringe. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents upon which our
technologies may infringe. There could also be existing patents of which we are unaware upon which our technologies may infringe. In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in
pending applications, we may have to participate in interference proceedings in the US Patent and Trademark Office to determine priority of invention. If third parties file oppositions in foreign countries, we may also have to participate in
opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications. We may also have to participate in interference proceedings involving our issued patents or our pending applications.



If a third party claims that we infringe upon its proprietary rights, any of the following
may occur:



| |  |  | we may become involved in time-consuming and expensive litigation, even if the claim is without merit;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | we may become liable for substantial damages for past infringement if a court decides that our technologies infringe upon a competitors patent;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a court may prohibit us from selling or licensing our product without a license from the patent holder, which may not be available on commercially acceptable terms, if at all, or
which may require us to pay substantial royalties or grant cross licenses to our patents; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may have to redesign our product so that it does not infringe upon others patent rights, which may not be possible or could require substantial funds or time.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



If any of these events occurs, our business will suffer and the
market price of our common stock will likely decline.



Our rights to use
technologies licensed to us by third parties are not within our control, and we may not be able to implement our products without these technologies.



We have licensed patents and other rights that are necessary to commercialize our products. Our business will significantly suffer if these licenses terminate, if the
licensors fail to abide by the terms of the license or fail to prevent infringement by third parties or if the licensed patents or other rights are found to be invalid.



We have exclusively in-licensed significant intellectual property, including patents and know-how, related to our cell analysis
instrumentation and cell isolation and enrichment products. In September 1999, we entered into a license agreement with the University of Texas, or Texas, under which we were granted exclusive rights to technology, including patents and
know-how, which we developed in collaboration with Texas, relating to the isolation, enrichment and characterization of circulating epithelial cells. Epithelial cells are cells that cover external and internal body surfaces and give rise to the
majority of solid tumors. This technology and the underlying patents and know-how contribute significantly to our cell analysis products in the field of cancer diagnostics. We are responsible for making royalty payments of 1% of our sales of
reagents incorporating the intellectual property licensed to us under this agreement. This agreement terminates when all of Texass rights to the licensed technologies expire. In addition, Texas also may unilaterally terminate this agreement if
we are in material breach or become bankrupt or insolvent. Texas also may unilaterally terminate the license granted under this agreement, or the exclusivity of such license, in any national political jurisdiction if we fail to provide written
evidence satisfactory to Texas, within 90 days of receiving written notice from Texas that it intends to terminate this license, that we or our sublicensees have commercialized or are actively attempting to commercialize a licensed invention in
these jurisdictions. In addition, in July 2002, we entered into a license agreement with Streck Laboratories, Inc., or Streck. Under this



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agreement, Streck granted to us a non-exclusive, worldwide, royalty-bearing license to practice certain of Strecks cell preservative technology,
including patents and know-how, for the research, development, manufacture and sale of our CellSave Preservative Tube to test for the presence of epithelial cells or CTCs in a sample of fluid from a patient. This agreement will terminate upon the
expiration date of the last to expire of the patents licensed under this agreement. In addition, either party also may terminate this agreement if the other party is in material breach or becomes involved in financial difficulties, including
bankruptcy and insolvency.



If we violate the terms of our licenses, or
otherwise lose our rights to these patents or patent applications, we may be unable to continue development of our products. Our licensors or others may dispute the scope of our rights under any of these licenses. Additionally, the licensors under
these licenses might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating
results.



If we cannot obtain additional licenses to intellectual property
owned by third parties that we desire to incorporate into new products we plan to develop, we may not be able to develop or commercialize these future products.



We are developing products designed to identify and characterize additional types of cells other than CTCs and epithelial cells, such as
endothelial cells. We are also developing cell profile and molecular products using reagents that are fluorescently tagged antibodies and/or probes designed to characterize target cells, which may be classified by the FDA as analyte specific
reagents, or ASRs. ASRs can be used in research as an aid in evaluating new therapies in clinical trials, and we plan to develop a family of ASRs for profiling of each rare cell type of interest. However, many, if not all, of the target-specific and
other reagents, including antibodies and probes, that we ultimately may use in the development and commercialization of these future cell profile products and in our future products for identifying additional types of cells may be protected by
patent and other intellectual property rights owned by third parties. If we are unable to obtain rights to use this third party intellectual property under commercially reasonable terms, or at all, we may be unable to develop these products, and
this could harm our ability to expand our commercial products offerings and to generate additional revenue from these products.



RISKS RELATING TO OUR COMMON STOCK



The market price of our common stock may be highly volatile.



We cannot assure you that an active trading market for our common stock will exist at any time. Holders of our common stock may not be able to sell shares quickly or at
the market price if trading in our common stock is not active. Since initial trading of our stock began in April 2004 through September 30, 2005, our average daily trading volume has been 107,247 shares. Substantially all of the
27.5 million shares outstanding are eligible for sale in the public market. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which
are beyond our control, including:



| |  |  | actual or anticipated results of our clinical trials;
| | - |  | -----------------------------------------------------



| |  |  | actual or anticipated regulatory approvals of our products or of competing products;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | changes in laws or regulations applicable to our products;
| | - |  | ----------------------------------------------------------



| |  |  | changes in the expected or actual timing of our development programs;
| | - |  | ---------------------------------------------------------------------



| |  |  | actual or anticipated variations in quarterly operating results;
| | - |  | ----------------------------------------------------------------



| |  |  | announcements of technological innovations by us, our collaborators or our competitors;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | new products or services introduced or announced by us or our competitors;
| | - |  | --------------------------------------------------------------------------



| |  |  | changes in financial estimates or recommendations by securities analysts;
| | - |  | -------------------------------------------------------------------------



| |  |  | conditions or trends in the biotechnology and pharmaceutical industries;
| | - |  | ------------------------------------------------------------------------



| |  |  | changes in the market valuations of similar companies;
| | - |  | ------------------------------------------------------



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| |  |  | announcements by us of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the loss of a collaborator, including Veridex;
| | - |  | ----------------------------------------------



| |  |  | developments concerning our collaborations;
| | - |  | -------------------------------------------



| |  |  | trading volume of our common stock; and
| | - |  | ---------------------------------------



| |  |  | sales of our common stock by us or our stockholders.
| | - |  | ----------------------------------------------------



In addition, the stock market in general, the Nasdaq National Market and the market for technology companies in particular have experienced extreme price and volume
fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of biotechnology and life sciences companies. These
broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been
instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of managements attention and resources.



The future sale of our common stock and the exercise of outstanding options and warrants could negatively affect our stock price and
cause dilution.



As of September 30, 2005, options to purchase
3,198,730 shares of our common stock and warrants to purchase 42,169 shares of our common stock were outstanding. A total of 1,312,740 of the outstanding options and warrants are in the money and exercisable as of September 30,
2005. In the money means that the current market price of the common stock is above the exercise price of the shares subject to the warrant or option. The issuance of common stock upon the exercise of these options and warrants could
adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.



If the price and volume of our common stock experience fluctuations, this could lead to costly litigation for us.



Because we have a limited operating history and operate within the medical devices and
diagnostic products segments of the pharmaceutical and biotechnology industries, our stock price is likely to be volatile. The market price of our common stock may fluctuate substantially due to a variety of factors, including:



| |  |  | results of our clinical trials related to developing multiple indications for our cancer diagnostic products, such as those related to colorectal, lung or other solid tissue
cancers, or expanding the applications of our technologies to fields of medicine other than cancer, such as cardiovascular and infectious diseases;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in reimbursement policies concerning the diagnostic products that we or our competitors offer;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | media reports and publications and announcements about cancer or diagnostic products or new cancer treatments or innovations that could compete with our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements concerning our competitors or the medical devices and diagnostic products segments in general;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | new regulatory pronouncements, changes in regulatory guidelines, such as adverse changes in reimbursement for cancer diagnostic products, and timing of regulatory approvals
concerning the products in our pipeline;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | market conditions or trends related to the medical diagnostics and biotechnology industries or the market in general;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



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| |  |  | additions to or departures of our key personnel, in particular, the loss of Edward L. Erickson, our Chief Executive Officer, Byron D. Hewett, our President and Chief Operating
Officer, Leon W.M.M. Terstappen, our Chief Scientific Officer, and James G. Murphy, our Chief Financial Officer;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disputes or other developments relating to proprietary rights, including patents, litigation matters and our ability to obtain patent protection for our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in financial estimates or recommendations by securities analysts;
| | - |  | -------------------------------------------------------------------------



| |  |  | variations in our quarterly financial and operating results; and
| | - |  | ----------------------------------------------------------------



| |  |  | changes in accounting principles.
| | - |  | ---------------------------------



The market prices of the securities of biotechnology and diagnostic companies, particularly companies like ours without consistent product revenues and earnings, have
been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. Moreover, market prices for stocks of biotechnology-related companies,
particularly following an initial public offering, frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are highly volatile. In the past, companies
that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our managements
attention and resources and harm our ability to grow our business.



Anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law could inhibit a change in control or a change in management that holders of our common stock consider favorable.



Provisions in our certificate of incorporation and bylaws could delay or prevent a change of
control or change in management that would provide holders of our common stock with a premium to the market price of our common stock. These provisions include those:



| |  |  | authorizing the issuance without further approval of blank check preferred stock that could be issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | prohibiting cumulative voting in the election of directors, which would otherwise allow less than a majority of stockholders to elect director candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting the ability to remove directors;
| | - |  | -----------------------------------------



| |  |  | limiting the ability of stockholders to call special meetings of stockholders;
| | - |  | ------------------------------------------------------------------------------



| |  |  | prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of stockholders; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder
meetings.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, Section 203 of the General
Corporation Law of the State of Delaware, as amended, or the Delaware General Corporation Law limits business combination transactions with 15 percent stockholders that have not been approved by our board of directors. These provisions and others
could make it difficult for a third party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders. Because our board of directors is responsible for appointing the members of
our management team, these provisions could in turn affect any attempt to replace the current management team. If a change of control or change in management is delayed or prevented, holders of our common stock may lose an opportunity to realize a
premium on their shares of common stock or the market price of our common stock could decline.



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We do not expect to pay dividends in the foreseeable future. As a result, holders of our common stock must rely on
stock appreciation for any return on their investment.



We do not
anticipate paying cash dividends on our common stock in the foreseeable future. Certain of our existing credit agreements prohibit the payment of cash dividends without lender consent. Any payment of cash dividends will also depend on our financial
condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their
investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.



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|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------



We do not believe that we have material exposure to interest rate, foreign currency exchange rate or other relevant market risks. We do not use derivative financial
instruments in our investment portfolio and have no foreign exchange contracts. Our financial instruments consist of cash, cash equivalents, and short-term investments, accounts payable and long-term obligations. We consider investments that, when
purchased, have a remaining maturity of 90 days or less to be cash equivalents. We invest in marketable securities in accordance with our investment policy. The primary objectives of our investment policy are to preserve principal, maintain
proper liquidity to meet operating needs and maximize yields. Our investment policy specifies credit quality standards for our investments.



|Item 4. | Controls and Procedures
|------- | -----------------------



Evaluation of disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of
the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. We believe that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of
the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.



Change in internal control over financial reporting.No change in our internal control over financial reporting occurred during our
most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents



PART II. OTHER INFORMATION



|Item 6. | Exhibits
|------- | --------



(b)



|     |  |                                                                                                                                                                                                                                                                                                                
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 |  | Form of Option Grant (incorporated by reference to Exhibit 10.1 of Immunicon Corporations Current Report on Form 8-K filed on August 31, 2005).                                                                                                                                                               
|     | 
|10.2 |  | Second Amendment to Amended and Restated Loan and Security Agreement, dated October 14, 2005, between Immunicon Corporation, it wholly-owned subsidiaries and Silicon Valley Bank.
(incorporated by reference to Exhibit 10.1 of Immunicon Corporations Current Report on Form 8-K filed on October 20, 2005).
|     | 
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                             
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                             



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##### Table of Contents



SIGNATURES



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



|                        |  |  |  |                       |                                                   |                           |  | 
|----------------------- |  |  |  | --------------------- | ------------------------------------------------- | ------------------------- |  | 
|                        |  |  |  | IMMUNICON CORPORATION
|                        |  |  | 
|Date: November 11, 2005 |  |  |  | By:                   |                                                   | /S/    EDWARD L.
ERICKSON
|                        |  |  |  |                       |                                                   | Edward L. Erickson       
|                        |  |  |  |                       | Chairman of the Board and Chief Executive Officer
|                        |  |  |  |                       | (Principal executive officer)                    



|                        |  |  |  |     |                                                    |                        |  | 
|----------------------- |  |  |  | --- | -------------------------------------------------- | ---------------------- |  | 
|                        |  |  | 
|Date: November 11, 2005 |  |  |  | By: |                                                    | /s/    JAMES G. MURPHY
|                        |  |  |  |     |                                                    | James G. Murphy       
|                        |  |  |  |     | Senior Vice President, Finance and Administration,
|                        |  |  |  |     | Chief Financial Officer                           
|                        |  |  |  |     | (Principal financial and accounting officer)      



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##### Table of Contents



EXHIBIT INDEX



|       |  |                                                                                                                                                                                                                                                                                                                
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                                                                                                                                                    
|10.1   |  | Form of Option Grant (incorporated by reference to Exhibit 10.1 of Immunicon Corporations Current Report on Form 8-K filed on August 31, 2005).                                                                                                                                                               
|       | 
|10.2   |  | Second Amendment to Amended and Restated Loan and Security Agreement, dated October 14, 2005, between Immunicon Corporation, its wholly-owned subsidiaries and Silicon Valley Bank
(incorporated by reference to Exhibit 10.1 of Immunicon Corporations Current Report on Form 8-K filed on October 20, 2005).
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                            
|       | 
|32.1   |  | Certification of Edward L. Erickson pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  
|       | 
|32.2   |  | Certification of James G. Murphy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                     



49