##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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 June 30, 2006

or



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

For the transition period from  to
.

Commission File Number: 000-50677



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IMMUNICON CORPORATION

(Exact name of registrant as specified in its charter)



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

3401 Masons Mill Road, Suite 100

Huntingdon Valley, Pennsylvania 19006

(Address of principal executive offices
and zip code)

(215) 830-0777

(Registrants telephone number including area code)



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

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

Large Accelerated Filer ̈Accelerated Filer  x    Non-Accelerated Filer ̈

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

As of August 2, 2006, there were 27,645,023 shares of Common Stock, $0.001 par value, outstanding.



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##### Table of Contents

IMMUNICON CORPORATION

INDEX



|         |  |                                                                                                             |  |           
|-------- |  | ----------------------------------------------------------------------------------------------------------- |  | ----------
|         |  |                                                                                                             |  | PageNumber
|PART I.  |  | FINANCIAL INFORMATION                                                                                       |  |           
|         |  |                                                                                                            
|Item 1.  |  | Condensed Consolidated Financial Statements (Unaudited):                                                    |  |           
|         |  |                                                                                                            
|         |  | Condensed Consolidated Balance Sheets: June 30, 2006 and December 31, 2005                                  |  | 3         
|         |  |                                                                                                            
|         |  | Condensed Consolidated Statements of Operations: Three and six months ended June 30, 2006 and June 30, 2005 |  | 4         
|         |  |                                                                                                            
|         |  | Condensed Consolidated Statements of Cash Flows: Six months ended June 30, 2006 and June 30, 2005           |  | 5         
|         |  |                                                                                                            
|         |  | Notes to Condensed Consolidated Financial Statements                                                        |  | 6         
|         |  |                                                                                                            
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                      |  | 15        
|         |  |                                                                                                            
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk.                                                 |  | 36        
|         |  |                                                                                                            
|Item 4.  |  | Controls and Procedures.                                                                                    |  | 36        
|         |  |                                                                                                            
|PART II. |  | OTHER INFORMATION                                                                                           |  |           
|         |  |                                                                                                            
|Item 1A. |  | Risk Factors.                                                                                               |  | 36        
|         |  |                                                                                                            
|Item 4.  |  | Submissions of Matters to a Vote of Securityholders                                                         |  | 37        
|         |  |                                                                                                            
|Item 6.  |  | Exhibits.                                                                                                   |  | 38        

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



2



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##### Table of Contents

Immunicon Corporation and Subsidiaries

PART I. FINANCIAL INFORMATION

I
tem 1. Condensed Consolidated Balance Sheets (Unaudited).

(In thousands)



|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                        |  | June 30,2006 |          |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                  |  |              |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                         |  |              |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                               |  | $            | 21,550   |   |                   | $ | 21,900   |  
|Short term investments                                                                                                                                                  |  |              | 11,881   |   |                   |   | 20,694   |  
|Accounts receivable                                                                                                                                                     |  |              | 1,584    |   |                   |   | 825      |  
|Receivable from related party                                                                                                                                           |  |              | 292      |   |                   |   | 316      |  
|Inventory                                                                                                                                                               |  |              | 4,221    |   |                   |   | 3,223    |  
|Prepaid assets                                                                                                                                                          |  |              | 451      |   |                   |   | 397      |  
|Other current assets                                                                                                                                                    |  |              | 259      |   |                   |   | 326      |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Total current assets                                                                                                                                                    |  |              | 40,238   |   |                   |   | 47,681   |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Property and equipment, net                                                                                                                                             |  |              | 4,431    |   |                   |   | 5,460    |  
|Long term investments                                                                                                                                                   |  |              | 500      |   |                   |   | 1,504    |  
|Other assets                                                                                                                                                            |  |              | 377      |   |                   |   | 325      |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Total assets                                                                                                                                                            |  | $            | 45,546   |   |                   | $ | 54,970   |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                    |  |              |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                    |  |              |          |   |                   |   |          |  
|Current portion of long-term debt                                                                                                                                       |  | $            | 2,138    |   |                   | $ | 2,769    |  
|Accounts payable                                                                                                                                                        |  |              | 1,541    |   |                   |   | 938      |  
|Payable to related party                                                                                                                                                |  |              | 1,129    |   |                   |   | 433      |  
|Current portion of deferred revenue:                                                                                                                                    |  |              |          |   |                   |   |          |  
|Related party                                                                                                                                                           |  |              | 2,054    |   |                   |   | 1,597    |  
|Other                                                                                                                                                                   |  |              | 46       |   |                   |   | 84       |  
|Accrued expenses                                                                                                                                                        |  |              | 3,384    |   |                   |   | 3,576    |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                               |  |              | 10,292   |   |                   |   | 9,397    |  
|                                                                                                                                                                        |  |             
|Long-term debt, less current portion                                                                                                                                    |  |              | 2,509    |   |                   |   | 3,115    |  
|                                                                                                                                                                        |  |             
|Deferred revenue - related party                                                                                                                                        |  |              | 406      |   |                   |   | 378      |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Commitments and contingencies                                                                                                                                           |  |              |          |   |                   |   |          |  
|                                                                                                                                                                        |  |             
|Shareholders equity:                                                                                                                                                   |  |              |          |   |                   |   |          |  
|Common stock, $0.001 par value 100,000,000 authorized, 27,644,023 and 27,556,885 shares issued and outstanding as of June 30, 2006
and December 31, 2005, respectively |  |              | 28       |   |                   |   | 27       |  
|Additional paid in capital                                                                                                                                              |  |              | 161,510  |   |                   |   | 162,630  |  
|Deferred stock-based compensation                                                                                                                                       |  |              |         |   |                   |   | (2,142   | )
|Accumulated other comprehensive income                                                                                                                                  |  |              | 19       |   |                   |   | 12       |  
|Accumulated deficit                                                                                                                                                     |  |              | (129,218 | ) |                   |   | (118,447 | )
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Total shareholders equity                                                                                                                                              |  |              | 32,339   |   |                   |   | 42,080   |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                                                                              |  | $            | 45,546   |   |                   | $ | 54,970   |  
|                                                                                                                                                                        |  |              |          |   |                   |   |          |  

See notes to condensed consolidated unaudited financial statements.



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Condensed Consolidated Statements of Operations (Unaudited).

Three and Six months ended June 30, 2006 and June 30, 2005

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



|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                               |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                               |  | 2006                        |            |   | 2005                      |   |            | 2006 |  |   | 2005       |  
|Product revenue:                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Related party                                                  |  | $                           | 359        |   |                           | $ | 305        |      |  | $ | 714        |   |  | $ | 615        |  
|Third party                                                    |  |                             | 1,429      |   |                           |   | 267        |      |  |   | 1,988      |   |  |   | 517        |  
|Service revenue                                                |  |                             | 338        |   |                           |   | 50         |      |  |   | 677        |   |  |   | 100        |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total product and service revenue                              |  |                             | 2,126      |   |                           |   | 622        |      |  |   | 3,379      |   |  |   | 1,232      |  
|                                                               |  |                             |            |  
|Milestone, license and other revenue                           |  |                             | 201        |   |                           |   | 313        |      |  |   | 401        |   |  |   | 582        |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                  |  |                             | 2,327      |   |                           |   | 935        |      |  |   | 3,780      |   |  |   | 1,814      |  
|                                                               |  |                             |            |  
|Cost of goods sold                                             |  |                             | 2,425      |   |                           |   | 636        |      |  |   | 3,950      |   |  |   | 810        |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Gross profit (loss)                                            |  |                             | (98        | ) |                           |   | 299        |      |  |   | (170       | ) |  |   | 1,004      |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Expenses:                                                      |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                       |  |                             | 3,259      |   |                           |   | 5,543      |      |  |   | 6,377      |   |  |   | 11,485     |  
|General and administrative                                     |  |                             | 2,349      |   |                           |   | 2,032      |      |  |   | 4,818      |   |  |   | 4,017      |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                       |  |                             | 5,608      |   |                           |   | 7,575      |      |  |   | 11,195     |   |  |   | 15,502     |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Operating loss                                                 |  |                             | (5,706     | ) |                           |   | (7,276     | )    |  |   | (11,365    | ) |  |   | (14,498    | )
|                                                               |  |                             |            |  
|Interest and other income                                      |  |                             | 422        |   |                           |   | 278        |      |  |   | 810        |   |  |   | 566        |  
|Interest expense                                               |  |                             | (103       | ) |                           |   | (120       | )    |  |   | (216       | ) |  |   | (245       | )
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Interest and other income, net                                 |  |                             | 319        |   |                           |   | 158        |      |  |   | 594        |   |  |   | 321        |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common stockholders                   |  | $                           | (5,387     | ) |                           | $ | (7,118     | )    |  | $ | (10,771    | ) |  | $ | (14,177    | )
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss per common share  basic and diluted                  |  | $                           | (0.20      | ) |                           | $ | (0.30      | )    |  | $ | (0.39      | ) |  | $ | (0.61      | )
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding  basic and diluted |  |                             | 27,620,882 |   |                           |   | 23,400,532 |      |  |   | 27,602,043 |   |  |   | 23,309,339 |  
|                                                               |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

See notes to condensed consolidated unaudited financial statements.



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

Six months ended June 30, 2006 and June 30, 2005 (in thousands)



|                                                                                  |  |                          |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Six Months EndedJune 30, |        
|                                                                                  |  | 2006                     |         |   | 2005 |  
|Operating activities:                                                             |  |                          |         |   |      |   |         |  
|Net loss                                                                          |  | $                        | (10,771 | ) |      | $ | (14,177 | )
|Adjustment to reconcile net loss to net cash used in operating activities:        |  |                          |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                          | 1,109   |   |      |   | 974     |  
|Interest expense on warrants                                                      |  |                          | 3       |   |      |   | 3       |  
|Loss on disposal of property and equipment                                        |  |                          | 16      |   |      |   | 18      |  
|Compensation expense related to the issuance of stock, stock options and warrants |  |                          | 856     |   |      |   | 795     |  
|Change in:                                                                        |  |                          |         |   |      |   |         |  
|Accounts receivable                                                               |  |                          | (759    | ) |      |   | 128     |  
|Accounts receivable from related party                                            |  |                          | 24      |   |      |   | 9       |  
|Inventory                                                                         |  |                          | (998    | ) |      |   | (1,638  | )
|Prepaid expenses and other                                                        |  |                          | (54     | ) |      |   | (126    | )
|Other assets                                                                      |  |                          | 3       |   |      |   | 290     |  
|Accounts payable                                                                  |  |                          | 603     |   |      |   | 641     |  
|Accounts payable to related parties                                               |  |                          | 696     |   |      |   | 84      |  
|Accrued expenses                                                                  |  |                          | (184    | ) |      |   | 273     |  
|Deferred revenue from related parties                                             |  |                          | 485     |   |      |   | (29     | )
|Deferred revenue                                                                  |  |                          | (38     | ) |      |   | (111    | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash used in operating activities                                             |  |                          | (9,009  | ) |      |   | (12,866 | )
|                                                                                  |  |                          |         |   |      |   |         |  
|Investing activities:                                                             |  |                          |         |   |      |   |         |  
|Purchase of investments                                                           |  |                          | (12,973 | ) |      |   | (18,458 | )
|Proceeds from maturities of investments                                           |  |                          | 22,874  |   |      |   | 27,051  |  
|Payments for purchases of property and equipment                                  |  |                          | (346    | ) |      |   | (2,375  | )
|Proceeds from disposal of property and equipment                                  |  |                          | 176     |   |      |   |        |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash provided by investing activities                                         |  |                          | 9,731   |   |      |   | 6,218   |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Financing activities:                                                             |  |                          |         |   |      |   |         |  
|Proceeds from term debt                                                           |  |                          | 380     |   |      |   | 2,289   |  
|Proceeds from exercise of stock options and stock purchase plan                   |  |                          | 159     |   |      |   | 406     |  
|Proceeds from sale of common stock, net                                           |  |                          |        |   |      |   | 18,169  |  
|Payments on term debt                                                             |  |                          | (1,618  | ) |      |   | (1,873  | )
|Loan issue fees                                                                   |  |                          |        |   |      |   | 5       |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                               |  |                          | (1,079  | ) |      |   | 18,996  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                           |  |                          | 7       |   |      |   | (15     | )
|Net increase (decrease) in cash and cash equivalents                              |  |                          | (357    | ) |      |   | 12,348  |  
|Cash and cash equivalents, beginning of period                                    |  |                          | 21,900  |   |      |   | 27,552  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                        | 21,550  |   |      | $ | 39,885  |  
|                                                                                  |  |                          |         |   |      |   |         |  
|Supplemental cash flow information:                                               |  |                          |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $                        | 224     |   |      | $ | 465     |  
|                                                                                  |  |                          |         |   |      |   |         |  

See notes to condensed consolidated unaudited financial statements.



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial
Statements

(1) Background and basis of presentation

The accompanying unaudited condensed consolidated financial statements of Immunicon Corporation and Subsidiaries (the Company, we) have been prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the Form 10-Q General Instructions and Article 10 of Regulation S-X of the Securities and Exchange Commission, or the SEC. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying condensed consolidated financial statements reflect all
adjustments (consisting only of normal recurring accruals) necessary to present fairly our financial position at June 30, 2006 and results of operations and cash flows for the three and six month periods ended June 30, 2006 and
June 30, 2005. Certain items have been reclassified to conform to current period presentation.

Certain footnote information has been condensed or
omitted from these financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2005. Results of operations for the three and six months ended June 30, 2006 and June 30, 2005 are not necessarily indicative of results to be expected for the full year.

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

On June 29, 2005, we sold 4.1 million shares of our common stock at $4.75 per share and received total proceeds of $19.7 million and net proceeds, net of fees
and expenses, of $18.0 million. These shares were sold pursuant to a shelf registration statement on Form S-3 filed in May 2005.

On December 29,
2005, our Board of Directors approved the accelerated vesting of all outstanding stock options held by our current officers and employees with an exercise price of at least $4.80 per share. Options held by our executive officers and members of the
Board were excluded from the vesting acceleration. Unvested stock options that had an exercise price of less than $4.80 per share continue to vest on their normal schedule. As a result of this vesting acceleration, options to purchase approximately
351,442 shares of our common stock became fully vested. The decision to accelerate the vesting of these stock options was made to reduce the compensation expense that might be recorded in future periods following our adoption of Financial
Accounting Standards Board Statement No. 123, Share Based Payment (revised 2004), or SFAS 123R. We believe that the options for which we accelerated the vesting had not provided sufficient retentive value when compared to the future
stock option compensation expense because these options had exercise prices in excess of the then current market values.

We have generated limited
revenues from product sales and have incurred substantial losses since our inception. We anticipate incurring additional losses over at least the next several years and such losses may fluctuate based on the amounts of revenue generated from sales
of our products and services.

We will need substantial financing to fund our operations and to continue developing our product candidates for sale. There
can be no assurance that such financing will be available when we need it. Our operations are subject to certain additional risks and uncertainties including, among others, dependence on Veridex, LLC, or Veridex, a Johnson & Johnson
company, to market our cancer diagnostic product candidates, the uncertainty of product development (including clinical trial results and completion of development of new instrument and reagent products), regulatory clearance and approval, supplier
and manufacturing dependence, competition, reimbursement availability, our dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary rights, dependence on key personnel and other risks related to
governmental regulations. We believe, however, that cash and cash equivalents available at June 30, 2006 will be sufficient to maintain operations through at least June 30, 2007.

Recent Accounting Pronouncements

In July 2006, the Financial
Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainties in income
taxes recognized in an enterprises financial statements. FIN 48 requires that we determine whether it is more likely than not that a tax position will be sustained upon examination by the appropriate taxing authority. If a tax position meets
the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than 50 percent likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal
years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on our financial position and results of operations has not been finalized.



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

Effective January 1, 2006, we adopted the provisions of SFAS 123R. Prior to January 1, 2006, we accounted for stock option awards granted under our share-based payment plans in accordance with the
recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,or APB 25, and related interpretations, as permitted by SFAS No. 123 Accounting for Stock-Based
Compensation, or SFAS 123. Prior to January 1, 2006, we recorded share-based employee compensation expense in our consolidated statements of earnings for the Pre-IPO options and nonvested shares but not for other option grants. Under the
modified-prospective-transition method of SFAS 123R, compensation expense recognized during the three and six months ended June 30, 2006 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested as
of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation expense for all share-based awards granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified-prospective-transition method, results for prior periods have not been restated. See Note 2 for further detail on the impact of SFAS 123R on
our condensed consolidated financial statements.

In March 2005, the U.S. Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin
No. 107, or SAB 107,Share-Based Payment, which expressed views of the SEC staff regarding the application of SFAS 123R. In April 2005, the SEC issued release No. 33-8568,Amendment to Rule 4-01(a) of Regulation S-X Regarding the
Compliance Date for Statement 123(R). Among other things, SAB 107 and release No. 33-8568 provided interpretive guidance related to the interaction between SFAS 123R and certain SEC rules and regulations, provided the SEC staffs views
regarding the valuation of share-based payment arrangements for public companies and changed the required adoption date of the standard to periods beginning after June 15, 2005.

In November 2004, the FASB issued SFAS, No. 151 Inventory Costsan amendment of ARB No. 43, Chapter 4,or SFAS 151. SFAS 151 requires all entities to allocate overhead costs to inventory
based on a calculation of normal manufacturing capacity. The Statement notes that this calculation is difficult because of the variety of considerations encountered in the allocation of costs and charges. This statement is effective for
the fiscal years beginning after June 15, 2005. We adopted SFAS 151 beginning with the first quarter of fiscal 2006 and it did not have a material impact on our financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, or SFAS 154, which changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS 154 replaces Accounting Principles Board, or APB, Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statement. It
requires retrospective application to prior periods financial statements of a voluntary change in accounting principle unless it is impracticable. In addition, under SFAS 154, if an entity changes its method of depreciation, amortization, or
depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate affected by a change in accounting principle. SFAS 154 applies to accounting changes and error corrections made in fiscal years
beginning after December 15, 2005. We adopted SFAS 154 beginning with the first quarter of fiscal 2006 and it did not have a material impact on our financial statements.

(2) Accounting for stock-based compensation

Our Amended and Restated Equity Compensation Plan, or the Plan, provides
for the granting of stock options, awards of restricted common stock, now referred to as nonvested shares and purchases of stock through an Employee Stock Purchase Program via payroll deductions. The Plan requires that exercise prices of stock
options may not be less than the market value of the common stock on the date of the grant. Each stock option expires on a date determined at the time of the grant, but not more than ten years after the date of the grant. During the period from
October 1, 2002 through December 8, 2003, we issued options to certain employees and directors under the Plan with exercise prices below the estimated fair value, determined with hindsight, of our common stock on the date of grant, or
pre-IPO options.

Effective January 1, 2006, we adopted the provisions of SFAS 123R. Prior to January 1, 2006, we accounted for stock
options granted under the Plan in accordance with the recognition and measurement provisions of APB 25 and related interpretations, as permitted by SFAS 123. Prior to January 1, 2006, we recorded share-based employee compensation expense in our
consolidated statements of earnings for the Pre-IPO options and nonvested shares but not for other option grants. All other stock option grants under the Plan made subsequent to December 31, 2003 had an exercise price equal to or greater than
the market value of the common stock on the date of the grant. Effective January 1, 2006, we adopted the provisions of SFAS 123R using the modified-prospective-transition



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

method. Under the modified-prospective-transition method of SFAS 123R which we have adopted, compensation expense recognized during the six months ended June 30, 2006 included: (a) compensation expense for
the grants between October 1, 2002 and December 8, 2003 that we issued at exercise prices below the estimated fair value, (b) compensation expense for all share-based awards granted between December 8, 2003 (the date of our first
Form S-1 filing with SEC) and December 31, 2005, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (c) compensation expense for all
share-based awards granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified-prospective-transition method, results for prior periods
have not been restated.

The charge to earnings from continuing operations and as well as the charge to net earnings for the three and six months ended
June 30, 2006 was $499,000 and $856,000, respectively for stock based compensation. The stock based compensation expense including the impact of adopting SFAS 123R on both basic and diluted earnings per share for the three and six months ended
June 30, 2006 was $0.02 and $0.03 per share, respectively.

SFAS 123R requires that cash flows resulting from tax benefits related to tax deductions
in excess of the compensation expense recognized for those options (excess tax benefits) be classified as financing cash flows. As we have reported a net loss in each period presented and have an accumulated deficit of $129.2 million as of
June 30, 2006, we believe that the deferred tax assets for these options do not satisfy the realization criteria set forth in SFAS 109 and we therefore have recorded a full valuation allowance against the deferred tax asset.

The following table illustrates the effect on net loss and loss per share for the three and six months ended June 30, 2005, if we had applied the fair market value
recognition provisions of SFAS 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, to options granted under our share-based payment plans. For purposes of this pro forma disclosure, the
value of the stock options is estimated using a Black-Scholes option-pricing model and amortized to expense over the options vesting periods. Since the estimated value is determined as of the date of grant, the actual value ultimately realized
by the employee may be significantly different.



|                                                                                                 |  |                                 |        |   |                               |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------------- | ------ | - | ----------------------------- | - | ------- | -
|(in thousands, except per share data)                                                            |  | Three Months EndedJune 30, 2005 |        |   | Six Months EndedJune 30, 2005 |  
|Net loss, as reported                                                                            |  | $                               | (7,118 | ) |                               | $ | (14,177 | )
|Add: Stock-based compensation expense included in reported net loss                              |  |                                 | 444    |   |                               |   | 795     |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards |  |                                 | (707   | ) |                               |   | (1,340  | )
|                                                                                                 |  |                                 |        |   |                               |   |         |  
|Pro forma net loss                                                                               |  | $                               | (7,381 | ) |                               | $ | (14,722 | )
|                                                                                                 |  |                                 |        |   |                               |   |         |  
|Net loss per share  basic and diluted, as reported                                              |  | $                               | (0.30  | ) |                               | $ | (0.61   | )
|                                                                                                 |  |                                 |        |   |                               |   |         |  
|Pro forma net loss per share  basic and diluted                                                 |  | $                               | (0.32  | ) |                               | $ | (0.63   | )
|                                                                                                 |  |                                 |        |   |                               |   |         |  

Compensation expense related to our share-based awards during the three and six months ended June 30, 2006
was $499,000 and $856,000, respectively. During the three and six months ended June 30, 2005, compensation expense related to our share-based awards was $444,000 and $795,000, respectively. The stock-based compensation consisted of the
following:



|                                                                  |  |                            |     |                          |   |      |  |      |     |  |   |    
|----------------------------------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | --- |  | - | ---
|                                                                  |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|(in thousands)                                                    |  | 2006                       |     | 2005                     |   | 2006 |  | 2005
|Adoption of SFAS 123R                                             |  | $                          | 241 |                          | $ |     |  | $    | 301 |  | $ |   
|Nonvested shares                                                  |  |                            | 110 |                          |   | 82   |  |      | 219 |  |   | 136
|Stock Options granted prior to our IPO at below fair market value |  |                            | 148 |                          |   | 362  |  |      | 336 |  |   | 659
|                                                                  |  |                            |     |                          |   |      |  |      |     |  |   |    
|Stock based compensation                                          |  | $                          | 499 |                          | $ | 444  |  | $    | 856 |  | $ | 795
|                                                                  |  |                            |     |                          |   |      |  |      |     |  |   |    

Cash received from stock options exercised during the three months ended June 30, 2006 and June 30, 2005
was $66,000 and $136,000, respectively. Cash received from stock options exercised during the six months ended June 30, 2006 and June 30, 2005 was and $98,000 and $276,000, respectively. We did not recognize any tax deductions related to
stock options exercised during the three



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

and six months ended June 30, 2006 and June 30, 2005 as a result of our significant net operating losses. The total intrinsic value of options exercised during the three months ended June 30, 2006 and
June 30, 2005 was $140,000 and $207,000, respectively, and for the six months ended June 30, 2006, $210,000 and $584,000, respectively.

The fair
value of each of our stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of our stock option awards, which are subject to straight line
vesting method, is expensed on a straight-line basis over the vesting life of the stock options. Expected volatility is based on an average of historical volatility of our stock. The risk-free rate for periods within the contractual life of the
stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the stock option award is granted with a maturity equal to the expected term of the stock option award granted. We use historical data to estimate stock
option exercises and forfeitures within the valuation model. We also used the simplified calculation of expected life, described in SAB 107, compared to the companys historical grants. Management believes that this calculation provides a
reasonable estimate of expected life for the companys employee stock options.

The significant weighted average assumptions relating to the valuation
of our stock options for the six months ended June 30, 2006 and June 30, 2005 were as follows:



|                             |  |              |   |  |              |  
|---------------------------- |  | ------------ | - |  | ------------ | -
|                             |  | June 30,2006 |   |  | June 30,2005 |  
|Dividend yield               |  |             | % |  |             | %
|Volatility rate              |  | 59.82        | % |  | 61.9         | %
|Risk-free interest rate      |  | 4.57         | % |  | 3.75         | %
|Expected option life (years) |  | 6.25         |   |  | 5.0          |  

A summary of our stock option activity for the six months ended June 30,
2006 was as follows:



|                                                   |  |               |   |  |                                |     
|-------------------------------------------------- |  | ------------- | - |  | ------------------------------ | ----
|                                                   |  | June 30, 2006
|(in thousands, except exercise price)              |  | Options       |   |  | Weighted Averageexercise price
|Options outstanding at the beginning of the period |  | 3,302         |   |  | $                              | 3.93
|Granted                                            |  | 205           |   |  |                                | 4.12
|Exercised                                          |  | (70           | ) |  |                                | 1.41
|Canceled                                           |  | (22           | ) |  |                                | 4.03
|                                                   |  |               |   |  |                                |     
|Options outstanding at the end of the period       |  | 3,415         |   |  | $                              | 3.99
|                                                   |  |               |   |  |                                |     
|Options exercisable at the end of the period       |  | 2,080         |   |  | $                              | 3.83

The weighted average fair value of options granted during the six months ended June 30, 2006 and
June 30, 2005 was $2.37 and $3.10, respectively.

The fair value of nonvested shares is determined based on the closing trading price of our common
stock on the grant date. There were no nonvested shares granted during the six months ended June 30, 2006. A summary of our nonvested shares activity for the six months ended June 30, 2006 was as follows:



|                               |  |         |  |                                      |     
|------------------------------ |  | ------- |  | ------------------------------------ | ----
|                               |  | Shares  |  | Weighted AverageGrant Date FairValue
|Nonvested at December 31, 2005 |  | 260,000 |  | $                                    | 5.06
|Grants                         |  |        |  |                                      |     
|Vested                         |  |        |  |                                      |     
|Forfeited                      |  |        |  |                                      |     
|                               |  |         |  |                                      |     
|Nonvested at June 30, 2006     |  | 260,000 |  | $                                    | 5.06
|                               |  |         |  |                                      |     



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

At June 30, 2006, there was $3.5 million of unrecognized compensation expense related to unvested share-based awards under our share-based payment plans, of which $752,000 relates to stock options granted before
our initial public offering at below fair market value, $1.9 million relates to stock options resulting from the adoption of SFAS 123R and $797,000 relates to nonvested shares. This cost is expected to be recognized over a weighted average period of
2.95 years.

(3) Restructuring

On August 29,
2005, we announced actions to align staff levels and other expenses with our current commercialization strategy. This initiative included a workforce reduction of approximately 25% of full-time equivalent domestic staff principally in research and
development, operations and certain support functions. A significant component of the workforce reduction involved employees who were engaged in platform development programs that were essentially completed, such as our next generation cell analysis
platform, the CellTracks Analyzer II. We had also completed development of certain core reagents and ancillary components incorporated in cell analysis kits, most notably the CellSearch Circulating Tumor Cell (CTC) Kit, sold by Veridex.
We continue to pursue important development projects such as clinical trials in metastatic colorectal and prostate cancer and research and development efforts on circulating endothelial cells and certain molecular analysis products. The clinical
trials in metastatic colorectal and prostate cancer are intended to lead to regulatory submissions for expanded claims for the CellSearch CTC Kit. In the first half of 2006, we recorded $188,000 in accelerated depreciation of certain property and
equipment resulting from the termination of the lease of a portion of our office space. We had previously estimated that these additional costs could be as high as $600,000. We completed these activities in the second quarter of 2006.

(4) Net loss per share

Basic and diluted net loss per common share
is calculated in accordance with SFAS No. 128, Earnings Per Share,or SFAS 128, and SEC Staff Accounting Bulletin No. 98, or SAB 98. Under the provisions of SFAS 128 and SAB 98, basic net loss per common share is calculated by
dividing the net loss applicable to common stockholders by the weighted-average number of unrestricted common shares outstanding during the period. Diluted net loss per common share is the same as basic net loss per common share, since the effects
of potentially dilutive securities are anti-dilutive for all periods presented.

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



|                                                                      |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                      |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|(in thousands)                                                        |  | 2006                       |        |   | 2005                     |   |        | 2006 |  |   | 2005    |  
|Numerator:                                                            |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                              |  | $                          | (5,387 | ) |                          | $ | (7,118 | )    |  | $ | (10,771 | ) |  | $ | (14,177 | )
|                                                                      |  |                            |        |  
|Denominator:                                                          |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding used for basic income per share   |  |                            | 27,621 |   |                          |   | 23,401 |      |  |   | 27,602  |   |  |   | 23,309  |  
|Common stock equivalents                                              |  |                            |       |   |                          |   |       |      |  |   |        |   |  |   |        |  
|                                                                      |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding used for diluted income per share |  |                            | 27,621 |   |                          |   | 23,401 |      |  |   | 27,602  |   |  |   | 23,309  |  
|                                                                      |  |                            |        |   |                          |   |        |      |  |   |         |   |  |   |         |  

(5) Inventory

Inventory consisted of the following:



|                |  |               |       |                   |   |      
|--------------- |  | ------------- | ----- | ----------------- | - | -----
|(in thousands)  |  | June 30, 2006 |       | December 31, 2005
|Raw materials   |  | $             | 1,390 |                   | $ | 1,597
|Finished goods  |  |               | 2,447 |                   |   | 1,465
|Work-in-process |  |               | 384   |                   |   | 161  
|                |  |               |       |                   |   |      
|Inventory       |  | $             | 4,221 |                   | $ | 3,223
|                |  |               |       |                   |   |      



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

(6) Property and equipment

Property and equipment consisted of the following:



|                               |  |               |        |   |                   |   |        |  
|------------------------------ |  | ------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                 |  | June 30, 2006 |        |   | December 31, 2005 |  
|Laboratory equipment           |  | $             | 2,542  |   |                   | $ | 2,473  |  
|Office furniture and equipment |  |               | 880    |   |                   |   | 1,195  |  
|Leasehold improvements         |  |               | 5,269  |   |                   |   | 5,734  |  
|Manufacturing equipment        |  |               | 891    |   |                   |   | 788    |  
|Computer equipment             |  |               | 1,054  |   |                   |   | 1,140  |  
|                               |  |               |        |   |                   |   |        |  
|Property and equipment, gross  |  |               | 10,636 |   |                   |   | 11,330 |  
|Less Accumulated depreciation  |  |               | (6,205 | ) |                   |   | (5,870 | )
|                               |  |               |        |   |                   |   |        |  
|Property and equipment, net    |  | $             | 4,431  |   |                   | $ | 5,460  |  
|                               |  |               |        |   |                   |   |        |  

Depreciation expense was $561,000 and $473,000 for the three months ended June 30, 2006 and June 30,
2005, respectively. Depreciation expense was $1.2 million and $893,000 for the six months ended June 30, 2006 and June 30, 2005, respectively.

(7) Accrued expenses

Accrued expenses consisted of the following:



|                                  |  |               |       |                   |   |      
|--------------------------------- |  | ------------- | ----- | ----------------- | - | -----
|(in thousands)                    |  | June 30, 2006 |       | December 31, 2005
|Salaryrelated expense            |  | $             | 802   |                   | $ | 718  
|Clinical research and trial costs |  |               | 1,173 |                   |   | 1,720
|Contracted research costs         |  |               | 130   |                   |   | 180  
|Accounting and legal fees         |  |               | 321   |                   |   | 240  
|Other                             |  |               | 958   |                   |   | 718  
|                                  |  |               |       |                   |   |      
|Accrued expenses                  |  | $             | 3,384 |                   | $ | 3,576
|                                  |  |               |       |                   |   |      

(8) Debt

As
of June 30, 2006, we had an aggregate of $4.6 million of bank debt outstanding with two lending institutions, $2.4 million to Silicon Valley Bank, or SVB, and $2.2 million to General Electric Capital Corporation, or GECC, as described below.
The carrying value of long-term debt is as follows:



|                                                                                                                       |  |               |        |   |                   |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ----------------- | - | ------ | -
|(in thousands)                                                                                                         |  | June 30, 2006 |        |   | December 31, 2005 |  
|Line of credit due to SVB - principal due from July 2006 to November 2009 at interest rates ranging from 8.5% to 8.75% |  | $             | 2,450  |   |                   | $ | 3,085  |  
|Line of credit due to GECC - principal due from July 2006 to July 2010 at interest rates ranging from 8.75% to 11.05%  |  |               | 2,197  |   |                   |   | 2,799  |  
|                                                                                                                       |  |               |        |   |                   |   |        |  
|                                                                                                                       |  |               | 4,647  |   |                   |   | 5,884  |  
|Less: current portion of long-term debt                                                                                |  |               | (2,138 | ) |                   |   | (2,769 | )
|                                                                                                                       |  |               |        |   |                   |   |        |  
|Longterm debt                                                                                                         |  | $             | 2,509  |   |                   | $ | 3,115  |  
|                                                                                                                       |  |               |        |   |                   |   |        |  

As of June 30, 2006 and June 30, 2005, interest rates in effect for outstanding obligations under the
credit facilities ranged from 8.50% to 11.05% and from 6.5% to 9.61%, respectively.

Both of the credit facilities are subject to certain covenants,
including maintaining a minimum level of earnings before interest, taxes, depreciation and amortization, as defined in the respective loan agreements, maintaining a minimum percentage of our cash available



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

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 six month periods ended
June 30, 2006 and June 30, 2005. As of June 30, 2006, we had $8.8 million and $3.5 million in available credit under our SVB and GECC credit facilities, respectively. The availability under our SVB credit facility will expire on
December 31, 2006 and the unborrowed amounts available under our GECC credit facility expire on October 31, 2006. 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.

(9) Geographical and customer information

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the
chief operating decision-maker, or decision-making group, when making decisions regarding resource allocation and assessing performance. To date, we have viewed our operations and manage our business as one segment operating primarily in the United
States of America. Revenues from external customers are summarized below. Revenues are attributed to a country based on the location of the customer. During the three month period ended June 30, 2006, we derived 22.4% and 13.9% of our revenue
from Veridex and Pfizer, Inc., respectively, as compared to 64.8% and 25.5% in the second quarter of 2005 from Veridex and Quest Diagnostics, respectively. During the six month period ended June 30, 2006, we derived 25.1% and 15.9% from Veridex
and Pfizer, respectively, as compared to 64.1% and 19.7% in the first half of 2005 from Veridex and Quest Diagnostics, respectively. Our revenue by geographical region is as follows:



|                        |  |                            |       |                          |   |      |  |      |       |  |   |      
|----------------------- |  | -------------------------- | ----- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                        |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|(in thousands)          |  | 2006                       |       | 2005                     |   | 2006 |  | 2005
|United States           |  | $                          | 1,557 |                          | $ | 925  |  | $    | 2,555 |  | $ | 1,797
|Europe                  |  |                            | 582   |                          |   | 2    |  |      | 933   |  |   | 2    
|Other foreign countries |  |                            | 188   |                          |   | 8    |  |      | 292   |  |   | 15   
|                        |  |                            |       |                          |   |      |  |      |       |  |   |      
|Total revenue           |  | $                          | 2,327 |                          | $ | 935  |  | $    | 3,780 |  | $ | 1,814
|                        |  |                            |       |                          |   |      |  |      |       |  |   |      

(10) Commitment and contingencies

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

On June 13, 2005, we announced that we, along with the Fox Chase Cancer Center, or Fox Chase, were awarded a Small Business Technology Transfer
grant totaling approximately $1.1 million from the National Institutes of Health (NIH), which extends over two years. These grant payments will come directly to us and then we will remit Fox Chases portion to them. We believe that
we will be entitled to $475,000 of the grant and that Fox Chase will receive the remainder of $615,000. The NIH grant is intended to fund the development of a new strategy to actively monitor the effectiveness of cancer drugs in clinical trials. As
of June 30, 2006, we have cumulatively received $170,000 and Fox Chase has received $281,000 from the grant.

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



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

Changes in product warranty obligations are as follows:



|                        |  |               |     |   |                   |   |     |  
|----------------------- |  | ------------- | --- | - | ----------------- | - | --- | -
|(in thousands)          |  | June 30, 2006 |     |   | December 31, 2005 |  
|Beginning of the period |  | $             | 78  |   |                   | $ |    |  
|Additions               |  |               | 44  |   |                   |   | 141 |  
|Claims                  |  |               | (51 | ) |                   |   | (63 | )
|                        |  |               |     |   |                   |   |     |  
|Ending of the period    |  | $             | 71  |   |                   | $ | 78  |  
|                        |  |               |     |   |                   |   |     |  

(11) Equity Compensation Plan

At our annual stockholders meeting held on June 7, 2006, our stockholders approved an amendment to increase common stock authorized under the Amended and Restated Equity Compensation Plan to 4,516,667
shares, an increase of 250,000 shares.

On December 29, 2005, our Board of Directors made nonvested stock grant of 100,000 in connection with the
appointment of our new Chief Executive Officer, Byron D. Hewett. The shares underlying this grant will fully vest on January 1, 2009. The nonvested stock grant had a fair market value of $336,000 as of close of business, December 29, 2005.

In January 2005, our Board of Directors made nonvested stock grants to two of our officers. We granted 100,000 nonvested shares to our Senior Vice
President, Research and Development and Chief Scientific Officer, Leon W.M.M. Terstappen, M.D., Ph.D, and 60,000 nonvested shares to our Senior Vice President, Finance and Administration and Chief Financial Officer, James G. Murphy. The shares
underlying both grants will fully vest on the third anniversary of the date of the grant. The nonvested stock grant had a fair market value of $979,000 as of the close of business, January 28, 2005.

If any of the officers employment terminates for any reason before the nonvested stock is fully vested, except as provided by such officers Change of Control
Agreement with us, the shares of nonvested stock that are not then vested will be forfeited. If the provisions of the officers Change of Control Agreement are triggered, the nonvested stock will vest in accordance with the officers
Change of Control Agreement. The fair value of nonvested shares is determined based on the closing price of our common stock, as reported by Nasdaq, on the grant date and compensation expense is recognized over the three years of the service period.
We have recognized 219,000 and $136,000 as compensation expense related to these grants for the six month periods ended June 30, 2006 and June 30, 2005, respectively. Compensation expense for the three months ended June 30, 2006 and
June 30, 2005 were $110,000 and $82,000, respectively.

(12) Related parties

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

In connection with the Development Agreement, Veridex made a $1.5 million up-front, non-refundable license fee payment to us. Under the Development
Agreement, Veridex is obligated to pay us approximately 31% of their net sales from the sale of reagents, test kits, and certain other consumable products and disposable items. Under the terms of the Development Agreement, we are required to invest
in related research based on a percentage of sales as defined in the Development Agreement. In 2000, another subsidiary of Johnson and Johnson, or J&J Sub, purchased $5 million of our Series E Preferred Stock. In December 2001 and
July 2003, J&J Sub purchased $3 million and $3.3 million of Series F Preferred Stock, respectively.

We have received a total of
$6.4 million in license and milestone payments under the terms of the Development Agreement from August 1, 2000 to June 30, 2006. These achievements will be recognized as revenue over the estimated product development period for the
corresponding product, which we estimated will end at various points through December 31, 2010. We have also continuously



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

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

The following table breaks out the revenue from related parties recognized over the three and six month periods ended June 30, 2006 and June 30, 2005:



|                                                  |  |                            |     |                          |   |      |  |      |       |  |   |      
|------------------------------------------------- |  | -------------------------- | --- | ------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                                  |  | Three Months EndedJune 30, |     | Six Months EndedJune 30,
|(in thousands)                                    |  | 2006                       |     | 2005                     |   | 2006 |  | 2005
|Contract and milestone revenue from related party |  | $                          | 200 |                          | $ | 311  |  | $    | 400   |  | $ | 580  
|Product revenue from related party                |  |                            | 359 |                          |   | 305  |  |      | 714   |  |   | 615  
|                                                  |  |                            |     |                          |   |      |  |      |       |  |   |      
|                                                  |  | $                          | 559 |                          | $ | 616  |  | $    | 1,114 |  | $ | 1,195
|                                                  |  |                            |     |                          |   |      |  |      |       |  |   |      

(13) 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 EndedJune 30, |       | Six Months EndedJune 30,
|(in thousands)                   |  | 2006                       |       | 2005                     |   | 2006  |  | 2005
|Salaries, benefits and taxes     |  | $                          | 1,651 |                          | $ | 3,050 |  | $    | 3,111 |  | $ | 6,065 
|Laboratory supplies and expenses |  |                            | 234   |                          |   | 54    |  |      | 361   |  |   | 498   
|Instrument development costs     |  |                            | 205   |                          |   | 129   |  |      | 412   |  |   | 386   
|Clinical trial expense           |  |                            | 332   |                          |   | 1,042 |  |      | 780   |  |   | 1,959 
|Contracted research costs        |  |                            | 104   |                          |   | 163   |  |      | 264   |  |   | 446   
|Depreciation expense             |  |                            | 316   |                          |   | 423   |  |      | 646   |  |   | 759   
|Insurance expense                |  |                            | 52    |                          |   | 182   |  |      | 145   |  |   | 378   
|All others                       |  |                            | 365   |                          |   | 500   |  |      | 658   |  |   | 994   
|                                 |  |                            |       |                          |   |       |  |      |       |  |   |       
|                                 |  | $                          | 3,259 |                          | $ | 5,543 |  | $    | 6,377 |  | $ | 11,485
|                                 |  |                            |       |                          |   |       |  |      |       |  |   |       

General and administrative expenses

General and administrative expenses consisted of the following:



|                             |  |                            |       |                          |   |       |  |      |       |  |   |      
|---------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                             |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|(in thousands)               |  | 2006                       |       | 2005                     |   | 2006  |  | 2005
|Salaries, benefits and taxes |  | $                          | 1,336 |                          | $ | 1,073 |  | $    | 2,761 |  | $ | 2,156
|Depreciation expense         |  |                            | 86    |                          |   | 50    |  |      | 203   |  |   | 134  
|Legal and professional fees  |  |                            | 519   |                          |   | 511   |  |      | 989   |  |   | 940  
|Insurance expense            |  |                            | 50    |                          |   | 41    |  |      | 158   |  |   | 85   
|All others                   |  |                            | 358   |                          |   | 357   |  |      | 707   |  |   | 702  
|                             |  |                            |       |                          |   |       |  |      |       |  |   |      
|                             |  | $                          | 2,349 |                          | $ | 2,032 |  | $    | 4,818 |  | $ | 4,017
|                             |  |                            |       |                          |   |       |  |      |       |  |   |      



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Immunicon Corporation and Subsidiaries

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 Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2005 and elsewhere in this report; and other risks and uncertainties as may be detailed from time to time in
our public announcements and SEC filings.

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

OVERVIEW

Our business principally involves the development, manufacture, marketing and sale of proprietary cell-based diagnostic and research products and certain service
activities with a primary focus on cancer. We believe that our products can provide significant clinical benefits by giving physicians better information to understand, treat, monitor and diagnose cancer and predict outcomes. Our technologies can
identify, count and characterize a small number of circulating tumor cells, or CTCs, and other rare cells present in a blood sample from a patient. We also employ our technologies to provide analytical services to pharmaceutical and biotechnology
companies to assist them in developing of new therapeutic agents. In 2000, we changed our state of incorporation to the State of Delaware.

In October
2004, we launched our initial cancer diagnostic products which had received FDA clearance in January 2004. We completed our first instrument sale to a third-party laboratory customer during the fourth quarter of 2004. We operate in one business
segment and have our principal offices in Huntingdon Valley, Pennsylvania, although we maintain a small research laboratory in the Netherlands.

From
inception we have raised $156 million, net of fees and expenses, from the sale of common and preferred stock, including $49.4 million, net of fees and expenses, from our initial public offering, or IPO, which was completed in April 2004. In the IPO,
we sold 6.9 million shares of common stock, including the underwriters over allotment option, at $8.00 per share. On June 29, 2005, we sold 4.1 million shares of our common stock at $4.75 per share and received net proceeds of
$18 million, net of fees and expenses. These shares were sold pursuant to a shelf registration statement filed in May 2005.

We have incurred substantial
losses since our inception. We anticipate incurring additional losses over at least the next several years. Substantial financing will be needed by us to fund our operations and to continue to commercially develop our product candidates. There is no
assurance that such financing will be available when needed. Our operations are subject to certain additional risks and



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Immunicon Corporation and Subsidiaries

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

uncertainties including, among others, dependence on Veridex to market our cancer diagnostic product candidates, the uncertainty of product development (including
clinical trial results), regulatory clearance and approval, supplier and manufacturing dependence, competition, reimbursement availability, dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary
rights, dependence on key personnel and other risks related to governmental regulations and approvals. We believe, however, that cash, cash equivalents and borrowing available under our line of credit at June 30, 2006 will be sufficient to
maintain operations through at least June 30, 2007.

Veridex collaboration

We expect that the majority of our revenues from product sales for at least the years 2006 and 2007 will be derived from our relationship with Veridex. Our Development Agreement with Veridex provides Veridex with
exclusive worldwide rights to commercialize cell analysis products based on our technologies in the field of cancer. Veridex received 510(k) clearance from the FDA for the use of the CellSearch Circulating Tumor Cell Kit in the management of
metastatic breast cancer on January 21, 2004 and for the CellSearch Circulating Tumor Cell Control Kit in September 2004. We are responsible for all cellular research and development, including the costs of clinical development. Upon any sale
by Veridex of certain of our products, including reagents, test kits, consumable products and disposable items, Veridex is obligated to pay us approximately 30% of net sales.

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

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

Revenues

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

We sold 31 instruments (eighteen cell analyzers and thirteen
CellTracks® AutoPrep® Systems) in the first half of 2006 and sixteen instruments (eight cell
analyzers and eight CellTracks AutoPrep Systems) in the first half of 2005. In the first half of 2006, 29 instruments were sold to third party customers. Five of the CellTracks® Analyzers II sold in the first half of 2006 were part of an upgrade program from the first generation CellSpotter® Analyzer System. In the first half of 2005, eight of
the instruments sold were purchased by Veridex for funded research centers and eight were sold to third party customers. Instrument sales to Veridex are recorded in Revenues from related party in the consolidated statement of operations.

We recorded $2.0 million and $920,000, respectively, in revenue from the sale of instrument products for the six month periods ended June 30, 2006
and June 30, 2005, and $1.4 million and $457,000 for the three month periods ended June 30, 2006 and June 30, 2005, respectively.

We
recorded $697,000 and $212,000, respectively in revenue from the sale of reagent products for the six month periods ended June 30, 2006 and June 30, 2005, and $417,000 and $115,000 for the three month periods ended June 30, 2006 and
June 30, 2005, respectively.



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Immunicon Corporation and Subsidiaries

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

We provide certain services to pharmaceutical companies to aid in their drug research and development. We record revenue from these services as part of service revenue
on our consolidated statement of operations. We recorded $677,000 and $100,000 in service revenue for the six month periods ended June 30, 2006 and 2005, respectively, and $338,000 and $50,000 in service revenue for the three month periods
ended June 30, 2006 and 2005, respectively.

We have received a total of $6.4 million in license and milestone payments under the terms of the
Development Agreement from August 1, 2000 to June 30, 2006 and have recorded $5.6 million as milestone and license revenue to date. Cash received related to these milestones will be recognized as revenue over the estimated product
development period for the corresponding product, which we estimated will end at various points through December 2010. We continuously review the status of the remaining development milestones and, where appropriate, have renegotiated the
development requirement and payment terms. We do not believe that these renegotiations have had or will have a material adverse effect on our product development or financial position.

As of June 30, 2006, we can receive up to an additional $4.1 million in license and milestone payments from Veridex for research-related milestones. We estimate that we will earn these license revenues from
research milestones over the next three to five years. Therefore, we expect that the trend associated with license revenue will fluctuate. Also, we expect to continue to invest in research and development, particularly in clinical trials and
manufacturing development and therefore we do not believe that these expenses will correspond to the periods wherein which we expect to earn the milestone revenue referenced above.

Under the Development Agreement with Veridex, we also can earn up to $10.0 million in revenue for achieving defined sales targets. Our agreement with Veridex provides for payments to us by Veridex of
$2.0 million, $3.0 million and $5.0 million in the first year that sales recognized by Veridex of the CellSearch reagent products to third parties, excluding sales of instruments, reach $250 million, $500 million and
$1 billion, respectively. We do not estimate that we will reach any of these sales targets until at least 2009 and therefore do not anticipate earning any sales-based milestone revenues until then.

We recognized $401,000 and $582,000 as milestone and other license related revenue in the six months ended June 30, 2006 and June 30, 2005, and $201,000 and
$313,000 in the three months ended June 30, 2006 and June 30, 2005, respectively.

Research and development expenses

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



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



| |  |  | 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.

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.



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Immunicon Corporation and Subsidiaries

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

Stock-based compensation expenses

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

Previously we had recorded stock-based compensation expense resulting from stock option grants to employees at exercise prices below the fair value of the underlying
common stock. This resulted in our recording stock-based compensation expense associated with such grants. We 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.

Interest income and expense

Interest income consists of interest earned on our cash, cash equivalents and investments. Investment holdings as of June 30, 2006 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, AutoPrep and the CellTracks AutoPrep System
logo, and the CellSpotter Analyzer logo by Immunivest Corporation, our wholly owned subsidiary. We have filed a number of trademark registration applications in preparation for commercial distribution activities with respect to future products. Much
of the proprietary software and related information utilized in our instrument systems is protected by the copyright rights or by rights that we have licensed.

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

We have a portfolio of issued patents and patent applications, which we believe provides patent coverage for our proprietary technologies and products. As of July 26, 2006, our intellectual property estate
consisted of 172 issued patents or patent applications as follows: 35 issued US patents, 24 US non-provisional patent applications, 6 US provision patent applications, 24 foreign patents, 69 foreign patent applications at various national stages and
13 foreign patents applications not at the national stage.

CRITICAL ACCOUNTING POLICIES

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



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



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Immunicon Corporation and Subsidiaries

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



| |  |  | 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 six months ended June 30, 2006.

Revenue recognition

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

In accordance with SAB 104, up-front non-refundable license fees are recorded as deferred revenue and recognized over the estimated development period. From
August 2000 through June 30, 2006, we have received $6.4 million in license and milestone payments from Veridex. License and milestone payments are deferred and amortized on a straight-line basis over the product development period as defined
for each specific product. Amounts received as reimbursement for research and development expenses are recorded as a reduction in research and development expense as the related costs are incurred.

Inventory capitalization

In October 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, for this reason and depending on market demand for our products we anticipate that our gross margin on sales of our instruments and reagents will fluctuate from quarter to quarter during 2006.

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.



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Immunicon Corporation and Subsidiaries

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

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

On January 1, 2006, we adopted SFAS 123R. Information regarding the adoption of SFAS 123R in our
financial statements is contained in Note 2 to our condensed consolidated financial statements. In adopting SFAS 123R, we elected to apply the modified prospective transition method of reporting as allowed under SFAS 123R and therefore have not
restated prior periods.

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

Stock-based compensation recorded in the first six months of 2006 is based on awards that are expected to vest and therefore have been reduced for estimated forfeitures. SFAS 123R require forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual forfeitures differ from the estimates. Forfeitures were based on historical experience.

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

Critical accounting estimates and assumptions are
evaluated periodically as conditions may arise and changes to such estimates are recorded as new information or changed as conditions require revision.

Through the end of 2005, we accounted for stock-based compensation costs under SFAS 123, as amended by SFAS 148, which permitted (i) recognition of the fair value of stock-based awards as an expense, or (ii) continued application
of the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,or APB 25. We accounted for our stock-based employee and director compensation plans under the recognition and
measurement principles of APB 25. Under this intrinsic value method, compensation cost represented the excess, if any, of the quoted market price of our common stock at the grant date over the amount the grantee had to pay for the stock. Our policy
is to grant stock options at their fair market value on the date of grant.



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##### Table of Contents

Immunicon Corporation and Subsidiaries

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

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 amortized to compensation expense on a
straight-line basis over the vesting period of the stock option.

All nonvested shares granted to executive officers are recorded as compensation expense
using the fair value method under SFAS 123R. Fair value is based upon the closing price of our common stock on the date of grant. See Note 11 to our condensed consolidated financial statements included in this Form 10-Q for a discussion of nonvested
stock awards granted to the non-employee members of our board of directors, our executive officers and certain of our other management. The first nonvested shares to executive officers were granted in January 2005.

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 June 30, 2006, we recorded a full valuation allowance of $51.4
million against our net deferred tax asset balance, due to uncertainties related to our deferred tax assets as a result of our history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which
we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or 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

Up to September 30, 2005 we considered ourselves a development stage enterprise. According to Statement of Financial Accounting Standards, Accounting and
Reporting by Development Stage Enterprises, or SFAS 7, in order to be identified as a development stage enterprise, the following conditions must be met: (1) planned principal operations have not commenced and (2) planned principal
operations have commenced, but there has been no significant revenue there from. We have completed all the initial product development milestones outlined in our Development Agreement with Veridex including completion of our clinical trial
in metastatic breast cancer and the commercialization of both the instrument systems and the CellSearch CTC Kit. We began commercialization of our products in the second half of 2004. Since launch we have sold products to customers
throughout the United States and on a limited basis in Europe and Japan. We completed the development of our CTA II and launched the instrument system in June 2005. The CTA II is the cell analysis platform which is and will continue to be
our basic cell analysis system for the foreseeable future. Therefore, based on having reached these commercialization goals, we were no longer a development stage company as of the beginning of the fourth quarter of 2005.



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Immunicon Corporation and Subsidiaries

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

RESULTS OF OPERATIONS

Three months ended June 30, 2006 and June 30, 2005

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 June 30,
|Revenue (dollars in thousands)                                                    |  | 2006                        |       | 2005
|Product revenue including product revenue from related party: Instrument revenue: |  |                             |       |      |   |    
|Related party                                                                     |  | $                           | 36    |      | $ | 219
|Other                                                                             |  |                             | 1,335 |      |   | 239
|Reagents and consumable product revenue:                                          |  |                             |       |      |   |    
|Related party                                                                     |  |                             | 323   |      |   | 86 
|Other                                                                             |  |                             | 94    |      |   | 28 
|                                                                                  |  |                             |       |      |   |    
|Total product revenue                                                             |  | $                           | 1,788 |      | $ | 572
|                                                                                  |  |                            
|Service revenue                                                                   |  |                             | 338   |      |   | 50 
|License and milestone revenue:                                                    |  |                             |       |      |   |    
|Other license and contract revenue                                                |  |                             | 1     |      |   | 2  
|Veridex and other related party                                                   |  |                             | 200   |      |   | 311
|                                                                                  |  |                             |       |      |   |    
|Total revenue                                                                     |  | $                           | 2,327 |      | $ | 935
|                                                                                  |  |                             |       |      |   |    
|                                                                                  | 
|                                                                                  |  | Three months ended June 30,
|Instrument sales                                                                  |  | 2006                        |       | 2005
|CellTracks Analyzer II                                                            |  |                             |       |      |   |    
|Veridex                                                                           |  |                             |      |      |   |   
|Third party customers                                                             |  |                             | 10    |      |   |   
|CellSpotter Analyzer                                                              |  |                             |       |      |   |    
|Veridex                                                                           |  |                             |      |      |   | 2  
|Third party customers                                                             |  |                             | 1     |      |   | 2  
|                                                                                  |  |                             |       |      |   |    
|Total analyzers sold                                                              |  |                             | 11    |      |   | 4  
|                                                                                  |  |                            
|CellTracks AutoPrep Systems                                                       |  |                             |       |      |   |    
|Veridex                                                                           |  |                             |      |      |   | 2  
|Third party customers                                                             |  |                             | 9     |      |   | 2  
|                                                                                  |  |                             |       |      |   |    
|Total AutoPreps sold                                                              |  |                             | 9     |      |   | 4  

We recorded $1.8 million in product revenue in the three months ended June 30, 2006 of which $355,000 was
earned from Veridex, a related party. We recorded $572,000 in product revenue in the three month period ended June 30, 2005, of which $305,000 was earned from Veridex. Instrument revenue increased $0.9 million, or 200.0% to $1.4 million from
$457,000 in the quarter ended June 30, 2005. We sold 20 instruments in the three month period ended June 30, 2006 and eight in the three month period ended June 30, 2005. We sold two CellTracks Analyzer II systems as part of an
upgrade program from the first generation CellSpotter analyzer system in the three month period ended June 30, 2006. These two CellTracks Analyzer II systems were sold below cost as part of a program to encourage upgrade of the first generation
CellSpotter Analyzers. Reagent and consumable product revenue increased $303,000, or 265.8%, to $417,000 in the second quarter of 2006 as compared to the prior year quarter. As we place more of our instruments in the field, we anticipate our reagent
and consumable product revenue to significantly increase.



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Immunicon Corporation and Subsidiaries

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

Service revenue was $338,000
and $50,000 in the three months ended June 30, 2006 and June 30, 2005, respectively. The revenue was earned primarily from our contract with Pfizer, Inc., or Pfizer. In March 2006, we announced an extension of our this agreement with
Pfizer under which we collaborated with Pfizer to develop new reagents designed to detect certain undisclosed antigens on CTCs. The collaboration began in February 2003 and was amended to permit the parties to initiate new clinical research studies.

License and milestone revenue from related party decreased by $111,000 to $200,000 for the three months ended June 30, 2006 from $311,000 for the
three months ended June 30, 2005. From August 1, 2000 to June 30, 2006, we received $6.4 million in license and milestone receipts under our Development Agreement with Veridex. License and milestone receipts have been deferred
and are amortized on a straight-line basis over the product development period as defined for each specific product.

In March 2006, we and Veridex agreed
that we had successfully filled the criteria for participation in a study in which we act as the central testing laboratory for conducting circulating tumor cell testing and analysis of study patients using CellSearch reagents and Veridex paid us
$250,000. We will recognize this revenue over the life of the study, which we estimate will conclude in the fourth quarter of 2010.

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

As a result of the above, total revenue increased by $1.4 million to $2.3
million in the three months ended June 30, 2006 as compared to $935,000 in the corresponding period of 2005.

Costs of goods sold

Costs of goods sold increased to $2.4 million in the three months ended June 30, 2006 from $636,000 in the corresponding period of 2005. This is the result of the
following of factors: We began recording costs of goods sold and capitalizing inventory in October 2004 after the launch of our initial in vitrodiagnostic products. Prior to that time, all products and inventory material purchases were
recorded as research and development expense, principally laboratory supplies. As a result, approximately $264,000 of product revenue in the second quarter of 2005 had no corresponding cost of goods sold recognized. In addition, effective on
October 1, 2005, we ceased to be a development stage company. Certain costs related to the manufacturing department in 2005 that were applied to certain research and development activities are now being applied directly to costs of goods sold.
Therefore the cost of goods sold for 2006 and 2005 are not comparable. Also during 2006 Immunicon decided to begin outsourcing certain activities related to the manufacture of instruments. Immunicon is in the process of reducing its internal
manufacturing costs but this transition process resulted in some limited duplicate instrument cost of goods sold. These costs should be reduced once the outsourcing process is completed. This process should be completed before the end of 2006.

Research and development expenses

Research and
development expenses decreased by $2.2 million, or 41.2%, to $3.3 million in the second quarter of 2006 from $5.5 million in the corresponding quarter of 2005. Overall decreases in the current quarter are principally the result of expense
reductions in salary and other areas related to the staff reductions which were completed in the third quarter of 2005. In addition, effective on October 1, 2005, we ceased to be a development stage company. Therefore, prior year quarters
included certain manufacturing department costs that were considered support of research and development activities. Now, a majority of the manufacturing department costs are applied directly to operations or costs of goods sold. Salary and
salary-related costs were $1.7 million in the second quarter of 2006 compared to $3.1 million in the corresponding quarter of 2005. This decrease of $1.4 million, or 45.9%, is due principally to the staff reduction referred to above and exiting
of the development stage. In addition, the portion of stock-based compensation expenses recognized as part of research and development salaries was $197,000 lower in the second quarter of 2006 than in the second quarter of 2005.

Laboratory supplies and expenses were $234,000 in the second quarter of 2006, or $180,000 higher than the $54,000 we incurred in the second quarter of 2005. Laboratory
supplies will fluctuate as we invest more funds into our research and development activities.

Clinical trial expenses decreased in the second quarter of
2006 by $710,000 to $332,000 from $1.0 million in the second quarter of 2005. We initiated a clinical trial for the monitoring of metastatic colorectal cancer in the second quarter of 2004. In January 2005,



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Immunicon Corporation and Subsidiaries

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

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 enrollment by December 31,
2005. Also, in October 2004, we initiated a pivotal clinical trial for the monitoring of metastatic prostate cancer, which, if successful, could result in a regulatory submission to the FDA. As the patient accrual for both of trials was
substantially completed at December 31, 2005, our clinical trial expenditures decreased significantly in the second quarter of 2006.

Depreciation
expense decreased in the second quarter of 2006 by $107,000 to $316,000 from $423,000 in the second quarter of 2005. This decrease was the result of certain manufacturing department costs which are now allocated directly to operations, see
discussion above.

Insurance expenses decreased by $130,000 in the second quarter of 2006 over the same period in 2005 due principally to a change in the
allocation of the directors and officers liability insurance cost as well as the decrease in directors and officers insurance premium in the current year.

A summary of the principal components of our research and development costs for the three months ended June 30, 2006 and June 30, 2005 are shown below:



|                                                 |  |                            |       |      |   |      
|------------------------------------------------ |  | -------------------------- | ----- | ---- | - | -----
|                                                 |  | Three months endedJune 30,
|Research and development expenses (in thousands) |  | 2006                       |       | 2005
|Salaries, benefits and taxes                     |  | $                          | 1,651 |      | $ | 3,050
|Laboratory supplies and expenses                 |  |                            | 234   |      |   | 54   
|Instrument development costs                     |  |                            | 205   |      |   | 129  
|Clinical trial expenses                          |  |                            | 332   |      |   | 1,042
|Contracted research costs                        |  |                            | 104   |      |   | 163  
|Depreciation expense                             |  |                            | 316   |      |   | 423  
|Insurance expense                                |  |                            | 52    |      |   | 182  
|All others                                       |  |                            | 365   |      |   | 500  
|                                                 |  |                            |       |      |   |      
|Total research and development expenses          |  | $                          | 3,259 |      | $ | 5,543
|                                                 |  |                            |       |      |   |      

Each of our research and development programs is subject to certain 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 $317,000, or 15.5%, to $2.3 million in the second quarter of 2006 from $2.0 million
in the second quarter of 2005. Salary-related costs increased by $263,000 in the second quarter of 2006, due principally to stock-based compensation expense as result of the adoption of SFAS 123R and the issuance of nonvested shares. Depreciation
expense increased by $36,000, or 71.9%, to $86,000 as a result of accelerated depreciation of certain property and equipment resulting from the termination of a portion of our office space lease.



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Immunicon Corporation and Subsidiaries

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

A summary of the principal
components of our general and administrative expenses for the three months ended June 30, 2006 and June 30, 2005 are shown below:



|                                                   |  |                            |       |      |   |      
|-------------------------------------------------- |  | -------------------------- | ----- | ---- | - | -----
|                                                   |  | Three months endedJune 30,
|General and administrative expenses (in thousands) |  | 2006                       |       | 2005
|Salaries, benefits and taxes                       |  | $                          | 1,336 |      | $ | 1,073
|Depreciation                                       |  |                            | 86    |      |   | 50   
|Legal and professional fees                        |  |                            | 519   |      |   | 511  
|Insurance expense                                  |  |                            | 50    |      |   | 41   
|Other                                              |  |                            | 358   |      |   | 357  
|                                                   |  |                            |       |      |   |      
|Total general and administrative expenses          |  | $                          | 2,349 |      | $ | 2,032
|                                                   |  |                            |       |      |   |      

Interest and other income

Interest income increased by $144,000, or 51.7%, to $422,000 in the quarter ended June 30, 2006 from $278,000 in the quarter ended June 30, 2005. The increase in interest income was primarily a result of an
increase in the average interest rate on invested cash and cash equivalents.

Interest expense

Interest expense decreased by $17,000, or 14.7%, to $103,000 for the second quarter of 2006 from $120,000 for second quarter of 2005. The decrease was due to lower
average debt outstanding in the second quarter of 2006 compared to the second quarter of 2005.

Stock-based compensation expenses

On January 1, 2006, we adopted SFAS 123R. Additional information regarding the application of SFAS 123R to our financial statements is contained in Note 2 to our
condensed consolidated financial statements. In adopting SFAS 123R, we applied the modified prospective transition method and therefore have not restated prior periods.

Through the end of 2005, we accounted for stock-based compensation costs under SFAS 123, as amended by SFAS 148, which permitted (i) recognition of the fair value of stock-based awards as an expense, or
(ii) continued application of the intrinsic value method of APB 25.

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 were granted with an exercise price below the estimated fair
value of our common stock at the grant date, the difference between the fair value of our common stock and the exercise price of the stock option was amortized to compensation expense on a straight-line basis over the vesting period of the stock
option.

Stock-based compensation expenses were $499,000 and $444,000 for the three months ended June 30, 2006 and June 30, 2005, respectively.
Stock-based compensation expense is recorded as a component of either cost of goods sold, research and development expense or general and administrative expense, The allocation is dependent on the expense category where the employee who holds the
stock option is assigned. A summary of the stock-based compensation is shown below.



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



|                                                              |  |                            |     |      |   |    
|------------------------------------------------------------- |  | -------------------------- | --- | ---- | - | ---
|                                                              |  | Three Months EndedJune 30,
|Stock-based compensation expenses included in: (in thousands) |  | 2006                       |     | 2005
|Cost of goods sold                                            |  | $                          | 15  |      | $ |   
|Research and development expenses                             |  |                            | 145 |      |   | 342
|General and administrative expenses                           |  |                            | 339 |      |   | 102
|                                                              |  |                            |     |      |   |    
|Total stock-based compensation expenses                       |  | $                          | 499 |      | $ | 444
|                                                              |  |                            |     |      |   |    

Income Taxes

We have incurred net operating losses since our inception and have consequently not paid any federal, state or foreign taxes. As of June 30, 2006, we had approximately $122.4 million of net operating loss carryforwards and
approximately $5.1 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 $5.4 million in the second quarter of 2006 was $1.7 million, or 24.3%, lower than the loss of $7.1 million in the second quarter of 2005. As the
result, the net loss per common share of $0.20 in the second quarter of 2006 was $0.10 per share lower than the loss per common share of $0.30 in the second quarter of 2005. Weighted average common shares outstanding during the three months ended
June 30, 2006 were approximately 27.6 million compared to 23.4 million for the same period of 2005.

Six months ended June 30, 2006
and 2005

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.



|                                                                                  |  |                           |       |      |   |      
|--------------------------------------------------------------------------------- |  | ------------------------- | ----- | ---- | - | -----
|                                                                                  |  | Six Months Ended June 30,
|Revenue ( in thousands)                                                           |  | 2006                      |       | 2005
|Product revenue including product revenue from related party: Instrument revenue: |  |                           |       |      |   |      
|Related party                                                                     |  | $                         | 159   |      | $ | 441  
|Other                                                                             |  |                           | 1,846 |      |   | 479  
|Reagents and other product revenue:                                               |  |                           |       |      |   |      
|Related party                                                                     |  |                           | 555   |      |   | 174  
|Other                                                                             |  |                           | 142   |      |   | 38   
|                                                                                  |  |                           |       |      |   |      
|Total product revenue                                                             |  | $                         | 2,702 |      | $ | 1,132
|                                                                                  |  |                          
|Service revenue                                                                   |  |                           | 677   |      |   | 100  
|License and milestone revenue:                                                    |  |                           |       |      |   |      
|Veridex and other related party                                                   |  |                           | 400   |      |   | 580  
|Other revenue                                                                     |  |                           | 1     |      |   | 2    
|                                                                                  |  |                           |       |      |   |      
|Total revenue                                                                     |  | $                         | 3,780 |      | $ | 1,814
|                                                                                  |  |                           |       |      |   |      



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



|                            |  |                           |  |     
|--------------------------- |  | ------------------------- |  | ----
|                            |  | Six months ended June 30,
|Instrument sales            |  | 2006                      |  | 2005
|CellTracks Analyzer II      |  |                           |  |     
|Veridex                     |  |                          |  |    
|Third party customers       |  | 15                        |  |    
|CellSpotter Analyzer        |  |                           |  |     
|Veridex                     |  | 1                         |  | 4   
|Third party customers       |  | 2                         |  | 4   
|                            |  |                           |  |     
|Total analyzers sold        |  | 18                        |  | 8   
|                            |  |                          
|CellTracks Autoprep Systems |  |                           |  |     
|Veridex                     |  | 1                         |  | 4   
|Third party customers       |  | 12                        |  | 4   
|                            |  |                           |  |     
|Total Autoprep sold         |  | 13                        |  | 8   

We earned $2.7 million in product revenue for the first half of 2006, including $2.0 million in instrument revenue
and $697,000 in reagent and consumable product sales. We earned $1.1 million in product revenue in the first half of 2005, including $920,000 in instrument revenue and $212,000 in reagent and consumable products revenue. We sold 31 instruments,
including 18 analyzers (15 CellTracks Analyzers II and three CellSpotter Analyzer Systems) and 13 AutoPreps, in the six months period ending June 30, 2006 and sold 16 instruments, including eight analyzers and eight AutoPreps, in the prior year
period. Of the 15 CellTracks Analyzer II we sold, five were upgrades from the first generation CellSpotter Analyzer System. These five CellTracks Analyzer II systems were sold below cost as part of a program to encourage upgrade of the first
generation CellSpotter Analyzers.

Service revenue was $677,000 and $100,000 in the six months ended June 30, 2006 and June 30, 2005,
respectively. The revenue was earned primarily from our contract with Pfizer. In March 2006, we announced an extension of our Research and Development Agreement with Pfizer, under which we collaborated with Pfizer to develop new reagents designed to
detect certain undisclosed antigens on CTCs. The collaboration began in February 2003 and was amended to permit the parties to initiate new clinical research studies by adding new Appendices duly signed by both parties to the Research and
Development Agreement. A new phase I trial has been added to the Research and Development Agreement and we have begun testing for this trial.

License and
milestone revenue from related party decreased by $180,000 to $400,000 for the first half of 2006 from $580,000 for the corresponding 2005 period. From August 1, 2000 to June 30, 2005, we received $6.4 million in license and milestone
receipts under our Development Agreement with Veridex. License and milestone receipts have been deferred and are amortized on a straight-line basis over the product development period as defined for each specific product.

In March 2006, we and Veridex agreed that we had successfully completed the criteria for participation in a study in which we act as the central testing laboratory for
conducting circulating tumor cell testing and analysis of study patients using CellSearch reagents and Veridex paid us $250,000. We will recognize this revenue over the estimated life of the study, which we estimate to conclude in the fourth quarter
of 2010. In March 2005, we and Veridex agreed that we had successfully completed the criteria for a 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 was completed in the second quarter of 2006.

Therefore, total revenue increased by $2.0
million to $3.8 million in the six months ended June 30, 2006 compared to $1.8 million in the corresponding period in 2005.

Costs of goods sold

Costs of goods sold increased $3.1 million to $3.9 million in the six months ended June 30, 2006 from $810,000 in the corresponding period of
2005. We reported a loss on product and service sales of $571,000 for the six months ended June 30, 2006 as compared to a gross profit on product sales of $422,000 in the corresponding period of 2005. This is the result of a few key factors.
First, we began capitalizing inventory-related costs in the fourth quarter of 2004. Prior thereto, all product and inventory material purchases were recorded as research and development expense, principally as laboratory supplies. In the six months
ended June 30, 2005 much of the materials typically recorded as cost of goods sold had been purchased and expensed in a prior period and as a result, $637,000 of the product revenue was reported without a corresponding cost of goods sold.
Secondly, effective on October 1, 2005, we ceased to be a



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Immunicon Corporation and Subsidiaries

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

development stage company.
Certain costs related to the manufacturing department in 2005 that were applied to certain research and development activities are now being applied directly to costs of goods sold. Finally, during 2006 Immunicon decided to begin outsourcing certain
activities related to the manufacture of instruments. Immunicon is in the process of reducing its internal manufacturing costs but this transition process resulted in some limited duplicate instrument cost of goods sold. These costs should be
reduced once the outsourcing process is completed. This process should be completed before the end of 2006. Therefore we believe that the cost of goods sold for 2006 and 2005 are not comparable.

Research and development expenses

Research and development expenses
for the six months ended June 30, 2006 decreased $5.1 million to $6.4 million, as compared to $11.5 million in the first half of 2005. Overall decreases in the current period are principally the result of the reduction in staff and other
expenses in order to align costs with our commercialization strategy and revenue growth. These expense reductions were completed in August of 2005. In addition, effective on October 1, 2005, we ceased to be a development stage company.
Therefore, prior year quarters included certain manufacturing department costs that were considered support of research and development activities. Since then, a majority of the manufacturing department costs are applied directly to operations or
costs of goods sold. Salary and salary-related costs were $3.1 million in the first half of 2006, as compared to $6.1 million in the first half of 2005. This decrease of $3.0 million, or 48.7%, is due principally to the staff reduction referred
to above and exiting of the development stage. In addition, the portion of stock-based compensation expenses recognized as part of research and development salaries was $503,000 lower in the first half of 2006 as compared to the corresponding prior
year period.

Laboratory supplies and expenses were $361,000 in the first half of 2006, or $137,000 lower, in the first half of 2005. This decrease is
primarily due to the expense reductions completed in August 2005 as previously mentioned.

Clinical trial expenses decreased in the first half of 2006 by
$1.2 million to $780,000 from $2.0 million in the first half of 2005. 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. 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. As of January 2006, we were substantially complete with the patient accrual of both of these clinical trials and therefore our trial expenses have decreased.

Contracted research costs were $182,000 lower in the first half of 2006 than in the first half of 2005. In the prior year period, we were incurring costs leading up to
the June 2005 launch of our CellTracks Analyzer II. These costs have also declined as a result of the reductions to align costs with our commercialization strategy.

Depreciation expense decreased in the first half of 2006 by $113,000 to $646,000 from $759,000 in the first half of 2005. This decrease was the result of certain manufacturing department costs which are now allocated
directly to operations, as discussed above.

Insurance expenses decreased by $233,000 in the first half of 2006 over the same period of 2005 related
principally to allocated costs of directors and officers liability insurance, which has significantly decreased in the current year.



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Immunicon Corporation and Subsidiaries

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

A summary of the principal
components of our research and development costs for the six months ended June 30, 2006 and June 30, 2005 are shown below:



|                                                 |  |                          |       |      |   |       
|------------------------------------------------ |  | ------------------------ | ----- | ---- | - | ------
|                                                 |  | Six months endedJune 30,
|Research and development expenses (in thousands) |  | 2006                     |       | 2005
|Salaries, benefits and taxes                     |  | $                        | 3,111 |      | $ | 6,065 
|Laboratory supplies and expenses                 |  |                          | 361   |      |   | 498   
|Instrument development costs                     |  |                          | 412   |      |   | 386   
|Clinical trial expenses                          |  |                          | 780   |      |   | 1,959 
|Contracted research costs                        |  |                          | 264   |      |   | 446   
|Depreciation expense                             |  |                          | 646   |      |   | 759   
|Insurance expense                                |  |                          | 145   |      |   | 378   
|All others                                       |  |                          | 658   |      |   | 994   
|                                                 |  |                          |       |      |   |       
|Total research and development expenses          |  | $                        | 6,377 |      | $ | 11,485
|                                                 |  |                          |       |      |   |       

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 $801,000, or 19.9%, to $4.8 million in the first half of 2006 from $4.0 million in the first
half of 2005. Salary-related costs increased by $605,000 in the first half of 2006, due principally to approximately $535,000 to non-cash compensation charges associated with the adoption of SFAS 123R and issuance of restricted shares. The remaining
increase is the result of accelerated depreciation of certain property and equipment resulting from the termination of the lease of a portion of our office space. In addition, insurance expenses increased by $73,000 as a result of the allocated
portion of the higher directors and officers liability insurance which increased as a result of exiting the development stage. A summary of the principal components of our general and administrative expenses for the six months ended
June 30, 2006 and June 30, 2005 are shown below:



|                                                   |  |                           |       |      |   |      
|-------------------------------------------------- |  | ------------------------- | ----- | ---- | - | -----
|                                                   |  | Six Months Ended June 30,
|General and administrative expenses (in thousands) |  | 2006                      |       | 2005
|Salaries, benefits and taxes                       |  | $                         | 2,761 |      | $ | 2,156
|Depreciation                                       |  |                           | 203   |      |   | 134  
|Legal and professional fees                        |  |                           | 989   |      |   | 940  
|Insurance expense                                  |  |                           | 158   |      |   | 85   
|Other                                              |  |                           | 707   |      |   | 702  
|                                                   |  |                           |       |      |   |      
|Total general and administrative expenses          |  | $                         | 4,818 |      | $ | 4,017
|                                                   |  |                           |       |      |   |      

Interest and other income

Interest and other income increased by $244,000, or 43.0%, to $810,000 in the first half of 2006 from $566,000 in the corresponding 2005 period. The increase in interest income was primarily a result of the increases
in interest rates over the past year.

Interest expense

Interest expense decreased by $29,000, or 11.9%, to $216,000 for the first half of 2006 from $245,000 for first half of 2005. The decrease was due to lower average debt outstanding in the first half of 2006 compared to the 2005 period.



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Immunicon Corporation and Subsidiaries

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

Stock-based compensation
expenses

Stock-based compensation expenses were $856,000 and $795,000 for the six months ended June 30, 2006 and June 30, 2005, respectively.
Stock-based compensation expense is recorded as a component of either cost of goods sold, research and development expense or general and administrative expense. The allocation is dependent on the expense category where the employee who holds the
stock option is assigned. A summary of the stock-based compensation is shown below.



|                                                              |  |                          |     |      |   |    
|------------------------------------------------------------- |  | ------------------------ | --- | ---- | - | ---
|                                                              |  | Six Months EndedJune 30,
|Stock-based compensation expenses included in (in thousands): |  | 2006                     |     | 2005
|Cost of goods sold                                            |  | $                        | 28  |      | $ |   
|Research and development expenses                             |  |                          | 114 |      |   | 617
|General and administrative expenses                           |  |                          | 714 |      |   | 178
|                                                              |  |                          |     |      |   |    
|Total stock-based compensation expenses                       |  | $                        | 856 |      | $ | 795
|                                                              |  |                          |     |      |   |    

Income taxes

We have incurred net operating losses since our inception and have consequently not paid any federal, state or foreign taxes. As of June 30, 2006, we had approximately $122.4 million of net operating loss carryforwards and
approximately $5.1million 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 $10.8 million in the first half of 2006 was $3.4 million, or 24.0%, lower than the loss of $14.2 million in the first half of 2005. As the
result, the net loss per common share of $0.39 in the six months ended June 30, 2006 was $0.22 per share lower than the loss per common share of $0.61 in the prior year period. Weighted average common shares outstanding during the six months
ended June 30, 2006 were approximately 27.6 million compared to 23.3 million for the same period in 2005. We completed the sale of 4.1 million common shares in June 2005 thereby increasing the weighted average number of common
shares outstanding in the current year period.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations since inception through private and public equity and debt financings, capital equipment and leasehold financing, license and milestone revenues from corporate collaborations,
government grants and interest earned on cash and investments. In October 2004, we launched our first FDA-cleared cancer diagnostic products. Based on reaching certain commercialization goals, including sales of our products, we determined that,
effective at the beginning of the fourth quarter of 2005, we were no longer a development stage company.

Cash and short-term investments decreased by
$9.2 million in the six month period ended June 30, 2006 to $33.4 million principally due to funding our net loss of $10.8 million.

We
spent $9.0 million for operating activities in the six months ended June 30, 2006 compared to $12.9 million in same period of 2005. This decrease in cash used for operating activities is primarily the result of expense reductions related
to the staff reductions implemented in the third quarter of 2005.

Our investing activities provided cash of $9.7 million in the six months ended
June 30, 2006. We received net proceeds from the sale of investments of $9.9 million and paid $346,000 in capital equipment. In the corresponding period in 2005, we generated approximately $6.2 million from investing activities as a result from
receiving net proceeds from maturities of our investments of $8.6 million which was offset by $2.4 million in payments for capital equipment and leasehold improvements.



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Immunicon Corporation and Subsidiaries

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

We had a net decrease in cash
of $1.1 million from our financing activities in the six months ended June 30, 2006 and had a net increase of $19.0 million in the corresponding six month period in 2005. In June 2005, we received $18.0 million, net of expenses, through the
sale of 4.1 million shares of common stock pursuant to shelf registration statement filed on Form S-3 in May 2005. In the six months ended June 30, 2006, we received $380,000 from borrowings and made principal payments on our debt of $1.6
million. In the corresponding period in 2005, we received $2.3 million from borrowings and made principal payments on our debt of $1.9 million.

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

Sales of our common and preferred stock from inception through June 30, 2006 are as follows:



|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|---------------------------------------------------------------- |  | ---------- |  | --------------- |  | --------------- | ------ | --------------------------- | - | ------------------------ |  | ----------
|Summary of all sales of common and convertible preferred stock   |  | Year(s)    |  | Number ofshares |  | Price Per share |        | Net proceeds (in thousands) |   | Equivalent common shares
|Initial sale of common stock (private)                           |  | 1984       |  | 10,000          |  | $               | 150.00 |                             | $ | 1,500                    |  | 10,000    
|                                                                 |  |            |  |                 | 
|Convertible preferred stock                                      |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|Series A                                                         |  | 1988       |  | 36,350          |  |                 | 10.00  |                             |   | 364                      |  | 669,343   
|Series B                                                         |  | 1989       |  | 30,000          |  |                 | 10.00  |                             |   | 300                      |  | 236,952   
|Series C                                                         |  | 1990       |  | 30,000          |  |                 | 10.00  |                             |   | 300                      |  | 296,016   
|Series D                                                         |  | 1999, 2004 |  | 33,971,098      |  |                 | 0.32   |                             |   | 10,597                   |  | 2,216,742 
|Series E                                                         |  | 2000       |  | 4,588,612       |  |                 | 4.74   |                             |   | 21,612                   |  | 3,059,083 
|Series F                                                         |  | 2001, 2003 |  | 13,454,500      |  |                 | 4.00   |                             |   | 51,942                   |  | 8,969,677 
|                                                                 |  |            |  |                 | 
|Initial public offering                                          |  | 2004       |  | 6,900,000       |  |                 | 8.00   |                             |   | 49,427                   |  | 6,900,000 
|                                                                 |  |            |  |                 | 
|Sale of common stock (secondary offering)                        |  | 2005       |  | 4,137,902       |  |                 | 4.75   |                             |   | 17,981                   |  | 4,137,902 
|                                                                 |  |            |  |                 | 
|Exercise of options and warrants and other sales of common stock |  |            |  |                 |  |                 |        |                             |   | 2,132                    |  | 1,148,308 
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|                                                                 |  |            |  |                 |  |                 |        |                             | $ | 156,155                  |  | 27,644,023
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           

As of June 30, 2006, 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 June 30, 2006 and the effects such obligations are
expected to have on our liquidity and cash flows in future periods.



|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |    
|----------------------------------- |  | --------------- | ------ | ---- | - | ------------- |  | ------------- | ----- | ---------- | - | ----- |  | - | ---
|                                    |  | Payments due in
|Contractual obligations             |  | Total           |        | 2006 |   | 2007 and 2008 |  | 2009 and 2010 |       | After 2010
|                                    |  | (in thousands) 
|Lines of credit                     |  | $               | 5,216  |      | $ | 1,375         |  | $             | 3,228 |            | $ | 613   |  | $ |   
|Operating leases                    |  |                 | 3,981  |      |   | 426           |  |               | 1,723 |            |   | 1,579 |  |   | 253
|Open purchase order commitments (1) |  |                 | 8,105  |      |   | 8,105         |  |               |      |            |   |      |  |   |   
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |    
|Total contractual obligations       |  | $               | 17,302 |      | $ | 9,906         |  | $             | 4,951 |            | $ | 2,192 |  | $ | 253
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |    

---

|(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
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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 June 30, 2006, 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 2006.

The
Development Agreement with Veridex provides for a total of up to $10.5 million in non-refundable license and milestone payments related to research and development activities, including up to $1.5 million for the initial license and up to
$9.0 million related to the completion of certain instrument and clinical trial milestones. We have received $6.4 million as of June 30, 2006. We have also continuously reviewed the status of the remaining development milestones and,
where appropriate, have renegotiated the development requirement and payment terms. We do not believe that these renegotiations will have a material adverse effect on our product development or financial position. We expect to receive the remaining
$4.1 million in development milestone payments over the next three to five years.

If we do not successfully complete the payment criteria for a given
future milestone, we will not receive the applicable milestone payment. If we do not successfully complete the payment criteria by the target date for a given milestone, we will continue to be entitled to receive the milestone payment in the future
upon successful completion of the criteria. However, Veridexs obligation to pay us a percentage of the net sales for the specific cell analysis product to which the milestone relates would be reduced by 0.5% for the ten-year period beginning
with the shipment for commercial sale of the first product resulting from the Development Agreement. In no event, however, would reductions due to missed target dates reduce our proportionate percentage share of net sales for the product specified
that we would otherwise be entitled to receive from Veridex for sales of all cell analysis products by Veridex under the Development Agreement by more than 0.5% in the aggregate. In the case of the CellSearch product related to metastatic breast
cancer, we agreed with Veridex that we did not reach a certain development milestone within the time period specified and therefore we will receive approximately 31% of net sales for this product.

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

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

We have also established a sales
agency arrangement with Veridex with respect to our sample preparation and cell analysis systems. Under this arrangement, Veridex is our exclusive sales, invoicing and collecting agent and exclusive instrument and technical service provider for
these systems in the field of cancer.

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

We began selling our first cancer in
vitro diagnostic product in October 2004. This represents the beginning of the commercialization phase as defined in the Development Agreement. According to the Development Agreement, license and supply agreement once



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

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

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

As of June 30, 2006 and
June 30, 2005, we had $12.3 million and $14.1 million, respectively, in available credit under our credit agreements. The available borrowing capacity under our SVB credit facility was $8.8 million and expires on December 31, 2006 and the
available borrowing capacity under our credit facilities with GECC, was $3.5 million and expires October 31, 2006. We were in compliance with all provisions of our various loans as of and for the six months ended June 30, 2006 and
June 30, 2005.The SVB credit agreement contains certain covenants that require us to, among other things, maintain a certain level of earnings or loss before interest, taxes, depreciation and amortization, maintain a minimum amount of
our available funds on deposit with SVB and deliver periodic financial statements and reports within a prescribed timeframe. The agreements with SVB and GECC also restrict our ability to among other things, dispose of property (including
intellectual property), change our business, ownership, management or business locations, merge with or acquire certain other entities, create or incur certain liens or encumbrances on any of its property, incur or amend the terms of certain
indebtedness, engage in transactions with affiliates, declare or pay certain dividends or redeem, retire or purchase shares of any capital stock without their prior approval.

On June 13, 2005 we announced that we, along with the Fox Chase Cancer Center, or Fox Chase, were awarded a Small Business Technology Transfer grant totaling approximately $1.1 from the National Institutes of
Health, or NIH, which extends over two years. These grant payments will come directly to us and then we will remit Fox Chases portion to them. We believe that we will be entitled to $475,000 of the grant and that Fox Chase will receive the
remainder of $615,000 The NIH grant is intended to fund the development of a new strategy to actively monitor the effectiveness of cancer drugs in clinical trials. As of June 30, 2006, we have cumulatively received $170,000 and Fox Chase has
received $281,000 from the grant.

On August 29, 2005, we announced actions to align staff levels and other expenses with our current
commercialization strategy. This initiative included a workforce reduction of approximately 25% of full-time equivalent domestic staff principally in research and development, operations and certain support functions. A significant component of the
workforce reduction involved employees who were engaged in platform development programs that were essentially completed, such as our next generation cell analysis platform, the CellTracks Analyzer II. We had also completed development of
certain core reagents and ancillary components incorporated in cell analysis kits, most notably the CellSearch Circulating Tumor Cell (CTC) Kit, sold by Veridex. We continue to pursue important development projects such as clinical trials in
metastatic colorectal and prostate cancer and research and development efforts on circulating endothelial cells and certain molecular analysis products. The clinical trials in metastatic colorectal and prostate cancer are intended to lead to
regulatory submissions for expanded claims for the CellSearch CTC Kit.

We recorded charges of $459,000 related to our staff and other cost reductions in
the year ended December 31, 2005. In the first half of 2006, we recorded $188,000 in accelerated depreciation of certain property and equipment resulting from the termination of the lease of a portion of our office space. We had previously
estimated that these additional costs could be as high as $600,000. We completed these activities in the second quarter of 2006.

Based on our operating
plans, we believe that our available cash and available borrowings under of lines of credit will be sufficient to finance operations and capital expenditures until at least June 30, 2007. 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



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

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 $33.4 million in cash on hand and short term investments, $0.5 million in long-term investments which have a maturity of greater than 12 months and $12.3 million in available lines of credit as of June 30,
2006. We plan to use our cash on hand and our available lines of credit to continue to develop our cancer diagnostic products beyond breast cancer to other types of solid tissue cancers and to explore the uses of our technology in earlier stages of
the cancer disease process. Also, we plan to explore development of uses for our technology outside of cancer such as in cardiovascular disease. We plan to use the anticipated funds generated from the sales of our products as well as additional
equity or debt-related offerings to finance our future development efforts. We may not be successful in generating sufficient product sales or raising sufficient funds from the sale of equity or debt securities to support the research and
development expenses necessary to expand the uses of the technology into other cancers and in non-cancer diseases. In addition, if we are unsuccessful in our product development efforts, additional financing may not be available in sufficient
amounts or on terms acceptable to us, if at all. If we are unable to obtain additional financing, we may elect to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities and this
could have a material adverse effect on our financial condition and operating results.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109, or FIN 48. FIN 48 clarifies the accounting for uncertainties in income taxes recognized in an enterprises financial statements. FIN 48 requires that we determine whether it is more likely than not that a tax
position will be sustained upon examination by the appropriate taxing authority. If a tax position meets the more likely than not recognition criteria, FIN 48 requires the tax position be measured at the largest amount of benefit greater than 50
percent likely of being realized upon ultimate settlement. This accounting standard is effective for fiscal years beginning after December 15, 2006. The effect, if any, of adopting FIN 48 on our financial position and results of operations has
not been finalized.

Effective January 1, 2006, we adopted the provisions of SFAS 123R. Prior to January 1, 2006, we accounted for stock option
awards granted under our share-based payment plans in accordance with the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, orAPB 25, and related
interpretations, as permitted by SFAS No. 123 Accounting for Stock-Based Compensation, or SFAS 123. Prior to January 1, 2006, we recorded share-based employee compensation expense in our consolidated statements of earnings for the
Pre-IPO options and nonvested shares but not for other option grants. Under the modified-prospective-transition method of SFAS 123R, compensation expense recognized during the three and six months ended June 30, 2006 included:
(a) compensation expense for all share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation
expense for all share-based awards granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified-prospective-transition method, results for
prior periods have not been restated. See Note 2 for further detail on the impact of SFAS 123R on our condensed consolidated financial statements.

In
March 2005, the U.S. Securities and Exchange Commission, or SEC, issued Staff Accounting Bulletin No. 107, or SAB 107,Share-Based Payment, which expressed views of the SEC staff regarding the application of SFAS 123R. In April 2005, the
SEC issued release No. 33-8568,Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement 123(R). Among other things, SAB 107 and release No. 33-8568 provided interpretive guidance related to the
interaction between SFAS 123R and certain SEC rules and regulations, provided the SEC staffs views regarding the valuation of share-based payment arrangements for public companies and changed the required adoption date of the standard to
periods beginning after June 15, 2005.

In November 2004, the FASB issued SFAS, No. 151 Inventory Costsan amendment of ARB No. 43,
Chapter 4,or SFAS 151. SFAS 151 requires all entities to allocate overhead costs to inventory based on a calculation of normal manufacturing capacity. The Statement notes that this calculation is difficult because of the variety of
considerations encountered in the allocation of costs and charges. This statement is effective for the fiscal years beginning after June 15, 2005. We adopted SFAS 151 beginning with the first quarter of fiscal 2006 and it did
not have a material impact on our financial statements.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, or
SFAS 154, which changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS 154 replaces Accounting Principles



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

Board, or APB, Opinion
No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statement. It requires retrospective application to prior periods financial statements of a voluntary change in accounting
principle unless it is impracticable. In addition, under SFAS 154, if an entity changes its method of depreciation, amortization, or depletion for long-lived, non-financial assets, the change must be accounted for as a change in accounting estimate
affected by a change in accounting principle. SFAS 154 applies to accounting changes and error corrections made in fiscal years beginning after December 15, 2005. We adopted SFAS 154 beginning with the first quarter of fiscal 2006 and it
did not have a material impact on our financial statements.



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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 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the
factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005 and the additional factor set forth below, all of which could materially affect our business, financial
condition or future results. The risks described in our Annual Report on Form 10-K and below are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results.

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

We have a limited operating history. We have incurred significant net
losses since we began operations in 1983. As of June 30, 2006, we had an accumulated deficit $129.2 million. These losses have resulted primarily from costs incurred in our research and development programs and from our general and
administrative expenses. Because our operating expenses may increase in the near term, we will need to generate significant additional revenue to achieve profitability. As we do not as yet have sufficient operating revenue from the sales of our
products to offset our losses, we do not expect to have any sufficient operating income from the sale of our products until at least 2008. We will continue to incur research and development and clinical trial expenses, as well as increased
manufacturing, sales and marketing expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders equity. Because of the numerous risks and uncertainties
associated with our product development efforts, market acceptance and uncertainties concerning the success of sales efforts by us and Veridex, we are unable to predict when we will become profitable, and we may never become profitable. Even if we
do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.



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Item 4. Submissions of Matters to a Vote of Securityholders

The Company held its Annual
Meeting of shareholders on June 7, 2006. At the annual meeting:

1. Eight nominees for director were elected for a one-year term by a vote of shares as
follows:

Edward L. Erickson received 21,992,984 votes for his election (99.5% of shares voted; 79.7% of shares outstanding) and 106,434 votes were withheld
(0.5% of shares voted; 0.4% of outstanding shares).

Jonathan Cool received 21,992,738 votes for his election (99.5 % of shares voted; 79.7% of shares
outstanding) and 106,680 votes were withheld (0.5% of shares voted; 0.4% of outstanding shares).

J. William Freytag received 21,919,568 votes for his
election (99.2% of shares voted; 79.5% of shares outstanding) and 179,850 votes were withheld (0.8% of shares voted; 0.7% of outstanding shares).

Brian J.
Geiger received 21,993,238 votes for his election ( 99.5% of shares voted; 79.7% of shares outstanding) and 106,180 votes were withheld (0.5% of shares voted; 0.4% of outstanding shares).

Zola Horowitz received 20,868,489 votes for his election (94.4% of shares voted; 75.7% of shares outstanding) and 1,230,929 votes were withheld (5.6% of shares voted;
4.5% of outstanding shares).

Allen Lauer received 21,992,538 votes for his election ( 99.5% of shares voted; 79.7% of shares outstanding) and 106,880
votes were withheld (0.5% of shares voted; 0.4% of outstanding shares).

Byron D. Hewett received 21,992,684 votes for his election ( 99.5% of shares
voted; 79.7% of shares outstanding) and 106,734 votes were withheld (0.5% of shares voted; 0.4 % of outstanding shares).

Elizabeth Tallett received
21,619,139 votes for her election ( 97.8% of shares voted; 78.4% of shares outstanding) and 480,279 votes were withheld (2.2% of shares voted; 1.7% of outstanding shares).

2. The appointment of Deloitte & Touch LLP as our independent registered public accountants for the year ending December 31, 2006 was ratified by a vote of 99.5% of shares voted (or 79.7% of outstanding
shares).



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|21,989,049 |  | 75,085  |  | 35,284 

3. The proposal to approve an amendment to our Amended and Restated Equity Compensation Plan, as amended (the
Plan) to increase by 250,000 shares the number of shares of common stock authorized for issuance or transfer under the Plan and to approve the entire Plan, as amended, was ratified by a vote of 97.7% of shares voted (or 53.4% of our
outstanding shares).



|           |  |         |  |        
|---------- |  | ------- |  | -------
|For        |  | Against |  | Abstain
|14,732,572 |  | 270,280 |  | 70,321 



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Item 6. Exhibits.

(b)



|       |  |                                                                                                                                                                     
|------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1** |  | Chairman of the Board of Director Compensation (filed with the Registrants Current Report on Form 8-K filed on June 12, 2006 and incorporated by reference herein).
|       | 
|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.                  

---

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



38



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##### Table of Contents

Immunicon Corporation and Subsidiaries

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: August 8, 2006 |  | By:                   |  | /s/ BYRON D. HEWETT                               
|                     |  |                       |  | Byron D. Hewett                                   
|                     |  |                       |  | President and Chief Executive Officer             
|                     |  |                       |  | (Principal executive officer)                     
|                     |  |                      
|Date: August 8, 2006 |  | By:                   |  | /s/ JAMES G. MURPHY                               
|                     |  |                       |  | James G. Murphy                                   
|                     |  |                       |  | Senior Vice President, Finance and Administration,
|                     |  |                       |  | Chief Financial Officer                           
|                     |  |                       |  | (Principal financial and accounting officer)      



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##### Table of Contents

Immunicon Corporation and Subsidiaries

EXHIBIT INDEX



|       |  |                                                                                                                                                                      
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                          
|10.1** |  | Chairman of the Board of Directors Compensation (filed with the Registrants Current Report on Form 8-K filed on June 12, 2006 and incorporated by reference herein).
|       | 
|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.                           

---

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



40