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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

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

For the Quarter ended September 30, 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)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is 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 November 2, 2007, there were 27,774,961 shares of Common Stock, $0.001 par value, outstanding.



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##### Table of Contents

IMMUNICON CORPORATION

INDEX



|         |  |                                                                                                                       |  |           
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----------
|         |  |                                                                                                                       |  | PageNumber
|         |  |                                                                                                                      
|PART I.  |  | FINANCIAL INFORMATION                                                                                                 |  |           
|         |  |                                                                                                                      
|Item 1.  |  | Condensed Consolidated Financial Statements (Unaudited):                                                              |  |           
|         |  |                                                                                                                      
|         |  | Condensed Consolidated Balance Sheets:September 30, 2007 and December 31, 2006                                        |  | 3         
|         |  |                                                                                                                      
|         |  | Condensed Consolidated Statements of Operations:Three and nine months ended September 30, 2007 and September 30, 2006 |  | 4         
|         |  |                                                                                                                      
|         |  | Condensed Consolidated Statements of Cash Flows:Nine months ended September 30, 2007 and September 30, 2006           |  | 5         
|         |  |                                                                                                                      
|         |  | Notes to Condensed Consolidated Financial Statements                                                                  |  | 6         
|         |  |                                                                                                                      
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                 |  | 21        
|         |  |                                                                                                                      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 45        
|         |  |                                                                                                                      
|Item 4.  |  | Controls and Procedures                                                                                               |  | 45        
|         |  |                                                                                                                      
|PART II. |  | OTHER INFORMATION                                                                                                     |  |           
|         |  |                                                                                                                      
|Item 1.  |  | Legal Proceedings                                                                                                     |  | 46        
|         |  |                                                                                                                      
|Item 1A. |  | Risk Factors                                                                                                          |  | 46        
|         |  |                                                                                                                      
|Item 6.  |  | Exhibits                                                                                                              |  | 48        

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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##### Table of Contents

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)



|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                             |  | September 30, 2007 |          |   | December 31, 2006 |  
|ASSETS                                                                                                                                                                       |  |                    |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                              |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                    |  | $                  | 23,300   |   |                   | $ | 36,132   |  
|Short term investments                                                                                                                                                       |  |                    | 15,323   |   |                   |   | 15,401   |  
|Receivable from related party                                                                                                                                                |  |                    | 1,120    |   |                   |   | 409      |  
|Accounts receivable, net of allowance of $196,000 and $0 at September 30, 2007 and December 31, 2006, respectively                                                           |  |                    | 1,641    |   |                   |   | 1,402    |  
|Inventory                                                                                                                                                                    |  |                    | 2,978    |   |                   |   | 3,966    |  
|Prepaid assets                                                                                                                                                               |  |                    | 398      |   |                   |   | 613      |  
|Other current assets                                                                                                                                                         |  |                    | 572      |   |                   |   | 861      |  
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                         |  |                    | 45,332   |   |                   |   | 58,784   |  
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Property and equipment, net                                                                                                                                                  |  |                    | 2,795    |   |                   |   | 4,011    |  
|Deferred financing fees                                                                                                                                                      |  |                    | 2,043    |   |                   |   | 2,616    |  
|Other assets                                                                                                                                                                 |  |                    | 835      |   |                   |   | 362      |  
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Total assets                                                                                                                                                                 |  | $                  | 51,005   |   |                   | $ | 65,773   |  
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|                                                                                                                                                                             |  |                   
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Current portion of long-term debt                                                                                                                                            |  | $                  | 1,717    |   |                   | $ | 1,781    |  
|Accounts payable                                                                                                                                                             |  |                    | 4,859    |   |                   |   | 1,743    |  
|Payable to related party                                                                                                                                                     |  |                    | 1,355    |   |                   |   | 792      |  
|Accrued expenses                                                                                                                                                             |  |                    | 4,764    |   |                   |   | 4,304    |  
|Current portion of deferred revenue:                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Related party                                                                                                                                                                |  |                    | 1,228    |   |                   |   | 1,821    |  
|Other                                                                                                                                                                        |  |                    | 329      |   |                   |   | 438      |  
|Detachable warrants                                                                                                                                                          |  |                    | 228      |   |                   |   | 2,181    |  
|Conversion rights related to convertible debt                                                                                                                                |  |                    | 699      |   |                   |   | 9,286    |  
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                    |  |                    | 15,179   |   |                   |   | 22,346   |  
|Convertible subordinated notes, net of discount                                                                                                                              |  |                    | 24,033   |   |                   |   | 20,313   |  
|Long-term debt                                                                                                                                                               |  |                    | 1,750    |   |                   |   | 2,256    |  
|Deferred revenue:                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|Related party                                                                                                                                                                |  |                    | 446      |   |                   |   | 234      |  
|Other                                                                                                                                                                        |  |                    | 944      |   |                   |   | 423      |  
|                                                                                                                                                                             |  |                   
|Shareholders equity:                                                                                                                                                        |  |                    |          |   |                   |   |          |  
|Common stock, $0.001 par value 100,000,000 authorized, 27,714,266 and 27,667,769 shares issued and outstanding as of September 30,
2007 and December 31, 2006, respectively |  |                    | 28       |   |                   |   | 28       |  
|Additional paid in capital                                                                                                                                                   |  |                    | 163,499  |   |                   |   | 162,596  |  
|Accumulated other comprehensive income                                                                                                                                       |  |                    | 31       |   |                   |   | 22       |  
|Accumulated deficit                                                                                                                                                          |  |                    | (154,905 | ) |                   |   | (142,445 | )
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Total shareholders equity                                                                                                                                                   |  |                    | 8,653    |   |                   |   | 20,201   |  
|                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                                                                                   |  | $                  | 51,005   |   |                   | $ | 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 and nine months ended September 30, 2007 and
September 30, 2006

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



|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                  |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |  
|                                                                  |  | 2007                             |            |   | 2006                            |   |            | 2007 |  |   | 2006       |  
|Product revenue:                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Related party                                                     |  | $                                | 2,727      |   |                                 | $ | 659        |      |  | $ | 5,554      |   |  | $ | 1,373      |  
|Third party                                                       |  |                                  | 1,355      |   |                                 |   | 855        |      |  |   | 3,658      |   |  |   | 2,843      |  
|Service revenue                                                   |  |                                  | 588        |   |                                 |   | 283        |      |  |   | 1,767      |   |  |   | 960        |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total product and service revenue                                 |  |                                  | 4,670      |   |                                 |   | 1,797      |      |  |   | 10,979     |   |  |   | 5,176      |  
|                                                                  |  |                                  |            |  
|Milestone, license and other revenue                              |  |                                  | 142        |   |                                 |   | 138        |      |  |   | 409        |   |  |   | 539        |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                     |  |                                  | 4,812      |   |                                 |   | 1,935      |      |  |   | 11,388     |   |  |   | 5,715      |  
|                                                                  |  |                                  |            |  
|Cost of goods sold                                                |  |                                  | 4,106      |   |                                 |   | 1,860      |      |  |   | 10,061     |   |  |   | 5,615      |  
|Cost of services sold                                             |  |                                  | 312        |   |                                 |   | 88         |      |  |   | 885        |   |  |   | 282        |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Gross profit (loss)                                               |  |                                  | 394        |   |                                 |   | (13        | )    |  |   | 442        |   |  |   | (182       | )
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|                                                                  |  |                                  |            |  
|Expenses:                                                         |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                          |  |                                  | 2,645      |   |                                 |   | 3,129      |      |  |   | 8,434      |   |  |   | 9,507      |  
|Selling, general and administrative                               |  |                                  | 6,771      |   |                                 |   | 2,683      |      |  |   | 12,407     |   |  |   | 7,501      |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                          |  |                                  | 9,416      |   |                                 |   | 5,812      |      |  |   | 20,841     |   |  |   | 17,008     |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Operating loss                                                    |  |                                  | (9,022     | ) |                                 |   | (5,825     | )    |  |   | (20,399    | ) |  |   | (17,190    | )
|                                                                  |  |                                  |            |  
|Interest and other income, net                                    |  |                                  | 514        |   |                                 |   | 367        |      |  |   | 1,689      |   |  |   | 1,177      |  
|Change in fair value of detachable warrants and conversion rights |  |                                  | 3,316      |   |                                 |   |           |      |  |   | 10,539     |   |  |   |           |  
|Interest expense                                                  |  |                                  | (1,535     | ) |                                 |   | (98        | )    |  |   | (4,555     | ) |  |   | (314       | )
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Interest and other income, net                                    |  |                                  | 2,295      |   |                                 |   | 269        |      |  |   | 7,673      |   |  |   | 863        |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Loss before income taxes                                          |  |                                  | (6,727     | ) |                                 |   | (5,556     | )    |  |   | (12,726    | ) |  |   | (16,327    | )
|                                                                  |  |                                  |            |  
|Income tax benefit                                                |  |                                  |           |   |                                 |   |           |      |  |   | (266       | ) |  |   |           |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common stockholders                      |  | $                                | (6,727     | ) |                                 | $ | (5,556     | )    |  | $ | (12,460    | ) |  | $ | (16,327    | )
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net loss per common share  basic and diluted                     |  | $                                | (0.24      | ) |                                 | $ | (0.20      | )    |  | $ | (0.45      | ) |  | $ | (0.59      | )
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding  basic and diluted    |  |                                  | 27,714,266 |   |                                 |   | 27,645,607 |      |  |   | 27,699,561 |   |  |   | 27,616,724 |  
|                                                                  |  |                                  |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  

See notes to condensed consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries

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Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended September 30, 2007 and September 30,
2006 (in thousands)



|                                                                                  |  |                                 |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months Ended September 30, |        
|                                                                                  |  | 2007                            |         |   | 2006 |  
|Operating activities:                                                             |  |                                 |         |   |      |   |         |  
|Net loss                                                                          |  | $                               | (12,460 | ) |      | $ | (16,327 | )
|Adjustment to reconcile net loss to net cash used in operating activities:        |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                 | 998     |   |      |   | 1,513   |  
|Non-cash interest expense                                                         |  |                                 | 4,307   |   |      |   |        |  
|Loss on disposal of property and equipment                                        |  |                                 |        |   |      |   | 19      |  
|Provisions for accounts receivable allowances                                     |  |                                 | 196     |   |      |   |        |  
|Compensation expense related to the issuance of stock, stock options and warrants |  |                                 | 800     |   |      |   | 1,358   |  
|Change in fair value of liabilities potentially settled in common stock           |  |                                 | (10,539 | ) |      |   |        |  
|Change in:                                                                        |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                 | (435    | ) |      |   | 360     |  
|Accounts receivable from related party                                            |  |                                 | (711    | ) |      |   | 28      |  
|Inventory                                                                         |  |                                 | 988     |   |      |   | (1,307  | )
|Prepaid expenses and other                                                        |  |                                 | 215     |   |      |   | (21     | )
|Other assets                                                                      |  |                                 | 326     |   |      |   | 33      |  
|Accounts payable                                                                  |  |                                 | 3,117   |   |      |   | 111     |  
|Accounts payable to related parties                                               |  |                                 | 473     |   |      |   | 766     |  
|Accrued expenses                                                                  |  |                                 | 549     |   |      |   | 420     |  
|Deferred revenue from related parties                                             |  |                                 | (382    | ) |      |   | 142     |  
|Deferred revenue                                                                  |  |                                 | 412     |   |      |   | 101     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in operating activities                                             |  |                                 | (12,146 | ) |      |   | (12,804 | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Investing activities:                                                             |  |                                 |         |   |      |   |         |  
|Purchase of investments                                                           |  |                                 | (33,326 | ) |      |   | (20,882 | )
|Payments for purchases of property and equipment                                  |  |                                 | (229    | ) |      |   | (710    | )
|Payments for license agreements                                                   |  |                                 | (464    | ) |      |   |        |  
|Payments for Kreatech Preferred Stock                                             |  |                                 | (52     | ) |      |   |        |  
|Proceeds from maturities of investments                                           |  |                                 | 33,851  |   |      |   | 30,639  |  
|Proceeds from disposal of property and equipment                                  |  |                                 |        |   |      |   | 176     |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash (used in)/provided by investing activities                               |  |                                 | (220    | ) |      |   | 9,223   |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Financing activities:                                                             |  |                                 |         |   |      |   |         |  
|Proceeds from term debt                                                           |  |                                 | 920     |   |      |   | 707     |  
|Proceeds from exercise of stock options and stock purchase plan                   |  |                                 | 104     |   |      |   | 166     |  
|Payments on term debt                                                             |  |                                 | (1,490  | ) |      |   | (2,259  | )
|Loan issue fees                                                                   |  |                                 | (8      | ) |      |   |        |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Net cash used in financing activities                                             |  |                                 | (474    | ) |      |   | (1,386  | )
|                                                                                  |  |                                 |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                           |  |                                 | 8       |   |      |   | 7       |  
|Net decrease in cash and cash equivalents                                         |  |                                 | (12,840 | ) |      |   | (4,967  | )
|Cash and cash equivalents, beginning of period                                    |  |                                 | 36,132  |   |      |   | 21,900  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                               | 23,300  |   |      | $ | 16,940  |  
|                                                                                  |  |                                 |         |   |      |   |         |  
|Supplemental cash flow information:                                               |  |                                 |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $                               | 254     |   |      | $ | 323     |  
|                                                                                  |  |                                 |         |   |      |   |         |  

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 September 30, 2007 and results of operations and cash flows for the three
and nine month periods ended September 30, 2007 and September 30, 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 and nine months ended September 30, 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, 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. 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. In the event of default, the holders of the Notes may require us to redeem all or any
portion of the Notes.

We are highly dependent on our collaboration with Veridex, LLC, or Veridex, a Johnson & Johnson company, for all
commercialization functions related to our cancer diagnostic products including dependence on Veridex for all sales and marketing of these products. On May 31, 2007 we announced that we had filed a Demand for Arbitration against Veridex
pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products, rescission of all licenses currently held by Veridex under that agreement, and compensatory and
punitive damages based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products. (See Footnote 9, Commitments and
contingencies.)

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 to market our cancer diagnostic product candidates, the ongoing arbitration proceeding with Veridex given such dependence, 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, convertible debt covenants and other risks related to



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Immunicon Corporation and Subsidiaries

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governmental regulations. We believe, however, that cash, cash equivalents and short term investments available at September 30, 2007 will be sufficient
to maintain operations through at least September 30, 2008.

Recent Accounting Pronouncements

In June 2007, the Financial Accounting Standards Board, or FASB, ratified the consensus reached by the Emerging Issues Task Force on Issue No. 07-3,
Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities, orEITF 07-3. Pursuant to EITF 07-3, nonrefundable advance payments for goods or services that will be used or
rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or services are performed, or when the goods or services are no longer
expected to be received. EITF 07-3 is effective for the fiscal years beginning after December 15, 2007 and is to be applied prospectively for contracts entered into on or after the effective date. We are in the process of determining the impact
that EITF 07-3 will have on its financial condition or results of operations.

In February 2007, the 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 us in the first quarter of 2008. We are currently evaluating the effect of SFAS 159 and have not determined the 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
the 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 5,016,667 shares of our common stock for issuance under the Plan and have 480,148 available for grant as of September 30, 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. Stock-based compensation expense related to our share-based awards was $457,000 and $502,000 for the three months ended September 30, 2007
and September 30, 2006, respectively, and $800,000 and $1.4 million for the nine months ended September 30, 2007 and September 30, 2006, 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 400,000 shares of our common stock for issuance under our ESPP and issued 141,716 shares under this plan as of September 30, 2007. The next purchase date will be in October 2007. As a result of our adopting FAS123R, we
have expensed these grants and recorded them as stock based compensation.



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In January, Edward L. Erickson, our former Chairman of the
Board, announced that he was not seeking re-election to our board of directors. Therefore effective June 12, 2007, Mr. Erickson was no longer a member of our Board. Consistent with the terms of the Plan, all of Mr. Ericksons
unvested options and nonvested shares were cancelled on that date. Mr. Erickson had been granted performance based stock options before our IPO in April 2004 and before the provisions of SFAS 123R became effective. We therefore had accounted
for these stock awards under the provisions of Accounting Principle Board Opinion No. 25, Accounting for Stock Options Issued to Employees. We have been recording compensation expense in the category Stock Options granted prior to
our IPO at below fair market value shown below. As a result of these options and nonvested shares being forfeited, we had to adjust the expense of $648,000 relating to the unvested portion of these options and nonvested shares in the second
quarter.

The stock-based compensation (income) and expense consisted of the following:



|                                                                  |  |                                  |     |                                 |   |      |  |   |      |   |  |   |      
|----------------------------------------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | - | ---- | - |  | - | -----
|                                                                  |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|(in thousands)                                                    |  | 2007                             |     | 2006                            |   | 2007 |  |   | 2006
|Stock options under SFAS 123R                                     |  | $                                | 223 |                                 | $ | 248  |  | $ | 694  |   |  | $ | 549  
|Nonvested shares                                                  |  |                                  | 149 |                                 |   | 110  |  |   | 453  |   |  |   | 329  
|Stock Options granted prior to our IPO at below fair market value |  |                                  | 85  |                                 |   | 144  |  |   | (347 | ) |  |   | 480  
|                                                                  |  |                                  |     |                                 |   |      |  |   |      |   |  |   |      
|Stock based compensation                                          |  | $                                | 457 |                                 | $ | 502  |  | $ | 800  |   |  | $ | 1,358
|                                                                  |  |                                  |     |                                 |   |      |  |   |      |   |  |   |      

Stock-based compensation recorded in the three and nine months ended September 30, 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. 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. 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 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 nine months ended September 30, 2007 and 2006
were as follows:



|                             |  |                   |   |  |                   |  
|---------------------------- |  | ----------------- | - |  | ----------------- | -
|                             |  | September 30,2007 |   |  | September 30,2006 |  
|Dividend yield               |  |                  | % |  |                  | %
|Volatility                   |  | 58.95% - 61.26    | % |  | 57.12% - 60.74    | %
|Weighted average volatility  |  | 60.92             | % |  | 59.37             | %
|Risk-free interest rate      |  | 4.28% - 5.09      | % |  | 4.32% to 5.22     | %
|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



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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. 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 EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|(in thousands, except for shares)                                     |  | 2007                            |            |   | 2006                           |   |            | 2007 |  |   | 2006       |  
|Numerator:                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                              |  | $                               | (6,727     | ) |                                | $ | (5,556     | )    |  | $ | (12,460    | ) |  | $ | (16,327    | )
|                                                                      |  |                                 |            |  
|Denominator:                                                          |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average shares outstanding used for basic income per share   |  |                                 | 27,714,266 |   |                                |   | 27,645,607 |      |  |   | 27,699,561 |   |  |   | 27,616,724 |  
|Common stock equivalents                                              |  |                                 |           |   |                                |   |           |      |  |   |           |   |  |   |           |  
|                                                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average shares outstanding used for diluted income per share |  |                                 | 27,714,266 |   |                                |   | 27,645,607 |      |  |   | 27,699,561 |   |  |   | 27,616,724 |  
|                                                                      |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

Potentially dilutive securities as of September 30, 2007 and September 30, 2006, which are not included
in our basic earnings per share, are summarized as follows:



|                                                    |  |                     |  |          
|--------------------------------------------------- |  | ------------------- |  | ---------
|                                                    |  | As of September 30,
|                                                    |  | 2007                |  | 2006     
|Common stock options and nonvested shares           |  | 4,042,049           |  | 3,703,810
|Warrants                                            |  | 1,509,163           |  | 42,169   
|Shares issuable upon conversion of convertible debt |  | 7,704,055           |  |         

(4) Inventory

Inventory consisted of the following:



|                |  |                    |       |                   |   |      
|--------------- |  | ------------------ | ----- | ----------------- | - | -----
|(in thousands)  |  | September 30, 2007 |       | December 31, 2006
|Raw materials   |  | $                  | 976   |                   | $ | 1,652
|Finished goods  |  |                    | 1,974 |                   |   | 2,301
|Work-in-process |  |                    | 28    |                   |   | 13   
|                |  |                    |       |                   |   |      
|Inventory       |  | $                  | 2,978 |                   | $ | 3,966
|                |  |                    |       |                   |   |      



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(5) Property and equipment

Property and equipment consisted of the following:



|                               |  |                    |        |   |                   |   |        |  
|------------------------------ |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|(in thousands)                 |  | September 30, 2007 |        |   | December 31, 2006 |  
|Laboratory equipment           |  | $                  | 2,883  |   |                   | $ | 2,862  |  
|Office furniture and equipment |  |                    | 875    |   |                   |   | 875    |  
|Leasehold improvements         |  |                    | 5,197  |   |                   |   | 5,165  |  
|Manufacturing equipment        |  |                    | 1,113  |   |                   |   | 974    |  
|Computer equipment             |  |                    | 888    |   |                   |   | 1,074  |  
|                               |  |                    |        |   |                   |   |        |  
|Property and equipment, gross  |  |                    | 10,956 |   |                   |   | 10,950 |  
|Less Accumulated depreciation  |  |                    | (8,161 | ) |                   |   | (6,939 | )
|                               |  |                    |        |   |                   |   |        |  
|Property and equipment, net    |  | $                  | 2,795  |   |                   | $ | 4,011  |  
|                               |  |                    |        |   |                   |   |        |  

Depreciation expense was $399,000 and $471,000 for three months ended September 30, 2007 and
September 30, 2006, respectively. Depreciation expense was $1.3 million and $1.7 million for the nine months ended September 30, 2007 and September 30, 2006, respectively.

(6) Accrued expenses

Accrued expenses consisted of the following:



|                                  |  |                    |       |                   |   |      
|--------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|(in thousands)                    |  | September 30, 2007 |       | December 31, 2006
|Salaryrelated expense            |  | $                  | 1,395 |                   | $ | 1,748
|Clinical research and trial costs |  |                    | 587   |                   |   | 782  
|Contracted research costs         |  |                    | 80    |                   |   | 216  
|Accounting and legal fees         |  |                    | 1,774 |                   |   | 270  
|Debt financing                    |  |                    |      |                   |   | 196  
|Other                             |  |                    | 928   |                   |   | 1,092
|                                  |  |                    |       |                   |   |      
|Accrued expenses                  |  | $                  | 4,764 |                   | $ | 4,304
|                                  |  |                    |       |                   |   |      

(7) Debt

Convertible subordinated notes payable



|                                                                                                       |  |                    |        |                   |   |       
|------------------------------------------------------------------------------------------------------ |  | ------------------ | ------ | ----------------- | - | ------
|Classification:                                                                                        |  | September 30, 2007 |        | December 31, 2006
|Current liabilities                                                                                    |  |                    |        |                   |   |       
|Detachable warrants                                                                                    |  | $                  | 228    |                   | $ | 2,181 
|Conversion rights relating to convertible debt                                                         |  |                    | 699    |                   |   | 9,286 
|                                                                                                       |  |                   
|Long term liability                                                                                    |  |                    |        |                   |   |       
|Convertible subordinated notes payable due in December 2009 at interest rate of 6.00%, net of discount |  |                    | 24,033 |                   |   | 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



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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. In the event of default, the holders of the Notes may require us to redeem all or any portion of the Notes. We were in
compliance with all provisions of the Notes, including the available cash test, as of September 30, 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 and nine month periods ended September 30, 2007, we have recorded non-cash interest expense relating to the discount of $789,000 and $2.3 million, respectively.

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. For the three and nine month periods ended September 30, 2007, we have recorded credits in the statement of operations of $2.7 million and $8.6 million, respectively,
relating to these changes in fair value for the conversion right.

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. The warrants are also marked to market and the change in
fair value is recorded in the statement of operations as Change in fair value of the detachable warrants and conversion right. For the three and nine month periods ended September 30, 2007, we have recorded credits in the statement
of operations of $594,000 and $1.9 million, respectively relating to these changes in fair value for the detachable warrants.

Other debt outstanding

As of September 30, 2007, we had an aggregate of $3.5 million of debt outstanding with two lending institutions, $2.6 million to Silicon Valley
Bank, or SVB, and $827,000 to General Electric Capital Corporation, or GECC, as described below. The carrying value of this debt is as follows:



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|                                                                                                                            |  |                    |        |   |                   |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|(in thousands)                                                                                                              |  | September 30, 2007 |        |   | December 31, 2006 |  
|Line of credit due to SVB - principal due from October 2007 to December 2010 at interest rates of 8.25%                     |  | $                  | 2,640  |   |                   | $ | 2,462  |  
|Line of credit due to GECC - principal due from October 2007 to October 2010 at interest rates ranging from 8.78% to 11.05% |  |                    | 827    |   |                   |   | 1,575  |  
|                                                                                                                            |  |                    |        |   |                   |   |        |  
|                                                                                                                            |  |                    | 3,467  |   |                   |   | 4,037  |  
|Less: current portion of long-term debt                                                                                     |  |                    | (1,717 | ) |                   |   | (1,781 | )
|                                                                                                                            |  |                    |        |   |                   |   |        |  
|Longterm debt                                                                                                              |  | $                  | 1,750  |   |                   | $ | 2,256  |  
|                                                                                                                            |  |                    |        |   |                   |   |        |  

As of December 31, 2006, interest rates in effect for outstanding obligations under the credit facilities
ranged from 8.75% to 11.05%.

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 as of September 30, 2007. As of September 30, 2007, we had $7.4 million in available credit under our SVB credit facility. The availability under
our SVB credit facility will expire on December 31, 2007. The $3.3 million availability under our GECC credit facility expired on June 30, 2007. We do not intend to extend the availability of the GECC credit facility.

(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. The following table consists of the customers from which we derived more than 10% of our revenue:



|          |  |                                  |   |  |                                 |   |  |      |   |  |      |  
|--------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ---- | - |  | ---- | -
|          |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|Customers |  | 2007                             |   |  | 2006                            |   |  | 2007 |   |  | 2006 |  
|Veridex   |  | 58.9                             | % |  | 40.5                            | % |  | 51.2 | % |  | 33.1 | %
|Pfizer    |  |                                 |   |  | 12.4                            | % |  |     |   |  | 14.7 | %

Our revenue by geographical region is as follows:



|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |      
|------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ------ |  | - | -----
|                         |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|(in thousands)           |  | 2007                             |       | 2006                            |   | 2007  |  | 2006
|United States            |  | $                                | 2,789 |                                 | $ | 1,859 |  | $    | 7,502  |  | $ | 4,397
|France                   |  |                                  | 976   |                                 |   | 1     |  |      | 1,139  |  |   | 3    
|Other European countries |  |                                  | 703   |                                 |   | 63    |  |      | 1,903  |  |   | 1,000
|Other foreign countries  |  |                                  | 344   |                                 |   | 12    |  |      | 844    |  |   | 315  
|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |      
|Total revenue            |  | $                                | 4,812 |                                 | $ | 1,935 |  | $    | 11,388 |  | $ | 5,715
|                         |  |                                  |       |                                 |   |       |  |      |        |  |   |      



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(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
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. As stated throughout this report, the Development Agreement is currently subject to arbitration between Veridex and us. (See Veridex Arbitrationbelow.)

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 viruses 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, we and DHI will use our 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, which began 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. As of September 30, 2007, we are still in the developing phase of this agreement. 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 $24,000 and $59,000 in contract revenue for the three and nine month periods
ended September 30, 2007, respectively.

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



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$71,000. In April 2007, we and Kreatech expanded our current research collaboration. See footnote 12,Related Parties for further information. As a
result of our new Cross-License Agreement with Kreatech, the old license fee was fully amortized.

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, or 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 are 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 September 30, 2007, we have received the entire grant proceeds and paid Fox Chases portion of the grant. We recorded our portion of the grant
receipts as a reduction of research and development expense.

We entered a 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. We recorded $4,000 and $2,000 for the royalty payments in costs of goods sold for the three months ended September 30, 2007 and September 30, 2006, respectively, and recorded $10,000
and $5,000 for the nine month periods ended September 30, 2007 and September 30, 2006, respectively. 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 September 30, 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.

Veridex Arbitration

On May 31, 2007, we
announced that we had filed a Demand for Arbitration against Veridex pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products and rescission of all
licenses currently held by Veridex under that agreement, based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products.
We are also seeking monetary damages including compensatory damages of $220.2 to $254.2 million and punitive damages of $480 million.

Under the current
agreement, Veridex is appointed as exclusive sales agent, licensee and distributor responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits to us. In the arbitration, we allege, among other
things, that Veridex breached its obligation to use its best efforts to market those products and thereafter reneg(ing) on its express commitment to engage and deploy sales representatives to personally promote, or
detail, the Immunicon Products to doctors. We further allege, (w)hile seriously damaging to us and to our shareholders, Veridexs actions are depriving cancer patients - who are in severe need of the best treatment and
testing - and their doctors of our FDA-cleared cancer diagnostic tests.

The agreement provides that the arbitration will take place before a single
arbitrator and that an award must be rendered within six months of the selection of the arbitrator. It is anticipated that this arbitration will be completed before the end of the first quarter of 2008.



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We also announced that we had discontinued our previously-disclosed contract audit following receipt of
Veridexs response to the audit demand. We further allege in the arbitration that Veridex refused outright to permit a meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon
Products, and erected a series of other roadblocks to a meaningful audit.

On May 25, 2007, after Veridex was informed that we were
discontinuing the audit and that we intended to file claims against it, Veridex sent us a notification asserting that we were in material breach of the current agreement. We believe that Veridexs assertion is without merit. We have
recorded approximately $4.5 million in legal fees associated with this action in the three months ended September 30, 2007 and $5.4 million in legal fees associated with this action in the nine months ended September 30, 2007.

In response to our arbitration demand, Veridex has filed an answer and counterclaim wherein it asserts, among other things, that Immunicon has failed to perform its
development, manufacturing and quality assurance obligations pursuant to the Development Agreement and has violated Veridexs exclusive right to sell Immunicon products. Veridexs counterclaim originally claimed damages of $35.6 million.
In a revised claim dated October 19, 2007, Veridex revised its claim and now seeks damages of $168 million for alleged breach of its obligation to refrain from selling products in the Field of Cancer except through Veridex. We
believe that Veridexs counterclaim, including its claim for damages, is without merit and therefore have not provided any reserve for any potential damages.

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.

Changes in accrued product warranty expense are as follows:



|                        |  |                                      |     |   |                              |   |     |  
|----------------------- |  | ------------------------------------ | --- | - | ---------------------------- | - | --- | -
|(in thousands)          |  | Nine Months Ended September 30, 2007 |     |   | Year Ended December 31, 2006 |  
|Beginning of the period |  | $                                    | 64  |   |                              | $ | 78  |  
|Additions               |  |                                      | 35  |   |                              |   | 62  |  
|Claims                  |  |                                      | (30 | ) |                              |   | (76 | )
|                        |  |                                      |     |   |                              |   |     |  
|Ending of the period    |  | $                                    | 69  |   |                              | $ | 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, we reimbursed Mr. Hewett $67,000 for the costs on the purchase of his new home and the moving expenses in December 2006.

In addition, we have reimbursed Mr. Hewett for costs associated with the search for and closing on the purchase of his new home along with the associated costs for
shipment of his household goods. 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.



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The relocation company sold the New York residence in August 2007 and total closing costs including any loss on the
sale and management fee from the relocation company was settled in September 2007. We recorded total relocation expense of $74,000 and $417,000 in 2007 and 2006, respectively.

Facility and operating leases

We currently lease approximately 46,945 square feet of office and laboratory
space in Huntingdon Valley, Pennsylvania which is adequate to support commercialization. The lease expires on January 31, 2012 although we can elect to terminate the lease at any time, 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 the three and nine month periods ended September 30, 2007
and September 30, 2006 was $232,000 and $695,000, and $227,000 and $733,000, respectively.

Future minimum lease payments under the operating leases
as of September 30, 2007 are as follows:



|                             |  |           |      
|---------------------------- |  | --------- | -----
|(in thousands)               |  | Operating
|2007                         |  | $         | 214  
|2008                         |  |           | 864  
|2009                         |  |           | 871  
|2010                         |  |           | 709  
|2011 and thereafter          |  |           | 253  
|                             |  |           |      
|Total minimum lease payments |  | $         | 2,911
|                             |  |           |      

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

Amended and Restated Equity
Compensation Plan

In June 2007, our stockholders approved an amendment to the Companys Amended and Restated Equity Compensation Plan, or the
Plan, to increase by 250,000 shares the number of shares of common stock authorized for issuance or transfer under the Plan and approved the entire Plan, as amended. As such, on September 30, 2007, the total number of shares of common stock
authorized for issuance or transfer under the Plan was 5,016,667. Our stockholders also approved an amendment to the Immunicon Corporation 2004 Employee Stock Purchase Plan, or the ESPP, to increase by 200,000 shares the number of shares of common
stock authorized for issuance or transfer under the ESPP and approved the entire ESPP, as amended. As of September 30, 2007, the total number of shares of common stock authorized for issuance under the ESPP was 400,000.

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).



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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 or the stock options
are fully vested, except as provided by such officers Employment Agreement with us, the shares of nonvested stock and stock options that are not then vested will be forfeited. If the provisions of the officers Employment Agreement are
triggered, the nonvested stock and stock options will vest in accordance with the officers Employment Agreement.

Grants

In September 2007, our Board of Directors (the Board) authorized and issued stock option grants to our officers and employees under the Plan. The Board
determined that option grants to all employees were appropriate as a means of promoting long term employment within our organization. In total, the Board awarded grants of 712,000 stock options which vest over the next four years on the anniversary
of the grant date. We used the closing price of our common stock on the grant date to price these options. The fair value of these options at the date of grant was $355,000 and we expensed $3,000 as of September 30, 2007.

In January 2007, our Board made nonvested stock grants to the non-employee directors of the Board and to certain officers of the Company. The non-employee 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 the 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 $149,000 and $110,000 for the three months ended September 30, 2007 and September 30, 2006, respectively and $453,000 and $329,000 for the nine months ended September 30, 2007 and September 30, 2006, respectively.

(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 September 30, 2007 and December 31, 2006 due to the uncertainty of the timing and amount of future
taxable income. As of December 31, 2006, we had a net operating loss carryforward of approximately $127.5 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 and expires through 2027. 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.

In 2007, we received notification from
the state of Pennsylvania that we were approved to assign research and development credit to another company and we have recorded a credit to deferred state income tax benefit in the second quarter of 2007. We received a cash payment of $266,000 for
our assignment in July 2007.

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.

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 nine months ended September 30, 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



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unrecognized tax benefit will change significantly within the next twelve months. As a result of the FIN 48 adjustment, our unused research and development
credit carryforward was approximately $4.3 million at December 31, 2006.

(12) Related parties

In April 2007, we entered into a new agreement with Kreatech (Cross-License Agreement) wherein which the terms and conditions of this initial agreement were
terminated and the research collaboration was expanded. Under the 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 in exchange for the exclusive right to sell these products in North America. As a result of the new Cross-License Agreement, the old license fee was fully amortized.

In accordance with the provisions of the Cross-License Agreement, we have agreed to make a $500,000 payment to Kreatech if we are successful in obtaining FDA clearance
of any product developed under the Cross-License Agreement. We have agreed to make an additional $500,000 payment once we have achieved aggregate sales of $10 million in North America for the products developed under the Cross-License Agreement. The
initial term of the Cross-License Agreement is ten years with an automatic extension of ten years subject to certain conditions. Therefore we will amortize the value ascribed to the Cross-License Agreement over 20 years.

We simultaneously entered into a Stock Purchase Agreement where we agreed to purchase Kreatech Series D Preferred Stock. Upon signing the Stock Purchase Agreement and
the Cross-License agreement, we paid Kreatech $500,000 and received 1.7 million shares of Series D Preferred Stock. We have agreed to make additional payments which will total approximately $1.0 million based on the achievement by Kreatech of
certain development milestones. We expect that these milestones will be achieved before the end of 2007. We made a milestone payment of $250,000 in October 2007 as Kreatech met the feasibility requirements for payment.

We performed various analyses including estimates of future cash flow and other analyses to determine the allocation of the value of the cash paid to Kreatech between
the cross-license and the Series D Preferred Stock. Based on these analyses we determined that we would allocate 90% of the fair value to the cross-license and 10% to the Series D Preferred Stock. The portion allocated to the Cross-License will be
amortized over the license period which we deem to be 20 years.

As of September 30, 2007, the balance related to the Series D Preferred Stock and the
Cross-License were $52,000 and $453,000, respectively. We have recorded the investment and the Cross-License in our consolidated balance sheet under the caption of Other Assets. We recorded amortization expense of $9,000 and $12,000 related to the
Cross-License in the statement of operations for the three months and nine months ended September 30, 2007, respectively.

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. As stated earlier, the Development Agreement is currently subject to arbitration between Veridex and us. See footnote 9, Commitment and Contingencies, for more discussion.

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



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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 $6.9 million in license
and milestone payments under the terms of the Development Agreement from inception to September 30, 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 June 30, 2011. We continuously review the status of the remaining development milestones and, where appropriate, have renegotiated the development requirement and payment terms. Subject to the outcome of the
arbitration between Veridex and us, we expect to receive the remaining $3.6 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 and nine month periods ended September 30, 2007 and September 30, 2006:



|                                                  |  |                                  |       |                                 |   |      |  |      |       |  |   |      
|------------------------------------------------- |  | -------------------------------- | ----- | ------------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                                                  |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|(in thousands)                                    |  | 2007                             |       | 2006                            |   | 2007 |  | 2006
|Contract and milestone revenue from related party |  | $                                | 118   |                                 | $ | 37   |  | $    | 303   |  | $ | 537  
|Product revenue from related party                |  |                                  | 2,727 |                                 |   | 659  |  |      | 5,554 |  |   | 1,373
|                                                  |  |                                  |       |                                 |   |      |  |      |       |  |   |      
|                                                  |  | $                                | 2,845 |                                 | $ | 796  |  | $    | 5,857 |  | $ | 1,910
|                                                  |  |                                  |       |                                 |   |      |  |      |       |  |   |      

(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 EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|(in thousands)                   |  | 2007                            |       | 2006                           |   | 2007  |  | 2006
|Salaries, benefits and taxes     |  | $                               | 1,728 |                                | $ | 1,742 |  | $    | 5,410 |  | $ | 4,853
|Laboratory supplies and expenses |  |                                 | 221   |                                |   | 117   |  |      | 611   |  |   | 478  
|Instrument development costs     |  |                                 | 14    |                                |   | 131   |  |      | 207   |  |   | 543  
|Clinical trial expense           |  |                                 | 119   |                                |   | 240   |  |      | 491   |  |   | 1,020
|Contracted research costs        |  |                                 | 196   |                                |   | 190   |  |      | 570   |  |   | 454  
|Depreciation expense             |  |                                 | 262   |                                |   | 290   |  |      | 816   |  |   | 936  
|All others                       |  |                                 | 105   |                                |   | 419   |  |      | 329   |  |   | 1,223
|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |      
|                                 |  | $                               | 2,645 |                                | $ | 3,129 |  | $    | 8,434 |  | $ | 9,507
|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |      



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Selling, general and administrative expenses

Selling, general and administrative expenses consisted of the following:



|                             |  |                                 |       |                                |   |       |  |      |        |  |   |      
|---------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                             |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|(in thousands)               |  | 2007                            |       | 2006                           |   | 2007  |  | 2006
|Salaries, benefits and taxes |  | $                               | 1,393 |                                | $ | 1,646 |  | $    | 3,874  |  | $ | 4,406
|Depreciation expense         |  |                                 | 27    |                                |   | 37    |  |      | 89     |  |   | 240  
|Legal and professional fees  |  |                                 | 4,878 |                                |   | 556   |  |      | 6,935  |  |   | 1,545
|Commission                   |  |                                 | 144   |                                |   | 128   |  |      | 460    |  |   | 319  
|All others                   |  |                                 | 329   |                                |   | 316   |  |      | 1,049  |  |   | 991  
|                             |  |                                 |       |                                |   |       |  |      |        |  |   |      
|                             |  | $                               | 6,771 |                                | $ | 2,683 |  | $    | 12,407 |  | $ | 7,501
|                             |  |                                 |       |                                |   |       |  |      |        |  |   |      

As discussed in footnote 9, in May 2007, we announced that we had filed a Demand for Arbitration against Veridex,
pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products, rescission of all licenses currently held by Veridex under that agreement, and compensatory and
punitive damages based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products. We have recorded approximately $4.5
million in legal fees associated with this action in the three months ended September 30, 2007 and $5.4 million in legal fees associated with this action in the nine months ended September 30, 2007.



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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, as well as our ongoing
arbitration with Veridex, research, development and sales based milestones and related payments from Veridex, expansion of research and development activities and increases in research and development costs, instrument system and platform
improvement activities and costs, 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 and uncertainties associated with our dependence on Veridex, the outcome of the arbitration proceeding with Veridex given such dependence, 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 the development 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, 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.



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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 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 diagnostic 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 outcome of the arbitration proceeding with Veridex given such dependence, 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 lines of credit at September 30, 2007 will be sufficient to maintain
operations through at least September 30, 2008.

Veridex collaboration and Immunicon demand for arbitration

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. Future milestone
payments will be subject to the outcome of the arbitration between Veridex and us. 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 metastatic 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. In June 2007, Veridex filed an application seeking 510(k) clearance from the FDA for in vitrodiagnostic use of the
CellSearch CTC kit for the management of metastatic colorectal cancer, and as such, Veridex paid us $500,000 for meeting this development milestone. Also, in January 2007, we announced that we had met 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 by the end of 2007 for in vitrodiagnostic use of the CellSearch CTC kit for the management of
metastatic prostate cancer. 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.

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. As part of our efforts to better understand this declining growth rate, in April 2007, we notified Veridex of our intention to exercise our right to conduct a contract audit to ensure that Veridex was complying with its
obligations under the Development Agreement.

On May 31, 2007, we announced that we had filed a Demand for Arbitration against Veridex pursuant to
which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products and rescission of all licenses currently held by Veridex under that agreement, based on repudiation and
fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products. We are also seeking monetary damages including compensatory damages of $220.2 to $254.2
million and punitive damages of $480 million.

Under the current agreement, Veridex is appointed as exclusive sales agent, licensee and distributor
responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits to us. In the arbitration, we allege, among other things, that Veridex breached its obligation to use its best efforts to
market those products and thereafter reneg(ing) on its express commitment to engage and deploy sales representatives to personally promote, or detail, the Immunicon Products to doctors. We



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further allege, (w)hile seriously damaging to us and to our shareholders, Veridexs actions are depriving cancer patients - who are in severe need
of the best treatment and testing - and their doctors of our FDA-cleared cancer diagnostic tests.

The agreement provides that the arbitration will
take place before a single arbitrator and that an award must be rendered within six months of the selection of the arbitrator. It is anticipated that this arbitration will be completed before the end of the first quarter of 2008.

We also announced that we had discontinued our previously-disclosed contract audit following receipt of Veridexs response to the audit demand. We further allege in
the arbitration that Veridex refused outright to permit a meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon Products, and erected a series of other roadblocks to a meaningful
audit.

On May 25, 2007, after Veridex was informed that we were discontinuing the audit and that we intended to file claims against it, Veridex
sent us a notification asserting that we were in material breach of the current agreement. We believe that Veridexs assertion is without merit. We have recorded approximately $4.5 million in legal fees associated with this action
in the three months ended September 30, 2007 and $5.4 million in legal fees associated with this action in the nine months ended September 30, 2007.

In response to our arbitration demand, Veridex has filed an answer and counterclaim wherein it asserts, among other things, that Immunicon has failed to perform its development, manufacturing and quality assurance obligations pursuant to
the Development Agreement and has violated Veridexs exclusive right to sell Immunicon products. Veridexs counterclaim originally claimed damages of $35.6 million. In a revised claim dated October 19, 2007 Veridex revised its claim
and now seeks damages of $168 million for alleged breach of its obligation to refrain from selling products in the Field of Cancer except through Veridex. We believe that Veridexs counterclaim, including its claim for damages,
is without merit and therefore have not provided any reserve for any potential damages.

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 and through our manufacturing subcontractors to
satisfy commercial demand through at least the end of 2008. Veridex is responsible for filling and packaging costs for the reagents, as well as sales, marketing, distribution, customer and technical support and field service of our cancer products,
including instrumentation. We have retained worldwide commercialization rights to all non-cancer applications of our technologies.

The pace and outcome of
both our commercialization efforts and clinical development programs are difficult to predict. As a result of these factors as well as the uncertainty associated with the ongoing arbitration we anticipate that our quarterly results will fluctuate
for the foreseeable future. In view of this variability, our limited operating history and the uncertainty associated with the arbitration, we believe that future operating results are highly uncertain and 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.

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,
which began 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. As of September 30, 2007, we are still in the developing phase of this agreement. In accordance
with EITF 00-21, we have evaluated the contract and



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determined that it has one unit of accounting. As of September 30, 2007 DHI has paid us $1.1 million under this agreement. 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.

Kreatech Biotechnology

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 $71,000. In April 2007 we entered into a new agreement with Kreatech (Cross-License Agreement) wherein which the terms and conditions of this initial agreement were terminated and
the research collaboration was expanded. Under the 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 in exchange for the exclusive right to sell these products in North America. As a result of the new Cross-License Agreement, the old license fee was fully amortized.

In accordance with the provisions of the Cross-License Agreement, we have agreed to make a $500,000 payment to Kreatech if we are successful in obtaining FDA clearance of any product developed under the Cross-License
Agreement. We have agreed to make an additional $500,000 payment once we have achieved aggregate sales of $10 million in North America for the products developed under the Cross-License Agreement. The initial term of the Cross-License Agreement is
ten years with an automatic extension of ten years subject to certain conditions. Therefore, we will amortize the value ascribed to the Cross-License Agreement over 20 years.

We simultaneously entered into a Stock Purchase Agreement pursuant to which we agreed to purchase Kreatech Series D Preferred Stock. Upon signing the Stock Purchase Agreement and the Cross-License agreement, we paid
Kreatech $500,000 and received 1.7 million shares of Series D Preferred Stock. We have agreed to make additional payments which will total approximately $1.0 million based on the achievement by Kreatech of certain development milestones. We
expect that these milestones will be achieved before the end of 2007. Based on the achievement of one of these milestones, we made a milestone payment of $250,000 in October 2007.

We performed various analyses including estimates of future cash flow and other analyses to determine the allocation of the value of the cash paid to Kreatech between the cross-license and the Series D Preferred
Stock. Based on these analyses we determined that we would allocate 90% of the fair value to the cross-license and 10% to the Series D Preferred Stock. The portion allocated to the Cross-License will be amortized over the license period which we
deem to be 20 years.

As of September 30, 2007, the carrying amounts for the Series D Preferred Stock and the Cross-License were $52,000 and $453,000,
respectively. We have recorded the investment and the Cross-License in our consolidated balance sheet under the caption of Other Assets. We recorded amortization expense of $9,000 and $12,000 related to the Cross-License in the statement of
operations for the three and nine months ended September 30, 2007.

Revenues

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
$4.7 million for the three months ended September 30, 2007, including $3.3 million in instrument revenue, $743,000 in reagent and consumable product sales and $588,000 in service revenue. This represents an increase of 160% over the $1.8
million in product and service revenue for the three months ended September 30, 2006, which included $1.0 million in instrument revenue, $488,000 in reagent and consumable product sales and $283,000 in service revenue.

We reported product and service revenue of $11.0 million for the nine months ended September 30, 2007, including $7.2 million in instrument revenue, $2.0 million in
reagent and consumable product sales and $1.8 million in service revenue. This represents an increase of 112% over the $5.2 million in product and service revenue for the nine months ended September 30, 2006, which included $3.0 million in
instrument revenue, $1.2 million in reagent and consumable product sales and $1.0 million in service revenue.



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We sold 93 instruments (49 CellTracks Analyzers II and 44 CellTracks AutoPrep systems) in the nine month period ended
September 30, 2007 and 45 instruments (25 cell analyzers and 20 CellTracks AutoPrep systems) in the corresponding prior year period. A summary of instrument shipments and instruments sold for revenue recognition purposes for the period from
product launch to September 30, 2007 is shown below:



|                     |  |                                 |  |                                      |  |                               
|-------------------- |  | ------------------------------- |  | ------------------------------------ |  | ------------------------------
|                     |  | Cumulative as ofJanuary 1, 2007 |  | Nine months ended September 30, 2007 |  | Cumulative @September 30, 2007
|Instrument shipments |  |                                 |  |                                      |  |                               
|Total Analyzers      |  | 85                              |  | 45                                   |  | 130                           
|                     |  |                                 |  |                                      |  |                               
|CellTracks AutoPrep  |  | 77                              |  | 42                                   |  | 119                           
|                     |  |                                 |  |                                      |  |                               
|                     |  |                                 | 
|Instruments sold (1) |  |                                 |  |                                      |  |                               
|Total Analyzers      |  | 74                              |  | 49                                   |  | 123                           
|                     |  |                                 |  |                                      |  |                               
|CellTracks AutoPrep  |  | 63                              |  | 44                                   |  | 107                           
|                     |  |                                 |  |                                      |  |                               

---

|(1) | - Presents instruments which were sold and revenue recorded in the period indicated.
|--- | ------------------------------------------------------------------------------------

We have received a total of $6.9 million in license and milestone payments under the terms of the Development Agreement from inception to September 30, 2007 and have recorded $6.1 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 June 2011. 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; however the Development Agreement is currently subject to arbitration between Veridex and us.

Subject to the outcome of
the arbitration between Veridex and us, we expect to receive the remaining $3.6 million in development milestone payments over the next three to five years. 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 $117,000 and $136,000 in the three months ended September 30, 2007 and September 30, 2006, respectively, and $299,000 and $533,000 as milestone and other license revenue from Veridex in the
nine months ended September 30, 2007 and September 30, 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:



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



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



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

We 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 September 30, 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 wholly owned subsidiary. We have filed a number of trademark registration applications in preparation for commercial distribution activities with



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respect to future products. Much of the proprietary software and related information utilized in our instrument systems is protected by the copyright rights
or by rights that we have licensed.

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

We have a portfolio of issued patents and patent applications, which we believe provides patent coverage for
our proprietary technologies and products. As of October 25, 2007 our intellectual property estate consisted of 165 issued patents or patent applications, as follows:

37 issued US patents, including two US design patents;

19 US non-provisional patent applications;

7 US provisional patent applications;

23 foreign patents, including 6
foreign design patents;

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

5 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 nine months ended September 30, 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.
The estimated development period has not been materially different from the actual development period. 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. We evaluate our estimates quarterly and actual results have not differed materially from quarter to quarter when comparing to
these estimates.

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



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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.

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. We review these estimates annually and actual results have not differed materially from these estimates.

Stock-based compensation recorded in the three and nine months ended September 30, 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.

Section 3(a) of the Companys Amended and Restated
Equity Compensation Plan, or the Plan, states in part that, during each calendar year that the Plan is maintained, the number of shares of common stock 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 of common stock authorized for issuance or transfer under than Plan to equal 15% of the our issued and outstanding shares of
common stock as of December 31 of the immediately prior year (on a fully-diluted basis); provided, however, that the maximum number of shares of common stock 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 of common stock 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.

In June 2007, our stockholders approved an amendment to the Plan, to increase by 250,000 shares the number of shares of common
stock authorized for issuance or transfer under the Plan and approved the entire Plan, as amended. As such, as of September 30, 2007, the total number of shares of common stock authorized for issuance or transfer under the Plan was 5,016,667.
Our stockholders also approved an amendment to the Immunicon Corporation 2004 Employee Stock Purchase Plan, or the ESPP, to increase by 200,000 shares the number of shares of common stock authorized for issuance or transfer under the ESPP and
approved the entire ESPP, as amended. As of September 30, 2007, the total number of shares of common stock authorized for issuance under the ESPP was 400,000.



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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.

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. We have not had any significant changes to these assumptions in the current year.

Accounting for income taxes

We must make significant management judgments when determining our provision for income
taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At September 30, 2007, we recorded a full valuation allowance of $61.2 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. We review these estimates annually and actual results have not differed materially from these estimates.

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 and nine months ended September 30, 2007. The application of FIN 48 would have resulted in a decrease in retained earnings of $724,000, except that



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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 September 30, 2007
and September 30, 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.



|                                                              |  |                                  |       |      |   |      
|------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | -----
|                                                              |  | Three Months Ended September 30,
|Revenue (dollars in thousands)                                |  | 2007                             |       | 2006
|Product revenue including product revenue from related party: |  |                                  |       |      |   |      
|Instrument revenue:                                           |  |                                  |       |      |   |      
|Related party                                                 |  | $                                | 1,984 |      | $ | 263  
|Other                                                         |  |                                  | 1,355 |      |   | 763  
|Reagents and other product revenue:                           |  |                                  |       |      |   |      
|Related party                                                 |  |                                  | 743   |      |   | 396  
|Other                                                         |  |                                  |      |      |   | 92   
|                                                              |  |                                  |       |      |   |      
|Total product revenue                                         |  | $                                | 4,082 |      | $ | 1,514
|                                                              |  |                                 
|Service revenue                                               |  |                                  | 588   |      |   | 283  
|License and milestone revenue:                                |  |                                  |       |      |   |      
|Related party                                                 |  |                                  | 118   |      |   | 137  
|Other                                                         |  |                                  | 24    |      |   | 1    
|                                                              |  |                                  |       |      |   |      
|Total revenue                                                 |  | $                                | 4,812 |      | $ | 1,935
|                                                              |  |                                  |       |      |   |      
|                                                              | 
|                                                              |  | Three Months Ended September 30,
|Instrument sales                                              |  | 2007                             |       | 2006
|Cell Analyzer                                                 |  |                                  | 21    |      |   | 7    
|CellTracks AutoPrep Systems                                   |  |                                  | 20    |      |   | 7    

We recorded $4.7 million in product and service revenue in
the quarter ended September 30, 2007 of which $2.7 million was earned from related parties, primarily from Veridex. In the current year, Veridex has decided to purchase certain units and place them in trials. Veridex is the owner of the
instrument and has no right of return, therefore we have experienced an increase in related party revenue over the last 6 months. We recorded $1.8 million in product and service revenue in the quarter ended September 30, 2006, of which $659,000
was earned from related parties. Instrument revenue increased $2.3 million, or 225%, to $3.3 million in the third quarter ended September 30, 2007 from $1.0 million in the quarter ended September 30, 2006. We sold 41 instruments in the
quarter ended September 30, 2007 and 14 in the quarter ended September 30, 2006. Reagent and other product revenue increased $255,000, or 52%, to $743,000 in the third quarter of 2007 compared to the quarter ended September 30, 2006.
As we place more of our instruments in the field, we anticipate that our reagent and other product revenue should increase. Effective April 1, 2007, we also increased the list prices for our instruments to $205,000 for an instrument system. An
instrument system is comprised of one cell analyzer plus one CellTracks AutoPrep sample preparation device. As of September 30, 2007, all of our orders in our current backlog are from the 3rdquarter and, as such, are at the higher sales price.

Service revenue was $588,000 and $283,000 in the
quarter ended September 30, 2007 and September 30, 2006, respectively. We have been successful in adding contracts for service revenue and expect to continue to add additional customers to this category in future periods. The increase in
service revenue over prior year third quarter is primarily related to these new contracts.



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License and milestone revenue from related parties decreased by $19,000 to $118,000 for the three months ended
September 30, 2007 from $137,000 for the three months ended September 30, 2006. Since inception to September 30, 2007, we received $6.9 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 $2.9 million to $4.8 million in the quarter ended September 30, 2007 compared to $1.9 million in quarter ended September 30, 2006.

Costs of goods sold

Total costs of goods sold, including services,
were $4.4 million for the quarter ended September 30, 2007 compared to $1.9 million for the quarter ended September 30, 2006. We reported gross margin on product and service sales of $252,000 in the quarter ended September 30, 2007
compared to a loss on product and service sales of $151,000 in the quarter ended September 30, 2006.

Improvement on instrument gross profit is due
principally to two factors. We completed the outsourcing of our instrument manufacturing activities in the third quarter and, effective April 1, 2007, we increased the list prices for our instruments to $205,000 per instrument system from
$150,000. As a result, the gross profit per instrument for the quarter was approximately $6,000, or a total gross profit on instrument sales of $233,000. Total costs of goods sold for instruments was $3.1 million in the quarter ended
September 30, 2007 compared to $1.3 million in the quarter ended September 30, 2006.

Costs of goods sold for reagents and consumables was $1.0
million and the loss on the sale of reagents and consumables was $257,000 in the third quarter of 2007 compared to costs of goods of $605,000 and a loss on the sale of reagents and consumables of $117,000 in the third quarter 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. In addition, as a result of the outsourcing of our instrument manufacturing
activities, more of the unabsorbed overhead is allocated to the reagent manufacturing, which is recorded as period costs.

Costs of services sold was
$312,000 and the gross profit on the services sold was $276,000 in the quarter ended September 30, 2007 compared to $88,000 costs of services and $195,000 gross profit in the quarter ended September 30, 2006.

Research and development expenses

Research and development expenses
decreased by $484,000, or 16%, to $2.6 million in the third quarter of 2007 from $3.1 million in the third quarter of 2006. This decrease is primarily related to the utilization of certain research and development personnel to support
pharma services activity. These costs are charged to cost of services sold and therefore allocated out of research and development expenses. In addition, our clinical trial expense has decrease due to the completion of our colorectal and prostate
studies.

A summary of the principal components of our research and development costs for the three months ended September 30, 2007 and
September 30, 2006 are shown below:



|                                                 |  |                                 |       |      |   |      
|------------------------------------------------ |  | ------------------------------- | ----- | ---- | - | -----
|                                                 |  | Three months endedSeptember 30,
|Research and development expenses (in thousands) |  | 2007                            |       | 2006
|Salaries, benefits and taxes                     |  | $                               | 1,728 |      | $ | 1,742
|Laboratory supplies and expenses                 |  |                                 | 221   |      |   | 117  
|Instrument development costs                     |  |                                 | 14    |      |   | 131  
|Clinical trial expense                           |  |                                 | 119   |      |   | 240  
|Contracted research costs                        |  |                                 | 196   |      |   | 190  
|Depreciation expense                             |  |                                 | 262   |      |   | 290  
|Other                                            |  |                                 | 105   |      |   | 419  
|                                                 |  |                                 |       |      |   |      
|                                                 |  | $                               | 2,645 |      | $ | 3,129
|                                                 |  |                                 |       |      |   |      



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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.

Selling, general and administrative expenses

Selling, general and
administrative expenses increased by 152% to $6.8 million in the third quarter of 2007 from $2.7 million in the third quarter of 2006. This increase is attributable to increases in legal and professional fees related to our arbitration
with Veridex described throughout this report. This increase was offset by the decrease in salaries, benefits and taxes related to the relocation of our CEO in 2006. The relocation occurred in August, 2006. Total closing cost including any loss on
the sale of our CEOs previous home and the management fee from the relocation company was settled in September 2007 and we reduced our accrual by $47,000. This income was recorded in the quarter ended September 30, 2007. In the quarter ended
September 30, 2006, we recorded $336,000 relating to the relocation.

On May 31, 2007, we announced that we had filed a Demand for Arbitration
against Veridex, LLC, pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products, rescission of all licenses currently held by Veridex under that agreement,
and compensatory and punitive damages based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products. For the three months ended
September 30, 2007 we incurred approximately $4.5 million in legal fees associated with this action.

A summary of the principal components of our
selling, general and administrative expenses for the three months ended September 30, 2007 and September 30, 2006 are shown below:



|                                                            |  |                                  |       |      |   |      
|----------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | -----
|                                                            |  | Three Months Ended September 30,
|Selling, general and administrative expenses (in thousands) |  | 2007                             |       | 2006
|Salaries, benefits and taxes                                |  | $                                | 1,393 |      | $ | 1,646
|Depreciation expense                                        |  |                                  | 27    |      |   | 37   
|Legal and professional fees                                 |  |                                  | 4,878 |      |   | 556  
|Commission                                                  |  |                                  | 144   |      |   | 128  
|All others                                                  |  |                                  | 329   |      |   | 316  
|                                                            |  |                                  |       |      |   |      
|                                                            |  | $                                | 6,771 |      | $ | 2,683
|                                                            |  |                                  |       |      |   |      

Interest and other income

Interest and other income increased by $147,000, or 40%, to $514,000 in the quarter ended September 30, 2007 from $367,000 in the quarter ended September 30, 2006. This increase in interest income was
primarily a result of higher average cash available for investment in 2007 compared to 2006.

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, interest volatility, expected life and our incremental borrowing rate. The $3.3 million increase in income in the third quarter of 2007 results primarily from the decrease in our
stock price from June 30, 2007 to September 30, 2007. If



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our stock price increases 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 an expense 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 $98,000 for the quarter ended September 30, 2007 and September 30, 2006, respectively. The increase is attributable principally to the non-cash interest expense of $1.5
million related to the issuance of the Notes and related warrants, which were issued 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 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 September 30, 2007 compared to the quarter ended September 30, 2006.

Stock-based
compensation expenses

In September 2007, the Board authorized and issued stock option grants to our officers and employees under the Plan. The
Board determined that option grants to all employees were appropriate as a means of promoting long term employment within our organization. In total, the Board awarded grants of 712,000 stock options which vest over the next four years on the
anniversary of the grant date. The strike price for the options was the closing price of our common stock on the grant date.

In January 2007, the Board
made nonvested stock grants to the non-employee directors of the Board and to certain officers of the Company. The Board 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 an officers employment is terminated for any reason before the nonvested stock or the stock options
are fully vested, except as provided by such officers Employment Agreement with us, the shares of nonvested stock and stock options that are not then vested will be forfeited. If the provisions of the officers Employment Agreement are
triggered, the nonvested stock and stock options 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 $149,000 and $110,000 for the third quarters ended September 30, 2007 and September 30, 2006, respectively.

Stock-based compensation
expenses were $457,000 and $502,000 for the third quarters ended September 30, 2007 and September 30, 2006, respectively. Stock-based compensation expense is recorded as a component of 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 Months EndedSeptember 30,
|Stock-based compensation expenses included in: (in thousands) |  | 2007                            |     | 2006
|Cost of goods sold                                            |  | $                               | 17  |      | $ | 16 
|Research and development expenses                             |  |                                 | 130 |      |   | 145
|Selling, general and administrative expenses                  |  |                                 | 310 |      |   | 341
|                                                              |  |                                 |     |      |   |    
|Total stock-based compensation expenses                       |  | $                               | 457 |      | $ | 502
|                                                              |  |                                 |     |      |   |    



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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 September 30, 2007 and December 31, 2006 due to the uncertainty of the timing and amount of future taxable income. As of December 31, 2007, we had a net operating loss carryforward of approximately $127.5
million and an unused research and development credit carryforward of approximately $4.3 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 and expires through 2027. 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. In the second quarter of 2007, we received notification from the State of Pennsylvania that we were approved to assign a research and development credit to another company. As such, we recorded a credit to deferred state income tax
benefit in the second quarter of 2007. We received cash of $266,000 for our assignment in July 2007.

Net loss and net loss per common share

For the quarter ended September 30, 2007, our net loss was $6.7 million compared to a net loss of $5.6 million in the quarter ended
September 30, 2006. The loss per share was $0.24 and $0.20 for the third quarter ended September 30, 2007 and September 30, 2006, respectively. The weighted average common shares outstanding were 27.7 and 27.6 million for the
quarter ended September 30, 2007 and September 30, 2006, respectively.

Nine months ended September 30, 2007 and 2006

Revenue

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



|                                                                                  |  |                                 |        |      |   |      
|--------------------------------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | -----
|                                                                                  |  | Nine Months Ended September 30,
|Revenue ( in thousands)                                                           |  | 2007                            |        | 2006
|Product revenue including product revenue from related party: Instrument revenue: |  |                                 |        |      |   |      
|Related party                                                                     |  | $                               | 3,734  |      | $ | 422  
|Other                                                                             |  |                                 | 3,482  |      |   | 2.609
|Reagents and other product revenue:                                               |  |                                 |        |      |   |      
|Related party                                                                     |  |                                 | 1,820  |      |   | 951  
|Other                                                                             |  |                                 | 176    |      |   | 234  
|                                                                                  |  |                                 |        |      |   |      
|Total product revenue                                                             |  | $                               | 9,212  |      | $ | 4,216
|                                                                                  |  |                                
|Service revenue                                                                   |  |                                 | 1,767  |      |   | 960  
|License and milestone revenue:                                                    |  |                                 |        |      |   |      
|Veridex and other related party                                                   |  |                                 | 303    |      |   | 537  
|Other revenue                                                                     |  |                                 | 106    |      |   | 2    
|                                                                                  |  |                                 |        |      |   |      
|Total revenue                                                                     |  | $                               | 11,388 |      | $ | 5,715
|                                                                                  |  |                                 |        |      |   |      
|                                                                                  | 
|                                                                                  |  | Nine Months Ended September 30,
|Instrument sales                                                                  |  | 2007                            |        | 2006
|Analyzers                                                                         |  |                                 | 49     |      |   | 25   
|CellTracks AutoPrep Systems                                                       |  |                                 | 44     |      |   | 20   



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We recognized $11.0 million in product and service revenue in the first nine months of 2007, including $7.2 million
in instrument revenue, $2.0 million in reagent and consumable product revenue and $1.8 million in service revenue. We recognized $5.2 million in product and service revenue in the first nine months of 2006, including $3.0 in instrument revenue, $1.2
million in reagent and consumable products revenue and $1.0 million in service revenue. We sold 93 instruments, including 49 CellTracks Analyzer II instruments and 44 CellTracks AutoPrep instruments, in the nine months ended September 30, 2007
and sold 45 instruments, including 25 Analyzers instruments and 20 CellTracks AutoPreps, in the nine months ended September 30, 2006.

Reagent revenue
increased 68% to $2.0 million in the nine months ended September 30, 2007 from $1.2 million in the nine months ended September 30, 2006.

Service revenue was $1.8 million and $1.0 million in the nine months ended September 30, 2007 and
September 30, 2006, respectively. We began offering development services for pharmaceutical companies in the 3rdquarter of 2006, therefore the
increase is primarily due to the fact that we had only one quarter of revenue in 2006 related to services versus the nine months in 2007. As a result, our service revenue increased by 84% in the nine months ended September 30, 2007 over the
nine months ended September 30, 2006.

License and milestone revenue from related parties decreased by $234,000 to $303,000 for the first nine
months of 2007 from $537,000 for the corresponding period in 2006. From August 1, 2000 to September 30, 2007, we received $6.9 million in license and milestone receipts under our Development Agreement with Veridex. License and
milestone receipts have been deferred and are amortized on a straight-line basis over the product development period as defined for each specific product.

In January 2006, we and Veridex agreed that we had successfully completed the criteria for participation in a study in which we act as the central testing laboratory for conducting circulating tumor cell testing using CellSearch products.
Veridex paid us $250,000 in recognition thereof. We will recognize this revenue over the estimated life of the study, which we estimate will conclude in the fourth quarter of 2010. 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. Veridex filed an application seeking 510(k) clearance from the FDA in 2007 for in vitrodiagnostic use in June 2007 and
Veridex paid us $500,000 in recognition thereof. We will recognize this revenue over the estimated life of the product, which we estimate will conclude in the second quarter of 2011.

Total revenue increased by $5.7 million to $11.4 million in the nine months ended September 30, 2007 compared to $5.7 million in the nine months ended September 30, 2006.

Costs of goods sold

Total cost of goods sold was $10.9 million for
the nine months ended September 30, 2007 compared to $5.9 million for the period ended September 30, 2006. We reported gross margin on product and service sales of $33,000 in the nine months ended September 30, 2007 compared to a loss
on product and service sales of $721,000 in the nine months ended September 30, 2006.

The improvement in gross profit is primarily related to
instrument revenue. Improvement on instrument gross profit is due principally to two factors. First, we completed the outsourcing of our instrument manufacturing activities in the third quarter and, second, effective April 1, 2007, we increased
the list prices for our instruments to $205,000 per instrument system from $150,000. As a result, the loss on the sale of instruments dropped from $894,000 or $19,900 per instrument in the nine months ended September 30, 2006 to a loss on the
sale of instruments of $484,000 or $5,000 per instrument in the nine months ended September 30, 2007. Total costs of goods sold for instruments was $7.7 million in the nine months ended September 30, 2007 compared to $3.9 million in the
nine months ended September 30, 2006.

Costs of goods sold for reagents and consumables was $2.4 million and the loss on the sale of reagents and
consumables was $365,000 in the nine months ended September 30, 2007 compared to costs of goods of $1.7 million and a loss on the sale of reagents and consumables of $505,000 in the prior year period. 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. In addition, as a result of the outsourcing of our instrument manufacturing activities, more of the unabsorbed
overhead is allocated to the reagent manufacturing, which is recorded as period costs.



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Costs of services sold was $885,000 and the gross profit on the services sold was $883,000 in the nine months ended
September 30, 2007 compared to $282,000 costs of services and $678,000 gross profit in the nine months ended September 30, 2006.

Research and
development expenses

Research and development expenses for the nine months ended September 30, 2007 decreased by $1.1 million to $8.4 million,
compared to $9.5 million in the nine months ended September 30, 2006. Salary and salary-related costs were $5.4 million in the nine months ended September 30, 2007, compared to $4.9 million in the nine months ended
September 30, 2006. Laboratory supplies and expenses were $611,000 in the nine months ended September 30, 2007 as compared to $478,000 in the prior year period. The increases in theses area are the result of additions to the R&D staff
and laboratory supplies to support the product development efforts related to our agreements with DHI and Kreatech and increase in stock compensation due to restricted shares given to the research and development officers in January of 2007.

Instrument development costs were $207,000 in the nine months ended September 2007 compared to $543,000 for the prior year period. We substantially
completed a number of instrument development and improvement projects in the second half of 2006. Therefore, instrument development costs are lower in the nine months ended September 30, 2007 compared to the nine months ended September 30,
2006.

Clinical trial expenses decreased by $529,000 to $491,000 in the nine months ended September 30, 2007 from $1.0 million in the prior year
period. In the first half of 2006, we completed a substantial portion of our patient accrual for the clinical trials for monitoring metastatic colorectal cancer and metastatic prostate cancer trials. Patient accrual typically represents the most
expensive portion of a clinical trial.

In the nine months ended September 30, 2007, we allocated $638,000 of research and development expense to cost
of services sold in support of the generation of the service revenue. This allocation is shown as part of All others in the table below.

A
summary of the principal components of our research and development costs for the nine months ended September 30, 2007 and September 30, 2006, respectively, is shown below:



|                                                 |  |                                 |       |      |   |      
|------------------------------------------------ |  | ------------------------------- | ----- | ---- | - | -----
|                                                 |  | Nine Months Ended September 30,
|Research and development expenses (in thousands) |  | 2007                            |       | 2006
|Salaries, benefits and taxes                     |  | $                               | 5,410 |      | $ | 4,853
|Laboratory supplies and expenses                 |  |                                 | 611   |      |   | 478  
|Instrument development costs                     |  |                                 | 207   |      |   | 543  
|Clinical trial expense                           |  |                                 | 491   |      |   | 1,020
|Contracted research costs                        |  |                                 | 570   |      |   | 454  
|Depreciation expense                             |  |                                 | 816   |      |   | 936  
|All others                                       |  |                                 | 329   |      |   | 1,223
|                                                 |  |                                 |       |      |   |      
|                                                 |  | $                               | 8,434 |      | $ | 9,507
|                                                 |  |                                 |       |      |   |      

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

Selling, general and administrative
expenses

Selling, general and administrative expenses increased by $4.9 million, or 65%, to $12.4 million in the nine months ended
September 30, 2007 from $7.5 million in the prior year period. This increase is primarily related to our legal fees associated with the arbitration against Veridex. We incurred $5.4 million in arbitration-related costs in the nine months
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costs decreased by $532,000 in the first nine months of 2007, due principally to the forfeiture of unvested options and nonvested shares associated with
Edward L. Ericksons resignation from the Board of Directors and due the cost of our Chief Executives relocation. In January, Mr.Erickson, our former Chairman of the Board, announced that he was not seeking re-election to our board of
directors. Therefore effective June 12, 2007, Mr. Erickson was no longer a member of our Board. Consistent with the terms of our Equity Compensation Plan all of Mr. Ericksons unvested options were cancelled on that date.
Mr. Erickson had been granted performance based stock options before the provisions of SFAS 123R became effective. We therefore had accounted for these stock awards under the provisions of Accounting Principle Board Opinion No. 25,
Accounting for Stock Options Issued to Employees. We have been recording compensation expense in the category Stock Options granted prior to our IPO at below fair market value. As a result of this forfeiture, we reduced salary
expenses by $648,000 in the nine months period ended September 30, 2007. The relocation of our CEO resulted in relocation expense of $74,000 and $336,000 in the nine months period ending September 30, 2007 and 2006, respectively.

The decrease in depreciation in the current period resulted from an acceleration of depreciation costs in 2006 resulting from the termination of a portion
of our office lease in 2006. A summary of the principal components of our selling, general and administrative expenses for the nine months ended September 30, 2007 and September 30, 2006 is shown below:



|                                                            |  |                                 |        |      |   |      
|----------------------------------------------------------- |  | ------------------------------- | ------ | ---- | - | -----
|                                                            |  | Nine Months Ended September 30,
|Selling, general and administrative expenses (in thousands) |  | 2007                            |        | 2006
|Salaries, benefits and taxes                                |  | $                               | 3,874  |      | $ | 4,406
|Depreciation expense                                        |  |                                 | 89     |      |   | 240  
|Legal and professional fees                                 |  |                                 | 6,935  |      |   | 1,545
|Commission                                                  |  |                                 | 460    |      |   | 319  
|All others                                                  |  |                                 | 1,049  |      |   | 991  
|                                                            |  |                                 |        |      |   |      
|                                                            |  | $                               | 12,407 |      | $ | 7,501
|                                                            |  |                                 |        |      |   |      

Interest and other income

Interest and other income increased by $512,000, or 44%, to approximately $1.7 million in the nine months of 2007 from $1.2 million in the corresponding 2006 period. The increase in interest income was primarily due
to higher average cash for investment and higher average interest rates on invested funds in the nine months ended September 30, 2007 compared to the corresponding period in 2006.

Interest expense

Interest expense increased by $4.2 million, to $4.6 million for the first nine months of 2007 from
$314,000 for the prior year period. The increase is attributable principally to the non-cash interest expense of $4.3 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 nine months ended September 30, 2007 compared to the corresponding period in 2006.

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 and interest volatility, expected life and our
incremental borrowing rate. The $10.5 million increase in income in the nine months ended September 30, 2007 results primarily from the decrease in our stock price from January 1, 2007 to September 30, 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



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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.

Stock-based compensation expenses

Stock-based compensation expenses were $800,000 and $1.4 million for the nine months ended September 30, 2007 and September 30, 2006, respectively. Stock-based
compensation expense is recorded as a component of cost of goods sold, research and development expense or 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.



|                                                              |  |                                |     |      |   |      
|------------------------------------------------------------- |  | ------------------------------ | --- | ---- | - | -----
|                                                              |  | Nine Months EndedSeptember 30,
|Stock-based compensation expenses included in (in thousands): |  | 2007                           |     | 2006
|Cost of goods sold                                            |  | $                              | 52  |      | $ | 44   
|Research and development expenses                             |  |                                | 438 |      |   | 259  
|General and administrative expenses                           |  |                                | 310 |      |   | 1,055
|                                                              |  |                                |     |      |   |      
|Total stock-based compensation expenses                       |  | $                              | 800 |      | $ | 1,358
|                                                              |  |                                |     |      |   |      

As mentioned above, as a result of Mr. Erickson no longer providing service as a Board member as of
June 12, 2007, we recorded an adjustment in stock-based compensation expense of $648,000 relating to his unvested stock options and nonvested shares in the nine months ended September 30, 2007.

Income taxes

We have incurred net operating losses since our
inception and have consequently not paid any federal, state or foreign taxes. As of December 31, 2007, we had approximately $127.5 million of net operating loss carryforwards and approximately $4.3 million in research and development tax credit
carryforwards available to offset future regular and alternative taxable income. If not utilized, these net operating loss carryforwards and tax credits will begin to expire in 2018 and expires through 2027. 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.

In the second quarter of 2007, we received notification from the State of Pennsylvania that we were approved
to assign research and development credit to another company and we have recorded a credit to deferred state income tax benefit. We received cash of $266,000 for our assignment in July 2007.

Net loss and net loss per common share

The net loss of
$12.5 million for the nine months ended September 30, 2007 was $3.9 million, or 24%, lower than the loss of $16.3 million in the prior year period. As the result, the net loss per common share of $0.45 in the nine months ended
September 30, 2007 was $0.14 per share lower than the loss per common share of $0.59 in the prior year period. Weighted average common shares outstanding for the nine months ended September 30, 2007 were approximately 27.7 million
compared to 27.6 million for the nine months ended September 30, 2006.

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 $12.9 million from $51.5 million at December 31, 2006 to $38.6 million at September 30, 2007 principally due to the funding of our net loss.



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We used $12.1 million for operating activities in the nine month period ended September 30, 2007 and $12.8
million in the nine months ended September 30, 2006.

We used $220,000 in our investing activities in the nine months ended September 30, 2007.
In April 2007, we entered into a Stock Purchase Agreement pursuant to which we agreed to purchase Kreatech Series D Preferred Stock. Upon signing the Stock Purchase Agreement and a corresponding Cross-License agreement, we paid Kreatech
approximately $500,000. We also purchased $229,000 in capital equipment in the period. These payments were offset by our net maturities of investments of $525,000. In the nine months ended September 30, 2006, we received approximately $9.2
million from investing activities principally from net proceeds of $9.8 million from maturities of investments and $176,000 in proceeds from the disposal of fixed assets. These increases were partially offset by $710,000 for purchases of capital
equipment and leasehold improvements.

We used $474,000 in our financing activities in the nine months ended September 30, 2007 and $1.4 million in
the nine months ended September 30, 2006. We made principal payments of $1.5 million and $2.3 million against our equipment credit lines of credit in the nine months ended September 30, 2007 and September 30, 2006, respectively. We
borrowed $920,000 and $707,000 under these same credit facilities in the nine months ended September 30, 2007 and September 30, 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 September 30, 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 |  |            |  |                 |  |                 |        |                             |   | 2,316                    |  | 1,218,551 
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|                                                                 |  |            |  |                 |  |                 |        |                             | $ | 156,339                  |  | 27,714,266
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           

As of September 30, 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 September 30, 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)   |  | $               | 3,822  |      | $ | 514           |  | $             | 2,971  |            | $ | 337   |  | $ |  
|Operating leases                       |  |                 | 2,912  |      |   | 214           |  |               | 1,736  |            |   | 942   |  |   | 20
|Open purchase order commitments (1)    |  |                 | 15,453 |      |   | 15,453        |  |               |       |            |   |      |  |   |  
|Convertible notes (including interest) |  |                 | 35,875 |      |   |              |  |               | 35,875 |            |   |      |  |   |  
|                                       |  |                 |        |      |   |               |  |               |        |            |   |       |  |   |   
|Total contractual obligations          |  | $               | 58,062 |      | $ | 16,181        |  | $             | 40,582 |            | $ | 1,279 |  | $ | 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 and nine months ended September 30, 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 $6.9 million as of September 30, 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. Subject to the outcome of the arbitration between Veridex and us, we expect to receive the remaining
$3.6 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.

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.

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.



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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.

On May 31, 2007, we announced that
we had filed a Demand for Arbitration against Veridex pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products and rescission of all licenses currently
held by Veridex under that agreement, based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products. We are also seeking
monetary damages including compensatory damages of $220.2 to $254.2 million and punitive damages of $480 million.

Under the current agreement, Veridex is
appointed as exclusive sales agent, licensee and distributor responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits to us. In the arbitration, we allege, among other things, that Veridex
breached its obligation to use its best efforts to market those products and thereafter reneg(ing) on its express commitment to engage and deploy sales representatives to personally promote, or detail, the Immunicon
Products to doctors. We further allege, (w)hile seriously damaging to us and to our shareholders, Veridexs actions are depriving cancer patients - who are in severe need of the best treatment and testing - and their doctors of our
FDA-cleared cancer diagnostic tests.

The agreement provides that the arbitration will take place before a single arbitrator and that an award must
be rendered within six months of the selection of the arbitrator. It is anticipated that this arbitration will be completed before the end of the first quarter of 2008.

We also announced that we had discontinued our previously-disclosed contract audit following receipt of Veridexs response to the audit demand. We further allege in the arbitration that Veridex refused
outright to permit a meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon Products, and erected a series of other roadblocks to a meaningful audit.



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On May 25, 2007, after Veridex was informed that we were discontinuing the audit and that we intended to file
claims against it, Veridex sent us a notification asserting that we were in material breach of the current agreement. We believe that Veridexs assertion is without merit. We have recorded approximately $4.5 million in legal fees
associated with this action in the three months ended September 30, 2007 and $5.4 million in legal fees associated with this action in the nine months ended September 30, 2007.

In response to our arbitration demand, Veridex has filed an answer and counterclaim wherein it asserts, among other things, that Immunicon has failed to perform its development, manufacturing and quality assurance
obligations pursuant to the Development Agreement and has violated Veridexs exclusive right to sell Immunicon products. Veridexs counterclaim originally claimed damages of $35.6 million. In a revised claim dated October 19, 2007,
Veridex revised its claim and now seeks damages of $168 million for alleged breach of its obligation to refrain from selling products in the Field of Cancer except through Veridex. We believe that Veridexs counterclaim,
including its claim for damages, is without merit and therefore have not provided any reserve for any potential damages.

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 $71,000. In April 2007, we entered into a new agreement with Kreatech (Cross-License Agreement) pursuant to which the terms and conditions of this initial agreement were terminated and the research collaboration
was expanded. Under the 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 in exchange for the
exclusive right to sell these products in North America. As a result of the new Cross-License Agreement, the old license fee was fully amortized.

In
accordance with the provisions of the Cross-License Agreement we have agreed to make a $500,000 payment to Kreatech if we are successful in obtaining FDA clearance of any product developed under the Cross-License Agreement. We have agreed to make an
additional $500,000 payment once we have achieved aggregate sales of $10 million in North America for the products developed under the Cross-License Agreement. The initial term of the Cross-License Agreement is ten years with an automatic extension
of ten years subject to certain conditions. Therefore we will amortize the value ascribed to the Cross-License Agreement over 20 years.

We simultaneously
entered into a Stock Purchase Agreement pursuant to which we agreed to purchase Kreatech Series D Preferred Stock. Upon signing the Stock Purchase Agreement and the Cross-License agreement, we paid Kreatech $500,000 and received 1.7 million
shares of Series D Preferred Stock. We have agreed to make additional payments which will total approximately $1.0 million based on the achievement by Kreatech of certain development milestones. We expect that these milestones will be achieved
before the end of 2007. We made an additional $250,000 payment to Kreatech in October 2007 upon the completion of an interim development milestone.

We
performed various analyses including estimates of future cash flow and other analyses to determine the allocation of the value of the cash paid to Kreatech between the cross-license and the Series D Preferred Stock. Based on these analyses we
determined that we would allocate 90% of the fair value to the cross-license and 10% to the Series D Preferred Stock. The portion allocated to the Cross-License will be amortized over the license period which we deem to be 20 years.

As of September 30, 2007, the carrying amounts for the Series D Preferred Stock and the Cross-License were $52,000 and $453,000, respectively. We have recorded the
investment and the Cross-License in our consolidated balance sheet under the caption of Other Assets. We recorded amortization expense of $9,000 and $12,000 related to the Cross-License in the statement of operations for the three and nine months
period ended September 30, 2007, respectively.

We had $7.4 million and $11.7 million in available credit under our credit agreements at the balance
sheet dates of September 30, 2007 and December 31, 2006, respectively. The available borrowing capacity under our SVB credit facility was $7.4 million and expires on December 31, 2007. The available borrowing capacity under our credit
facility with GECC expired and we do not intend to extend the availability of the GECC credit facility . We were in compliance with all provisions of our various loans as of and for the periods ended September 30, 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



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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.

In December 2006, we signed a definitive license, development, supply and distribution agreement with 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 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. As of September 30, 2007, we are still in the developing phase of this agreement.
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 September 30, 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 $38.6 million in cash on hand and short term investments and $7.4 million in available lines of credit as of September 30, 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 June 2007, the Financial Accounting Standards Board, or FASB, ratified the consensus reached by the Emerging Issues Task Force on Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods
or Services Received for Use in Future Research and Development Activities, orEITF 07-3. Pursuant to EITF 07-3, nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities
should be deferred and capitalized. Such amounts should be recognized as an expense as the related goods are delivered or services are performed, or when the goods or services are no longer expected to be received. EITF 07-3 is effective for the
fiscal years beginning after December 15, 2007 and is to be applied prospectively for contracts entered into on or after the effective date. We are in the process of determining the impact that EITF 07-3 will have on its financial condition or
results of operations.

In February 2007, the 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
us in the first quarter of 2008. We are currently evaluating the effect of SFAS 159 and have not determined the 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 the 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. See footnote 11, Income Taxes, 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, except for convertible debt as discussed below. 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.

The result of the accounting treatment for our
convertible debt 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. The fair value of these warrants and rights are primarily affected by our stock price, but are also affected by our stock price volatility, expected life and interest rates.



|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.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

On May 31, 2007, we announced that we had
filed a Demand for Arbitration against Veridex pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products and rescission of all licenses currently held by
Veridex under that agreement, based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products. We are also seeking monetary
damages including compensatory damages of $220.2 to $254.2 million and punitive damages of $480 million.

Under the current agreement, Veridex is appointed
as exclusive sales agent, licensee and distributor responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits to us. In the arbitration, we allege, among other things, that Veridex breached
its obligation to use its best efforts to market those products and thereafter reneg(ing) on its express commitment to engage and deploy sales representatives to personally promote, or detail, the Immunicon Products to
doctors. We further allege, (w)hile seriously damaging to us and to our shareholders, Veridexs actions are depriving cancer patients - who are in severe need of the best treatment and testing - and their doctors of our FDA-cleared
cancer diagnostic tests.

The agreement provides that the arbitration will take place before a single arbitrator and that an award must be rendered
within six months of the selection of the arbitrator. It is anticipated that this arbitration will be completed before the end of the first quarter of 2008.

We also announced that we had discontinued our previously-disclosed contract audit following receipt of Veridexs response to the audit demand. We further allege in the arbitration that Veridex refused outright to permit a
meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon Products, and erected a series of other roadblocks to a meaningful audit.

On May 25, 2007, after Veridex was informed that we were discontinuing the audit and that we intended to file claims against it, Veridex sent us a notification
asserting that we were in material breach of the current agreement. We believe that Veridexs assertion is without merit. We have recorded approximately $4.5 million in legal fees associated with this action in the three months
ended September 30, 2007 and $5.4 million in legal fees associated with this action in the nine months ended September 30, 2007.

In response to
our arbitration demand, Veridex has filed an answer and counterclaim wherein it asserts, among other things, that Immunicon has failed to perform its development, manufacturing and quality assurance obligations pursuant to the Development Agreement
and has violated Veridexs exclusive right to sell Immunicon products. Veridexs counterclaim originally claimed damages of $35.6 million. In a revised claim dated October 19, 2007 Veridex revised its claim and now seeks damages of
$168 million for alleged breach of its obligation to refrain from selling products in the Field of Cancer except through Veridex. We believe that Veridexs counterclaim, including its claim for damages, is without merit and
therefore have not provided any reserve for any potential damages.



|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 factors 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 September 30, 2007, we had an accumulated deficit $154.9 million. These losses have resulted primarily from costs incurred in our research and



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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.

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

On May 31, 2007, we announced that we had filed a Demand for Arbitration against Veridex pursuant to which we are seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute
our cancer diagnostic products and rescission of all licenses currently held by Veridex under that agreement, based on repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell
and distribute our cancer diagnostic products. We are also seeking monetary damages including compensatory damages of $220.2 to $254.2 million and punitive damages of $480 million.

Under the current agreement, Veridex is appointed as exclusive sales agent, licensee and distributor responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits
to us. In the arbitration, we allege, among other things, that Veridex breached its obligation to use its best efforts to market those products and thereafter reneg(ing) on its express commitment to engage and deploy sales
representatives to personally promote, or detail, the Immunicon Products to doctors. We further allege, (w)hile seriously damaging to us and to our shareholders, Veridexs actions are depriving cancer patients - who are
in severe need of the best treatment and testing - and their doctors of our FDA-cleared cancer diagnostic tests.

The agreement provides that the
arbitration will take place before a single arbitrator and that an award must be rendered within six months of the selection of the arbitrator. It is anticipated that this arbitration will be completed before the end of the first quarter of 2008.

We also announced that we had discontinued our previously-disclosed contract audit following receipt of Veridexs response to the audit demand. We
further allege in the arbitration that Veridex refused outright to permit a meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon Products, and erected a series of other roadblocks to
a meaningful audit.

On May 25, 2007, after Veridex was informed that we were discontinuing the audit and that we intended to file claims
against it, Veridex sent us a notification asserting that we were in material breach of the current agreement. We believe that Veridexs assertion is without merit. We have recorded approximately $4.5 million in legal fees
associated with this action in the three months ended September 30, 2007 and $5.4 million in legal fees associated with this action in the nine months ended September 30, 2007.

In response to our arbitration demand, Veridex has filed an answer and counterclaim wherein it asserts, among other things, that Immunicon has failed to perform its development, manufacturing and quality assurance
obligations pursuant to the Development Agreement and has violated Veridexs exclusive right to sell Immunicon products. Veridexs counterclaim originally claimed damages of $35.6 million. In a revised claim dated October 19, 2007,
Veridex revised its claim and now seeks damages of $168 million for alleged breach of its obligation to refrain from selling products in the Field of Cancer except through Veridex. We believe that Veridexs counterclaim,
including its claim for damages, is without merit and therefore have not provided any reserve for any potential damages.

In August 2000, we entered into
the aforementioned development, license and supply agreement with Veridex, under which we granted to Veridex a worldwide exclusive license in the field of cancer to commercialize cell analysis products based on our technologies. We also appointed
Veridex as our exclusive sales, invoicing and collection agent for our cell analysis instrumentation in cancer. If Veridex fails to meet its obligations under the agreement or fails to deploy adequate resources to commercialize products such that
our relationship with Veridex does not function effectively, as we allege in our arbitration demand, we may suffer substantial



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losses, and if Veridex does not allow us to terminate the agreement or to commercialize products on our own, we have no reservation of rights under the
agreement to step in and commercialize products. While Veridex has the exclusive right under this agreement to market, distribute and conduct field, technical, customer service and certain manufacturing finishing operations for these products,
Veridex has very limited obligations to perform these functions under this agreement. For example, the agreement does not require Veridex to meet any minimum levels with respect to sales, marketing personnel or other marketing expenditures, and
Veridex may terminate this agreement with or without reason at any time by providing us with 24 months prior written notice. Veridex may also terminate this agreement if we are in material breach or are acquired by a competitor in the IVD
field. If Veridex were to fail to meet its obligations under this agreement or fail to deploy adequate resources to commercialize products under this agreement or terminate this agreement, as we allege in our arbitration demand:



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



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



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

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

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

We may be unable to maintain our listing on The
Nasdaq Global Market, which could cause our stock price to fall and decrease the liquidity of our common stock.

Our common stock is currently listed on
the Nasdaq Global Market. Continued listing on the Nasdaq Global Market requires us to meet certain quantitative standards, including that we maintain at least $10 million in stockholders equity and that the closing price of our common stock
not be less than $1.00 per share for 30 consecutive trading days.

We may be unable to maintain compliance with some of these requirements and, as such,
may be subject to delisting proceedings by Nasdaq. Although we will have the opportunity to re-establish compliance prior to delisting, no assurance can be given that we will be able to continue to demonstrate compliance with all requirements for
continued listing on the Nasdaq Global Market in the future, or that our stock will remain listed. To the extent that we are delisted from the Nasdaq Global Market, we believe that we will be able to list our shares on the Nasdaq Capital Market. If
our securities are delisted from the Nasdaq Global Market, the liquidity for our securities could be adversely affected and our ability to raise additional capital could be impaired.



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



|         |  |                                                                                                                                                   
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 # # |  | Executive Compensation (Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on September 25, 2007).
|         | 
|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.                                                                      

---

|# | Filed herewith
|- | --------------

|# # | Management contract or compensatory plan or arrangement.
|--- | --------------------------------------------------------



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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: November 8, 2007 |  | By:                   |  | /s/ BYRON D. HEWETT                                                       
|                       |  |                       |  | Byron D. Hewett                                                           
|                       |  |                       |  | President and Chief Executive Officer                                     
|                       |  |                       |  | (Principal Executive Officer)                                             
|                       |  |                      
|Date: November 8, 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                                                                                                                                       
|10.1 # # |  | Executive Compensation (Incorporated by reference to the Registrants Current Report on Form 8-K filed with the Commission on September 25, 2007).
|         | 
|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.                                                                      

---

|# | Filed herewith
|- | --------------

|# # | Management contract or compensatory plan or arrangement.
|--- | --------------------------------------------------------



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