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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

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



For the Quarter ended March 31, 2005 or



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



For the transition period from  to
.



Commission File Number: 000-50677



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IMMUNICON CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|Delaware                                                      |  | 23-2269490                      
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification No.)



3401 Masons Mill
Road, Suite 100

Huntingdon Valley, Pennsylvania 19006

(Address of principal executive offices and zip code)

(215) 830-0777

(Registrants telephone number including area code)



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



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



Include the number of shares outstanding of each of the issuers classes of common stock, as of the latest possible date. As of May 5, 2005, there were 23,304,726 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):                                                                                                                  |  | 3         
|         |  |                                                                                                                                                                          
|         |  | Condensed Consolidated Balance Sheets: March 31, 2005 and December 31, 2004                                                                                               |  | 3         
|         |  |                                                                                                                                                                          
|         |  | Condensed Consolidated Statements of Operations: Three months ended March 31, 2005 and 2004 and for the period from August 25, 1983 (date of inception) to March 31, 2005 |  | 4         
|         |  |                                                                                                                                                                          
|         |  | Condensed Consolidated Statements of Cash Flows: Three months ended March 31, 2005 and 2004 and for the period from August 25, 1983 (date of inception) to March 31, 2005 |  | 5         
|         |  |                                                                                                                                                                          
|         |  | Notes to Condensed Consolidated Financial Statements                                                                                                                      |  | 6         
|         |  |                                                                                                                                                                          
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                     |  | 14        
|         |  |                                                                                                                                                                          
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                |  | 41        
|         |  |                                                                                                                                                                          
|Item 4.  |  | Controls and Procedures                                                                                                                                                   |  | 41        
|         |  |                                                                                                                                                                          
|PART II. |  | OTHER INFORMATION                                                                                                                                                         |  |           
|         |  |                                                                                                                                                                          
|Item 6.  |  | Exhibits                                                                                                                                                                  |  | 41        



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



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)



PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Balance Sheets (Unaudited)

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



|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                         |  | March 31,2005 |         |   | December 31, 2004 |  
|ASSETS                                                                                                                                                                   |  |               |         |   |                   |   |         |  
|Current Assets:                                                                                                                                                          |  |               |         |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                |  | $             | 22,840  |   |                   | $ | 27,552  |  
|Short term investments                                                                                                                                                   |  |               | 24,542  |   |                   |   | 25,551  |  
|Accounts receivable                                                                                                                                                      |  |               | 143     |   |                   |   | 255     |  
|Receivable from related party                                                                                                                                            |  |               | 885     |   |                   |   | 249     |  
|Inventory                                                                                                                                                                |  |               | 1,914   |   |                   |   | 1,076   |  
|Prepaid assets                                                                                                                                                           |  |               | 434     |   |                   |   | 591     |  
|Other current assets                                                                                                                                                     |  |               | 494     |   |                   |   | 509     |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Total current assets                                                                                                                                                     |  |               | 51,252  |   |                   |   | 55,783  |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Property and equipment, net                                                                                                                                              |  |               | 5,405   |   |                   |   | 4,380   |  
|Long term investments                                                                                                                                                    |  |               |        |   |                   |   | 530     |  
|Other assets                                                                                                                                                             |  |               | 358     |   |                   |   | 371     |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Total assets                                                                                                                                                             |  | $             | 57,015  |   |                   | $ | 61,064  |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                     |  |               |         |   |                   |   |         |  
|Current Liabilities:                                                                                                                                                     |  |               |         |   |                   |   |         |  
|Current portion of long-term debt                                                                                                                                        |  | $             | 2,902   |   |                   | $ | 3,012   |  
|Accounts payable                                                                                                                                                         |  |               | 2,295   |   |                   |   | 840     |  
|Payable from related party                                                                                                                                               |  |               | 252     |   |                   |   | 229     |  
|Current portion of deferred revenue                                                                                                                                      |  |               | 1,784   |   |                   |   | 1,398   |  
|Accrued expenses                                                                                                                                                         |  |               | 3,807   |   |                   |   | 3,263   |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Total current liabilities                                                                                                                                                |  |               | 11,040  |   |                   |   | 8,742   |  
|                                                                                                                                                                         |  |              
|Long-term debt, less current portion                                                                                                                                     |  |               | 2,899   |   |                   |   | 2,587   |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Deferred revenue                                                                                                                                                         |  |               | 811     |   |                   |   | 897     |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Commitments and contingencies                                                                                                                                            |  |               |         |   |                   |   |         |  
|                                                                                                                                                                         |  |              
|Shareholders equity:                                                                                                                                                    |  |               |         |   |                   |   |         |  
|Convertible preferred stock (liquidation value of $0 as of March 31, 2005 and December 31, 2004)                                                                         |  |               |        |   |                   |   |        |  
|Common stock, $0.001 par value 100,000,000 authorized, 23,248,994 and 23,165,741 shares issued and outstanding as of March 31, 2005 and
December 31, 2004, respectively |  |               | 23      |   |                   |   | 23      |  
|Additional paid in capital                                                                                                                                               |  |               | 143,775 |   |                   |   | 142,670 |  
|Deferred stock-based compensation                                                                                                                                        |  |               | (2,959  | ) |                   |   | (2,345  | )
|Accumulated other comprehensive income                                                                                                                                   |  |               | 24      |   |                   |   | 29      |  
|Deficit accumulated during the development stage                                                                                                                         |  |               | (98,598 | ) |                   |   | (91,539 | )
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Total shareholders equity                                                                                                                                               |  |               | 42,265  |   |                   |   | 48,838  |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  
|Total liabilities and shareholders equity                                                                                                                               |  | $             | 57,015  |   |                   | $ | 61,064  |  
|                                                                                                                                                                         |  |               |         |   |                   |   |         |  



See notes to condensed
consolidated unaudited financial statements.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)



Condensed Consolidated Statements of Operations (Unaudited)

Three months ended
March 31, 2005 and 2004 and for the period from August 25, 1983

(date of inception) to March 31, 2005 (in thousands,
except for share and per-share amounts)



|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|------------------------------------------------------------ |  | ---------------------------- | ---------- | - | ------------------------------------------------------------ | - | ------- | - |  | - | -------- | -
|                                                             |  | Three Months Ended March 31, |            |   | Period fromAugust 25,1983 (date ofinception) toMarch 31,2005 |  
|                                                             |  | 2005                         |            |   | 2004                                                         |   |        
|Revenue:                                                     |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Revenue from related party                                   |  | $                            | 579        |   |                                                              | $ | 144     |   |  | $ | 5,788    |  
|Product revenue                                              |  |                              | 250        |   |                                                              |   |        |   |  |   | 606      |  
|Other revenue                                                |  |                              | 50         |   |                                                              |   | 13      |   |  |   | 3,964    |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Total revenue                                                |  |                              | 879        |   |                                                              |   | 157     |   |  |   | 10,358   |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Cost of goods sold                                           |  |                              | 392        |   |                                                              |   |        |   |  |   | 392      |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Gross profit                                                 |  |                              | 487        |   |                                                              |   | 157     |   |  |   | 9,966    |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Expenses:                                                    |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Research and development                                     |  |                              | 5,724      |   |                                                              |   | 5,241   |   |  |   | 83,809   |  
|General and administrative                                   |  |                              | 1,985      |   |                                                              |   | 1,183   |   |  |   | 26,489   |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Total operating expenses                                     |  |                              | 7,709      |   |                                                              |   | 6,424   |   |  |   | 110,298  |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Operating loss                                               |  |                              | (7,222     | ) |                                                              |   | (6,267  | ) |  |   | (100,332 | )
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Other income from related party                              |  |                              |           |   |                                                              |   |        |   |  |   | 250      |  
|                                                             |  |                              |           
|Interest and other income                                    |  |                              | 288        |   |                                                              |   | 62      |   |  |   |          |  
|Interest expense                                             |  |                              | (125       | ) |                                                              |   | (163    | ) |  |   |          |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Interest income (expense), net                               |  |                              | 163        |   |                                                              |   | (101    | ) |  |   | 1,484    |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Net loss attributable to common stockholders                 |  | $                            | (7,059     | ) |                                                              | $ | (6,368  | ) |  | $ | (98,598  | )
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Net loss per common sharebasic and diluted                  |  | $                            | (0.30      | ) |                                                              | $ | (13.10  | ) |  |   |          |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  
|Weighted average common shares outstandingbasic and diluted |  |                              | 23,217,300 |   |                                                              |   | 486,240 |   |  |   |          |  
|                                                             |  |                              |            |   |                                                              |   |         |   |  |   |          |  



See notes to condensed
consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries (A Development Stage Company)



Condensed Consolidated Statements of Cash Flows (Unaudited)

Three months ended
March 31, 2005 and 2004, and for the period from

|August | 25, 1983 (date of inception) to March 31, 2005
|------ | ----------------------------------------------

(in thousands)



|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------------------------------------------- | - | ------ | - |  | - | -------- | -
|                                                                                  |  | Three Months Ended March 31, |         |   | Period fromAugust 25, 1983(date of inception)to March 31, 2005 |  
|                                                                                  |  | 2005                         |         |   | 2004                                                           |   |       
|Operating activities:                                                             |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Net loss                                                                          |  | $                            | (7,059  | ) |                                                                | $ | (6,368 | ) |  | $ | (98,598  | )
|Adjustment to reconcile net loss to net cash used in operating activities:        |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Depreciation and amortization                                                     |  |                              | 481     |   |                                                                |   | 332    |   |  |   | 6,624    |  
|Interest expense on warrants                                                      |  |                              | 2       |   |                                                                |   | 9      |   |  |   | 129      |  
|Loss on disposal of property and equipment                                        |  |                              |        |   |                                                                |   |       |   |  |   | 4        |  
|Compensation expense related to the issuance of stock, stock options and warrants |  |                              | 350     |   |                                                                |   | 401    |   |  |   | 3,076    |  
|Change in:                                                                        |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Accounts receivable                                                               |  |                              | 112     |   |                                                                |   | (128   | ) |  |   | (139     | )
|Accounts receivable from related party                                            |  |                              | (636    | ) |                                                                |   |       |   |  |   | (797     | )
|Inventory                                                                         |  |                              | (838    | ) |                                                                |   |       |   |  |   | (1,914   | )
|Prepaid expenses and other                                                        |  |                              | 157     |   |                                                                |   | 118    |   |  |   | (602     | )
|Other assets                                                                      |  |                              | 15      |   |                                                                |   | (401   | ) |  |   | (1,367   | )
|Accounts payable                                                                  |  |                              | 1,534   |   |                                                                |   | 1,134  |   |  |   | 2,474    |  
|Accrued expenses                                                                  |  |                              | 488     |   |                                                                |   | (476   | ) |  |   | 4,617    |  
|Deferred revenue                                                                  |  |                              | 300     |   |                                                                |   | 459    |   |  |   | 2,584    |  
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Net cash used in operating activities                                             |  |                              | (5,094  | ) |                                                                |   | (4,920 | ) |  |   | (83,909  | )
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Investing activities:                                                             |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Purchase of investments                                                           |  |                              | (10,312 | ) |                                                                |   |       |   |  |   | (102,871 | )
|Proceeds from maturities of investments                                           |  |                              | 11,801  |   |                                                                |   |       |   |  |   | 77,800   |  
|Cash proceeds from disposals of property and equipment                            |  |                              |        |   |                                                                |   |       |   |  |   | 1        |  
|Purchases of property and equipment                                               |  |                              | (1,445  | ) |                                                                |   | (749   | ) |  |   | (11,460  | )
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Net cash provided by (used in) investing activities                               |  |                              | 44      |   |                                                                |   | (749   | ) |  |   | (36,530  | )
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Financing activities:                                                             |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Proceeds from term debt                                                           |  |                              | 1,254   |   |                                                                |   | 795    |   |  |   | 18,956   |  
|Proceeds from sale of preferred stock                                             |  |                              |        |   |                                                                |   |       |   |  |   | 84,115   |  
|Proceeds from sale of common stock                                                |  |                              |        |   |                                                                |   |       |   |  |   | 53,002   |  
|Proceeds from exercise of stock options and warrants                              |  |                              | 139     |   |                                                                |   | 263    |   |  |   | 1,354    |  
|Loan for stock options                                                            |  |                              |        |   |                                                                |   |       |   |  |   | 19       |  
|Loan issue fees                                                                   |  |                              |        |   |                                                                |   |       |   |  |   | (127     | )
|Payments of IPO fees                                                              |  |                              |        |   |                                                                |   | (575   | ) |  |   | (1,909   | )
|Payments on term debt                                                             |  |                              | (1,051  | ) |                                                                |   | (808   | ) |  |   | (12,156  | )
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Net cash provided by (used in) financing activities                               |  |                              | 342     |   |                                                                |   | (325   | ) |  |   | 143,254  |  
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Effect of exchange rate changes on cash                                           |  |                              | (4      | ) |                                                                |   |       |   |  |   | 25       |  
|Net increase (decrease) in cash and cash equivalents                              |  |                              | (4,708  | ) |                                                                |   | (5,994 | ) |  |   | 22,815   |  
|Cash and cash equivalents, beginning of period                                    |  |                              | 27,552  |   |                                                                |   | 30,601 |   |  |   |         |  
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Cash and cash equivalents, end of period                                          |  | $                            | 22,840  |   |                                                                | $ | 24,607 |   |  | $ | 22,840   |  
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Supplemental cash flow information:                                               |  |                              |         |   |                                                                |   |        |   |  |   |          |  
|Cash paid for interest                                                            |  | $                            | 109     |   |                                                                | $ | 140    |   |  |   |          |  
|                                                                                  |  |                              |         |   |                                                                |   |        |   |  |   |          |  



See notes to condensed
consolidated unaudited financial statements.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



Three months ended March 31, 2005 and 2004, and for the period from August 25, 1983 (date of inception) to March 31, 2005.



(1) Background and basis of presentation



The accompanying unaudited condensed consolidated financial statements of Immunicon Corporation and Subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United States of America for interim financial information and with the Form 10-Q General Instructions and Article 10 of Regulation S-X of the Securities and Exchange Commission (the
SEC). Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the
accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly our financial position at March 31, 2005 and results of operations and cash flows for the
three month periods ended March 31, 2005 and 2004 and for the period from inception to March 31, 2005. Certain items have been reclassified to conform to current period presentation.



Certain footnote information has been condensed or omitted from these financial statements. Therefore, these financial statements should be
read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Results of operations for the three months ended March 31, 2005 and 2004 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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates or assumptions. The more significant
estimates reflected in these financial statements include judgmentally accrued expenses and the valuation of stock-based compensation.



We have generated limited revenues from product sales and have incurred substantial losses since our inception. We anticipate incurring additional losses over at least
the next several years and such losses may increase as we expand our research and development activities. Accordingly, we are considered to be in the development stage as of March 31, 2005, as defined in Statement of Financial Accounting Standards
(SFAS) No. 7, Accounting and Reporting by Development Stage Enterprises.



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



We will need substantial financing to fund our operations and to continue developing our product candidates for sale. There can be no assurance that such financing will
be available when we need it. Our operations are subject to certain additional risks and uncertainties including, among others, dependence on Veridex, LLC (Veridex), a Johnson & Johnson company, to market our cancer diagnostic
product candidates, the uncertainty of product development (including clinical trial results and completion of development of new instrument and reagent products), regulatory clearance and approval, supplier and manufacturing dependence,
competition, reimbursement availability, our dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary rights, dependence on key personnel and other risks related to governmental regulations. We
believe, however, that cash and cash equivalents available at March 31, 2005 will be sufficient to maintain operations through at least March 31, 2006.



Recent Accounting Pronouncements



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



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



(2) Accounting for stock-based compensation



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



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



|                                                                                                 |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                 |  | Three Months Ended March 31, |       
|(in thousands)                                                                                   |  | 2005                         |        |   | 2004 |  
|Net loss, as reported                                                                            |  | $                            | (7,059 | ) |      | $ | (6,368 | )
|Add: Stock-based compensation expense included in reported net loss                              |  |                              | 350    |   |      |   | 401    |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards |  |                              | (632   | ) |      |   | (441   | )
|                                                                                                 |  |                              |        |   |      |   |        |  
|Pro forma net loss                                                                               |  | $                            | (7,341 | ) |      | $ | (6,408 | )
|                                                                                                 |  |                              |        |   |      |   |        |  
|Net loss per share  basic and diluted, as reported                                              |  | $                            | (0.30  | ) |      | $ | (13.10 | )
|                                                                                                 |  |                              |        |   |      |   |        |  
|Pro forma net loss per share  basic and diluted                                                 |  | $                            | (0.32  | ) |      | $ | (13.18 | )
|                                                                                                 |  |                              |        |   |      |   |        |  



The fair value of each option is
estimated on the date of grant using the fair value method with the following weighted average assumptions: risk-free interest rate of 3.68% and 3.1% and volatility rate of 58.36% and 45.96% for the periods ended March 31, 2005 and 2004,
respectively; an expected life of five years and a dividend yield of zero for all periods presented. Stock compensation arrangements with non-employees are accounted for in accordance with SFAS No. 123, as amended by SFAS No. 148, and EITF No.
96-18, Accounting for Equity Instruments That Are Issued to Other than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, using a fair value approach.



(3) Net loss per share



Basic and diluted net loss per common share is calculated in accordance with SFAS No. 128, Earnings Per Share (SFAS No. 128) and SEC Staff Accounting
Bulletin No. 98 (SAB No. 98). Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is calculated by dividing the net loss applicable to common stockholders by the weighted-average number of unrestricted
common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, since the effects of potentially dilutive securities are anti-dilutive for all periods presented. Fully diluted shares
outstanding for the three months ended March 31, 2005 and 2004 would have been 25,167,839 and 17,158,581, respectively.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



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



|                                                                      |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                      |  | Three Months Ended March 31, |       
|(in thousands)                                                        |  | 2005                         |        |   | 2004 |  
|Numerator:                                                            |  |                              |        |   |      |   |        |  
|Net loss                                                              |  | $                            | (7,059 | ) |      | $ | (6,368 | )
|                                                                      |  |                             
|Denominator:                                                          |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding used for basic income per share   |  |                              | 23,217 |   |      |   | 486    |  
|Common stock equivalents                                              |  |                              |       |   |      |   |       |  
|                                                                      |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding used for diluted income per share |  |                              | 23,217 |   |      |   | 486    |  
|                                                                      |  |                              |        |   |      |   |        |  



(4) Inventory



Inventory consisted of the following:



|                |  |                |       |                   |   |      
|--------------- |  | -------------- | ----- | ----------------- | - | -----
|(in thousands)  |  | March 31, 2005 |       | December 31, 2004
|Raw materials   |  | $              | 1,571 |                   | $ | 976  
|Work-in-process |  |                | 197   |                   |   |     
|Finished goods  |  |                | 146   |                   |   | 100  
|                |  |                |       |                   |   |      
|Inventory       |  | $              | 1,914 |                   | $ | 1,076
|                |  |                |       |                   |   |      



(5) Property and equipment



Property and equipment consisted of the following:



|                               |  |                |        |   |                   |   |        |  
|------------------------------ |  | -------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                 |  | March 31, 2005 |        |   | December 31, 2004 |  
|Laboratory equipment           |  | $              | 1,962  |   |                   | $ | 1,844  |  
|Office furniture and equipment |  |                | 1,099  |   |                   |   | 945    |  
|Leasehold improvements         |  |                | 5,121  |   |                   |   | 4,139  |  
|Manufacturing equipment        |  |                | 791    |   |                   |   | 688    |  
|Computer equipment             |  |                | 1,721  |   |                   |   | 1,634  |  
|                               |  |                |        |   |                   |   |        |  
|Property and equipment, gross  |  |                | 10,694 |   |                   |   | 9,250  |  
|Less Accumulated depreciation  |  |                | (5,289 | ) |                   |   | (4,870 | )
|                               |  |                |        |   |                   |   |        |  
|Property and equipment, net    |  | $              | 5,405  |   |                   | $ | 4,380  |  
|                               |  |                |        |   |                   |   |        |  



Depreciation expense was $420,000 and
$327,000 for the three months ended March 31, 2005 and 2004, respectively.



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



(6) Accrued expenses



Accrued expenses consisted of the following:



|                                  |  |                |       |                   |   |      
|--------------------------------- |  | -------------- | ----- | ----------------- | - | -----
|(in thousands)                    |  | March 31, 2005 |       | December 31, 2004
|Salaryrelated expense            |  | $              | 871   |                   | $ | 777  
|Clinical research and trial costs |  |                | 1,097 |                   |   | 943  
|Contracted research costs         |  |                | 183   |                   |   | 91   
|Accrued interest                  |  |                | 243   |                   |   | 222  
|Accounting and legal fees         |  |                | 131   |                   |   | 142  
|Leasehold improvements            |  |                | 412   |                   |   | 331  
|Other                             |  |                | 870   |                   |   | 757  
|                                  |  |                |       |                   |   |      
|Accrued expenses                  |  | $              | 3,807 |                   | $ | 3,263
|                                  |  |                |       |                   |   |      



(7) Debt



As of March 31, 2005 we had an aggregate of $5.8 million of bank debt outstanding with two
lending institutions, $2.6 million to Silicon Valley Bank, or SVB, and $3.2 million to General Electric Capital Corporation, or GE, as described below. The carrying value of long-term debt is as follows:



|                                        |  |                |        |   |                   |   |        |  
|--------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                          |  | March 31, 2005 |        |   | December 31, 2004 |  
|SVB credit facility                     |  | $              | 2,582  |   |                   | $ | 2,170  |  
|GE credit facility                      |  |                | 3,219  |   |                   |   | 3,411  |  
|Other                                   |  |                |       |   |                   |   | 18     |  
|                                        |  |                |        |   |                   |   |        |  
|                                        |  |                | 5,801  |   |                   |   | 5,599  |  
|Less: current portion of long-term debt |  |                | (2,902 | ) |                   |   | (3,012 | )
|                                        |  |                |        |   |                   |   |        |  
|Longterm debt                          |  | $              | 2,899  |   |                   | $ | 2,587  |  
|                                        |  |                |        |   |                   |   |        |  



As of March 31, 2005 and 2004,
interest rates in effect for outstanding obligations under the credit facilities ranged from 6.25% to 9.41% and 6.75% to 9.74%, respectively.



All of the credit facilities are subject to certain covenants, including maintaining a minimum level of earnings before interest, taxes, depreciation and amortization, as
defined in the loan agreement, maintaining a minimum percentage of our cash available for investing with the lending institution, and providing audited financial statements within 120 days after the close of the fiscal year. We were in compliance
with all covenants for the three month periods ended March 31, 2005 and 2004.As of March 31, 2005, we had $10.3 million and $4.8 million in available credit under our SVB and GE credit agreements. The availability under our SVB credit
facility expires on December 31, 2005 and availability on our GE credit facility expires July 31, 2005. We are currently in discussions with both lending institutions to extend the availability of each credit facility but there can be no assurance
that we will be successful in extending the availability of either credit facility.



(8) Commitments and contingencies



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



9



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



(9) Shareholders equity



On January 28, 2005, our board of directors made restricted stock grants to two of our officers. We granted 100,000 restricted shares to our
Senior Vice President  Research and Development and 60,000 restricted shares to our Senior Vice President  Finance and Administration and Chief Financial Officer. The shares underlying both grants will fully vest on the third anniversary
of the date of grant. If either of the officers employment terminates for any reason before the restricted stock is fully vested, except as provided by the officers Change of Control Agreement with us, the shares of restricted stock that
are not then vested shall be forfeited. If the provisions of the officers Change of Control Agreement are triggered then the restricted stock shall vest in accordance with the officers Change of Control agreement. The restricted stock
grant had a fair market value of $979,000 as of the close of business on January 28, 2005. Compensation related to the grant is recorded as deferred stock based compensation and recognized over the three year service period. As of March 31, 2005, we
had recognized $54,000 as compensation expense in the Condensed Consolidated Statement of Operations.



(10) Related parties



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



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



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



We earned and were paid a total of $1,833,000 in license and milestone
payments during 2004. These payments will be recognized as revenue over the estimated product development period for the corresponding product.



| | 1. | We received $500,000 in milestone receipts related to product development milestones during the first quarter of 2004 as a partial receipt of the milestone for commercial readiness
for breast cancer monitoring. We will recognize these receipts as revenue over the estimated life of the initial product life cycle which we estimate will end on December 31, 2007.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | In June 2004 we initiated a multi-center clinical trial for the monitoring of metastatic colorectal cancer and completed a development milestone defined in the Veridex agreement. As
a result, we earned a $500,000 milestone payment. This milestone payment will be recognized over the estimated product development period which is estimated to be completed by the end of 2006.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | As of September 30, 2004, we have successfully completed three more development milestones and from which we received $833,000 as a result. They were:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prostate cancer  feasibility of a large blood volume sample processing method and product concept completed; amount of milestone payable to us was $300,000
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



| |  |  | Tumor cell profiling reagents  product development process approved by the joint Veridex/Immunicon Steering Committee progress, first product is commercially available, second
product completed production readiness review, and proof of principle demonstrated for a third product and associated antibody licensed; amount of milestone payable to us was $200,000
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lung cancer: adjuvant prognosis and recurrence monitoring  first patient enrolled in clinical trial associated with this indication; amount of milestone payable to us was
$333,000.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will recognize these milestone receipts as revenue
over the estimated product development period which is estimated to end at various points through June 30, 2008.



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



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



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



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



On March 1, 2005, we and Veridex agreed that we had successfully completed the criteria for another development milestone relating to the enrollment of the first patient into the bone marrow study. Veridex has paid us $334,000 for this
milestone. We will recognize this receipt as revenue over the estimated life of the bone marrow study which we estimate will conclude in the second quarter of 2006.



We recognized $258,000 as milestone and other license related revenue in the three months ended March 31, 2005 and $31,000 for the three
months ended March 31, 2004. As of March 31, 2005 and December 31, 2004, we had receivables from Veridex of $885,000 and $249,000, respectively and payables to Veridex of $250,000 and $229,000, respectively. These receivables are recorded in
Receivable from related party and the payables are recorded in Payable from related party in the consolidated balance sheet.



We recognized revenue for the sale of four instrument sets in the first quarter of 2005, of which two instruments were for Veridex funded research centers. We sold an
instrument system to Veridex in the first quarter of 2004 and recognized revenue of $103,000. This revenue is recorded in Revenues from related party in the consolidated statement of operations.



In August 2003, we sold 80,000 shares of Series F Preferred Stock and entered into a License
and Supply Agreement (License and Supply Agreement) with another company. We received $400,000 in proceeds for the combined transaction. Because shares of our Series F Preferred Stock were valued at $4.00 per share in a similar
transaction, the same value was applied to the shares in this



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



transaction. The amount above the $4.00 per share value of the shares of our Series F Preferred Stock was deemed attributable to the License and Supply
Agreement and recorded as deferred license revenue. We recorded this $80,000 premium as deferred license revenue and are amortizing it into income over the two year period of the exclusive supply arrangement with this company. The unamortized
deferred license revenue related to this arrangement amounted to $15,000, and $55,000 as of March 31, 2005 and 2004, respectively. We recognized revenue of $11,000 and $10,000 related to the arrangement for the three months ended March 31, 2005 and
2004, respectively, and recorded it as Revenue from related party in the consolidated statement of operations.



The following table breaks out the revenue from related parties recognized over the three month periods ended March 31, 2005 and 2004:



|                                                  |  |                              |     |      |   |    
|------------------------------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                                                  |  | Three Months Ended March 31,
|(in thousands)                                    |  | 2005                         |     | 2004
|Contract and milestone revenue from related party |  | $                            | 269 |      | $ | 41 
|Product revenue from related party                |  |                              | 310 |      |   | 103
|                                                  |  |                              |     |      |   |    
|                                                  |  | $                            | 579 |      | $ | 144
|                                                  |  |                              |     |      |   |    



(11) Supplemental expense
information



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



Research and development expenses



Research and development expenses consisted of the following:



|                                 |  |                              |       |      |   |      
|-------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                 |  | Three Months Ended March 31,
|(in thousands)                   |  | 2005                         |       | 2004
|Salaries, benefits and taxes     |  | $                            | 3,015 |      | $ | 2,349
|Laboratory supplies and expenses |  |                              | 110   |      |   | 1,131
|Instrument development costs     |  |                              | 256   |      |   | 192  
|Clinical trial expense           |  |                              | 921   |      |   | 399  
|Contracted research costs        |  |                              | 283   |      |   | 312  
|Depreciation expense             |  |                              | 336   |      |   | 262  
|Insurance expense                |  |                              | 196   |      |   | 46   
|All others                       |  |                              | 607   |      |   | 550  
|                                 |  |                              |       |      |   |      
|                                 |  | $                            | 5,724 |      | $ | 5,241
|                                 |  |                              |       |      |   |      



General and administrative expenses



General and administrative expenses consisted of the following:



|                             |  |                              |       |      |   |      
|---------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                             |  | Three Months Ended March 31,
|(in thousands)               |  | 2005                         |       | 2004
|Salaries, benefits and taxes |  | $                            | 1,083 |      | $ | 658  
|Depreciation expense         |  |                              | 84    |      |   | 65   
|Legal and professional fees  |  |                              | 428   |      |   | 294  
|Insurance expense            |  |                              | 44    |      |   | 9    
|All others                   |  |                              | 346   |      |   | 157  
|                             |  |                              |       |      |   |      
|                             |  | $                            | 1,985 |      | $ | 1,183
|                             |  |                              |       |      |   |      



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##### Table of Contents

Immunicon Corporation and Subsidiaries (A Development Stage Company)

Notes to Condensed Consolidated Unaudited Financial Statements



(12) Subsequent events



On April 25, 2005, we issued a press release announcing that our board of directors elected Byron D. Hewett as our President and Chief
Operating Officer reporting to Chairman and Chief Executive Officer Edward L. Erickson. Mr. Hewett had previously served as our Chief Operating Officer and General Manager, Cancer Products since October 2004. Mr. Hewett was granted an option to
purchase 50,000 of our common shares and the option will vest evenly on an annual basis over four years.



Concurrent with this announcement, Mr. Erickson notified our board of directors of his intention to step down as Chief Executive Officer on March 31, 2006. The Nominating and Governance Committee and our board of
directors as a whole continue to plan, direct and oversee our succession process.



On May 6, 2005 we filed a shelf registration statement on Form S-3 with the SEC. If and when declared effective by the SEC, the shelf registration statement would permit the offer, sale and issuance by us from time to time, in one or more
offerings, of up to an aggregate of $75 million of our common stock, preferred stock, debt securities, warrants, depositary shares, stock purchase contracts and stock purchase units. The terms of any offering will be established at the time of the
offering.



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##### Table of Contents

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



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



Forward-Looking Statements



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



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



OVERVIEW



Our business principally involves the development, manufacture, marketing and sale of proprietary cell and molecular based diagnostic and research products with a primary focus on cancer. We believe that our products
can provide significant clinical benefits by giving physicians better information to understand, treat, monitor and diagnose cancer. Our technologies can identify, count and characterize a small number of circulating tumor cells, or CTC, and other
rare cells, such as endothelial cells, present in a blood sample from a patient.



Our collaborator, Veridex, LLC, or Veridex, a Johnson & Johnson company, received 510(k) clearance from the Food and Drug Administration, or FDA, in January 2004 for use of the Veridex CellSearch Circulating Tumor Cell Kit, which incorporates our technologies, in the management of
metastatic breast cancer (breast cancer that has spread beyond the primary breast tumor). In August 2000, we entered into a development, license and supply agreement with Ortho-Clinical Diagnostics, or OCD, a Johnson & Johnson company, which
subsequently assigned all rights and obligations under the agreement to Veridex. Under the terms of this agreement, we granted to Veridex a worldwide exclusive license within the field of cancer to commercialize cell analysis products incorporating
our technologies.



We were incorporated in 1983. Since our inception, we have
focused our activities on product development and life science research. In March 1999, we obtained $10.6 million in financing from the sale of our convertible preferred stock. As a result, we substantially increased investment in our cancer-related
products and technologies, hired additional key management team members and redefined our business strategy. Since 1999, we have devoted substantially all of our efforts to the development of our cell analysis platforms and diagnostic tools for
application in cancer. We completed the initial public offering, or the IPO, of shares of our common stock on April 21, 2004. In the IPO, we sold 6.9 million shares of our common stock, including the underwriters over allotment option, at
$8.00 per share and received proceeds of $49.4 million, net of fees and expenses. We are a development stage company and have incurred losses in the last five fiscal years. As of March 31, 2005, we had an accumulated deficit of $98.6 million. We
expect to incur substantial losses, which may increase over the next several years as we:



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



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##### Table of Contents

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



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



| |  |  | expand and scale-up our manufacturing capability for instruments, bulk reagents, reagent kits and other consumable products; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



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



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



Veridex collaboration



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



Commercialization of the
first product under this Development Agreement occurred in August 2004. Beginning therewith, we became obligated to invest at least 10% of Veridexs net sales from these products, excluding revenues from instrument sales, in certain research
and development activities. However, beginning with the first calendar year after the amount of these net sales exceeds $250 million; we are only required to invest an amount equal to at least 8.5% of these net sales. We are also responsible for
manufacturing reagents for CellSearch kits in bulk and delivering them to Veridex. We are responsible for all instrument manufacturing and certain ancillary products. We believe that we have manufacturing capacity available at our existing
facilities to satisfy commercial demand through 2005. Veridex is responsible for filling and packaging costs for the reagents, as well as sales, marketing, distribution, customer and technical support and field service of our cancer products,
including instrumentation. We have retained worldwide commercialization rights to all non-cancer applications of our technologies.



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



Revenues



We have not generated any significant product revenues since our inception. We initiated
sales activities for instrument platforms and reagent kits for research use only, RUO, in the first quarter of 2004 and for in vitro diagnostic, or IVD, use in the third quarter of 2004. As of March 31, 2005, we have shipped 26
CellTracks® AutoPrep Systems and 25
CellSpotter® Analyzers. We have recognized revenue
for 15 complete instrument system sets, including four in the three months ended March 31, 2005. We now have instruments in the USA, Europe and Japan. The recognition of revenue related to instrument shipments is typically delayed for a period of
several months due to final validation and testing of these systems at customer locations.



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



We earned and were paid a total of $1,833,000 in license and milestone payments during 2004. These payments will be recognized as revenue over the estimated product
development period for the corresponding product.



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| |  |  | We received $500,000 in milestone receipts related to product development milestones during the first quarter of 2004 as a partial receipt of the milestone for commercial readiness
for breast cancer monitoring. We will recognize these receipts as revenue over the estimated life of the initial product life cycle which we estimate will end on December 31, 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In June 2004 we initiated a multi-center clinical trial for the monitoring of metastatic colorectal cancer and completed a development milestone defined in the Veridex agreement. As
a result we earned a $500,000 milestone payment. This milestone payment will be recognized over the estimated product development period which is estimated to be completed by the end of 2006.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As of September 30, 2004, we have successfully completed three more development milestones from which we received $833,000 as a result. They were:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Prostate cancer  feasibility of a large blood volume sample processing method and product concept completed; amount of milestone payable to us is $300,000
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Tumor cell profiling reagents  product development process approved by the joint Veridex/Immunicon Steering Committee progress, first product is commercially available, second
product completed production readiness review, and proof of principle demonstrated for a third product and associated antibody licensed; amount of milestone payable to us is $200,000
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lung cancer: adjuvant prognosis and recurrence monitoring  first patient enrolled in clinical trial associated with this indication; amount of milestone payable to us is
$333,000.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We will recognize these milestone
receipts as revenue over the estimated product development period which is estimated to end at various points through June 30, 2008.



On March 1, 2005, we and Veridex agreed that we had successfully completed the criteria for another development milestone relating to the enrollment of the first patient
into the bone marrow study. Veridex has paid us $334,000 for this achievement. We will recognize this receipt as revenue over the estimated life of the bone marrow study which we estimate will conclude in the second quarter of 2006.



We recognized $258,000 as milestone and other license related revenue in the three months
ended March 31, 2005 and $31,000 for the three months ended March 31, 2004.



We
recognized revenue for the sale of four instrument sets in the first quarter of 2005, of which two instruments were for Veridex funded research centers. We sold an instrument system to Veridex in the first quarter of 2004 and recognized revenue of
$103,000. These instrument sets are recorded in Revenues from related party in the consolidated statement of operations.



As of March 31, 2005, we can earn up to an additional $4.3 million in license revenue from Veridex for research-related milestones. We estimate that we will earn these
license revenues from research milestones over the next three to five years. Therefore, we expect that the trend of license revenue will fluctuate. Also, we expect to continue to invest significant amounts in research and 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 2007 and therefore do not anticipate earning any sales-based
milestone revenues until then.



Research and development expenses



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



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



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



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



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



We expense research and development costs as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue these
investments in order to realize the potential of our product candidates and proprietary technologies. We expect to continue to incur significant costs for clinical research and for trials and to make investments to improve our instrument platforms
and reagents. From inception through March 31, 2005, we have incurred $83.8 million in total research and development expenses, the majority of which relate to our cell-based research and diagnostic products.



General and administrative expenses



Our general and administrative expenses consist primarily of salaries and other related
costs for personnel in executive, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in research and development expense and professional fees for legal and
accounting services. From inception through March 31, 2005, we incurred $26.5 million in general and administrative expenses.



Stock-based compensation expenses



Stock-based compensation expense, which is a non-cash charge to expenses, results from stock option grants to employees at exercise prices below the fair value of the
underlying common stock resulting in our recording stock-based compensation expense associated with such grants. Stock-based compensation expense also is recorded for stock option and warrant grants to non-employees and for restricted stock grants
provided to directors and advisors in lieu of cash compensation. We amortize the deferred stock-based compensation to operating expenses over the vesting periods of the options and grants, subject to adjustment for forfeiture during the vesting
period. Since our inception, we recognized $6.0 million in deferred stock-based compensation expense. For the period from inception through March 31, 2005, we have recognized cumulative stock-based compensation expense of $3.1 million.



Interest income and expense



Interest income consists of interest earned on our cash, cash equivalents and investments.
Investment holdings as of March 31, 2005 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 CellSave, CellTracks,
CellSpotter, Magnest, and the CellTracks AutoPrep System logo, and the CellSpotter Analyzer logo by Immunivest Corporation, our wholly owned subsidiary. We have filed a number of trademark registration applications in
preparation for commercial distribution activities with respect to future products. Much of the proprietary software and related information utilized in our instrument systems is protected by the copyright rights or by rights that we have licensed.



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



We have a portfolio of issued
patents and patent applications, which we believe provides patent coverage for our proprietary technologies and products. As of April 30, 2005, our intellectual property estate consisted of 56 issued patents, 136 pending patent applications, 10
registered trademarks and 17 pending trademarks registrations.



CRITICAL
ACCOUNTING POLICIES



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



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



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



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



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



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



In accordance with the SECs Release No. 33-8040, Cautionary Advice Regarding Disclosure about Critical Accounting Policies, we have determined the critical principles by considering accounting policies
that involve the most complex or subjective decisions or assessments. There were no significant changes to our critical accounting policies during the three months ended March 31, 2005.



Revenue recognition



We derive revenues from three primary sources: license revenue, instrument product sales and reagent product sales. We recognize revenue on product sales in accordance
with the SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, or SAB No. 104, when persuasive evidence of an arrangement exists, the contract price is fixed or determinable, the product or accessory has been
delivered, title and risk of loss have passed to the customer, and collection of the resulting receivable is reasonably assured. We recognize revenue for instrument placements at the time that all necessary conditions for the recognition of revenue
have been met. Specifically, we may place instruments with customers and allow the customer a period of time for training and validation as is common in our industry. Therefore there may be a delay between the time that an instrument is placed with
a customer and the point at which the revenue for the instrument placement is recognized. Also in certain instances the customer may be provided with an opportunity to return the instrument to us prior to acceptance. We therefore recognize the
revenue associated with these instrument placements only at the point when it is clear that all revenue recognition criteria have been met and that no continuing right of return remains.



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



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Inventory capitalization



In August 2004, we initiated sales for in vitro diagnostic use of our initial cancer diagnostic products which had received FDA
clearance in January 2004. We determined that this represented the initiation of the commercialization of our products. We completed our first instrument sale to a third party laboratory customer during the fourth quarter of 2004. Therefore,
effective October 1, 2004 we adopted a policy for capitalizing inventory and recognizing cost of sales. Prior to October 1, 2004, all costs associated with manufacturing were included in research and development expenses. In the fourth quarter of
2004, we began to capitalize in inventory the cost of manufactured products for commercial sale and to expense such costs as cost of products sold at the time of sale. However, as we sell that portion of our existing inventory that had previously
been expensed as part of research and development expenses, there will be a period of time where we will recognize manufacturing revenue with minimum corresponding cost. Therefore, we anticipate that our gross margin on sales of our instruments and
reagents will fluctuate from quarter to quarter during 2005.



We believe that
our gross margins will be distorted for comparative purposes through at least the end of 2005 and depending on market demand for our products.



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



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



Accounting for research and development expenses



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



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



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



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Accounting for income taxes



We must make significant management judgments when determining our provision for income taxes, our deferred tax assets and liabilities and
any valuation allowance recorded against our net deferred tax assets. At March 31, 2005, we recorded a full valuation allowance of $39.8 million against our net deferred tax asset balance, due to uncertainties related to our deferred tax assets as a
result of our history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual
results differ from these estimates or if we adjust these estimates in future periods we may need to change the valuation allowance, which could materially impact our financial position and results of operations.



Development Stage Enterprise



Although we initiated sales of our first cancer diagnostic products in August 2004, we have
generated no significant product revenue to date. Our activities have consisted primarily of developing and licensing products, raising capital and recruiting personnel. Accordingly, we are considered to be in the development stage as of March 31,
2005, as defined by Statement of Financial Accounting Standards, or SFAS No. 7, Accounting and Reporting by Development Stage Enterprises.



RESULTS OF OPERATIONS



Three months ended March 31, 2005 and 2004



Revenue



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



|                                                                                  |  |                              |     |      |   |    
|--------------------------------------------------------------------------------- |  | ---------------------------- | --- | ---- | - | ---
|                                                                                  |  | Three Months Ended March 31,
|Revenue (dollars in thousands)                                                    |  | 2005                         |     | 2004
|Product revenue including product revenue from related party: Instrument revenue: |  |                              |     |      |   |    
|Veridex                                                                           |  | $                            | 223 |      | $ | 103
|Other                                                                             |  |                              | 240 |      |   |   
|Reagents and other product revenue:                                               |  |                              |     |      |   |    
|Veridex                                                                           |  |                              | 78  |      |   |   
|Other                                                                             |  |                              | 19  |      |   |   
|                                                                                  |  |                              |     |      |   |    
|Total product revenue                                                             |  | $                            | 560 |      | $ | 103
|License and milestone revenue:                                                    |  |                              |     |      |   |    
|Veridex and other related party                                                   |  |                              | 269 |      |   | 41 
|Other revenue                                                                     |  |                              | 50  |      |   | 13 
|                                                                                  |  |                              |     |      |   |    
|Total revenue                                                                     |  | $                            | 879 |      | $ | 157
|                                                                                  |  |                              |     |      |   |    



We earned $560,000 in product revenue
in the three months ended March 31, 2005 of which $301,000 earned from Veridex, a related party. Instrument revenue was $463,000 and reagent revenue was $97,000. We earned $103,000 in product revenue in the three month period ended March 31, 2004,
all of which was instrument-related revenue. Our instrument revenue increased because we sold four instrument systems in the three months ended March 31, 2005 compared to one instrument system in the corresponding period in 2004. Included in the
2005 revenue is approximately $373,000 of product revenue with no corresponding cost of goods sold recognized in this period. These product revenues relate to materials purchased prior to October 1, 2004 and were previously expensed as research and
development expense.



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License and milestone revenue from related party increased by $228,000 to $269,000 for the three months ended March
31, 2005 from $41,000 for the three months ended March 31, 2004. From August 1, 2000 to March 31, 2005, we earned $6.2 million in license and milestone receipts under our Development Agreement with Veridex and have received $5.9 million as of March
31, 2005. 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.



During the first quarter of 2004, we received $500,000 in milestone receipts as a partial receipt of the milestone for commercial readiness
for breast cancer monitoring. We will recognize this as revenue over the estimated life of the related product development period, which we estimate will end on December 31, 2007.



On March 1, 2005, we and Veridex agreed that we had successfully completed the criteria for another development milestone relating to the
enrollment of the first patient into the bone marrow study and Veridex paid us $334,000. We will recognize this receipt as revenue over the estimated life of the bone marrow study which we estimate will be completed in the second quarter of 2006.



We recognized $258,000 as milestone and other license related revenue in the
three months ended March 31, 2005 and $31,000 for the three months ended March 31, 2004.



In August 2003, we sold 80,000 shares of Series F Preferred Stock and entered into a License and Supply Agreement (License and Supply Agreement) with another company. We received $400,000 in proceeds for
the combined transaction. Because shares of our Series F Preferred Stock were valued at $4.00 per share in a similar transaction, the same value was applied to the shares in this transaction. The amount above the $4.00 per share value of the shares
of our Series F Preferred Stock was deemed attributable to the License and Supply Agreement and recorded as deferred license revenue. We recorded this $80,000 premium as deferred license revenue and we are amortizing it into income over the two year
period of the exclusive supply arrangement with this company. We recognized revenue of $11,000 and $10,000 related to the arrangement and recorded it as Revenue from related party in the consolidated statement of operations for the three
month periods ended March 31, 2005 and 2004, respectively.



As a result of the
above, total revenue increased by $722,000 to $879,000 in the three months ended March 31, 2005 as compared to $157,000 in the corresponding period in 2004.



Costs of goods sold



Costs of goods sold increased to $392,000 in the three months ended March 31, 2005 from zero in the corresponding period in 2004. We initiated the practice of recording costs of goods sold and capitalizing inventory
in October 2004 after the launch of our initial in vitrodiagnostic products.



Instrument costs of goods sold was $299,000 and reagent costs of goods was $93,000 for the three months ended March 31, 2005.



Research and development expenses



Research and development expenses increased by $745,000, or 15.0%, to $5.7 million in the first quarter of 2005 from $5.0 million in the corresponding quarter in 2004.
Salary and salary-related costs were $3.0 million in the first quarter of 2005 compared to $2.3 million in the corresponding quarter in 2004. This increase of $0.7 million or 28.4% is due principally to higher staff levels necessary to complete the
development of certain instrument platforms and complete the development of our initial cancer monitoring test. We hired additional personnel during the second half of 2004 to support the commercial launch of our initial products, to support
clinical development to expand applications of our cancer diagnostic technology and to expand uses of our technology beyond cancer to other disease states. The portion of stock-based compensation expenses recognized as part of research and
development salaries was $274,000 in the first quarter of 2005 versus $282,000 in the first quarter of 2004.



Laboratory supplies and expenses were $110,000, or $1.0 million lower, in the first quarter of 2005 than in 2004. As of October 1, 2004 we began capitalizing inventory. Prior thereto we had recorded all inventory
related costs as part of laboratory supplies and expenses. The costs incurred in the first quarter of 2004 were initial inventory purchases made in preparation for product launch but recorded as laboratory supplies and expenses. These purchases in
2005 were capitalized as inventory.



Our instrument development costs increased
by $64,000 to $256,000 in the first quarter of 2005 from $192,000 in the previous years corresponding quarter. This increase was a result of additional development expense related to the upcoming launch of the CellTracks



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Analyzer II which is planned for the second quarter of 2005. We anticipate that we will continue to engage in instrument system improvement activities for
the remainder of 2005 and beyond. Therefore, it is likely that instrument development costs will fluctuate in future periods.



Clinical trial expenses increased in the first quarter of 2005 by $522,000 to $921,000 from $399,000 in the first quarter of 2004. In the second quarter of 2004, we
initiated a clinical trial for the monitoring of metastatic colorectal cancer. In January 2005 based on encouraging interim data we decided to increase the number of patients to be included in the trial from the original trial size of 200 patients
up to 400. We increased our enrollment efforts in order to attempt to complete our patient accrual by December 31, 2005. Also, in October 2004 we initiated a pivotal clinical trial for the monitoring of metastatic prostate cancer, which we believe,
if it is successful, should result in a regulatory submission to the FDA. We anticipate increasing our clinical trial expenditures in the remainder of 2005 and beyond in order to expand the uses of our technology to other cancers, to earlier stages
of the cancer disease state and to other disease states where our technology may represent an improvement over current diagnostic techniques.



Contracted research costs were $29,000 lower in the first quarter of 2005 than in the first quarter of 2004. We incurred higher costs associated with manufacturing
validation efforts in the first quarter of 2004 as we prepared for the launch of our initial in vitro diagnostic products in August 2004. Therefore, these expenses were not as high in the first quarter of 2005.



Depreciation expense increased in the first quarter of 2005 by $74,000 to $336,000 from
$262,000 in the first quarter of 2004. This increase is primarily related to capital expenditures for equipment and facilities related costs incurred in preparation for the launch of our initial commercial products.



Insurance expenses increased by $150,000 in the first quarter of 2005 over the same period in
2004 related principally to allocated costs of directors and officers liability insurance which increased as a result our completion of our IPO in April 2004.



A summary of the principal components of our research and development costs for the three months ended March 31, 2005 and 2004 are shown below:



|                                        |  |                              |       |      |   |      
|--------------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                        |  | Three months ended March 31,
|Research and development expenses       |  | 2005                         |       | 2004
|                                        |  | (in thousands)              
|Salaries, benefits and taxes            |  | $                            | 3,015 |      | $ | 2,349
|Laboratory supplies and expenses        |  |                              | 110   |      |   | 1,131
|Instrument development costs            |  |                              | 256   |      |   | 192  
|Clinical trial expenses                 |  |                              | 921   |      |   | 399  
|Contracted research costs               |  |                              | 283   |      |   | 312  
|Depreciation expense                    |  |                              | 336   |      |   | 262  
|Insurance expense                       |  |                              | 196   |      |   | 46   
|All others                              |  |                              | 607   |      |   | 550  
|                                        |  |                              |       |      |   |      
|Total research and development expenses |  | $                            | 5,724 |      | $ | 5,241
|                                        |  |                              |       |      |   |      



We expect salary related expenses to
increase in future years as we hire additional personnel and continue to invest in research and clinical trial activities. We believe that costs related to laboratory supplies and expenses will be higher in future periods as we develop:



| |  | research and diagnostic products for cancers other than breast cancer;
|- |  | ----------------------------------------------------------------------



| |  | tests designed to diagnose cancer earlier in the disease; and
|- |  | -------------------------------------------------------------



| |  | other diagnostic tools for use in diseases such as cardiovascular and infectious diseases, and for use in drug development.
|- |  | ---------------------------------------------------------------------------------------------------------------------------



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We expect clinical development expenses to be higher in future years as we expand our clinical trials to investigate
the effectiveness of our cancer diagnostic products on cancers other than breast cancer and in earlier stages of the disease in breast and other cancers, and as we develop other diagnostic tools for use in diseases such as cardiovascular,
inflammatory and infectious diseases and for use in tools for drug development.



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



General and administrative expenses



General and administrative expenses increased by $540,000, or 37.4%, to $2.0 million in the
first quarter of 2005 from $1.4 million in 2004. Salary-related costs increased by $425,000 in the first quarter of 2005, due principally to increases in personnel throughout the period from April 2004 through March 2005. We hired additional
accounting and administrative personnel in order to prepare for the additional administrative and reporting activities resulting from our transition to a publicly-held company and in preparation for the commercial launch of our initial products,
including hiring our Chief Counsel in April 2004 and our Chief Operating Officer in October 2004 after our commercial launch of our products. Legal, accounting and other professional fees increased by $134,000, or 45.6% to $428,000 in the first
quarter of 2005 as a result of additional expenses associated with public company compliance and reporting requirements. We became a public company in April 2004. Insurance expenses increased to $44,000 as a result of the allocated portion of the
higher directors and officers liability insurance which increased as a result our completion of our IPO in April 2004. Depreciation expense increased by $19,000 to $84,000 in the first quarter of 2005 from $65,000 in the first quarter of 2004. This
increase was attributable to the expansion of our office facilities to support personnel additions related to our transition to a publicly held company.



Interest income



Interest income increased by $226,000, or 364.5%, to $288,000 in the quarter ended March 31, 2005 from $62,000 in the quarter ended March 31, 2004. The increase in interest income was primarily a result of an increase
in average invested cash balances in 2005. Our increase in invested cash balances resulted from our IPO which provided net cash proceeds of $49.4 million and which was completed on April 21, 2004.



Interest expense



Interest expense decreased by $38,000, or 23.3%, to $125,000 for the first quarter of 2005 from $163,000 for first quarter of 2004. The
decrease was due to lower average debt outstanding in the first quarter of 2005 compared to 2004.



Stock-based compensation expenses



Stock-based compensation expenses were $350,000 and $401,000 for the three months ended March 31, 2005 and 2004, respectively. This decrease was principally due to lower amount of options granted to consultants in the periods following the
three months ended March 31, 2004. We recognized these expenses as part of research and development expenses and general and administrative expenses as shown below.



|                                               |  |                             |     |      |   |    
|---------------------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                               |  | Three MonthsEnded March 31,
|Stock-based compensation expenses included in: |  | 2005                        |     | 2004
|                                               |  | (in thousands)             
|Research and development expenses              |  | $                           | 274 |      | $ | 282
|General and administrative expenses            |  |                             | 76  |      |   | 119
|                                               |  |                             |     |      |   |    
|Total stock-based compensation expenses        |  | $                           | 350 |      | $ | 401
|                                               |  |                             |     |      |   |    



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



Income Taxes



We have incurred net operating losses since our inception and have consequently not paid any federal, state or foreign taxes. As of March 31, 2005, we had approximately
$34.7 million of net operating loss carryforwards and approximately $3.6 million in research and development tax credit carryforwards available to offset future regular and alternative taxable income. If not utilized, these net operating loss
carryforwards and tax credits will begin to expire in 2018. If we do not achieve profitability, we may lose our net operating loss carryforwards. In addition, the Internal Revenue Code places certain limitations on the annual amount of net operating
loss carryforwards that can be utilized if certain changes in our ownership occur. We are currently not subject to these limitations.



Net loss and net loss per common share



The net loss of $7.1 million in the first quarter of 2005 was $0.7 million, or 10.9%, higher than the loss of $6.4 million in the first quarter of 2004.



At the completion of our IPO on April 21, 2004 approximately 52.1 million preferred shares
were converted into 15.5 million shares of common stock. As the result, the net loss per common share of $0.30 in the first quarter of 2005 was $12.80 per share lower than the loss per common share of $13.10 in the first quarter of 2004. Weighted
average common shares outstanding during the three months ended March 31, 2005 were approximately 23.2 million compared to 486,000 for the same period in 2004.



LIQUIDITY AND CAPITAL RESOURCES



We are a development stage company. We have financed our operations since inception through private equity and debt financings, license and milestone revenues from
corporate collaborations, capital equipment and leasehold financing, government grants and interest earned on cash and investments. Since our inception, we have generated net losses of $98.6 million from operations.



Cash and short-term investments decreased by $5.7 million in the three month period ended
March 31, 2005 to $47.4 million from $53.1 million as of December 31, 2004, principally due to the stage of development and early commercialization period.



We used $5.1 million in our operating activities in the three months ended March 31, 2005 compared to $4.9 million in same period in 2004 and $83.9 million from inception
through March 31, 2005. Our operating activities during these periods consisted principally of research and development efforts and the conduct of clinical trials.



Our investing activities provided cash of $44,000 in the three months ended March 31, 2005. We received net proceeds from maturities of our
investments of $1.5 million and spent $1.4 million on capital expenditures. We used approximately $700,000 in investing activities in the three months ended March 31, 2004 as a result of purchases for capital. We have used $36.5 million in investing
activities from inception, resulting principally from the net investment maturities of $25.0 million in short term investments and by purchases of $11.5 million of property and equipment.



We generated cash of $342,000 from our financing activities in the three months ended March 31, 2005, used $325,000 in the same period in
2004 and from inception we have generated cash from financing activities of $143.3 million. We had proceeds from new borrowings of $1.3 million and made principal payments of $1.1 million in the three months ended March 31, 2005 as compared to
proceeds from new borrowings of $795,000 and principal payments of $808,000 in the three months ended March 31, 2004 and $19.0 borrowings and payments of $12.2 million since inception. On April 21, 2004, we completed our IPO. In the IPO, we sold 6.9
million shares of our common stock at $8.00 per share. We raised a total of $49.4 million, net of fees and expenses. In connection with the IPO, we incurred costs totaling $1.9 million and paid these expenses in the current year. All of the shares
were sold by us. The net proceeds from the IPO will be used for product commercialization, including manufacturing, and for clinical trials, research and development, capital expenditures, and working capital and other general corporate purposes.
Our common stock trades on The Nasdaq National Market System under the symbol IMMC. From inception to March 31, 2005 we have raised $51.0 million from the sale of our common stock, including our IPO, $1.5 million from the sale of 10,000
shares of our common stock to three investors in 1984 and $85.1 million, net of issuance costs of $2.1 million, from the sale of our preferred stock.



24



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##### Table of Contents

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



Since March 1999, we have also borrowed $19.0 million through equipment lines of credit and have received $6.2
million in milestone receipts from Veridex. Our liquidity requirements are the result primarily of research and development and other operating expenditures, capital equipment expenditures and payments on outstanding indebtedness. Sales of our
common and preferred stock, including the IPO, were 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 
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|Exercise of options and warrants and other sales of common stock |  | various    |  |                 |  |                 |        |                             |   | 1,520                    |  | 891,181   
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|                                                                 |  |            |  |                 |  |                 |        |                             | $ | 137,562                  |  | 23,248,994
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           



As of March 31, 2005, we did not have
any off balance sheet financing arrangements.



The following
table summarizes our contractual obligations and related interest charges on lines of credit at March 31, 2005 and the effects such obligations are expected to have on our liquidity and cash flows in future periods.



|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |      
|----------------------------------- |  | --------------- | ------ | ---- | - | ------------- |  | ------------- | ----- | ---------- | - | ----- |  | - | -----
|                                    |  | Payments due in
|Contractual obligations             |  | Total           |        | 2005 |   | 2006 and 2007 |  | 2008 and 2009 |       | After 2009
|                                    |  | (in thousands) 
|Lines of credit                     |  | $               | 6,612  |      | $ | 2,726         |  | $             | 3,298 |            | $ | 588   |  | $ |     
|Operating leases                    |  |                 | 5,668  |      |   | 677           |  |               | 1,932 |            |   | 1,979 |  |   | 1,080
|Open purchase order commitments (1) |  |                 | 6,899  |      |   | 6,899         |  |               |      |            |   |      |  |   |     
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |      
|Total contractual obligations       |  | $               | 19,179 |      | $ | 10,302        |  | $             | 5,230 |            | $ | 2,567 |  | $ | 1,080
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |      

---

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



We also have contingent obligations for research and development and clinical trial expenditures under our Development Agreement with Veridex. Specifically, we must pay
the first $5.0 million in clinical trial costs for the first cellular analysis product for general population screening for a major cancer, and Veridex is responsible for the next $5.0 million of such clinical trial costs. We have agreed to
negotiate in good faith for the allocation of costs in excess of $10.0 million. As of March 31, 2005 we have not incurred any costs related to clinical trials for a product for general population screening, and we do not anticipate spending any
funds on clinical trials toward such a product through 2005.



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



In addition, if we achieve certain levels of sales of our reagents, we may receive up to an additional $10.0 million
in milestone payments from Veridex, although we do not expect to receive any milestone payments related to sales goals until at least 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 earned $6.2 million of these milestone payments and have received $5.9
million as of March 31, 2005. We expect to earn the remaining $4.3 million over the next three to five years.



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



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



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



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



Following commercialization, if we and Veridex are able to generate product sales under the Development Agreement, we are required to invest an amount ranging from
between 8.5% and 10% of total net product sales by Veridex, excluding revenue from cell analysis system sales, in research and development activities for cancer-related cell analysis products. These research and



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



development activities may consist of any activities, such as product improvements, product line extensions and clinical trials, conducted to achieve the
milestones described above, to advance the development program designed by the steering committee for this agreement, or to enhance the cancer-related cell analysis products or sample preparation and cell analysis systems based on our technologies.



At March 31, 2005, we had $15.1 million in available borrowing capacity under
our existing equipment lines of credit. The availability under our SVB credit facility expires on December 31, 2005 and availability on our GE credit facility expires July 31, 2005. We are currently in discussions with both lending institutions to
extend the availability of each credit facility but there can be no assurance that we will be successful in extending the availability of either credit facility.



On May 6, 2005 we filed a shelf registration statement on Form S-3 with the SEC. If and when declared effective by the SEC, the shelf
registration statement would permit the offer, sale and issuance by us from time to time, in one or more offerings, of up to an aggregate of $75 million of our common stock, preferred stock, debt securities, warrants, depositary shares, stock
purchase contracts and stock purchase units. The terms of any offering will be established at the time of the offering.



Based on our operating plans, we believe that our available cash including the net proceeds from our IPO will be sufficient to finance operations and capital expenditures
until at least March 31, 2006. Our future capital requirements include, but are not limited to, supporting our research and development efforts and our clinical trials, although we are not obligated to meet any absolute minimum dollar spending
requirements under our current operating agreements. Our future capital requirements will depend on many factors, including the scope and progress made in our research and development activities, our clinical trials and capital requirements related
to our commercialization efforts. We had $47.4 million in cash on hand and short term investments, as well as approximately $15.1 million in available lines of credit as of March 31, 2005. We plan to use our cash on hand and our available lines of
credit to continue to develop our cancer diagnostic products beyond breast cancer to other types of solid tissue cancers as well as to explore the uses of our technology in earlier stages of the cancer disease process. Also, we plan to explore
development of uses for our technology outside of cancer such as in cardiovascular disease. We plan to use our cash on hand, anticipated funds generated from the sales of our products as well as additional equity or debt-related offerings to finance
our future development efforts. We may not be successful in generating sufficient product sales or raising sufficient funds from the sale of equity or debt securities to support the research and development expenses necessary to expand the uses of
the technology into other cancers and in non-cancer diseases. In addition, if we are unsuccessful in our product development efforts, additional financing may not be available in sufficient amounts or on terms acceptable to us, if at all. If we are
unable to obtain additional financing, we may elect to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could have a material adverse effect on our financial condition
and operating results.



RECENT ACCOUNTING PRONOUNCEMENTS



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



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Risk factors



FACTORS THAT MAY AFFECT FUTURE RESULTS



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



RISKS RELATING TO OUR BUSINESS



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



We are a development stage company with limited operating history. We have incurred
significant net losses since we began operations in 1983. As of March 31, 2005, we had a deficit accumulated during our development stage of $98.6 million. For the three months ended March 31, 2005 and 2004 we had net losses of $7.1 million and $6.4
million, respectively. These losses have resulted primarily from costs incurred in our research and development programs and from our general and administrative expenses. Because our operating expenses are likely to increase significantly in the
near term, we will need to generate significant additional revenue to achieve profitability. As we do not as yet have sufficient operating revenue from the sales of our products to offset our losses, we do not expect to have any significant
operating income from the sales of our products until at least 2007, and we expect our losses to continue to increase as a result of ongoing research and development and clinical trial expenses, as well as increased manufacturing, sales and
marketing expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders equity. Because of the numerous risks and uncertainties associated with our
product development efforts, market acceptance and uncertainties concerning the success of sales efforts by us and Veridex, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.



If our relationship with Veridex is terminated, we may be unable to continue to
commercialize effectively certain of our products based on our technologies in the field of cancer.



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



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



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



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



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



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



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Risk factors



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



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



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



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



To accomplish this, we and Veridex will need to convince oncologists, primary care
physicians, surgeons, laboratory professionals and other members of the medical and biotechnology communities of the benefits of these products through published papers, presentations at scientific conferences and additional clinical trials For
example, we currently have FDA clearance for the use of our products for determining progression free survival and overall survival in patients undergoing treatment for metastatic breast cancer. We believe that we will need to expand the intended
use of this technology to other uses within breast cancer and to other cancers, such as colorectal and prostate cancer, in order to achieve broad market acceptance. If we and Veridex are not successful in these efforts, the market acceptance for
these products could be limited. Additionally, if ongoing or future clinical trials result in unfavorable or inconsistent results, these products may not achieve market acceptance. Other factors that might influence market acceptance of these
products include the following:



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



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



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



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



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



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



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



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



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



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



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



All of the products that we
or Veridex intend to submit for FDA clearance or approval will be subject to substantial restrictions, including, among other things, restrictions on the indications for which we and Veridex may market these products, which could result in lower
revenues. The marketing claims we and Veridex will be permitted to make in labeling or advertising regarding our cancer diagnostic products, if cleared or approved by the FDA, will be limited to those specified in any clearance or approval. We
expect that



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Risk factors



initially many of these products will be limited to research use only (or RUO). In addition, both we and Veridex are subject to inspection and marketing
surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we or Veridex have failed to comply with these requirements, it can institute a wide variety of enforcement actions, ranging from a public
warning letter to more severe sanctions, including:



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



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



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



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



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



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



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



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



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



We have limited commercial manufacturing experience and capabilities. We currently assemble or perform final assembly, test and release the CellSpotter and CellTracks
AutoPrep System, as well as bulk reagents and other associated products used with the CellTracks AutoPrep System, at our facility located in Huntingdon Valley, Pennsylvania. We currently have adequate manufacturing capacity to meet anticipated
demand for 2004 and 2005. However, in order to meet anticipated demand thereafter, we will have to expand our manufacturing processes and facilities or increase our reliance on third-party manufacturers. Under our agreement with Veridex, we might be
required to establish a third manufacturing facility or qualify a contract manufacturer in the future. We might encounter difficulties in expanding our manufacturing processes and facilities or in expanding our relationships with third-party
manufacturers and might be unsuccessful in overcoming these difficulties. In that event, our ability to meet product demand could be impaired or delayed.



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



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



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



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



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



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Risk factors



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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

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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



The extent to which any of our technologies and products achieve market acceptance will
depend on many competitive factors, many of which are beyond our control. Competition in the pharmaceutical and biotechnology industries, and the medical devices and



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diagnostic products segments in particular, is intense and has been accentuated by the rapid pace of technological development. Our competitors include large
diagnostics and life sciences companies. Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do. Some of them also have more
experience than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales. These organizations also compete with us to:



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



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



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



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



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



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



To improve our competitive position, we believe that we will need to develop new products as well as improve our existing instruments, reagents and ancillary products.
Improvements in automation and throughput (the number of tests that can be performed in a specified period of time) of our products will be important to the competitive position of our products as we market to a broader, perhaps less technically
proficient, group of customers. Our ability to develop new products and make improvements in our products may face difficult technological challenges leading to development delays. For example, we had experienced delays in connection with the
development of our laser-based CellTracks Analyzer cell analysis instrument for use in cancer diagnostic testing. These delays were the result of technical problems associated with reliability of the system to detect cancer cells. In response, we
are planning to introduce a second generation instrument, the CellTracks Analyzer II, which, among other improvements compared to our CellSpotter Analyzer, implements enhancements, such as the automation of many of the steps associated with scanning
samples. We are continuing our product development programs to improve our analyzer platforms further because we believe that some of the planned features, such as enhanced software to recognize cells and to quantify proteins associated with the
cells, may be required to address future potential research and clinical applications and to remain competitive. If we are unable to successfully complete development of new products or if we are unable to successfully complete the planned
enhancements to our products, in each case without significant delays, our future competitive position may be adversely affected.



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



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



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



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



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



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



RISKS RELATED TO
OUR INTELLECTUAL PROPERTY



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



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



Because the issuance of a patent is not conclusive of our validity or enforceability and can
be challenged, we do not know how much protection, if any, our patents will provide to us if we attempt to enforce them or if others challenge their validity or enforceability in court. For example, if our patents relating to the separation of CTCs
from blood samples were challenged and invalidated, we would not be able to prevent others from utilizing these key aspects of our technologies, which would substantially harm our business. Moreover, our patent applications may not result in issued
patents, and even if issued, our patents may not contain claims that are

sufficiently broad to prevent others from practicing our technologies or
developing competing products. Accordingly, we cannot assure you that we will be able to obtain, defend or enforce our patent rights covering our technologies in the US or in foreign countries. In addition, if others discover or misappropriate the
technologies that we have chosen to maintain as trade secrets, we may not be able to effectively maintain our technologies as unpatented trade secrets. Although we have taken measures to protect our unpatented trade secrets and other non-public
information such as know-how, including the use of confidentiality and invention assignment agreements with our employees, consultants and some of our contractors, it is possible that these persons may unintentionally or willingly breach the
agreements or that our competitors may independently develop or otherwise discover our trade secrets and know-how.



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



Although we may initiate
litigation to stop the infringement of our patent claims or to attempt to force an unauthorized user of



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



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



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



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



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



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



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



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



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



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



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



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



We have exclusively in-licensed significant intellectual property, including patents and know-how, related to our cell analysis
instrumentation and cell isolation and enrichment products. In April 1997 we entered into a license agreement with the University of Twente, or Twente, under which we were granted exclusive rights to technology developed at Twente relating to
optical analysis of particles similar to cells and cell particles. This technology and the underlying patents and know-how contribute significantly to



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our cell analysis platforms. This agreement will terminate upon the later of April 2007 or the expiration date of the last to expire of the patents licensed
under this agreement. In addition, Twente may unilaterally terminate this agreement if we are in material breach or if we become bankrupt or insolvent. Twente also may unilaterally terminate the license granted under this agreement if we do not
maintain sufficient general and product liability insurance coverage once we have begun clinical trials and commercialization of our products. In addition, in September 1999, we entered into a license agreement with the University of Texas, or
Texas, under which we were granted exclusive rights to technology, including patents and know-how, which we developed in collaboration with Texas, relating to the isolation, enrichment and characterization of circulating epithelial cells. Epithelial
cells are cells that cover external and internal body surfaces and give rise to the majority of solid tumors. This technology and the underlying patents and know-how contribute significantly to our cell analysis products in the field of cancer
diagnostics. We are responsible for making royalty payments of 1% of our sales of reagents incorporating the intellectual property licensed to us under this agreement. This agreement terminates when all of Texass rights to the licensed
technologies expire. In addition, Texas also may unilaterally terminate this agreement if we are in material breach or become bankrupt or insolvent. Texas also may unilaterally terminate the license granted under this agreement, or the exclusivity
of such license, in any national political jurisdiction if we fail to provide written evidence satisfactory to Texas, within 90 days of receiving written notice from Texas that it intends to terminate this license, that we or our sub licensees have
commercialized or are actively attempting to commercialize a licensed invention in these jurisdictions. In addition, in July 2002, we entered into a license agreement with Streck Laboratories, Inc., or Streck. Under this agreement, Streck granted to
us a non-exclusive, worldwide, royalty-bearing license to practice certain of Strecks cell preservative technology, including patents and know-how, for the research, development, manufacture and sale of our CellSave Preservative Tube to test
for the presence of epithelial cells or CTCs in a sample of fluid from a patient. This agreement will terminate upon the expiration date of the last to expire of the patents licensed under this agreement. In addition, either party also may terminate
this agreement if the other party is in material breach or becomes involved in financial difficulties, including bankruptcy and insolvency.



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



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



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



RISKS RELATING TO OUR COMMON STOCK



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



We cannot assure you that an active trading market for our common stock will exist at any
time. Holders of our common stock may not be able to sell shares quickly or at the market price if trading in our common stock is not active. Since initial trading of our stock began in April 2004 through March 31, 2005, our average daily trading
volume has been 113,151 shares. Substantially all of the 23.2 million shares outstanding are eligible for sale in the public market. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in
price in response to various factors, many of which are beyond our control, including:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



As of March 31, 2005, options to purchase 3,044,562
shares of our common stock and warrants to purchase 42,169 shares of our common stock were outstanding. As of March 31, 2005, an aggregate of 160,000 shares had been granted subject to restricted stock grants under our Equity Compensation Plan, all
of which remain outstanding but subject to restrictions under the Equity Compensation Plan. A total of 1,253,425 of the outstanding options and warrants are in the money and exercisable as of March 31, 2005. In the money
means that the current market price of the common stock is above the exercise price of the shares subject to the warrant or option. The issuance of common stock upon the exercise of these options and warrants could adversely affect the market price
of the common stock or result in substantial dilution to our existing stockholders.



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



Because we have a limited operating history and operate within the medical devices and diagnostic products segments of the



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pharmaceutical and biotechnology industries, our stock price is likely to be volatile. The market price of our common stock may fluctuate substantially due
to a variety of factors, including:



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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



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Risk factors



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



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



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



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



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



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



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Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



Item 4. Controls and Procedures



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



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



PART II. OTHER INFORMATION



Item 6. Exhibits



(b)



|     |  |                                                                                                                                                   
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|     | 
|31.2 |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|     | 
|32.1 |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|     | 
|32.2 |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES



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



|                   |  |                       |  |                                                   
|------------------ |  | --------------------- |  | --------------------------------------------------
|                   |  | IMMUNICON CORPORATION
|                   |  |                      
|Date: May 12, 2005 |  | By:                   |  | EDWARD L ERICKSON                                 
|                   |  |                       |  | Edward L. Erickson                                
|                   |  |                       |  | Chairman of the Board and Chief Executive Officer 
|                   |  |                       |  | (Principal executive officer)                     
|                   |  |                      
|Date: May 12, 2005 |  | By:                   |  | JAMES G. MURPHY                                   
|                   |  |                       |  | James G. Murphy                                   
|                   |  |                       |  | Senior Vice President, Finance and Administration,
|                   |  |                       |  | Chief Financial Officer                           
|                   |  |                       |  | (Principal financial and accounting officer)      



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EXHIBIT INDEX



|       |  |                                                                                                                                              
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                  
|31.1   |  | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                          
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                          
|       | 
|32.1   |  | Certification of Edward L. Erickson pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|       | 
|32.2   |  | Certification of James G. Murphy pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   



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