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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 March 31, 2007

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)



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|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|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)



---

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large Accelerated Filer ̈Accelerated Filer  x    Non-Accelerated Filer ̈

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

As of May 2, 2007, there were 27,713,941 shares of Common Stock, $0.001 par value, outstanding.



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##### Table of Contents

IMMUNICON CORPORATION

INDEX



|         |  |                                                                                                       |  |            
|-------- |  | ----------------------------------------------------------------------------------------------------- |  | -----------
|         |  |                                                                                                       |  | Page Number
|PART I.  |  | FINANCIAL INFORMATION                                                                                 |  |            
|         |  |                                                                                                      
|Item 1.  |  | Condensed Consolidated Financial Statements (Unaudited):                                              |  |            
|         |  |                                                                                                      
|         |  | Condensed Consolidated Balance Sheets: March 31, 2007 and December 31, 2006                           |  | 3          
|         |  |                                                                                                      
|         |  | Condensed Consolidated Statements of Operations: Three months ended March 31, 2007 and March 31, 2006 |  | 4          
|         |  |                                                                                                      
|         |  | Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2007 and March 31, 2006 |  | 5          
|         |  |                                                                                                      
|         |  | Notes to Condensed Consolidated Financial Statements                                                  |  | 6          
|         |  |                                                                                                      
|Item 2.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations.                |  | 18         
|         |  |                                                                                                      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk.                                           |  | 35         
|         |  |                                                                                                      
|Item 4.  |  | Controls and Procedures.                                                                              |  | 35         
|         |  |                                                                                                      
|PART II. |  | OTHER INFORMATION                                                                                     |  |            
|         |  |                                                                                                      
|Item 1A. |  | Risk Factors.                                                                                         |  | 35         
|         |  |                                                                                                      
|Item 6.  |  | Exhibits.                                                                                             |  | 36         

Immunicon is a registered trademark of Immunicon Corporation. The Immunicon logo is a registered trademark of
Immunicon Corporation. CellTracks, CellSpotter, MagNest, AutoPrep, 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 Analyzer II, CellCapture, Viasure, SlideNest 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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Immunicon Corporation and Subsidiaries

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PART I. FINANCIAL INFORMATION



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

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



|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                         |  | March 31,2007 |          |   | December 31, 2006 |  
|ASSETS                                                                                                                                                                   |  |               |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                          |  |               |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                |  | $             | 27,328   |   |                   | $ | 36,132   |  
|Short term investments                                                                                                                                                   |  |               | 19,480   |   |                   |   | 15,401   |  
|Receivable from related party                                                                                                                                            |  |               | 375      |   |                   |   | 409      |  
|Accounts receivable                                                                                                                                                      |  |               | 814      |   |                   |   | 1,402    |  
|Inventory                                                                                                                                                                |  |               | 4,112    |   |                   |   | 3,966    |  
|Prepaid assets                                                                                                                                                           |  |               | 555      |   |                   |   | 613      |  
|Other current assets                                                                                                                                                     |  |               | 585      |   |                   |   | 861      |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Total current assets                                                                                                                                                     |  |               | 53,249   |   |                   |   | 58,784   |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Property and equipment, net                                                                                                                                              |  |               | 3,530    |   |                   |   | 4,011    |  
|Deferred financing fees                                                                                                                                                  |  |               | 2,432    |   |                   |   | 2,616    |  
|Other assets                                                                                                                                                             |  |               | 359      |   |                   |   | 362      |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Total assets                                                                                                                                                             |  | $             | 59,570   |   |                   | $ | 65,773   |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|                                                                                                                                                                         |  |              
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  |               |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                     |  |               |          |   |                   |   |          |  
|Current portion of long-term debt                                                                                                                                        |  | $             | 1,584    |   |                   | $ | 1,781    |  
|Accounts payable                                                                                                                                                         |  |               | 1,547    |   |                   |   | 1,743    |  
|Payable to related party                                                                                                                                                 |  |               | 919      |   |                   |   | 792      |  
|Accrued expenses                                                                                                                                                         |  |               | 3,826    |   |                   |   | 4,304    |  
|Current portion of deferred revenue:                                                                                                                                     |  |               |          |   |                   |   |          |  
|Related party                                                                                                                                                            |  |               | 1,796    |   |                   |   | 1,821    |  
|Other                                                                                                                                                                    |  |               | 325      |   |                   |   | 438      |  
|Detachable warrants                                                                                                                                                      |  |               | 1,623    |   |                   |   | 2,181    |  
|Conversion option related to convertible debt                                                                                                                            |  |               | 7,120    |   |                   |   | 9,286    |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                |  |               | 18,740   |   |                   |   | 22,346   |  
|                                                                                                                                                                         |  |              
|Convertible subordinated notes, net of discount                                                                                                                          |  |               | 21,543   |   |                   |   | 20,313   |  
|Long-term debt                                                                                                                                                           |  |               | 1,891    |   |                   |   | 2,256    |  
|Deferred revenue:                                                                                                                                                        |  |               |          |   |                   |   |          |  
|Related party                                                                                                                                                            |  |               | 179      |   |                   |   | 234      |  
|Other                                                                                                                                                                    |  |               | 624      |   |                   |   | 423      |  
|                                                                                                                                                                         |  |              
|Shareholders equity:                                                                                                                                                    |  |               |          |   |                   |   |          |  
|Common stock, $0.001 par value 100,000,000 authorized, 27,678,203 and 27,667,769 shares issued and outstanding as of March 31, 2007
and December 31, 2006, respectively |  |               | 28       |   |                   |   | 28       |  
|Additional paid in capital                                                                                                                                               |  |               | 163,102  |   |                   |   | 162,596  |  
|Accumulated other comprehensive income                                                                                                                                   |  |               | 24       |   |                   |   | 22       |  
|Accumulated deficit                                                                                                                                                      |  |               | (146,561 | ) |                   |   | (142,445 | )
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Total shareholders equity                                                                                                                                               |  |               | 16,593   |   |                   |   | 20,201   |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                                                                               |  | $             | 59,570   |   |                   | $ | 65,773   |  
|                                                                                                                                                                         |  |               |          |   |                   |   |          |  

See notes to condensed consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries

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Condensed Consolidated Statements of Operations (Unaudited).

Three months ended March 31, 2007 and March 31, 2006

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



|                                                                  |  |                              |            |   |      |   |            |  
|----------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                  |  | Three Months Ended March 31, |           
|                                                                  |  | 2007                         |            |   | 2006 |  
|Product revenue:                                                  |  |                              |            |   |      |   |            |  
|Related party                                                     |  | $                            | 1,210      |   |      | $ | 355        |  
|Third party                                                       |  |                              | 767        |   |      |   | 559        |  
|Service revenue                                                   |  |                              | 577        |   |      |   | 339        |  
|                                                                  |  |                              |            |   |      |   |            |  
|Total product and service revenue                                 |  |                              | 2,554      |   |      |   | 1,253      |  
|                                                                  |  |                             
|Milestone, license and other revenue                              |  |                              | 103        |   |      |   | 200        |  
|                                                                  |  |                              |            |   |      |   |            |  
|Total revenue                                                     |  |                              | 2,657      |   |      |   | 1,453      |  
|                                                                  |  |                             
|Cost of goods sold                                                |  |                              | 2,523      |   |      |   | 1,442      |  
|Cost of services sold                                             |  |                              | 302        |   |      |   | 82         |  
|                                                                  |  |                              |            |   |      |   |            |  
|Gross loss                                                        |  |                              | (168       | ) |      |   | (71        | )
|                                                                  |  |                              |            |   |      |   |            |  
|                                                                  |  |                             
|Expenses:                                                         |  |                              |            |   |      |   |            |  
|Research and development                                          |  |                              | 2,826      |   |      |   | 3,119      |  
|Selling, general and administrative                               |  |                              | 2,957      |   |      |   | 2,469      |  
|                                                                  |  |                              |            |   |      |   |            |  
|Total operating expenses                                          |  |                              | 5,783      |   |      |   | 5,588      |  
|                                                                  |  |                              |            |   |      |   |            |  
|Operating loss                                                    |  |                              | (5,951     | ) |      |   | (5,659     | )
|                                                                  |  |                              |            |   |      |   |            |  
|Interest and other income                                         |  |                              | 616        |   |      |   | 388        |  
|Change in fair value of detachable warrants and conversion rights |  |                              | 2,723      |   |      |   |           |  
|Interest expense                                                  |  |                              | (1,504     | ) |      |   | (113       | )
|                                                                  |  |                              |            |   |      |   |            |  
|Total other income, net                                           |  |                              | 1,835      |   |      |   | 275        |  
|                                                                  |  |                              |            |   |      |   |            |  
|Net loss attributable to common stockholders                      |  | $                            | (4,116     | ) |      | $ | (5,384     | )
|                                                                  |  |                              |            |   |      |   |            |  
|Net loss per common sharebasic and diluted                       |  | $                            | (0.15      | ) |      | $ | (0.20      | )
|                                                                  |  |                              |            |   |      |   |            |  
|Weighted average common shares outstandingbasic and diluted      |  |                              | 27,675,742 |   |      |   | 27,582,995 |  
|                                                                  |  |                              |            |   |      |   |            |  

See notes to condensed consolidated unaudited financial statements.



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Condensed Consolidated Statements of Cash Flows (Unaudited)

Three months ended March 31, 2007 and March 31, 2006 (in
thousands)



|                                                                                  |  |                              |         |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                                                  |  | Three Months Ended March 31, |        
|                                                                                  |  | 2007                         |         |   | 2006 |  
|Operating activities:                                                             |  |                              |         |   |      |   |        |  
|Net loss                                                                          |  | $                            | (4,116  | ) |      | $ | (5,384 | )
|Adjustment to reconcile net loss to net cash used in operating activities:        |  |                              |         |   |      |   |        |  
|Return allowance                                                                  |  |                              | 28      |   |      |   |       |  
|Depreciation and amortization                                                     |  |                              | 522     |   |      |   | 584    |  
|Non-cash interest expense                                                         |  |                              | 1,420   |   |      |   | 2      |  
|Loss on disposal of property and equipment                                        |  |                              |        |   |      |   | 37     |  
|Compensation expense related to the issuance of nonvested stock and Stock options |  |                              | 489     |   |      |   | 357    |  
|Change in fair value of liabilities potentially settled in common stock           |  |                              | (2,723  | ) |      |   |       |  
|Change in:                                                                        |  |                              |         |   |      |   |        |  
|Accounts receivable                                                               |  |                              | 559     |   |      |   | (299   | )
|Accounts receivable from related party                                            |  |                              | 34      |   |      |   | 55     |  
|Inventory                                                                         |  |                              | (146    | ) |      |   | (593   | )
|Prepaid expenses and other                                                        |  |                              | 58      |   |      |   | 107    |  
|Other assets                                                                      |  |                              | 273     |   |      |   | 143    |  
|Accounts payable                                                                  |  |                              | (196    | ) |      |   | 200    |  
|Accounts payable to related parties                                               |  |                              | 127     |   |      |   | 299    |  
|Accrued expenses                                                                  |  |                              | (478    | ) |      |   | 73     |  
|Deferred revenue from related parties                                             |  |                              | (80     | ) |      |   | 345    |  
|Deferred revenue                                                                  |  |                              | 88      |   |      |   | (38    | )
|                                                                                  |  |                              |         |   |      |   |        |  
|Net cash used in operating activities                                             |  |                              | (4,141  | ) |      |   | (4,112 | )
|                                                                                  |  |                              |         |   |      |   |        |  
|Investing activities:                                                             |  |                              |         |   |      |   |        |  
|Purchase of investments                                                           |  |                              | (11,878 | ) |      |   | (7,491 | )
|Proceeds from maturities of investments                                           |  |                              | 7,899   |   |      |   | 15,239 |  
|Payments for purchases of property and equipment                                  |  |                              | (141    | ) |      |   | (97    | )
|                                                                                  |  |                              |         |   |      |   |        |  
|Net cash provided by (used in) investing activities                               |  |                              | (4,120  | ) |      |   | 7,651  |  
|                                                                                  |  |                              |         |   |      |   |        |  
|Financing activities:                                                             |  |                              |         |   |      |   |        |  
|Proceeds from term debt                                                           |  |                              |        |   |      |   | 128    |  
|Proceeds from exercise of stock options and stock purchase plan                   |  |                              | 17      |   |      |   | 32     |  
|Payments on term debt                                                             |  |                              | (562    | ) |      |   | (851   | )
|                                                                                  |  |                              |         |   |      |   |        |  
|Net cash used in financing activities                                             |  |                              | (545    | ) |      |   | (691   | )
|                                                                                  |  |                              |         |   |      |   |        |  
|Effect of exchange rate changes on cash                                           |  |                              | 2       |   |      |   | 2      |  
|Net increase (decrease) in cash and cash equivalents                              |  |                              | (8,806  | ) |      |   | 2,848  |  
|Cash and cash equivalents, beginning of period                                    |  |                              | 36,132  |   |      |   | 21,900 |  
|                                                                                  |  |                              |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                            | 27,328  |   |      | $ | 24,750 |  
|                                                                                  |  |                              |         |   |      |   |        |  
|Supplemental cash flow information:                                               |  |                              |         |   |      |   |        |  
|Cash paid for interest                                                            |  | $                            | 87      |   |      | $ | 117    |  
|                                                                                  |  |                              |         |   |      |   |        |  

See notes to condensed consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries

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(1) Background and basis of presentation

The accompanying unaudited condensed consolidated financial statements of Immunicon Corporation and subsidiaries (collectively, the Company or we) 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, or 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 March 31, 2007 and results of operations and cash flows for the three month
periods ended March 31, 2007 and 2006.

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, 2006. Results of operations for the three months
ended March 31, 2007 are not necessarily indicative of results to be expected for the full year.

The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires our 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 valuation of derivatives, accrued expenses and the valuation of stock-based compensation.

In December 2006, we entered into a
definitive agreement for the sale and issuance of $30 million in aggregate principal amount of unsecured subordinated convertible promissory notes, or the Notes, which are convertible initially into an aggregate of up to 7,334,964 shares of our
common stock. The Notes bear interest at 6% per annum. Interest is not payable currently but is accrued and added to the principal on a quarterly basis. Any portion of the Notes and all accrued but unpaid interest which is not converted is
repayable in cash on December 5, 2009. We also issued warrants under this agreement to purchase 1,466,994 shares of our common stock. The Notes are convertible into shares at a conversion price of $4.09. The warrants have an exercise price of
$4.09 per share. We received net proceeds of approximately $27.3 million from the sale of the Notes and accompanying warrants after deducting the placement agent fees and offering expenses of $2.7 million.

We are highly dependent on our collaboration with Veridex for all commercialization functions related to our cancer products including dependence on Veridex for all
sales and marketing of these products. 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
fluctuate based on the amounts of revenue generated from sales of our products and services.

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, dependence on
Veridex, LLC, or Veridex, a Johnson & Johnson company, to market our cancer diagnostic product candidates, the uncertainty of product development (including clinical trial results and completion of development of new instrument and reagent
products), regulatory clearance and approval, supplier and manufacturing dependence, competition, 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, cash equivalents and short term investments available at March 31, 2007 will be sufficient to maintain operations through at least
March 31, 2008.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115, or SFAS
159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each
subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by in the first quarter of 2008. We are currently evaluating the effect of SFAS
159 and have not determined impact on our consolidated results of operations and financial condition.



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In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 provides
guidance for using fair value to measure assets and liabilities. It also responds to investors requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure
fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances.
SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by us in the first quarter of 2008. We are currently evaluating the effect of SFAS 157 and have not
determined impact on our consolidated results of operations and financial condition.

On July 13, 2006, the FASB issued FASB Interpretation, or FIN,
No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No.109,
Accounting for Income Taxes, and provides guidance on classification and disclosure requirements for tax contingencies. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after December 15, 2006 and was adopted by us in the first quarter of 2007. The adoption of FIN 48 did not
impact our statement of operations and financial condition. See note 11 for further discussion on FIN 48 impact.

(2) Accounting for stock-based
compensation

Our Amended and Restated Equity Compensation Plan, or the Plan, provides for the granting of stock options, awards of restricted common
stock, now referred to as nonvested shares. We have reserved an aggregate of 4,766,667 shares of our common stock for issuance under the Plan and have 360,088 available for grant as of March 31, 2007. The Plan requires that exercise prices of
stock options may not be less than the market value of the common stock on the date of the grant. The date of grant is determined when both parties have reached a mutual understanding of the key terms of the grant. In general, stock options granted
to employees under the Plan have ten-year terms and vest over four years from the date of grant Compensation expense related to our share-based awards during the three months ended March 31, 2007 and 2006 was $489,000 and $357,000, respectively

Our 2004 Employee Stock Purchase Plan, or ESPP, was initiated upon the completion of our IPO. The plan permits eligible employees to purchase shares of
our common stock through after-tax payroll deductions. We have reserved an aggregate of 200,000 shares of our common stock for issuance under our ESPP and issued 38,470 shares under this plan as of December 31, 2006. Our next purchase will be
in April 2007. As a result of our adopting FAS123R, we have expensed these grants and recorded them as stock based compensation.

The stock-based
compensation consisted of the following:



|                                                                  |  |                              |     |      |   |    
|----------------------------------------------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                                                                  |  | Three Months Ended March 31,
|(in thousands)                                                    |  | 2007                         |     | 2006
|Stock options under SFAS 123R                                     |  | $                            | 240 |      | $ | 60 
|Nonvested shares                                                  |  |                              | 145 |      |   | 110
|Stock options granted prior to our IPO at below fair market value |  |                              | 104 |      |   | 187
|                                                                  |  |                              |     |      |   |    
|Stock-based compensation                                          |  | $                            | 489 |      | $ | 357
|                                                                  |  |                              |     |      |   |    

Stock-based compensation recorded in the three months ended March 31, 2007 is based on awards that are
expected to vest and therefore have been reduced for estimated forfeitures. SFAS 123R require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the estimates.
Forfeitures were based on historical experience. The fair value of each of our stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of our
stock option awards, which are subject to the straight-line vesting method, is recorded as an expense using a straight-line basis over the vesting life of the stock options. Expected volatility is based on an average of historical volatility of our
stock. The risk-free interest rate for periods within the contract life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date of the stock option award with a maturity equal to the expected term of the
stock option award granted. We use historical data to estimate stock option forfeitures within the valuation model.



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We also used the simplified calculation of expected life, described in SAB 107, Share-Based Payment, compared to the Companys historical grants.
Management believes that this calculation provides a reasonable estimate of expected life for the Companys employee stock options.

The significant
assumptions relating to the weighted average valuation of our stock options for the three months ended March 31, 2007 and 2006 were as follows:



|                             |  |                |   |  |                |  
|---------------------------- |  | -------------- | - |  | -------------- | -
|                             |  | March 31, 2007 |   |  | March 31, 2006 |  
|Dividend yield               |  |               | % |  |               | %
|Volatility                   |  | 59.45% - 60.35 | % |  | 59.22% - 60.74 | %
|Weighted average volatility  |  | 59.91          | % |  | 60.40          | %
|Risk-free interest rate      |  | 4.46% - 4.87   | % |  | 4.31% - 4.66   | %
|Expected option life (years) |  | 6.25           |   |  | 6.25           |  

(3) Net loss per share

Basic and diluted net loss per common share is calculated in accordance with SFAS No. 128, Earnings Per Share, or SFAS 128, and SEC Staff Accounting Bulletin No. 98, Computations of Earnings Per Share (Revisions of
previous SABs), or SAB 98. Under the provisions of SFAS 128 and SAB 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 earnings for common stockholders per common share, or diluted EPS, considers the impact of potentially dilutive securities except in periods in which there is a loss because the inclusion of the potential
common shares would have an antidilutive effect. Diluted EPS excludes the impact of potential common shares related to our stock options in periods in which the option exercise price is greater than the average market price of our common stock
during the period. Our 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.

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



|                                                                      |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                      |  | Three Months Ended March 31, |       
|(in thousands)                                                        |  | 2007                         |        |   | 2006 |  
|Numerator:                                                            |  |                              |        |   |      |   |        |  
|Net loss                                                              |  | $                            | (4,116 | ) |      | $ | (5,384 | )
|                                                                      |  |                             
|Denominator:                                                          |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding used for basic income per share   |  |                              | 27,676 |   |      |   | 27,583 |  
|Common stock equivalents                                              |  |                              |       |   |      |   |       |  
|                                                                      |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding used for diluted income per share |  |                              | 27,676 |   |      |   | 27,583 |  
|                                                                      |  |                              |        |   |      |   |        |  

Potentially dilutive securities, which are not included in our earnings per share, are summarized as follows:



|                                                  |  |                              |  |          
|------------------------------------------------- |  | ---------------------------- |  | ---------
|                                                  |  | Three Months Ended March 31,
|                                                  |  | 2007                         |  | 2006     
|Common stock options                              |  | 3,462,574                    |  | 3,407,243
|Warrants                                          |  | 1,509,163                    |  | 42,169   
|Nonvested shares                                  |  | 449,860                      |  | 260,000  
|Shares issuable on conversion of convertible debt |  | 7,478,033                    |  |         



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(4) Inventory

Inventory consisted of the following:



|                |  |                |       |                   |   |      
|--------------- |  | -------------- | ----- | ----------------- | - | -----
|(in thousands)  |  | March 31, 2007 |       | December 31, 2006
|Raw materials   |  | $              | 1,947 |                   | $ | 1,652
|Finished goods  |  |                | 2,125 |                   |   | 2,301
|Work-in-process |  |                | 40    |                   |   | 13   
|                |  |                |       |                   |   |      
|Inventory       |  | $              | 4,112 |                   | $ | 3,966
|                |  |                |       |                   |   |      

(5) Property and equipment

Property and equipment consisted of the following:



|                               |  |                |        |   |                   |   |        |  
|------------------------------ |  | -------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                 |  | March 31, 2007 |        |   | December 31, 2006 |  
|Laboratory equipment           |  | $              | 2,883  |   |                   | $ | 2,862  |  
|Office furniture and equipment |  |                | 875    |   |                   |   | 875    |  
|Leasehold improvements         |  |                | 5,180  |   |                   |   | 5,165  |  
|Manufacturing equipment        |  |                | 1,061  |   |                   |   | 974    |  
|Computer equipment             |  |                | 906    |   |                   |   | 1,074  |  
|                               |  |                |        |   |                   |   |        |  
|Property and equipment, gross  |  |                | 10,905 |   |                   |   | 10,950 |  
|Less Accumulated depreciation  |  |                | (7,375 | ) |                   |   | (6,939 | )
|                               |  |                |        |   |                   |   |        |  
|Property and equipment, net    |  | $              | 3,530  |   |                   | $ | 4,011  |  
|                               |  |                |        |   |                   |   |        |  

Depreciation expense was $622,000 for both three months ended March 31, 2007 and March 31, 2006.

(6) Accrued expenses

Accrued expenses consisted of
the following:



|                                  |  |                |       |                   |   |      
|--------------------------------- |  | -------------- | ----- | ----------------- | - | -----
|(in thousands)                    |  | March 31, 2007 |       | December 31, 2006
|Salaryrelated expense            |  | $              | 1,375 |                   | $ | 1,748
|Clinical research and trial costs |  |                | 763   |                   |   | 782  
|Contracted research costs         |  |                | 147   |                   |   | 216  
|Accounting and legal fees         |  |                | 463   |                   |   | 270  
|Debt financing                    |  |                |      |                   |   | 196  
|Other                             |  |                | 1,078 |                   |   | 1,092
|                                  |  |                |       |                   |   |      
|Accrued expenses                  |  | $              | 3,826 |                   | $ | 4,304
|                                  |  |                |       |                   |   |      



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(7) Debt

Convertible subordinated notes payable



|                                                                                                       |  |                |        |                   |   |       
|------------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ----------------- | - | ------
|Classification:                                                                                        |  | March 31, 2007 |        | December 31, 2006
|Current liabilities                                                                                    |  |                |        |                   |   |       
|Detachable warrants                                                                                    |  | $              | 1,623  |                   | $ | 2,181 
|Conversion feature relating to convertible debt                                                        |  |                | 7,120  |                   |   | 9,286 
|                                                                                                       |  |               
|Long term liability                                                                                    |  |                |        |                   |   |       
|Convertible subordinated notes payable due in December 2009 at interest rate of 6.00%, net of discount |  |                | 21,543 |                   |   | 20,313

In December 2006, we entered into a definitive agreement for the sale and issuance of $30 million in aggregate
principal amount of unsecured subordinated convertible promissory notes, or the Notes, which are convertible initially into an aggregate of up to 7,334,964 shares of our common stock. The Notes bear interest at 6% per annum. Interest is not
payable currently but is accrued and added to the principal on a quarterly basis. Any portion of the Notes and all accrued but unpaid interest which is not converted is repayable in cash on December 5, 2009, or the maturity date. We also issued
warrants under this agreement to purchase 1,466,994 shares of our common stock. The Notes are convertible into shares at a conversion price of $4.09. The warrants have an exercise price of $4.09 per share. We received net proceeds of approximately
$27.3 million from the sale of the Notes and accompanying warrants after deducting the placement agent fees and offering expenses of $2.7 million.

If, at
any time after the eighteen-month anniversary of the issuance date of the Notes, the last closing sale price of our common stock exceeds $7.50 for any twenty consecutive trading days, we have the right to require the holders of the Notes to convert
all or any portion of the Notes into shares of our common stock at the conversion price, subject to certain limitations on beneficial ownership. This mandatory conversion right is subject to compliance with certain conditions during the sixty day
period prior to the mandatory conversion including our continued listing on an eligible trading market, compliance with certain covenants and the lack of occurrence of an event of default.

The Notes contain customary events of default provisions, including without limitation, suspension of our common stock from trading, failure to cure conversion failures,
breaches of covenants, breaches of material representations, failure to repay certain indebtedness, the occurrence of bankruptcy or similar events, and the rendering of a final judgment in excess of $500,000 not covered by insurance.

The Notes contain covenants which, among other things, restrict us in the ability to incur additional indebtedness other than in connection with existing senior
indebtedness or other permitted indebtedness, or to make distributions on or repurchase shares of our common stock. In addition, we are required to maintain available cash as of the end of each fiscal quarter in an amount at least equal to our cash
burn for such fiscal quarter multiplied by four. Our available cash means an amount equal to the aggregate amount of our cash, cash equivalent and eligible investment balances, minus our increase in debt balance. We were in compliance with all
provisions of the Notes, including the available cash test, as of and for the three months ended March 31, 2007.

We have allocated the proceeds
received from the Notes between the underlying debt instruments, conversion rights, and the detachable warrants. At inception, the fair value of the detachable warrants of $1.9 million and the conversion rights of $8.1 million were bifurcated from
the host debt contract and recorded as a derivative liability. This resulted in a reduction of the initial notional carrying amount of the Notes as unamortized discount which will be amortized over the term of the Notes under the effective interest
method. For the three months ended March 31, 2007, we have recorded non-cash interest expense relating to the discount of $778,000.

The result of
this accounting treatment is that the fair value of the embedded derivative is marked-to-market each balance sheet date and recorded as a liability. The change in fair value is recorded in the statement of operations as Change in fair value of
the detachable warrants and conversion right. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Management used a
derivative model analyzing the conversion features, additional shares to be paid resulting from the interest accrual and the redemption options. The model also considered factors such as the stock price, interest rate, the stock and interest rate
volatility and the expected life.



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Management used the above model to value the related warrants that were issued in conjunction with the Notes. The
primary factors driving the economic value of the warrants were factors, such as stock price, stock volatility, interest rate and expected life of the warrants.

Other debt outstanding

As of March 31, 2007, we had an aggregate of $3.5 million of debt outstanding with two lending institutions,
$2.3 million to Silicon Valley Bank, or SVB, and $1.2 million to General Electric Capital Corporation, or GECC, as described below. The carrying value of this debt is as follows:



|                                                                                                                        |  |                |        |   |                   |   |        |  
|----------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                                                                                                          |  | March 31, 2007 |        |   | December 31, 2006 |  
|Line of credit due to SVBprincipal due from April 2007 to December 2010 at interest rates of 8.75%                     |  | $              | 2,245  |   |                   | $ | 2,462  |  
|Line of credit due to GECCprincipal due from April 2007 to October 2010 at interest rates ranging from 8.75% to 11.05% |  |                | 1,230  |   |                   |   | 1,575  |  
|                                                                                                                        |  |                |        |   |                   |   |        |  
|                                                                                                                        |  |                | 3,475  |   |                   |   | 4,037  |  
|Less: current portion of long-term debt                                                                                 |  |                | (1,584 | ) |                   |   | (1,781 | )
|                                                                                                                        |  |                |        |   |                   |   |        |  
|Longterm debt                                                                                                          |  | $              | 1,891  |   |                   | $ | 2,256  |  
|                                                                                                                        |  |                |        |   |                   |   |        |  

As of March 31, 2007 and December 31, 2006, interest rates in effect for outstanding obligations under
the credit facilities ranged from 8.75% to 11.05% for both periods for the SVB and GECC lines of credit.

Both 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 respective loan agreements, 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 periods ended March 31, 2007 and December 31, 2006. As of March 31,
2007, we had $8.4 million and $3.3 million in available credit under our SVB and GECC credit facilities, respectively. The availability under our SVB credit facility will expire on December 31, 2007 and the availability under our GECC credit
facility will expire on June 30, 2007.

(8) Geographical and customer information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision-maker, or decision-making group, when
making decisions regarding resource allocation and assessing performance. To date, we have viewed our operations and manage our business as one segment operating primarily in the United States of America. Revenues from external customers are
summarized below. Revenues are attributed to a country based on the location of the customer. During the three month period ended March 31, 2007, we derived 49% of our revenue from Veridex, compared to 38% from Veridex in the quarter ended
March 31, 2006. In addition we derived 19% and 10% in the first quarter of 2006 from Pfizer and the Hospital of Prato, respectively. Our revenue by geographical region is as follows:



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|                        |  |                              |       |      |   |      
|----------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                        |  | Three Months Ended March 31,
|(in thousands)          |  | 2007                         |       | 2006
|United States           |  | $                            | 2,022 |      | $ | 998  
|Europe                  |  |                              | 452   |      |   | 351  
|Other foreign countries |  |                              | 183   |      |   | 104  
|                        |  |                              |       |      |   |      
|Total revenue           |  | $                            | 2,657 |      | $ | 1,453
|                        |  |                              |       |      |   |      

(9) Commitment and contingencies

Licensing and sponsored research agreements

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 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.

In
December 2006, we entered into a license, development, supply and distribution agreement with Diagnostic HYBRIDS, Inc., or DHI, to develop and commercialize products in the field of clinical virology diagnostics, starting with a panel of multiplex
respiratory virus and sexually transmitted infection assays. The new product portfolios will be developed for our EasyCount System, a small, automated analyzer based on fluorescence microscopy. Under the terms of the license agreement, we have
granted DHI the exclusive license to sell the new products developed under the license agreement within the United States and Canada and their respective territories and possessions. In addition, Immunicon and DHI will use their respective best
efforts to negotiate commercially reasonable terms and conditions, to be set forth in a separate written agreement, with respect to marketing and sale of such products in other countries. The agreement terms are in effect for a period ending on the
fifth anniversary of the commencement of the commercial period and either party may elect to extend the original term for an additional five years. The agreement automatically terminates in the event that pre-marketing FDA clearance for a new
product is not received on or before July 1, 2009.

In consideration for the grant of the rights and licenses under the license agreement, we received
an upfront non-refundable, non-creditable license fee of $500,000 and we will earn an additional $1.0 million upon clearance by the FDA of the first product developed under the agreement. In addition, in consideration for the performance of our
obligations in the development of new products, DHI will pay us a quarterly payment of $200,000 for six fiscal quarters, beginning January 2007.

We will manufacture and supply DHI with their requirements for bulk reagents, instrument systems and related
components and materials. DHI will manufacture and supply the detection reagents and finished products. We will receive 41% of the revenue from the sale of these reagents. DHI will act as our distributor for the instrument systems. We are
responsible for one year of warranty service for the instrument systems. We receive all revenue from servicing or repair of instrument systems. DHI is entitled to 10% of service revenue as their commission. DHI will be responsible for all expenses
for sales and training with respect to products and systems. In accordance with EITF 00-21,Revenue Recognition with Multiple Deliverables, or EITF 00-21, we have evaluated the contract and determined that it has one unit of accounting. The
payments received will be amortized over the life of the contract which we expect will be a total of 11 1/2years which includes a 5 year extension of the initial term. We recorded $15,000 in contract revenue for the quarter ended March 31, 2007.

In
January 2006, we entered into a license agreement with Kreatech Biotechnology B.V., or KREATECH, under which KREATECH granted to us a royalty-bearing, non-exclusive, non-transferable license to offer for sale, sell, distribute, import, and export to
resellers and end users reagents processed using KREATECHs Universal Linkage System technology for use with our imaging technologies and instrument platforms. In consideration for the grant of the rights and licenses under this agreement, we
paid to KREATECH an initial license fee of 60,000 euros. We entered into an expanded agreement with KREATECH in April 2007 wherein which the terms and conditions of this initial agreement were terminated. (See note 14).



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On June 13, 2005, we announced that we, along with the Fox Chase Cancer Center, or Fox Chase, were awarded a
Small Business Technology Transfer grant totaling approximately $1.1 million from the National Institutes of Health (NIH), which extends over two years. The grant payments are made directly to us. We then remit Fox Chases portion
to them. Under the terms of the grant, we believe that we will be entitled to $475,000 of the grant and that Fox Chase will receive the remainder of $615,000. The NIH grant is intended to fund the development of a new strategy to actively monitor
the effectiveness of cancer drugs in clinical trials. As of March 31, 2007, we have received a total of $953,000 of grant proceeds of which we have paid $535,000 to Fox Chase and recorded the remainder of $418,000 as a reduction of research and
development expense.

In August 2000, we entered into a Development, License and Supply Agreement, or the Development Agreement, with Ortho Clinical
Diagnostics, Inc., or 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 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. See note 12 Related Parties for further discussion.

We entered a licensing agreement, or Licensing Agreement, with a
university on June 1, 1999 in an effort to develop licensed subject matter and identify future technologies. The technology developed relates to the isolation, enrichment and characterization of circulating epithelial cells, while determining
their relationship to cancer disease states. We were granted a royalty bearing, exclusive license to use, manufacture and distribute licensed products developed as part of the Licensing Agreement with the university. The term of the Licensing
Agreement is for 15 years.

In consideration of the rights granted by the university, we will pay the university a nonrefundable annual license maintenance
royalty of $25,000, along with a royalty equal to one percent of net sales of licensed products. As of March 31, 2007, we have manufactured a limited quantity of products developed as a result of the Licensing Agreement. In the event we pay a
royalty to a third-party for use of patented technology which materially enables the functionality of the universitys developed technology, then we shall be entitled to receive a credit against royalties due the university in the amount of the
third-party royalty payments.

In 1997, we entered into a license agreement with a university, the Netherlands Agreement, covering optical analysis of
particles similar to cells and cell particles. In consideration of the rights granted by the university, we will pay the university a royalty equal to three percent of net sales of products covered by the licensed technology for which a valid patent
exists or one and three-quarters percent (1.75%) of net sales of products covered by the licensed technology for which no valid patent exists. As of March 31, 2007, we have sold a limited quantity of the products as a result of the
Netherlands Agreement. In June 2004, we entered into an addendum to the Netherlands Agreement with the university, and STW, a research funding agency of the Dutch government. Under the modified Netherlands Agreement, STW will provide the university
with up to approximately $1 million toward developing an affordable and portable instrument to monitor patients with HIV. This instrument represents an additional application of our existing technology, specifically the CellTracks EasyCount system,
which was developed through our collaboration with the university. Under the Netherlands Agreement addendum, we will contribute in kind research effort toward the project such as personnel, equipment and supplies, among other things, and
we have rights to commercialize products that result from the Netherlands Agreement.

Warranty for instrument product sales

We generally include a one year warranty for product quality related to our instrument product sales. We record warranty expense for known warranty issues if a loss is
probable and can reasonably be estimated, and we record warranty expenses for anticipated but, as yet, unidentified warranty expenses based on historical activity. Provisions for estimated warranty expenses related to product warranties are made at
the time products are shipped. The warranty liability and the related expense were not significant during the periods presented. Management believes that the warranty accrual is appropriate; however, actual claims incurred could differ from the
original estimates, requiring adjustments to the accrual. Our product warranty obligations are included in accrued expenses on the accompanying condensed consolidated balance sheet.



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Changes in accrued product warranty expense are as follows:



|                        |  |                                   |     |   |                              |   |     |  
|----------------------- |  | --------------------------------- | --- | - | ---------------------------- | - | --- | -
|(in thousands)          |  | Three Months Ended March 31, 2007 |     |   | Year Ended December 31, 2006 |  
|Beginning of the period |  | $                                 | 64  |   |                              | $ | 78  |  
|Additions               |  |                                   | 20  |   |                              |   | 62  |  
|Claims                  |  |                                   | (16 | ) |                              |   | (76 | )
|                        |  |                                   |     |   |                              |   |     |  
|Ending of the period    |  | $                                 | 68  |   |                              | $ | 64  |  
|                        |  |                                   |     |   |                              |   |     |  

Relocation Agreement

In August 2006, the Compensation Committee of our Board of Directors, or the Committee, approved a change to the compensation of our Chief Executive Officer, Byron D. Hewett. In order to facilitate
Mr. Hewetts relocation from his home in New York to the Philadelphia area, the Committee unanimously approved the engagement of a relocation company to aid Mr. Hewett in the sale of his home in New York. The agreement between the
relocation company and us provides that the relocation company will provide Mr. Hewett with marketing assistance in the sale of his New York home. The agreement further provides that, at Mr. Hewetts option, the relocation company
will purchase the home from Mr. Hewett at fair market value and include the home in its inventory for sale. We will reimburse the relocation company for expenses related to the purchase and sale of Mr. Hewetts New York home,
including any loss on the sale incurred by the relocation company. Mr. Hewett exercised this option in October 2006 and the relocation company is now seeking to sell the home.

In addition, we have reimbursed Mr. Hewett for costs associated with the search for and closing on the purchase of his new home in the Philadelphia area. Lastly, we have reimbursed Mr. Hewett for costs
associated with the shipment of his household goods into his new home. The reimbursement payments to Mr. Hewett included the amount of Mr. Hewetts anticipated United States Federal income tax liability with respect to such
reimbursements and with respect to the payments to the relocation company.

We reimbursed Mr. Hewett $67,000 for the costs on the purchase of his new
home and the moving expenses in December 2006. We anticipate that the payments to the relocation company will aggregate between $389,000 and $450,000 but actual costs will depend on the final sale proceeds of Mr. Hewetts home in New York.
As of March 31, 2007, we have additional accrued expenses of $389,000 related to his relocation.

Facility and operating leases

We currently lease approximately 46,945 square feet of office and laboratory space in Huntingdon Valley, Pennsylvania. Our current space is
adequate to support commercialization. The lease expires on January 31, 2012 although we can elect to terminate the lease any time after May 10, 2006, subject to an early termination payment.

We also lease approximately 2,500 square feet of office and laboratory research space in Enschede, The Netherlands, used to support our research and development
activities. This lease expires on August 1, 2009.

Rent expense for all locations for 3 months ended March 31, 2007 and March 31, 2006 was
$232,000, and $263,000, respectively.

Future minimum lease payments under the operating leases as of March 31, 2007 are as follows:



|                             |  |           |      
|---------------------------- |  | --------- | -----
|(in thousands)               |  | Operating
|2007                         |  | $         | 647  
|2008                         |  |           | 863  
|2009                         |  |           | 871  
|2010                         |  |           | 709  
|2011 and thereafter          |  |           | 253  
|                             |  |           |      
|Total minimum lease payments |  | $         | 3,343
|                             |  |           |      



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Employment contracts

We are liable for certain payments under employment contracts with our Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer and Chief Counsel. The contracts require that we continue salary and
benefits for these officers for a period of one year as well as accelerate any unvested options, if any, if the officer is terminated, except for cause, or in the event of a Change of Control, as defined in the contracts.

(10) Equity compensation plan

In January 2007, our Board of
Directors made nonvested stock grants to the non-employee directors of the Board and to certain Officers of the Company. The directors of the Board were granted a total of 34,860 shares which will vest one-half on each of the next two anniversary
dates from the grant date. Certain officers were granted a total of 155,000 shares which will vest one-third per year for each of the next three years on the anniversary of the grant date. The nonvested stock grant had a fair market value of
$107,000 and $477,000 for the directors and officers, respectively. All such grants were made pursuant to our Amended and Restated Equity Compensation Plan. The fair value of nonvested shares is determined based on the closing price of our common
stock, as reported by Nasdaq, on the grant date and compensation expense is recognized over the service period, or vesting period. Compensation expense relating to issuance of nonvested shares was $145,000 and $110,000 for the three months ended
March 31, 2007 and March 31, 2006, respectively.

Our Chief Executive Officer, Chief Scientific Officer, Chief Financial Officer and Chief
Counsel each have Employment Agreements with the Company which outline employment and certain rights and obligations in the event of a change of control of the Company. If the officers employment is terminated for any reason before the
nonvested stock is fully vested, except as provided by such officers Employment Agreement with us, the shares of nonvested stock that are not then vested will be forfeited. If the provisions of the officers Employment Agreement are
triggered, the nonvested stock will vest in accordance with the officers Employment Agreement.

Section 3(a) of the Plan states in part that,
during each calendar year that the Plan is maintained, the number of Shares authorized for issuance or transfer under the Plan shall be increased without further action by our board of directors, and without further approval by our stockholders, in
such amount as shall cause the number of Shares authorized for issuance or transfer under than Plan to equal 15% of the our issued and outstanding Shares as of December 31 of the immediately prior year (on a fully-diluted basis); provided,
however, that the maximum number of Shares to be added in any calendar year pursuant to Section 3(a) of the Plan shall not exceed 250,000. As such, on December 31, 2006, pursuant to Section 3(a) of the Plan, the total number of Shares
authorized for issuance or transfer under the Plan increased from 4,516,667 shares to 4,766,667 shares, an increase of 250,000 shares (the Evergreen Shares).

(11) Income taxes

As previously stated, we adopted the provision of FIN 48 on January 1, 2007. We have
established a valuation allowance to fully reserve our net deferred tax assets at March 31, 2007 and December 31, 2006 due to the uncertainty of the timing and amount of future taxable income. As of March 31, 2007, we had a net
operating loss carryforward of approximately $131.7 million and an unused research and development credit carryforward of approximately $4.5 million. We file income tax returns in the U.S. federal jurisdiction, and various states and foreign
jurisdictions. As a result of the net operating loss carryforwards, our federal statute of limitation remains open for all years since 1990 with no years currently under examination by the Internal Revenue Service. If not utilized, these net
operating loss carryforwards and tax credits will begin to expire in 2018. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return. The state impact of any federal
changes remains subject to examination by various states for a period of up to one year after formal notification to the states.

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.



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In accordance with paragraph 19 of FIN 48, interest, if any, relating to unrecognized tax benefits would be recorded
as a component of interest expense and penalties, if any, relating to unrecognized tax benefits as a component of tax expense. As of the date of the adoption of FIN48, we did not have any accrued interest or penalties associated with any
unrecognized tax benefits.

We have an unrecognized tax benefit of approximately $724,000 which did not change significantly during the three months ended
March 31, 2007. The application of FIN 48 would have resulted in a decrease in retained earnings of $724,000, except that the decrease was fully offset by the application of a valuation allowance. Any changes in the future to the unrecognized
tax benefit would not impact the effective tax rate due to the existence of the valuation allowance. We do not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months.

(12) Related parties

In March 2007, Leon W. M.M. Terstappen, MD,
Ph.D., our Senior Vice President of Research and Development and Chief Scientific Officer, was appointed Chair of Medical Cell Biophysics in the Faculty of Science and Technology at the University of Twente, Enschede, The Netherlands.
Dr. Terstappen will remain in his current position with us but will devote approximately 20% of his time to academic activities at the University with which we have substantial contracts and relationships. The University will compensate
directly to Dr. Terstappen for his time devoted to the University.

In August 2000, we entered into a Development, License and Supply Agreement, or
the Development Agreement, with Ortho Clinical Diagnostics, Inc., or 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 LLC, or Veridex, a subsidiary of Ortho. 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 31% of their net sales from the sale of reagents, test kits, and certain other
consumable products and disposable items. 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 2000, another subsidiary of Johnson and
Johnson, or 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 our Series F Preferred Stock, respectively.

We have received a total of $6.4 million in license and milestone payments under the terms of the Development Agreement from inception to March 31, 2007. These payments
are recognized as revenue over the estimated product development period for the corresponding product, which we estimate will end at various points through December 31, 2010. We continuously review the status of the remaining development
milestones and, where appropriate, have renegotiated the development requirement and payment terms. We do not believe that these renegotiations will have a material adverse effect on the Companys product development or financial position. We
expect to receive the remaining $4.1 million in development milestone payments over the next three to five years.

The following table breaks out the
revenue from related parties recognized over the three month periods ended March 31, 2007 and March 31, 2006:



|                                                  |  |                              |       |      |   |    
|------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | ---
|                                                  |  | Three Months Ended March 31,
|(in thousands)                                    |  | 2007                         |       | 2006
|Contract and milestone revenue from related party |  | $                            | 87    |      | $ | 200
|Product revenue from related party                |  |                              | 1,210 |      |   | 355
|                                                  |  |                              |       |      |   |    
|                                                  |  | $                            | 1,297 |      | $ | 555
|                                                  |  |                              |       |      |   |    



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(13) Supplemental expense information

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

Research and development expenses

Research and development expenses consisted of the following:



|                                 |  |                              |       |      |   |      
|-------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                 |  | Three Months Ended March 31,
|(in thousands)                   |  | 2007                         |       | 2006
|Salaries, benefits and taxes     |  | $                            | 1,887 |      | $ | 1,460
|Laboratory supplies and expenses |  |                              | 119   |      |   | 126  
|Instrument development costs     |  |                              | 27    |      |   | 206  
|Clinical trial expense           |  |                              | 242   |      |   | 449  
|Contracted research costs        |  |                              | 233   |      |   | 160  
|Depreciation expense             |  |                              | 280   |      |   | 331  
|All others                       |  |                              | 38    |      |   | 387  
|                                 |  |                              |       |      |   |      
|                                 |  | $                            | 2,826 |      | $ | 3,119
|                                 |  |                              |       |      |   |      

Selling, general and administrative expenses

Selling, general and administrative expenses consisted of the following:



|                             |  |                              |       |      |   |      
|---------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                             |  | Three Months Ended March 31,
|(in thousands)               |  | 2007                         |       | 2006
|Salaries, benefits and taxes |  | $                            | 1,548 |      | $ | 1,424
|Depreciation expense         |  |                              | 33    |      |   | 117  
|Legal and professional fees  |  |                              | 910   |      |   | 470  
|Insurance expense            |  |                              | 68    |      |   | 108  
|Commission                   |  |                              | 77    |      |   | 15   
|All others                   |  |                              | 321   |      |   | 335  
|                             |  |                              |       |      |   |      
|                             |  | $                            | 2,957 |      | $ | 2,469
|                             |  |                              |       |      |   |      

(14) Subsequent events

In April 2007, we and KREATECH expanded our current research collaboration related to centromere probes, which involve the use of our technologies with KREATECHs proprietary Universal Linkage System. Under the new exclusive
cross-license agreement, we have provided an exclusive right to KREATECH to utilize certain of our technologies to improve existing KREATECH products and to manufacture and supply such improved products for sale exclusively by us in North America.
We have agreed to make an equity investment in KREATECH up to $1.5 million based on the achievement of certain development milestones as agreed under a separate investment agreement.



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|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, our relationship with Veridex, LLC, or Veridex, a Johnson & Johnson company, 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, our relationship with Twente University, and other such institutions and companies with which we
have a contractual relationship, expansion of clinical trials and related costs, use of net proceeds from the sale of common stock and other funds, regulatory applications and requests for clearance intend to be submitted and regulatory clearances
anticipated to be received 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 and the terms of our existing financing arrangements, research and development and clinical trial expenditures, commercialization of the our product candidates, our ability to use licensed products and to obtain new licenses from
third parties, our ability to manage growth, our ability to obtain necessary regulatory approvals, reliance on third-party manufacturers and suppliers, reimbursement by third-party payors to our customers for our products, compliance with applicable
manufacturing standards, our ability to earn license and milestone payments under our agreement with Veridex, our ability to retain 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 Item 1A, Risk Factors in this quarterly report on Form 10-Q and in our Annual Report on Form
10-K for the year ended December 31, 2006 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-based diagnostic and research products and certain service activities 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 and predict outcomes. Our technologies can identify, count and characterize a small number of circulating tumor cells, or CTCs,
and other rare cells present in a blood sample from a patient. We also employ our technologies to provide analytical services to pharmaceutical and biotechnology companies to assist them in developing of new therapeutic agents. We operate in one
business segment, have our principal offices in Huntingdon Valley, Pennsylvania, and maintain a small research and clinical development laboratory in the Netherlands.

In December 2006, we entered into a definitive agreement for the sale and issuance of $30 million in aggregate principal amount of unsecured subordinated convertible promissory notes, or the Notes, which are
convertible initially into an aggregate of up to 7,334,964 shares of our common stock. The Notes bear interest at 6% per annum. Interest is not payable currently but is accrued and added to the principal on a quarterly basis. Any portion of the
Notes and all accrued but unpaid interest which is not converted is repayable in cash on December 5, 2009. We also issued warrants under this agreement to purchase 1,466,994 shares of our common stock. The Notes are convertible into shares at a
conversion price of $4.09. The warrants have an exercise price of $4.09 per share. We received net proceeds of approximately $27.3 million from the sale of the Notes and accompanying warrants after deducting the placement agent fees and offering
expenses of $2.7 million.



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We have incurred substantial losses since our inception. We anticipate incurring additional losses over at least the
next several years. Substantial financing will be needed by us to fund our operations and to continue to commercially develop our product candidates. We are highly dependent on our collaboration with Veridex. Veridex is responsible for, among other
responsibilities, all commercialization functions related to our cancer products including all sales and marketing of these products. 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 fluctuate based on the amounts of revenue generated from sales of our products and services.

There is no assurance that such financing will be available when needed. Our operations are subject to certain additional risks and uncertainties including, among
others, dependence on Veridex to market our cancer diagnostic product candidates, the uncertainty of product development (including clinical trial results), regulatory clearance and approval, supplier and manufacturing dependence, competition,
reimbursement availability, dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary rights, dependence on key personnel and other risks related to governmental regulations and approvals. We believe,
however, that cash, cash equivalents, short term investments and borrowing available under our line of credit at March 31, 2007 will be sufficient to maintain operations through at least March 31, 2008.

Veridex collaboration

We expect that the majority of our revenues
from product sales for at least the years 2007 and 2008 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. In December 2006, Veridex received FDA clearance for the CellSearch Circulating Tumor Cell Kit as an aid in the monitoring of patients with metastic breast cancer. In addition, in September 2006, we
announced that we had achieved our primary and secondary endpoints in our pivotal clinical trial in the management of metastatic colorectal cancer. We expect that Veridex will file an application seeking 510(k) clearance from the FDA in 2007 for
in vitrodiagnostic use. Also, in January 2007, we announced that we had succeeded in meeting the endpoints in our clinical trial for use of the CTC Kit in the management of metastatic prostate cancer. We expect that Veridex will file an
application seeking 510(k) clearance from the FDA in 2007 for in vitrodiagnostic use. Commercialization of this clinical indication is subject to a number of factors, including but not limited to clearance for sale by the FDA. 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.

We commercialized the first product under the Development Agreement in October 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 at least the end of 2007. 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.

As stated above, Veridex is responsible for marketing our cancer diagnostic products including the CellSearch reagents.
Adoption of our cancer diagnostic products to date has not been as rapid as we expected. In particular, CellSearch reagent revenue increased by only 9% in the quarter ended March 31, 2007, compared to the quarter ended December 31, 2006.
Since the quarter ended March 31, 2006, the quarterly growth rate in CellSearch reagent revenue has declined each quarter. As part of our efforts to better understand this declining growth rate we have notified Veridex of our intention to
exercise our right to conduct a contract audit to ensure that Veridex is complying with its obligations under the Development Agreement. We plan to conduct this audit in the second quarter of 2007.

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.



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Diagnostic HYBRIDS, Inc. Agreement

In December 2006, we signed a definitive license, development, supply and distribution agreement to develop and
commercialize products in the field of clinical virology diagnostics, starting with a panel of multiplex respiratory virus and sexually transmitted infection assays with Diagnostic HYBRIDS, Inc., or DHI. The agreement terms are in effect for a
period ending on the fifth anniversary of the commencement of the commercial period and either party may elect to extend the original term for an additional five years. We received an upfront non-refundable license fee of $500,000 and are eligible
for an additional $1.0 million upon clearance by the FDA for the first initial product. In addition, in consideration for our performance of our obligations in the development of new products under the agreement, DHI will pay us a quarterly payment
of $200,000 for six fiscal quarters, beginning January 2007. We will manufacture and supply DHI with their requirements of for bulk reagents and DHI will manufacture and supply the detection reagents. We will receive 41% of the revenue from the sale
of these reagents. DHI will act as our distributor for the instrument systems. DHI will be responsible for all expenses for sales and training with respect to products and systems. We received $500,000 for the license fee and the first $200,000
quarterly payment. In accordance with EITF 00-21, we have evaluated the contract and determined that it has one unit of accounting. The payments received will be amortized over the life of the contract which we expect will be a total of 11 1/2years which includes a 5 year extension of the initial term.

Revenues

We have not generated significant product revenues since
our inception. We derive revenues from four primary sources: instrument product sales, reagent product sales, service revenue and license revenue. We initiated sales activities for instruments and reagent products for research use only, or RUO, in
the first quarter of 2004 and for in vitro diagnostic, or IVD, use in October 2004.

We reported product and service revenue of $2.6 million for the
three months ended March 31, 2007, including $1.4 million in instrument revenue, $580,000 in reagent and consumable product sales and $577,000 in service revenue. This represents an increase of 104% over the $1.3 million in product and service
revenue for the three months ended March 31, 2006, which included $635,000 in instrument revenue, $279,000 in reagent and consumable product sales and $339,000 in service revenue.

We sold 20 instruments (12 cell analyzers and 8 CellTracks® AutoPrep®
systems) in the first quarter of 2007 and 11 instruments (7 cell analyzers and 4 CellTracks® AutoPrep® systems) in the previous years first quarter. A summary of instrument shipments and instruments sold for revenue recognition purposes for the period from product launch to March 31, 2007 is shown below:



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|                       |  |                                  |  |                                   |  |                            
|---------------------- |  | -------------------------------- |  | --------------------------------- |  | ---------------------------
|                       |  | Cumulative as of January 1, 2007 |  | Three months ended March 31, 2007 |  | Cumulative @ March 31, 2007
|Instrument shipments   |  |                                  |  |                                   |  |                            
|CellTracks Analyzer II |  | 66                               |  | 7                                 |  | 73                         
|CellSpotter (1)        |  | 19                               |  |                                  |  | 19                         
|                       |  |                                  |  |                                   |  |                            
|Total Analyzers        |  | 85                               |  | 7                                 |  | 92                         
|                       |  |                                  |  |                                   |  |                            
|CellTracks AutoPreps   |  | 77                               |  | 7                                 |  | 84                         
|                       |  |                                  |  |                                   |  |                            
|                       |  |                                  | 
|Instruments sold (2)   |  |                                  |  |                                   |  |                            
|CellTracks Analyzer II |  | 50                               |  | 12                                |  | 62                         
|Total CellSpotter      |  | 24                               |  |                                  |  | 24                         
|                       |  |                                  |  |                                   |  |                            
|Total Analyzers        |  | 74                               |  | 12                                |  | 86                         
|                       |  |                                  |  |                                   |  |                            
|CellTracks AutoPreps   |  | 63                               |  | 8                                 |  | 71                         
|                       |  |                                  |  |                                   |  |                            

---

|    |  |   |  |                                                                                                                                                                                   
|--- |  | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) |  |  |  | CellSpotter analyzers are the first-generation cell analyzer. We are in the process of replacing or upgrading CellSpotter analyzers to the next-generation CellTracks Analyzer
II.
|(2) |  |  |  | Presents instruments which were sold and revenue recorded in the period indicated.                                                                                                

We have received a total of $6.4 million in license and milestone payments under the terms of the Development
Agreement from inception to March 31, 2007 and have recorded $5.9 million as milestone and license revenue to date. Cash received related to these milestones is being recognized as revenue over the estimated product development period for the
corresponding product, which we estimate will end at various points through December 2010. We continuously review the status of the remaining development milestones and, where appropriate, renegotiate the development requirement and payment terms.
We do not believe that these renegotiations have had or will have a material adverse effect on our product development or financial position.

As of
March 31, 2007, we can receive up to an additional $4.1 million in license and milestone payments 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 associated with license revenue will fluctuate. Also, we expect to continue to invest in research and development, particularly in clinical trials and manufacturing development and therefore we do not
believe that these expenses will correspond to the periods wherein 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 2009 and therefore do not anticipate earning any sales-based milestone revenues until then.

We recognized $103,000 and $200,000 as milestone and
other license related revenue in the three months ended March 31, 2007 and March 31, 2006, respectively.

Research and development expenses

Our research and development expenses consist of expenses incurred in developing reagents, 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;
| | - |  | --------------------------------------------



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| |  |  | 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 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.

Selling, general and administrative expenses

Our selling, general and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, accounting, sales and
marketing, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in research and development expense, commissions and professional fees for legal and accounting services.

Stock-based compensation expenses

As described under the heading
Critical Accounting Policies below, on January 1, 2006, we adopted SFAS 123R,and began reporting expenses associated with all forms of equity compensation granted, which includes stock options, employee stock purchase plan
and restricted shares, now referred to as nonvested stock. The charges related to equity compensation are allocated among all expense components depending on the department of the employee receiving the equity compensation.

Previously we had recorded stock-based compensation expense resulting from stock option grants to employees at exercise prices below the fair value of the underlying
common stock. This resulted in our recording stock-based compensation expense associated with such grants. We record stock-based compensation to operating expenses over the vesting periods of the options and grants, subject to adjustment for
forfeiture during the vesting period.

Interest income and expense

Interest income consists of interest earned on our cash, cash equivalents and investments. Investment holdings as of March 31, 2007 consist primarily of mortgage back 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.

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 CellTracks, CellSpotter, Magnest, AutoPrep, the CellTracks AutoPrep System logo, and the CellSpotter
Analyzer logo by Immunivest Corporation, our



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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
April 30, 2007 our intellectual property estate consisted of 180 issued patents or patent applications, as follows:

35 issued US patents, including
two US design patents;

25 US non-provisional patent applications;

12 US provisional patent applications;

27 foreign patents, including 6 foreign design patents;

73 foreign patent applications that are in various national stages of prosecution; and

8 foreign patent applications not at the national stage.

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 stock-based compensation;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | derivative financial instruments; 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 March 31, 2007 except for the adoption of FIN 48. See below for further discussion.

Revenue recognition

We derive revenues from: instrument and reagent
product sales, sales of services to pharmaceutical and biotechnology companies, license agreements and milestone achievements. We recognize revenue on product sales in accordance with the SEC Staff Accounting



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Bulletin No. 104, Revenue Recognition in Financial Statement as revised and updated, or SAB 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 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.

We record revenue from services provided as part of contracted research received under research and development
support agreements and milestone payments under collaborations with third parties. We examine each contract and consider the appropriate revenue recognition in accordance with SAB 104 and Emerging Issue Task Force, or EITF, 00-21, Revenue
Recognition with Multiple Deliverables,or EITF 00-21. We evaluate all deliverables in our collaborative agreement to determine whether it represents separate units of accounting. Deliverables qualify for separate accounting treatment if they
have standalone value to the customer and if there is objective evidence of fair value for the undelivered items. If there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration
is allocated to the separate units of accounting based on their relative fair values.

In accordance with SAB 104, up-front non-refundable license
fees are recorded as deferred revenue and recognized over the estimated development period. 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

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 as well as 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.

Accounting for research and development expenses

Our research and development expenses are primarily composed of costs associated with product development for our cancer diagnostic products. Future research and development expenses may be directed toward development
of non-cancer products such as products that may be used to diagnose and identify infectious diseases or cardiovascular disease. Costs incurred to date 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, or CROs, 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 of the enrolled patients through the trial, and contracted costs with CROs 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 not match the estimated costs for a given accounting period. We expect
that expenses in the research and development category will fluctuate for the foreseeable future as we allocate personnel to various activities, expand our clinical trial activities and increase our discovery research capabilities. The fluctuations
are difficult to predict due to the uncertainty inherent in the timing of clinical trial initiations, progress in our discovery research program, the rate of patient enrollment and the detailed design of future trials. In addition, the results from
each of our research programs and research trials will influence the number, size and duration of both planned and unplanned trials.



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

On January 1, 2006, we adopted Statement of Financial Accounting Standards, or SFAS, No. 123 (Revised 2004), Share Based Payment, or SFAS 123R. In
adopting SFAS 123R, we elected to apply the modified prospective transition method of reporting as allowed under SFAS 123R and therefore have not restated prior periods.

We value our employee stock options using the Black-Scholes method and have applied the assumptions described in the notes to the financial statements. These assumptions describe expected volatility, anticipated term
of the options and the risk-free interest rate. We used historical volatility in the assumptions for the expected volatility. In selecting the historical volatility approach we had reviewed similar entities as well as the AMEX Biotechnology Index
and based on this analysis, chose our own historical volatility as the best measure of expected volatility. Additionally, we began using the simplified calculation of expected life, described in SAB 107. Management believes that this calculation
provides a reasonable estimate of expected life for our employee stock options. The risk-free interest rate assumption is based upon the rate applicable to the US Treasury security with a maturity equal to the expected term of the option on the
grant date.

Stock-based compensation recorded in the three months ended March 31, 2007 is based on awards that are expected to vest and therefore
have been reduced for estimated forfeitures. SFAS 123R require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from the estimates. Forfeitures were based on historical
experience.

Management believes that the estimate related to the expense of stock options is a critical accounting estimate as the underlying assumptions
can change from time to time. As a result, the future compensation expense that we record under SFAS 123R may differ significantly from what we have recorded in the current period with respect to similar instruments.

Critical accounting estimates and assumptions are evaluated periodically as conditions may arise and changes to such estimates are recorded as new information or changed
as conditions require revision. Our policy is to grant stock options at their fair market value on the date of grant.

All nonvested shares granted to
executive officers are recorded as compensation expense using the fair value method under SFAS 123R. Fair value is based upon the closing price of our common stock on the date of grant.

Derivative Financial Instruments

On December 5, 2006, we issued $30 million in convertible subordinated notes,
or the Notes. The Notes have been accounted for in accordance with SFAS 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133, and the EITF No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Companys Own Stock, or EITF 00-19.

We do not use derivative instruments to hedge exposures to cash flow, market or
foreign currency risks. We review the terms of our convertible debt and equity instruments that we issue to determine whether there are embedded derivatives that need to be bifurcated and accounted for separately as a derivative. When the embedded
features risks are not clearly or closely related to the host instrument, the host instrument is not re-measured at fair value and if a separate instrument with the same terms would meet the definition of a derivative, the embedded instrument is
bifurcated and accounted for separately. All three of these criteria need to be met in order to treat the embedded instrument as a derivative. If the convertible instrument is debt, the risks associated with the embedded conversion option are not
clearly and closely related to the debt instrument. The conversion option has risks associated with an equity instrument, not a debt instrument. If the host contract is considered to be conventional convertible debt, bifurcation of the
embedded conversion option is not required. Generally, where the ability to physical or net-share settle the conversion option is deemed not in our control, the embedded conversion option is required to be bifurcated and accounted for as a
derivative.

We may also issue options or warrants associated with the issuance of convertible debt. Although the terms of the options or warrants may not
provide for net-cash settlement, in certain circumstances, physical or net-share settlement may not be considered in our control and, accordingly, we may be required to account for these options or warrants as derivative financial instruments and
record them as a liability instead of equity.



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For derivative instruments that are required to be accounted for as liabilities, the instrument would be initially
recorded at its fair value and then at each reporting date, the change in fair value would be recorded in the statement of operations.

If the embedded
derivative instrument is to be bifurcated and accounted for as a liability, the proceeds from an issuance will be first allocated to the fair value of the bifurcated derivative instruments. If there are also options or warrants that are required to
be recorded as a liability, the proceeds are next allocated to the fair value of those instruments. The remaining proceeds, if any, are allocated to the convertible instrument itself, usually resulting in that instrument being recorded at a discount
from the face amount.

The identification of, and accounting for, derivative instruments is complex. Management used a derivative model analyzing the
conversion features, additional shares to be paid resulting from the interest accrual and the redemption options. The model also considered factors such as the stock price, interest rate, the stock and interest rate volatility and the expected life.

Management used the above model to value the related warrants that were issued in conjunction with the Notes. The primary factors driving the economic
value of the warrants were factors, such as stock price, stock volatility, interest rate and expected life.

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 March 31, 2007, we recorded a full valuation allowance of $57.4 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 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.

In accordance with paragraph 19 of FIN 48, interest, if any, relating to unrecognized tax benefits would be recorded as a component of interest expense and penalties, if
any, relating to unrecognized tax benefits as a component of tax expense. As of the date of the adoption of FIN48, we did not have any accrued interest or penalties associated with any unrecognized tax benefits.

We have an unrecognized tax benefit of approximately $724,000 which did not change significantly during the three months ended March 31, 2007. The application of
FIN 48 would have resulted in a decrease in retained earnings of $724,000, except that the decrease was fully offset by the application of a valuation allowance. Any changes in the future to the unrecognized tax benefit would not impact the
effective tax rate due to the existence of the valuation allowance. We do not reasonably estimate that the unrecognized tax benefit will change significantly within the next twelve months.

RESULTS OF OPERATIONS

Three months ended March 31, 2007 and
March 31, 2006

Revenue

We segregate revenue
into product revenue, which includes instrument, reagent and other product revenue, service revenue and license and milestone revenue. We further identify related party revenue where indicated.



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|                                                              |  |                              |       |      |   |      
|------------------------------------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                                              |  | Three Months Ended March 31,
|Revenue (dollars in thousands)                                |  | 2007                         |       | 2006
|Product revenue including product revenue from related party: |  |                              |       |      |   |      
|Instrument revenue:                                           |  |                              |       |      |   |      
|Related party                                                 |  | $                            | 715   |      | $ | 125  
|Other                                                         |  |                              | 682   |      |   | 510  
|Reagents and other product revenue:                           |  |                              |       |      |   |      
|Related party                                                 |  |                              | 495   |      |   | 230  
|Other                                                         |  |                              | 85    |      |   | 49   
|                                                              |  |                              |       |      |   |      
|Total product revenue                                         |  | $                            | 1,977 |      | $ | 914  
|                                                              |  |                             
|Service revenue                                               |  |                              | 577   |      |   | 339  
|License and milestone revenue:                                |  |                              |       |      |   |      
|Related party                                                 |  |                              | 87    |      |   | 200  
|Other                                                         |  |                              | 16    |      |   |     
|                                                              |  |                              |       |      |   |      
|Total revenue                                                 |  | $                            | 2,657 |      | $ | 1,453
|                                                              |  |                              |       |      |   |      

We recorded $2.6 million in product and service revenue in the three months ended March 31, 2007 of which
$1.2 million was earned from related parties, primarily from Veridex. We recorded $1.3 million in product and service revenue in the three month period ended March 31, 2006, of which $355,000 was earned from related parties. Instrument revenue
increased $762,000, or 120%, to $1.4 million in the quarter ended March 31, 2007 from $635,000 in the quarter ended March 31, 2006. We sold 20 instruments in the three month period ended March 31, 2007 and 11 in the three month period
ended March 31, 2006. We sold four CellTracks Analyzer II systems as part of an upgrade program from the first generation CellSpotter analyzer system in the three month period ended March 31, 2007 and three upgrades in the three months
ended March 31, 2006. These CellTracks Analyzer II systems were sold below cost as part of a program to encourage upgrade of the first generation CellSpotter Analyzers. Reagent and other product revenue increased $301,000, or 108%, to $580,000
in the first quarter of 2007 as compared to the quarter ended March 31, 2006. As we place more of our instruments in the field, we anticipate that our reagent and other product revenue will increase. We had an instrument backlog of 24 AutoPrep
instruments and 23 CellTracks Analyzers II cell analysis instruments as of March 31, 2007. We anticipate these instruments to be delivered over the next two quarters.

Service revenue was $577,000 and $339,000 in the three months ended March 31, 2007 and March 31, 2006, respectively. The primary source of our service revenue to date has been from our contract with Pfizer.
In March 2006, we announced an extension of our agreement with Pfizer under which we collaborate with Pfizer to aid their efforts to develop and evaluate the effectiveness of new drug candidates. In the third quarter of 2006, we entered into
laboratory service agreements with several pharmaceutical companies, including AstraZeneca UK Limited, or AstraZeneca, and MolMed S.p.A, or MolMed. We expect to continue to add additional customers to this category in future periods.

License and milestone revenue from related party decreased by $97,000 to $103,000 for the three months ended March 31, 2007 from $200,000 for the three months ended
March 31, 2006. Since inception to March 31, 2007, we received $6.4 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.

As a result of the above, total revenue increased by $1.2
million to $2.7 million in the three months ended March 31, 2007 compared to $1.5 million in the corresponding period of 2006.

Costs of goods sold

Costs of goods sold were $2.8 million for the three months ended March 31, 2007 compared to $1.5 million for the three months ended March 31,
2006. We reported a loss on product and service sales of $271,000 in both the three month periods ended March 31, 2007 and March 31, 2006.

The
loss on product sales in the quarter ended March 31, 2007 resulted entirely from losses on the sale of instruments. During the quarter ended March 31, 2007, Immunicon sold instruments at a price which was lower than the cost to produce
such instruments. This



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loss was approximately $24,000 per instrument, or a total loss of $481,000, on the sale of instruments in the quarter ended March 31, 2007. Total costs
of goods sold for instruments was $1.9 million in the three months ended March 31, 2007 compared to $968,000 in the quarter ended March 31, 2006. During 2006, Immunicon decided to begin outsourcing certain activities related to the
manufacture of instruments and Immunicon currently continues the process of reducing its internal manufacturing costs; however, this transition process has resulted in some duplicate instrument cost of goods sold. These costs should be reduced once
the outsourcing process is completed, which we now expect will be in the second half of 2007. Effective April 1, 2007, we also increased the list prices for our instruments to $205,000 for an instrument system. Taken together, the ongoing
outsourcing effort and the price increase should eliminate the loss on sales of instruments.

Costs of goods sold for reagents and consumables was $646,000
and the loss on the sale of reagents and consumables was $66,000 in 2007 compared to costs of goods of $474,000 and a loss on the sale of reagents and consumables of $195,000 in the first three months of 2006. The loss in both periods is due to low
volumes for reagents and consumables such that we are unable to capitalize all costs associated with reagent and consumable manufacturing.

Costs of
services sold was $302,000 and the gross profit on the services sold was $275,000 in 2007 compared to $82,000 costs of services and $257,000 gross profit in the quarter ended March 31, 2006.

Research and development expenses

Research and development expenses
decreased by $300,000, or 9%, to $2.8 million in the first quarter of 2007 from $3.1 million in the first quarter of 2006. This decrease is primarily related to a decrease in clinical trial expenses. In the first quarter of 2006 we completed
enrollment for clinical trials in metastatic prostate and metastatic colorectal cancer. In the quarter ended March 31, 2007, we allocated certain research and development expense to cost of services sold which were related to the generation of
the service revenue. This allocation is shown as part of All others below. Also, we completed development of the EasyCount instrument system in the fourth quarter of 2006; therefore, instrument development costs are lower in the quarter
ended March 31, 2007 compared to the quarter ended March 31, 2006. These decreases are offset by the increase in salaries of $427,000. The increase is the result of additions to the R&D staff to support the product development efforts
related to DHI and KREATECH as well as to an increase in stock based compensation expense.

A summary of the principal components of our research and
development costs for the three months ended March 31, 2007 and March 31, 2006 are shown below:



|                                                 |  |                             |       |      |   |      
|------------------------------------------------ |  | --------------------------- | ----- | ---- | - | -----
|                                                 |  | Three months endedMarch 31,
|Research and development expenses (in thousands) |  | 2007                        |       | 2006
|Salaries, benefits and taxes                     |  | $                           | 1,887 |      | $ | 1,460
|Laboratory supplies and expenses                 |  |                             | 119   |      |   | 126  
|Instrument development costs                     |  |                             | 27    |      |   | 206  
|Clinical trial expense                           |  |                             | 242   |      |   | 449  
|Contracted research costs                        |  |                             | 233   |      |   | 160  
|Depreciation expense                             |  |                             | 280   |      |   | 331  
|All others                                       |  |                             | 38    |      |   | 387  
|                                                 |  |                             |       |      |   |      
|                                                 |  | $                           | 2,826 |      | $ | 3,119
|                                                 |  |                             |       |      |   |      

Each of our research and development programs is subject to certain risks and uncertainties, including the
possible requirement to obtain regulatory approval prior to introduction of the product, and these risks are often 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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Selling, general and administrative expenses

Selling, general and administrative expenses increased by $487,000, or 20%, to $3.0 million in the first quarter of 2007 from $2.5 million in the first quarter of 2006. The increase is primarily attributable to
increases in legal and professional fees. These fees include expenses for accounting (both audit and Sarbanes-Oxley fees), public relations, media or advertising agencies and legal fees including fees related to patents and licensing particularly
related to our recent licensing agreements with DHI and KREATECH.

The decrease in the depreciation expense is due primarily related to an acceleration of
depreciation of equipment which occurred as a result of a business restructuring which began in the second half of 2005 and extended into the first quarter of 2006.

A summary of the principal components of our selling, general and administrative expenses for the three months ended March 31, 2007 and March 31, 2006 are shown below:



|                                                            |  |                             |       |      |   |       
|----------------------------------------------------------- |  | --------------------------- | ----- | ---- | - | ------
|                                                            |  | Three months endedMarch 31,
|Selling, general and administrative expenses (in thousands) |  | 2007                        |       | 2006
|Salaries, benefits and taxes                                |  | $                           | 1,548 |      | $ | 1,424 
|Depreciation                                                |  |                             | 33    |      |   | 117   
|Legal and professional fees                                 |  |                             | 910   |      |   | 470   
|Insurance expense                                           |  |                             | 68    |      |   | 108   
|Commission expense                                          |  |                             | 77    |      |   | 15    
|Other                                                       |  |                             | 321   |      |   | 335   
|                                                            |  |                             |       |      |   |       
|Total selling, general and administrative expenses          |  | $                           | 2,957 |      |   | $2,469
|                                                            |  |                             |       |      |   |       

Interest and other income

Interest and other income increased by $228,000, or 59%, to $616,000 in the quarter ended March 31, 2007 from $388,000 in the quarter ended March 31, 2006. This increase in interest income was primarily a
result of higher average cash balance available for investment in 2007 compared to 2006 and was also affected by the increase in the average interest rate on invested cash and cash equivalents in 2007.

Value of conversion rights and warrant value

We have determined to
value certain provisions of the Notes and related warrants separately in accordance with various accounting guidance pronouncements, including SFAS133 and EITF 00-19. As such, we have recorded a liability for both the warrants and conversion
features. The warrants and conversion features are required to be adjusted to their fair value each quarter as a charge to earnings. The fair value of these warrants is primarily affected by our stock price, but is also affected by our stock price
volatility, expected life and the risk-free interest rates. The fair value of the conversion rights is primarily affected by our stock price, but is also affected by our stock price volatility, expected life and our incremental borrowing rate. The
$2.7 million increase in income in the first quarter of 2007 results primarily from the decrease in our stock price from December 31, 2006 to March 31, 2007. If our stock price were to increase in the future and assuming that the
volatility of our stock price and the risk-free or incremental borrowing interest rates remain constant, the fair value of the warrants and conversion features would increase and we would recognize a charge to earnings. Conversely, if the price of
our stock decreases and these factors remain constant, the fair value of the warrants and the conversion feature will decrease and we will recognize income.

Interest expense

Interest expense was $1.5 million and $113,000 for the three months ended March 31, 2007 and 2006, respectively. The
increase is attributable principally to the non-cash interest expense of $1.4 million related to the issuance of the Notes and related warrants, which occurred on December 5, 2006. The Notes have a 6% interest coupon which is payable at
maturity of the Notes. In addition, we paid financing fees of $2.7 million. These fees are amortized as part of interest expense over the life of the Notes. In addition, the discount on the Notes is also charged to interest expense. This increase is
partially offset by the lower interest expense on the senior debt due to a lower average balance outstanding in the quarter ended March 31, 2007 compared to the quarter ended March 31, 2006.



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Stock-based compensation expenses

In January 2007, our Board of Directors made nonvested stock grants to the non-employee directors of the Board and to certain officers of the Company. The directors of the Board were granted a total of 34,860 shares
which will vest one-half on each of the next two anniversary dates from the grant date. Certain officers were granted a total of 155,000 shares which will vest one-third per year for each of the next three years on the anniversary of the grant date.
The nonvested stock grant had a fair market value of $107,000 and $477,000 for the directors and officers, respectively.

Our Chief Executive Officer,
Chief Scientific Officer, Chief Financial Officer and Chief Counsel each have Employment Agreements with the Company which outline employment and certain rights and obligations in the event of a change of control of the Company. If the
officers employment is terminated for any reason before the nonvested stock is fully vested, except as provided by such officers Employment Agreement with us, the shares of nonvested stock that are not then vested will be forfeited. If
the provisions of the officers Employment Agreement are triggered, the nonvested stock will vest in accordance with the officers Employment Agreement. The fair value of nonvested shares is determined based on the closing price of our
common stock, as reported by Nasdaq, on the grant date and compensation expense is recognized over the three years of the service period. Compensation expense relating to issuance of nonvested shares was $145,000 and $110,000 for the three months
ended March 31, 2007 and March 31, 2006, respectively.

Stock-based compensation expenses were $489,000 and $357,000 for the three months ended
March 31, 2007 and March 31, 2006, respectively. Stock-based compensation expense is recorded as a component of either cost of goods sold, research and development expense or selling, general and administrative expense. The allocation is
dependent on the expense category where the employee who holds the stock option is assigned. A summary of the stock-based compensation is shown below.



|                                                              |  |                             |     |      |   |    
|------------------------------------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                                              |  | Three MonthsEnded March 31,
|Stock-based compensation expenses included in: (in thousands) |  | 2007                        |     | 2006
|Cost of goods sold                                            |  | $                           | 17  |      | $ | 13 
|Research and development expenses                             |  |                             | 150 |      |   |   
|Selling, general and administrative expenses                  |  |                             | 322 |      |   | 344
|                                                              |  |                             |     |      |   |    
|Total stock-based compensation expenses                       |  | $                           | 489 |      | $ | 357
|                                                              |  |                             |     |      |   |    

Income Taxes

We have incurred net operating losses since our inception and therefore have not paid any federal, state or foreign taxes. We adopted the provision of FIN 48 on January 1, 2007. We have established a valuation allowance to fully
reserve our net deferred tax assets at March 31, 2007 and December 31, 2006 due to the uncertainty of the timing and amount of future taxable income. As of March 31, 2007, we had a net operating loss carryforward of approximately
$131.7 million and an unused research and development credit carryforward of approximately $4.5 million. As a result of the net operating loss carryforwards, our federal statute of limitation remains open for all years since 1990 with no years
currently under examination by the Internal Revenue Service. 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

For the three months ended
March 31, 2007, our net loss was $4.1 million compared to a net loss of $5.4 million for the three months ended March 31, 2006. The loss per share was $0.15 and $0.20 for the three months ended March 31, 2007 and 2006, respectively.
The weighted average common shares outstanding were 27.7 and 27.6 million for the three month periods ended March 31, 2007 and 2006, respectively.



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LIQUIDITY AND CAPITAL RESOURCES

We have limited operating history. We have financed our operations since inception primarily through private and public equity and debt financings, capital equipment and leasehold financing, license and milestone
revenues from corporate collaborations, government grants and interest earned on cash and investments.

Cash and short-term investments decreased by $4.7
million in the three month period ended March 31, 2007 to $46.8 million principally due to funding our net loss.

We used $4.1 million for operating
activities in both three month periods ended March 31, 2007 and March 31, 2006.

We used $4.1 million in our investing activities in the three
months ended March 31, 2007. We had net purchases of investments of $4.0 million and we purchased $141,000 in capital equipment. In the three months ended March 31, 2006, we received approximately $7.7 million from investing activities
principally from net proceeds of $7.7 million from maturities of investments which was partially offset by $97,000 for purchases of capital equipment and leasehold improvements

We used $545,000 in our financing activities in the three months ended March 31, 2007 and $691,000 in the corresponding three month period in 2006. We made principal payments of $562,000 and $851,000 against our
equipment credit facilities in the three months ended March 31, 2007 and March 31, 2006, respectively.

We have funded our operations to date
principally through the sale of our stock and through the issuance of debt. Our expenditures are primarily for research and development and for other operating expenditures, as well as for purchases of capital equipment and for payments on
outstanding indebtedness.

Sales of our common and preferred stock from inception through March 31, 2007 are as follows:



|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|---------------------------------------------------------------- |  | ---------- |  | --------------- |  | --------------- | ------ | --------------------------- | - | ------------------------ |  | ----------
|Summary of all sales of common and convertible preferred stock   |  | Year(s)    |  | Number ofshares |  | Price Per share |        | Net proceeds (in thousands) |   | Equivalent Common shares
|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 
|                                                                 |  |            |  |                 | 
|Sale of common stock (secondary offering)                        |  | 2005       |  | 4,137,902       |  |                 | 4.75   |                             |   | 17,981                   |  | 4,137,902 
|                                                                 |  |            |  |                 | 
|Exercise of options and warrants and other sales of common stock |  |            |  |                 |  |                 |        |                             |   | 2,228                    |  | 1,182,488 
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|                                                                 |  |            |  |                 |  |                 |        |                             | $ | 156,251                  |  | 27,678,203
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           

As of March 31, 2007, 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 March 31, 2007 and the effects such obligations are
expected to have on our liquidity and cash flows in future periods.



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|                                       |  |                 |        |      |   |               |  |               |        |            |   |       |  |   |   
|-------------------------------------- |  | --------------- | ------ | ---- | - | ------------- |  | ------------- | ------ | ---------- | - | ----- |  | - | --
|                                       |  | Payments due in
|Contractual obligations                |  | Total           |        | 2007 |   | 2008 and 2009 |  | 2010 and 2011 |        | After 2011
|                                       |  | (in thousands) 
|Lines of credit (including interest)   |  | $               | 3,897  |      | $ | 1,441         |  | $             | 2,280  |            | $ | 176   |  | $ |  
|Operating leases                       |  |                 | 3,343  |      |   | 647           |  |               | 1,734  |            |   | 942   |  |   | 20
|Open purchase order commitments (1)    |  |                 | 8,243  |      |   | 8,243         |  |               |       |            |   |      |  |   |  
|Convertible notes (including interest) |  |                 | 35,875 |      |   |              |  |               | 35,875 |            |   |      |  |   |  
|                                       |  |                 |        |      |   |               |  |               |        |            |   |       |  |   |   
|Total contractual obligations          |  | $               | 51,358 |      | $ | 10,331        |  | $             | 39,889 |            | $ | 1,118 |  | $ | 20
|                                       |  |                 |        |      |   |               |  |               |        |            |   |       |  |   |   

---

|(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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In December
2006, we entered into a definitive agreement for the sale and issuance of $30 million in aggregate principal amount of unsecured subordinated convertible promissory notes, or the Notes, which are convertible initially into an aggregate of up to
7,334,964 shares of our common stock. The Notes bear interest at 6% per annum. Interest is not payable currently but is accrued and added to the principal on a quarterly basis. Any portion of the Notes and all accrued but unpaid interest which
is not converted is repayable in cash on December 5, 2009. We also issued warrants under this agreement to purchase 1,466,994 shares of our common stock. The notes are convertible into shares at a conversion price of $4.09. The warrants have an
exercise price of $4.09 per share. We received net proceeds of approximately $27.3 million from the sale of the Notes and accompanying warrants after deducting the placement agent fees and offering expenses of $2.7 million. These Notes contain
certain covenants that require us to, among other things, maintain a certain level of cash, restrict amount of indebtedness and restriction on redemption and cash dividends. We were in compliance with all provisions of our convertible notes as of
and for the three months ended March 31, 2007.

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 $6.4 million as of March 31, 2007. We have also continuously reviewed the status of the remaining development milestones and, where appropriate, have renegotiated the development requirement and payment terms. We do not believe that
these renegotiations will have a material adverse effect on our product development or financial position. We expect to receive the remaining $4.1 million in development milestone payments over the next three to five years.

If we do not successfully complete the payment criteria for a given future milestone, we will not receive the applicable milestone payment. If we do not successfully
complete the payment criteria 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 specific 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 the Development
Agreement. In no event, however, would reductions due to missed target dates reduce our proportionate percentage share of net sales for the product specified that we would otherwise be entitled to receive from Veridex for sales of all cell analysis
products by Veridex under the Development Agreement by more than 0.5% in the aggregate. In the case of the CellSearch product related to metastatic breast cancer, we agreed with Veridex that we did not reach a certain development milestone within
the time period specified and therefore we will receive approximately 30% of net sales for this product.

In addition, if we achieve certain levels of
sales of our reagents we may receive up to an additional $10 million in milestone payments from Veridex although we do not expect to receive any milestone payments related to sales goals until at least 2009.

Veridex is responsible under the Development Agreement for obtaining all regulatory clearances, in consultation with us, for these cell analysis products in the field of
cancer.



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We have also 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 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%, as defined in the Development Agreement. 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 Development 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 instrument systems. We anticipate that the majority of our future gross margins and future profits derived under the Development Agreement with Veridex will result
from the sales of reagents and disposables.

We began selling our first cancer in vitro diagnostic product in October 2004. This represents the
beginning of the commercialization phase as defined in the Development Agreement. According to the Development Agreement, license and supply agreement once commercialization begins, 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 the Development Agreement, or to enhance the
cancer-related cell analysis products or sample preparation and cell analysis systems based on our technologies.

The Development Agreement has an initial
term of 20 years and is automatically renewed for three-year terms unless earlier terminated. There are various conditions that allow either party to terminate the Development Agreement, including a material breach by either party or by mutual
agreement. Veridex may also terminate for additional reasons including upon a change of control of us, as defined in the Development Agreement, at any time prior to commercialization of any cell analysis products under the Development Agreement with
or without reason upon 180 days prior written notice, or at any time following commercialization of the first cell analysis product under the Development Agreement with or without reason upon 24 months prior written notice. At this time,
we believe the latter provision is in effect due to initiation of commercialization in 2004. In certain circumstances of termination, Veridex may, at its option, retain certain worldwide rights to sell our cell analysis products if it agrees to pay
us any unpaid license and milestone payments and an ongoing net sales royalty. Johnson and Johnson Development Corporation beneficially own approximately 6% of our common stock and is a wholly-owned subsidiary of Johnson & Johnson, Inc.

In April 2007, we and KREATECH expanded our current research collaboration related to centromere probes, which involve the use of our technologies with
KREATECHs proprietary Universal Linkage System (ULS). Under the new exclusive cross-license agreement, we have provided an exclusive right to KREATECH to utilize certain of our technologies to improve existing KREATECH products and to
manufacture and supply such improved products for sale exclusively by us in North America. We have agreed to make an equity investment in KREATECH up to $1.5 million based on the achievement of certain development milestones as agreed under a
separate investment agreement.

We had $11.7 million in available credit under our credit agreements at both balance sheet dates of March 31, 2007 and
December 31, 2006. The available borrowing capacity under our SVB credit facility was $8.4 million and expires on December 31, 2007. As of March 31, 2007, the available borrowing capacity under our credit facilities with GECC was $3.3
million and will expire June 30, 2007. We were in compliance with all provisions of our various loans as of and for the ended March 31, 2007 and December 31, 2006.The SVB credit agreement contains certain covenants that
require us to, among other things, maintain a certain level of earnings or loss before interest, taxes, depreciation and amortization, maintain a minimum amount of our available funds on deposit with SVB and deliver periodic financial statements and
reports within a prescribed timeframe. The credit agreements with SVB and GECC also restrict our ability to among other things, dispose of property (including intellectual property), change our business, ownership, management or business locations,
merge with or acquire certain other entities, create or incur certain liens or encumbrances on any of its property, incur or amend the terms of certain indebtedness, engage in transactions with affiliates, declare or pay certain dividends or redeem,
retire or purchase shares of any capital stock without their prior approval.



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In December 2006, we signed a definitive license, development,
supply and distribution agreement to develop and commercialize products in the field of clinical virology diagnostics, starting with a panel of multiplex respiratory virus and sexually transmitted infection assays with DHI. The agreement terms are
in effect for a period ending on the fifth anniversary of the commencement of the commercial period and either party may elect to extend the original term for an additional five years. We received an upfront non-refundable license fee of $500,000
and are eligible for an additional $1.0 million upon clearance by the FDA for the first initial product. In addition, in consideration for our performance of our obligations in the development of new products under the agreement, DHI will pay us a
quarterly payment of $200,000 for six fiscal quarters, beginning January 2007. We will manufacture and supply DHI with their requirements of for bulk reagents and DHI will manufacture and supply the detection reagents. We will receive 41% of the
revenue from the sale of these reagents. DHI will act as our distributor for the instrument systems. DHI will be responsible for all expenses for sales and training with respect to products and systems. We received $500,000 for the license fee and
the first $200,000 quarterly payment. In accordance with EITF 00-21, we have evaluated the contract and determined that it has one unit of accounting. The payments received will be amortized over the life of the contract. Therefore, the payments are
amortized over a total of 11 1/2years or the full contract life, including an additional 5 years extension, as
either party can opt to renew.

Based on our operating plans, we believe that our available cash and available borrowings under of lines of credit
will be sufficient to finance operations and capital expenditures until at least March 31, 2008. 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 $46.8 million in cash on hand and short term investments and $11.7 million in available lines of credit as of March 31, 2007. 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 the 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 and this could have a material
adverse effect on our financial condition and operating results.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115, or SFAS 159. SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which
the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and is required to be adopted by
in the first quarter of 2008. We are currently evaluating the effect of SFAS 159 and have not determined impact on our consolidated results of operations and financial condition.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, or SFAS 157. SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors
requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. SFAS 157 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair value, and does not expand the use of fair value in any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after
November 15, 2007 and is required to be adopted by us in the first quarter of 2008. We are currently evaluating the effect of SFAS 157 and have not determined impact on our consolidated results of operations and financial condition.

On July 13, 2006, the FASB issued FASB Interpretation, or FIN, No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No.109, Accounting for Income Taxes, and provides guidance on classification and disclosure requirements for
tax contingencies. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and



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measurement of a tax position taken or expected to be taken in a tax return. This interpretation is effective for fiscal years beginning after
December 15, 2006 and was adopted by us in the first quarter of 2007. See note 11 to our financial statements for further discussion.



|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 were (1) designed to ensure that material information relating to the Company, including its consolidated
subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable
assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the SECs
rules and forms. The information is accumulated and communicated to management to allow timely decisions.

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.

PART II. OTHER INFORMATION



|Item 1A. | Risk Factors.
|-------- | -------------

In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006 and the additional factor set forth below, all of which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K and below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results.

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

We have a limited operating history. We have incurred significant net
losses since we began operations in 1983. As of March 31, 2007, we had an accumulated deficit $146.6 million. These losses have resulted primarily from costs incurred in our research and development programs and from our selling, 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 sufficient 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.



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



|     |  |                                                                                                            
|---- |  | -----------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                               
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                               



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SIGNATURES

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



|                   |  |                       |  |                                                   
|------------------ |  | --------------------- |  | --------------------------------------------------
|                   |  | IMMUNICON CORPORATION
|                   |  |                      
|Date: May 10, 2007 |  | By:                   |  | /s/ BYRON D. HEWETT                               
|                   |  |                       |  | Byron D. Hewett                                   
|                   |  |                       |  | President and Chief Executive Officer             
|                   |  |                       |  | (Principal Executive Officer)                     
|                   |  |                      
|Date: May 10, 2007 |  | 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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EXHIBIT INDEX



|       |  |                                                                                                            
|------ |  | -----------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                
|31.1   |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|31.2   |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                               
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                               



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