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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-Q



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(Mark One)

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

For the Quarter ended September 30, 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 November 2, 2006, there were 27,667,769 shares of Common Stock, $0.001 par value, outstanding.



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##### Table of Contents

IMMUNICON CORPORATION

INDEX



|         |  |                                                                                                                       |  |           
|-------- |  | --------------------------------------------------------------------------------------------------------------------- |  | ----------
|         |  |                                                                                                                       |  | PageNumber
|PART I.  |  | FINANCIAL INFORMATION                                                                                                 |  |           
|         |  |                                                                                                                      
|Item 1.  |  | Condensed Consolidated Financial Statements (Unaudited):                                                              |  |           
|         |  |                                                                                                                      
|         |  | Condensed Consolidated Balance Sheets:September 30, 2006 and December 31, 2005                                        |  | 3         
|         |  |                                                                                                                      
|         |  | Condensed Consolidated Statements of Operations:Three and nine months ended September 30, 2006 and September 30, 2005 |  | 4         
|         |  |                                                                                                                      
|         |  | Condensed Consolidated Statements of Cash Flows:Nine months ended September 30, 2006 and September 30, 2005           |  | 5         
|         |  |                                                                                                                      
|         |  | Notes to Condensed Consolidated Financial Statements                                                                  |  | 6         
|         |  |                                                                                                                      
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations.                                |  | 18        
|         |  |                                                                                                                      
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk.                                                           |  | 40        
|         |  |                                                                                                                      
|Item 4.  |  | Controls and Procedures.                                                                                              |  | 40        
|         |  |                                                                                                                      
|PART II. |  | OTHER INFORMATION                                                                                                     |  |           
|         |  |                                                                                                                      
|Item 1A. |  | Risk Factors.                                                                                                         |  | 40        
|         |  |                                                                                                                      
|Item 6.  |  | Exhibits.                                                                                                             |  | 41        

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



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##### Table of Contents

Immunicon Corporation and Subsidiaries



PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Balance Sheets (Unaudited).

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



|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                             |  | September 30,2006 |          |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                       |  |                   |          |   |                   |   |          |  
|Current Assets:                                                                                                                                                              |  |                   |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                    |  | $                 | 16,940   |   |                   | $ | 21,900   |  
|Short term investments                                                                                                                                                       |  |                   | 12,095   |   |                   |   | 20,694   |  
|Accounts receivable                                                                                                                                                          |  |                   | 465      |   |                   |   | 825      |  
|Receivable from related party                                                                                                                                                |  |                   | 288      |   |                   |   | 316      |  
|Inventory                                                                                                                                                                    |  |                   | 4,530    |   |                   |   | 3,223    |  
|Prepaid assets                                                                                                                                                               |  |                   | 418      |   |                   |   | 397      |  
|Other current assets                                                                                                                                                         |  |                   | 231      |   |                   |   | 326      |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|Total current assets                                                                                                                                                         |  |                   | 34,967   |   |                   |   | 47,681   |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|Property and equipment, net                                                                                                                                                  |  |                   | 4,321    |   |                   |   | 5,460    |  
|Long term investments                                                                                                                                                        |  |                   | 500      |   |                   |   | 1,504    |  
|Other assets                                                                                                                                                                 |  |                   | 374      |   |                   |   | 325      |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|Total assets                                                                                                                                                                 |  | $                 | 40,162   |   |                   | $ | 54,970   |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |                   |          |   |                   |   |          |  
|Current Liabilities:                                                                                                                                                         |  |                   |          |   |                   |   |          |  
|Current portion of long-term debt                                                                                                                                            |  | $                 | 1,932    |   |                   | $ | 2,769    |  
|Accounts payable                                                                                                                                                             |  |                   | 1,049    |   |                   |   | 938      |  
|Payable to related party                                                                                                                                                     |  |                   | 1,199    |   |                   |   | 433      |  
|Current portion of deferred revenue:                                                                                                                                         |  |                   |          |   |                   |   |          |  
|Related party                                                                                                                                                                |  |                   | 1,797    |   |                   |   | 1,597    |  
|Other                                                                                                                                                                        |  |                   | 185      |   |                   |   | 84       |  
|Accrued expenses                                                                                                                                                             |  |                   | 3,988    |   |                   |   | 3,576    |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                    |  |                   | 10,150   |   |                   |   | 9,397    |  
|                                                                                                                                                                             |  |                  
|Long-term debt, less current portion                                                                                                                                         |  |                   | 2,401    |   |                   |   | 3,115    |  
|                                                                                                                                                                             |  |                  
|Deferred revenue - related party                                                                                                                                             |  |                   | 320      |   |                   |   | 378      |  
|                                                                                                                                                                             |  |                  
|Commitments and contingencies                                                                                                                                                |  |                   |          |   |                   |   |          |  
|                                                                                                                                                                             |  |                  
|Shareholders equity:                                                                                                                                                        |  |                   |          |   |                   |   |          |  
|Common stock, $0.001 par value 100,000,000 authorized, 27,646,957 and 27,556,885 shares issued and outstanding as of September 30,
2006 and December 31, 2005, respectively |  |                   | 28       |   |                   |   | 27       |  
|Additional paid in capital                                                                                                                                                   |  |                   | 162,019  |   |                   |   | 162,630  |  
|Deferred stock-based compensation                                                                                                                                            |  |                   |         |   |                   |   | (2,142   | )
|Accumulated other comprehensive income                                                                                                                                       |  |                   | 18       |   |                   |   | 12       |  
|Accumulated deficit                                                                                                                                                          |  |                   | (134,774 | ) |                   |   | (118,447 | )
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|Total shareholders equity                                                                                                                                                   |  |                   | 27,291   |   |                   |   | 42,080   |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  
|Total liabilities and shareholders equity                                                                                                                                   |  | $                 | 40,162   |   |                   | $ | 54,970   |  
|                                                                                                                                                                             |  |                   |          |   |                   |   |          |  

See notes to condensed consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries



Condensed Consolidated Statements of Operations (Unaudited).

Three and Nine months ended
September 30, 2006 and September 30, 2005

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



|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                               |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                               |  | 2006                            |            |   | 2005                           |   |            | 2006 |  |   | 2005       |  
|Product revenue:                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Related party                                                  |  | $                               | 659        |   |                                | $ | 483        |      |  | $ | 1,373      |   |  | $ | 1,098      |  
|Third party                                                    |  |                                 | 855        |   |                                |   | 385        |      |  |   | 2,843      |   |  |   | 902        |  
|Service revenue                                                |  |                                 | 247        |   |                                |   | 174        |      |  |   | 924        |   |  |   | 274        |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total product and service revenue                              |  |                                 | 1,761      |   |                                |   | 1,042      |      |  |   | 5,140      |   |  |   | 2,274      |  
|                                                               |  |                                 |            |  
|Milestone, license and other revenue                           |  |                                 | 174        |   |                                |   | 241        |      |  |   | 575        |   |  |   | 823        |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total revenue                                                  |  |                                 | 1,935      |   |                                |   | 1,283      |      |  |   | 5,715      |   |  |   | 3,097      |  
|                                                               |  |                                 |            |  
|Cost of goods sold                                             |  |                                 | 1,948      |   |                                |   | 835        |      |  |   | 5,897      |   |  |   | 1,645      |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Gross profit (loss)                                            |  |                                 | (13        | ) |                                |   | 448        |      |  |   | (182       | ) |  |   | 1,452      |  
|                                                               |  |                                 |            |  
|Operating Expenses:                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                       |  |                                 | 3,129      |   |                                |   | 5,761      |      |  |   | 9,507      |   |  |   | 17,246     |  
|General and administrative                                     |  |                                 | 2,683      |   |                                |   | 2,064      |      |  |   | 7,501      |   |  |   | 6,081      |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                       |  |                                 | 5,812      |   |                                |   | 7,825      |      |  |   | 17,008     |   |  |   | 23,327     |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Operating loss                                                 |  |                                 | (5,825     | ) |                                |   | (7,377     | )    |  |   | (17,190    | ) |  |   | (21,875    | )
|                                                               |  |                                 |            |  
|Interest and other income                                      |  |                                 | 367        |   |                                |   | 429        |      |  |   | 1,177      |   |  |   | 995        |  
|Interest expense                                               |  |                                 | (98        | ) |                                |   | (122       | )    |  |   | (314       | ) |  |   | (367       | )
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Interest and other income, net                                 |  |                                 | 269        |   |                                |   | 307        |      |  |   | 863        |   |  |   | 628        |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss attributable to common stockholders                   |  | $                               | (5,556     | ) |                                | $ | (7,070     | )    |  | $ | (16,327    | ) |  | $ | (21,247    | )
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss per common share  basic and diluted                  |  | $                               | (0.20      | ) |                                | $ | (0.26      | )    |  | $ | (0.59      | ) |  | $ | (0.86      | )
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding  basic and diluted |  |                                 | 27,645,607 |   |                                |   | 27,488,789 |      |  |   | 27,616,724 |   |  |   | 24,717,798 |  
|                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

See notes to condensed consolidated unaudited financial statements.



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Immunicon Corporation and Subsidiaries



Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended
September 30, 2006 and September 30, 2005 (in thousands)



|                                                                                  |  |                                |         |   |      |   |         |  
|--------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                  |  | Nine Months EndedSeptember 30, |        
|                                                                                  |  | 2006                           |         |   | 2005 |  
|Operating activities:                                                             |  |                                |         |   |      |   |         |  
|Net loss                                                                          |  | $                              | (16,327 | ) |      | $ | (21,247 | )
|Adjustment to reconcile net loss to net cash used in operating activities:        |  |                                |         |   |      |   |         |  
|Depreciation and amortization                                                     |  |                                | 1,513   |   |      |   | 1,433   |  
|Interest expense on warrants                                                      |  |                                |        |   |      |   | 5       |  
|Loss on disposal of property and equipment                                        |  |                                | 19      |   |      |   | 27      |  
|Compensation expense related to the issuance of nonvested stock and stock options |  |                                | 1,358   |   |      |   | 1,142   |  
|Change in:                                                                        |  |                                |         |   |      |   |         |  
|Accounts receivable                                                               |  |                                | 360     |   |      |   | (205    | )
|Accounts receivable from related party                                            |  |                                | 28      |   |      |   | (44     | )
|Inventory                                                                         |  |                                | (1,307  | ) |      |   | (1,933  | )
|Prepaid expenses and other                                                        |  |                                | (21     | ) |      |   | 34      |  
|Other assets                                                                      |  |                                | 33      |   |      |   | 260     |  
|Accounts payable                                                                  |  |                                | 111     |   |      |   | 356     |  
|Accounts payable to related parties                                               |  |                                | 766     |   |      |   | 185     |  
|Accrued expenses                                                                  |  |                                | 420     |   |      |   | 1,178   |  
|Deferred revenue from related parties                                             |  |                                | 142     |   |      |   | (100    | )
|Deferred revenue                                                                  |  |                                | 101     |   |      |   | (161    | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                             |  |                                | (12,804 | ) |      |   | (19,070 | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Investing activities:                                                             |  |                                |         |   |      |   |         |  
|Purchase of investments                                                           |  |                                | (20,882 | ) |      |   | (34,000 | )
|Proceeds from maturities of investments                                           |  |                                | 30,639  |   |      |   | 35,565  |  
|Payments for purchases of property and equipment                                  |  |                                | (710    | ) |      |   | (3,050  | )
|Proceeds from disposal of property and equipment                                  |  |                                | 176     |   |      |   |        |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                               |  |                                | 9,223   |   |      |   | (1,485  | )
|                                                                                  |  |                                |         |   |      |   |         |  
|Financing activities:                                                             |  |                                |         |   |      |   |         |  
|Proceeds from term debt                                                           |  |                                | 707     |   |      |   | 2,817   |  
|Proceeds from exercise of stock options and stock purchase plan                   |  |                                | 166     |   |      |   | 421     |  
|Proceeds from sale of common stock, net                                           |  |                                |        |   |      |   | 17,981  |  
|Payments on term debt                                                             |  |                                | (2,259  | ) |      |   | (2,632  | )
|Loan issue fees                                                                   |  |                                |        |   |      |   | 5       |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                               |  |                                | (1,386  | ) |      |   | 18,592  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Effect of exchange rate changes on cash                                           |  |                                | 7       |   |      |   | (15     | )
|Net decrease in cash and cash equivalents                                         |  |                                | (4,967  | ) |      |   | (1,963  | )
|Cash and cash equivalents, beginning of period                                    |  |                                | 21,900  |   |      |   | 27,552  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                          |  | $                              | 16,940  |   |      | $ | 25,574  |  
|                                                                                  |  |                                |         |   |      |   |         |  
|Supplemental cash flow information:                                               |  |                                |         |   |      |   |         |  
|Cash paid for interest                                                            |  | $                              | 323     |   |      | $ | 588     |  
|                                                                                  |  |                                |         |   |      |   |         |  

See notes to condensed consolidated unaudited financial statements.



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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 or we) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the Form 10-Q General
Instructions and Article 10 of Regulation S-X of the Securities and Exchange Commission, or the SEC. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of our management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring accruals) necessary to present fairly our
financial position at September 30, 2006 and results of operations for the three and nine month periods ended September 30, 2006 and cash flows for the nine month period ended September 30, 2006 and 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 nine months ended September 30, 2006 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 Statement of Financial Accounting Standards, or SFAS, 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, cash equivalents and short term investments available at
September 30, 2006 will be sufficient to maintain operations through at least September 30, 2007.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board, or FASB issued SFAS, No. 157, Fair Value Measurements, or SFAS 157. SFAS
157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value
hierarchy as defined in the standard. Additionally, companies are required to provide



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##### Table of Contents

Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



enhanced disclosure regarding financial instruments in one of the three categories, including a reconciliation of the
beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.
We believe that the adoption of SFAS 157 will not have a material impact on our consolidated financial statements.

In September 2006, the U.S.
Securities and Exchange Commission, or the SEC, issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108
provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year financial statements for purposes of determining whether the current years financial statements are materially
misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the
offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108 is effective for the first fiscal year ending on or after November 15, 2006, with earlier application encouraged for any
interim period of the first fiscal year ending after November 15, 2006, and filed after the publication of the SAB (September 13, 2006). We assessed the effect of adopting this guidance and determined that there will be no impact on the
Companys consolidated financial statements.

In July 2006, 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 No. 123R Share-Based Payment,
or 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 operations 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 nine months ended September 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. See Note 2 for further detail on the impact of SFAS 123R on our condensed consolidated financial statements.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment, or SAB 107, 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),or Release No. 33-8568. 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 beginning with the first interim or annual reporting period of the first fiscal year beginning on or 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



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



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. We have reserved an aggregate of 4,516,667 shares of our common stock for issuance under the Plan and have 329,139 available for granting as
of September 30, 2006. The Plan requires that exercise prices of stock options may not be less than the market value of the common stock on the date of the grant. The date of grant is determined when both parties have reached a mutual
understanding of the key terms of the grant. In general, stock options granted to employees under the Plan have ten-year terms and vest over four years from the date of grant. 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.

The charge to net loss for the three and nine months ended September 30, 2006 was $502,000 and $1.4 million, 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 nine months ended September 30, 2006 was $0.02 and $0.05 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 $134.8 million as of September 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.



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



The following table illustrates the effect on net loss and loss per share for the three and nine months ended
September 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 EndedSeptember 30, 2005 |        |   | Nine Months EndedSeptember 30, 2005 |  
|Net loss, as reported                                                                            |  | $                                    | (7,070 | ) |                                     | $ | (21,247 | )
|Add: Stock-based compensation expense included in reported net loss                              |  |                                      | 347    |   |                                     |   | 1,142   |  
|Deduct: Total stock-based compensation expense determined under fair value method for all awards |  |                                      | (659   | ) |                                     |   | (1,999  | )
|                                                                                                 |  |                                      |        |   |                                     |   |         |  
|Pro forma net loss                                                                               |  | $                                    | (7,382 | ) |                                     | $ | (22,104 | )
|                                                                                                 |  |                                      |        |   |                                     |   |         |  
|Net loss per share  basic and diluted, as reported                                              |  | $                                    | (0.26  | ) |                                     | $ | (0.86   | )
|                                                                                                 |  |                                      |        |   |                                     |   |         |  
|Pro forma net loss per share  basic and diluted                                                 |  | $                                    | (0.27  | ) |                                     | $ | (0.89   | )
|                                                                                                 |  |                                      |        |   |                                     |   |         |  

Compensation expense related to our share-based awards during the three and nine months ended September 30,
2006 was $502,000 and $1.4 million, respectively. During the three and nine months ended September 30, 2005, compensation expense related to our share-based awards was $347,000 and $1.1 million, respectively. The stock-based compensation
consisted of the following:



|                                                                  |  |                                 |     |                                |   |      |  |      |       |  |   |      
|----------------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                                                  |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|(in thousands)                                                    |  | 2006                            |     | 2005                           |   | 2006 |  | 2005
|Adoption of SFAS 123R                                             |  | $                               | 248 |                                | $ |     |  | $    | 549   |  | $ |     
|Nonvested shares                                                  |  |                                 | 110 |                                |   | 82   |  |      | 329   |  |   | 218  
|Stock Options granted prior to our IPO at below fair market value |  |                                 | 144 |                                |   | 265  |  |      | 480   |  |   | 924  
|                                                                  |  |                                 |     |                                |   |      |  |      |       |  |   |      
|Stock based compensation                                          |  | $                               | 502 |                                | $ | 347  |  | $    | 1,358 |  | $ | 1,142
|                                                                  |  |                                 |     |                                |   |      |  |      |       |  |   |      

Cash received from stock options exercised during the three months ended September 30, 2006 and
September 30, 2005 was $7,000 and $15,000, respectively. Cash received from stock options exercised during the nine months ended September 30, 2006 and September 30, 2005 was $105,000 and $291,000, respectively. We did not recognize
any tax deductions related to stock options exercised during the three and nine months ended September 30, 2006 and September 30, 2005 as a result of our significant net operating losses. The total intrinsic value of options exercised
during the three months ended September 30, 2006 and September 30, 2005 was $8,000 and $9,000, respectively, and for the nine months ended September 30, 2006 and September 30, 2005, $218,000 and $510,000, respectively. Intrinsic
value of options exercised is calculated as the difference between the market price on the date of exercise and the exercise price multiplied by the number of options exercised.

The fair value of each of our stock option awards is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. The fair value of our stock option
awards, which are subject to the straight line vesting method, is recorded as an expense using a straight-line basis over the vesting life of the stock options. Expected volatility is based on an average of historical volatility of our stock. The
risk-free interest rate for periods within the contract life of the stock option award is based on the yield curve of a zero-coupon U.S. Treasury bond on the date of the stock option award with a maturity equal to the expected term of the stock
option award granted. We use historical data to estimate stock option 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.



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



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



|                                                                                                                                    |  |                   |  |                  
|----------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | -----------------
|                                                                                                                                    |  | September 30,2006 |  | September 30,2005
|Dividend yield                                                                                                                      |  |   %              |  |   %             
|Weighted average volatility rate (ranging from 57.12% to 60.74% for September 30, 2006 and 56.42% to 64.60% for September 30,
2005) |  | 59.37%            |  | 60.79%           
|Risk-free interest rate                                                                                                             |  | 4.32% to 5.22%    |  | 3.64% to 4.24%   
|Expected option life (years)                                                                                                        |  | 6.25              |  | 5.0              

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



|                                                   |  |                 |   |  |                               |      |                                         |      |                         |   |      
|-------------------------------------------------- |  | --------------- | - |  | ----------------------------- | ---- | --------------------------------------- | ---- | ----------------------- | - | -----
|(in thousands, except exercise price)              |  | Number ofShares |   |  | WeightedAverageExercise Price |      | WeightedAverageRemainingContractualTerm |      | AggregateIntrinic Value
|                                                   |  |                 |   |  |                               |      |                                         |      |                        
|Options outstanding at the beginning of the period |  | 3,302           |   |  | $                             | 3.93 |                                         |      |                         |   |      
|Granted                                            |  | 255             |   |  |                               | 4.33 |                                         |      |                         |   |      
|Exercised                                          |  | (72             | ) |  |                               | 1.45 |                                         |      |                         |   |      
|Forfeited                                          |  | (41             | ) |  |                               | 5.72 |                                         |      |                         |   |      
|                                                   |  |                 |   |  |                               |      |                                         |      |                         |   |      
|Options outstanding at the end of the period       |  | 3,444           |   |  | $                             | 3.99 |                                         | 6.74 |                         | $ | 4,172
|                                                   |  |                 |   |  |                               |      |                                         |      |                         |   |      
|Options exercisable at the end of the period       |  | 2,175           |   |  | $                             | 3.77 |                                         | 5.98 |                         | $ | 3,116

The weighted average fair value of options granted during the nine months ended September 30, 2006 and
September 30, 2005 was $2.62 and $2.79, 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 nine months ended September 30, 2006. These nonvested shares have 3 year cliff vesting. A summary of our nonvested shares activity for the nine months ended
September 30, 2006 was as follows:



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

At September 30, 2006, there was $3.1 million of unrecognized compensation expense related to unvested
share-based awards under our share-based payment plans, of which $607,000 relates to stock options granted before our initial public offering at below fair market value, $1.8 million relates to stock options resulting from the adoption of SFAS 123R
and $687,000 relates to nonvested shares. This cost is expected to be recognized over a weighted average period of 2.76 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



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



were engaged in platform development programs that were essentially completed, such as our next generation cell
analysis platform, the CellTracks Analyzer II. We 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 fiscal year 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 completed the consolidation of office space in the first half of 2006. We had recorded severance expense of $384,000 in the nine months ended
September 30, 2005 as a result of the workforce reduction. As of December 31, 2005, all severance costs relating to this workforce reduction had been paid. We have recorded total expense of $647,000 related to the workforce reduction and
the accelerated depreciation since we announced these actions in August 2005. These items were recorded in our operating expenses.

(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 potential dilutive
securities that were not included in diluted income per share since the effects were anti-dilutive were: 1,229,128 and 1,051,122 for the three months ended September 30, 2006 and 2005, respectively, and 1,168,030 and 1,364,898 for the nine
months ended September 30, 2006 and 2005, respectively. The potential dilutive securities include warrants, nonvested shares and in-the-money stock options. Options to purchase 1,005,743 and 875,144 shares of common stock at a range of $4.43 to
$9.95 and $5.30 to $9.95 were outstanding during the nine months period ending September 30, 2006 and September 30, 2005, respectively, but were not included in the computation of diluted EPS because the options exercise price was greater than the
average market price of the common shares. Options to purchase 993,993 and 1,078,943 shares of common stock at a range of $4.78 to $9.95 and $4.13 to $9.95 were outstanding during the three months period ending September 30, 2006 and September 30,
2005, respectively, but were not included in the computation of diluted EPS because the options exercise price was greater than the average market price of the common shares.

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



|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                      |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|(in thousands)                                                        |  | 2006                            |        |   | 2005                           |   |        | 2006 |  |   | 2005    |  
|Numerator:                                                            |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Net loss                                                              |  | $                               | (5,556 | ) |                                | $ | (7,070 | )    |  | $ | (16,327 | ) |  | $ | (21,247 | )
|                                                                      |  |                                 |        |  
|Denominator:                                                          |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding used for basic income per share   |  |                                 | 27,646 |   |                                |   | 27,489 |      |  |   | 27,617  |   |  |   | 24,718  |  
|Common stock equivalents                                              |  |                                 |       |   |                                |   |       |      |  |   |        |   |  |   |        |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  
|Weighted average shares outstanding used for diluted income per share |  |                                 | 27,646 |   |                                |   | 27,489 |      |  |   | 27,617  |   |  |   | 24,718  |  
|                                                                      |  |                                 |        |   |                                |   |        |      |  |   |         |   |  |   |         |  

(5) Inventory

Inventory consisted of the following:



|                |  |                    |       |                   |   |      
|--------------- |  | ------------------ | ----- | ----------------- | - | -----
|(in thousands)  |  | September 30, 2006 |       | December 31, 2005
|Raw materials   |  | $                  | 2,027 |                   | $ | 1,597
|Finished goods  |  |                    | 2,284 |                   |   | 1,465
|Work-in-process |  |                    | 219   |                   |   | 161  
|                |  |                    |       |                   |   |      
|Inventory       |  | $                  | 4,530 |                   | $ | 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)                 |  | September 30, 2006 |        |   | December 31, 2005 |  
|Laboratory equipment           |  | $                  | 2,753  |   |                   | $ | 2,473  |  
|Office furniture and equipment |  |                    | 875    |   |                   |   | 1,195  |  
|Leasehold improvements         |  |                    | 5,298  |   |                   |   | 5,734  |  
|Manufacturing equipment        |  |                    | 990    |   |                   |   | 788    |  
|Computer equipment             |  |                    | 1,060  |   |                   |   | 1,140  |  
|                               |  |                    |        |   |                   |   |        |  
|Property and equipment, gross  |  |                    | 10,976 |   |                   |   | 11,330 |  
|Less Accumulated depreciation  |  |                    | (6,655 | ) |                   |   | (5,870 | )
|                               |  |                    |        |   |                   |   |        |  
|Property and equipment, net    |  | $                  | 4,321  |   |                   | $ | 5,460  |  
|                               |  |                    |        |   |                   |   |        |  

Depreciation expense was $471,000 and $502,000 for the three months ended September 30, 2006 and
September 30, 2005, respectively. Depreciation expense was $1.7 million and $1.4 million for the nine months ended September 30, 2006 and September 30, 2005, respectively.

(7) Accrued expenses

Accrued expenses consisted of the following:



|                                  |  |                    |       |                   |   |      
|--------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|(in thousands)                    |  | September 30, 2006 |       | December 31, 2005
|Salaryrelated expense            |  | $                  | 1,529 |                   | $ | 718  
|Clinical research and trial costs |  |                    | 873   |                   |   | 1,720
|Contracted research costs         |  |                    | 140   |                   |   | 180  
|Accounting and legal fees         |  |                    | 333   |                   |   | 240  
|Other                             |  |                    | 1,113 |                   |   | 718  
|                                  |  |                    |       |                   |   |      
|Accrued expenses                  |  | $                  | 3,988 |                   | $ | 3,576
|                                  |  |                    |       |                   |   |      

(8) Debt

As
of September 30, 2006, we had an aggregate of $4.3 million of bank debt outstanding with two lending institutions, $2.4 million to Silicon Valley Bank, or SVB, and $1.9 million to General Electric Capital Corporation, or GECC, as described
below. The carrying value of long-term debt is as follows:



|                                                                                                                            |  |                    |        |   |                   |   |        |  
|--------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|(in thousands)                                                                                                              |  | September 30, 2006 |        |   | December 31, 2005 |  
|Line of credit due to SVB - principal due from October 2006 to August 2010 at interest rates of 8.75%                       |  | $                  | 2,389  |   |                   | $ | 3,085  |  
|Line of credit due to GECC - principal due from October 2006 to October 2010 at interest rates ranging from 8.75% to 11.05% |  |                    | 1,944  |   |                   |   | 2,799  |  
|                                                                                                                            |  |                    |        |   |                   |   |        |  
|                                                                                                                            |  |                    | 4,333  |   |                   |   | 5,884  |  
|Less: current portion of long-term debt                                                                                     |  |                    | (1,932 | ) |                   |   | (2,769 | )
|                                                                                                                            |  |                    |        |   |                   |   |        |  
|Longterm debt                                                                                                              |  | $                  | 2,401  |   |                   | $ | 3,115  |  
|                                                                                                                            |  |                    |        |   |                   |   |        |  



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



As of September 30, 2006 and December 31, 2005, interest rates in effect for outstanding obligations under
the credit facilities ranged from 8.75% to 11.05% and from 7.75% to 10.16%, respectively, for the SVB and GECC lines of credit.

Both of the credit
facilities are subject to certain covenants, including maintaining a minimum level of earnings before interest, taxes, depreciation and amortization, as defined in the respective loan agreements, maintaining a minimum percentage of our cash
available for investing with the lending institution, and providing audited financial statements within 120 days after the close of the fiscal year. We were in compliance with all covenants for the nine month periods ended September 30,
2006 and September 30, 2005. As of September 30, 2006, we had $8.6 million and $3.3 million in available credit under our SVB and GECC credit facilities, respectively. The availability under our SVB credit facility will expire on
December 31, 2006 and the unborrowed amounts available under our GECC credit facility expire on April 30, 2007. 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 September 30, 2006, we derived 33% and 12% of our revenue
from Veridex and Pfizer, Inc., or Pfizer, respectively, compared to 48%, 14% and 10% in the third quarter of 2005 from Veridex, Pfizer and Institute of Cancer Research, respectively. During the nine month period ended September 30, 2006, we
derived 28% and 15% from Veridex and Pfizer, respectively, as compared to 57% and 12% in the prior year period from Veridex and Quest Diagnostics, respectively. Our revenue by geographical region is as follows:



|                        |  |                                 |       |                                |   |       |  |      |       |  |   |      
|----------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                        |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|(in thousands)          |  | 2006                            |       | 2005                           |   | 2006  |  | 2005
|United States           |  | $                               | 1,859 |                                | $ | 905   |  | $    | 4,402 |  | $ | 2,702
|Europe                  |  |                                 | 64    |                                |   | 234   |  |      | 998   |  |   | 236  
|Other foreign countries |  |                                 | 12    |                                |   | 144   |  |      | 315   |  |   | 159  
|                        |  |                                 |       |                                |   |       |  |      |       |  |   |      
|Total revenue           |  | $                               | 1,935 |                                | $ | 1,283 |  | $    | 5,715 |  | $ | 3,097
|                        |  |                                 |       |                                |   |       |  |      |       |  |   |      

(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 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. The grant payments are made directly to us. We then remit Fox Chases portion to them. Under the terms of the grant, we
believe that we will be entitled to $475,000 of the grant and that Fox Chase will receive the remainder of $615,000. The NIH grant is intended to fund the development of a new strategy to actively monitor the effectiveness of cancer drugs in
clinical trials. As of September 30, 2006, we have received a total of $587,000 of grant proceeds of which we have paid $350,000 to Fox Chase and recorded the remainder of $237,000 as a reduction of research and development expense.

We generally include a one year warranty for product quality related to our instrument product sales. We record warranty expense for



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



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

Changes in accrued
product warranty expense are as follows:



|                        |  |                   |     |   |                  |   |     |  
|----------------------- |  | ----------------- | --- | - | ---------------- | - | --- | -
|(in thousands)          |  | September 30,2006 |     |   | December 31,2005 |  
|Beginning of the period |  | $                 | 78  |   |                  | $ |    |  
|Additions               |  |                   | 56  |   |                  |   | 141 |  
|Claims                  |  |                   | (73 | ) |                  |   | (63 | )
|                        |  |                   |     |   |                  |   |     |  
|Ending of the period    |  | $                 | 61  |   |                  | $ | 78  |  
|                        |  |                   |     |   |                  |   |     |  

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

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

We anticipate that the reimbursements to Mr. Hewett and the payments to the relocation company will aggregate between $336,000 and $450,000 but actual costs will depend on a number of factors, including the final
sale proceeds of Mr. Hewetts home in New York. As of September 30, 2006, we have recorded $336,000 for these expenses.

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 this agreement whereby all of rights and responsibilities of Ortho were transferred to Veridex. In addition, we and Veridex re-negotiated certain clinical development and regulatory milestones. The 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 agreement. See footnote 12 Related Party for further discussion.

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

In consideration of the rights granted by the university, we will pay the university a nonrefundable annual license maintenance royalty of $25,000, along with a royalty equal to one percent of net sales of licensed
products. As of December 31, 2005, we have manufactured a



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements



limited quantity of products developed as a result of the licensing agreement. In the event we pay a royalty to a
third-party for use of patented technology which materially enables the functionality of the universitys developed technology, then we shall be entitled to receive a credit against royalties due the university in the amount of the third-party
royalty payments.

We reimbursed the university for all previously incurred patent related expenses. In addition, we are responsible for all fees
associated with filing prosecuting, enforcing and maintaining the rights of the patented technology. In consideration for the rights granted by the university, we issued the university 13,334 shares of common stock in 1999, which was valued at
$15,000 and recorded such issuance as research and development expense.

In 1997, we entered into a license agreement with a university (Netherlands
Agreement) covering optical analysis of particles similar to cells and cell particles. In consideration of the rights granted by the university, we will pay the university a royalty equal to three percent of net sales of products covered by
the licensed technology for which a valid patent exists or one and three-quarters percent (1.75%) of net sales of products covered by the licensed technology for which no valid patent exists. As of September 30, 2006, we had yet to
manufacture any products developed as a result of the Netherlands Agreement. In June 2004, we entered into an addendum to our technology development agreement and license agreement with the university, and STW, a research funding agency of the Dutch
government. Under the modified agreement, STW will provide the university with up to approximately $1 million toward developing an affordable and portable instrument to monitor patients with HIV. This instrument represents an additional application
of our existing technology, specifically the CellTracks EasyCount system, which was developed through our collaboration with the university. Under the agreement addendum, we will contribute in kind research effort toward the project such
as personnel, equipment and supplies, among other things, and we have rights to commercialize products that result from the agreement.

(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. Compensation expense for the three months ended September 30, 2006 and September 30, 2005 was $110,000 and $82,000, respectively. We have recognized $329,000 and $218,000 as
compensation expense related to these grants for the nine month periods ended September 30, 2006 and September 30, 2005, 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, a subsidiary of Ortho. In addition, we and Veridex re-negotiated certain clinical development and regulatory milestones. The Development Agreement has a term of 20 years and may be terminated earlier by either party under certain
conditions. We are not aware of any intentions by Veridex to terminate the Development Agreement.



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Notes to Condensed Consolidated Unaudited Financial Statements

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

We have received a total of $6.4 million in license and milestone payments under the terms of the Development Agreement from inception to September 30, 2006. These
payments are recognized as revenue over the estimated product development period for the corresponding product, which we estimate will end at various points through December 31, 2010. We continuously review the status of the remaining
development milestones and, where appropriate, have renegotiated the development requirement and payment terms. We do not believe that these renegotiations will have a material adverse effect on the Companys product development or financial
position. We expect to receive the remaining $4.1 million in development milestone payments over the next three to five years.

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



|                                                  |  |                                 |     |                                |   |      |  |      |       |  |   |      
|------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                                  |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|(in thousands)                                    |  | 2006                            |     | 2005                           |   | 2006 |  | 2005
|Contract and milestone revenue from related party |  | $                               | 137 |                                | $ | 240  |  | $    | 537   |  | $ | 820  
|Product revenue from related party                |  |                                 | 659 |                                |   | 483  |  |      | 1,373 |  |   | 1,098
|                                                  |  |                                 |     |                                |   |      |  |      |       |  |   |      
|                                                  |  | $                               | 796 |                                | $ | 723  |  | $    | 1,910 |  | $ | 1,918
|                                                  |  |                                 |     |                                |   |      |  |      |       |  |   |      

(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 EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|(in thousands)                   |  | 2006                            |       | 2005                           |   | 2006  |  | 2005
|Salaries, benefits and taxes     |  | $                               | 1,742 |                                | $ | 3,049 |  | $    | 4,853 |  | $ | 9,114 
|Laboratory supplies and expenses |  |                                 | 117   |                                |   | 105   |  |      | 478   |  |   | 603   
|Instrument development costs     |  |                                 | 131   |                                |   | 67    |  |      | 543   |  |   | 452   
|Clinical trial expense           |  |                                 | 240   |                                |   | 983   |  |      | 1,020 |  |   | 2,942 
|Contracted research costs        |  |                                 | 190   |                                |   | 205   |  |      | 454   |  |   | 651   
|Depreciation expense             |  |                                 | 290   |                                |   | 427   |  |      | 936   |  |   | 1,186 
|Insurance expense                |  |                                 | 72    |                                |   | 172   |  |      | 218   |  |   | 550   
|All others                       |  |                                 | 347   |                                |   | 753   |  |      | 1,005 |  |   | 1,748 
|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |       
|                                 |  | $                               | 3,129 |                                | $ | 5,761 |  | $    | 9,507 |  | $ | 17,246
|                                 |  |                                 |       |                                |   |       |  |      |       |  |   |       



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Immunicon Corporation and Subsidiaries

Notes to Condensed Consolidated Unaudited Financial Statements

General and administrative expenses

General and administrative expenses consisted of the following:



|                             |  |                                 |       |                                |   |       |  |      |       |  |   |      
|---------------------------- |  | ------------------------------- | ----- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                             |  | Three Months EndedSeptember 30, |       | Nine Months EndedSeptember 30,
|(in thousands)               |  | 2006                            |       | 2005                           |   | 2006  |  | 2005
|Salaries, benefits and taxes |  | $                               | 1,646 |                                | $ | 1,043 |  | $    | 4,406 |  | $ | 3,199
|Depreciation expense         |  |                                 | 37    |                                |   | 75    |  |      | 240   |  |   | 209  
|Legal and professional fees  |  |                                 | 556   |                                |   | 605   |  |      | 1,545 |  |   | 1,545
|Insurance expense            |  |                                 | 63    |                                |   | 48    |  |      | 221   |  |   | 133  
|All others                   |  |                                 | 381   |                                |   | 293   |  |      | 1,089 |  |   | 995  
|                             |  |                                 |       |                                |   |       |  |      |       |  |   |      
|                             |  | $                               | 2,683 |                                | $ | 2,064 |  | $    | 7,501 |  | $ | 6,081
|                             |  |                                 |       |                                |   |       |  |      |       |  |   |      



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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 operate in one business segment, have our principal offices in Huntingdon Valley, Pennsylvania, and 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

uncertainties including, among others, dependence on Veridex to market our cancer diagnostic product candidates, the uncertainty of



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



product development (including clinical trial results), regulatory clearance and approval, supplier and manufacturing
dependence, competition, reimbursement availability, dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary rights, dependence on key personnel and other risks related to governmental regulations
and approvals. We believe, however, that cash, cash equivalents, short term investments and borrowing available under our line of credit at September 30, 2006 will be sufficient to maintain operations through at least September 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. In addition, in September 2006, we announced that we had achieved our primary and secondary endpoints in our pivotal clinical trial in the management of metastatic colorectal cancer.
Commercialization of this clinical indication is subject to a number of factors, including but not limited to clearance for sale by the FDA. We are responsible for all cellular research and development, including the costs of clinical development.
Upon any sale by Veridex of certain of our products, including reagents, test kits, consumable products and disposable items, Veridex is obligated to pay us approximately 30% of net sales.

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
45 instruments (25 cell analyzers and 20 CellTracks® AutoPrep® systems) in the first nine months of 2006 and 30 instruments (17 cell analyzers and 13 CellTracks® AutoPrep® systems) in the first nine months of 2005. In the first nine
months of 2006, 39 instruments were sold to third party customers. Five of the CellTracks® Analyzers II sold in the first nine months of 2006 were part of an upgrade program from the first generation CellSpotter® analyzer system as compared
to five in the prior year period. In the first nine months of 2005, thirteen of the instruments sold were purchased by Veridex for funded research centers and 17 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 $3.0 million and $1.6 million in revenue from the sale of
instrument products for the nine month periods ended September 30, 2006 and September 30, 2005, respectively, and $1.0 million and $0.7 million for the three month periods ended September 30, 2006 and September 30, 2005,
respectively.



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



We recorded $1.2 million and $365,000 in revenue from the sale of reagent products for the nine month periods ended
September 30, 2006 and September 30, 2005, respectively, and $488,000 and $153,000 for the three month periods ended September 30, 2006 and September 30, 2005, respectively.

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 $924,000 and $274,000 in service revenue for the nine month periods ended September 30, 2006 and September 30, 2005, respectively, and $247,000 and $174,000 in service revenue for
the three month periods ended September 30, 2006 and September 30, 2005, respectively.

We have received a total of $6.4 million in license and
milestone payments under the terms of the Development Agreement from inception to September 30, 2006 and have recorded $5.7 million as milestone and license revenue to date. Cash received related to these milestones is being recognized as
revenue over the estimated product development period for the corresponding product, which we estimate will end at various points through December 2010. We continuously review the status of the remaining development milestones and, where
appropriate, renegotiate the development requirement and payment terms. We do not believe that these renegotiations have had or will have a material adverse effect on our product development or financial position.

As of September 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 $575,000 and $823,000 as milestone and other license related revenue in the nine months ended September 30, 2006 and September 30,
2005, respectively, and $174,000 and $241,000 in the three months ended September 30, 2006 and September 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 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.



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



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.

Stock-based
compensation expenses

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

Previously we had
recorded stock-based compensation expense resulting from stock option grants to employees at exercise prices below the fair value of the underlying common stock. This resulted in our recording stock-based compensation expense associated with such
grants. We 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 September 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, the CellTracks AutoPrep System logo, and the CellSpotter Analyzer logo by Immunivest
Corporation, our wholly owned subsidiary. We have filed a number of trademark registration applications in preparation for commercial distribution activities with respect to future products. Much of the proprietary software and related information
utilized in our instrument systems is protected by the copyright rights or by rights that we have licensed.

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

We have a portfolio of issued patents
and patent applications, which we believe provides patent coverage for our proprietary technologies and products. As of October 26, 2006, our intellectual property estate consisted of 159 issued patents or patent applications as follows: 35
issued US patents, 21 US non-provisional patent applications, 5 US provision patent applications, 23 foreign patents, 63 foreign patent applications at various national stages and 12 foreign patents applications not at the national stage.



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



CRITICAL ACCOUNTING POLICIES

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



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



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



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



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



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

In accordance with the SECs Release
No. 33-8040, Cautionary Advice Regarding Disclosure about Critical Accounting Policies,we have determined the critical principles by considering accounting policies that involve the most complex or subjective decisions or assessments.
There were no significant changes to our critical accounting policies during the nine months ended September 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 September 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, during 2005, as we sold that portion of our existing inventory that had previously been expensed as part of research and development expenses, we recognized manufacturing revenue with minimum corresponding cost. Therefore, for
this reason we anticipate that our gross margin on sales of our instruments and reagents will not be comparable from quarter to quarter during 2006 when compared to 2005.



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Immunicon Corporation and Subsidiaries

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



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

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

Accounting for research and development expenses

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

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

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 nine 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.



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Immunicon Corporation and Subsidiaries

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



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.

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 September 30, 2006, we recorded a full valuation allowance of $53.2 million against our net deferred tax asset balance, due to uncertainties related to our deferred tax assets as a result of our
history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from
these estimates or 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 September 30, 2006 and September 30, 2005

Revenue

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



|                                                              |  |                                 |       |      |   |      
|------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                                              |  | Three Months EndedSeptember 30,
|Revenue (dollars in thousands)                                |  | 2006                            |       | 2005
|Product revenue including product revenue from related party: |  |                                 |       |      |   |      
|Instrument revenue:                                           |  |                                 |       |      |   |      
|Related party                                                 |  | $                               | 263   |      | $ | 347  
|Other                                                         |  |                                 | 763   |      |   | 368  
|Reagents and other product revenue:                           |  |                                 |       |      |   |      
|Related party                                                 |  |                                 | 396   |      |   | 136  
|Other                                                         |  |                                 | 92    |      |   | 17   
|                                                              |  |                                 |       |      |   |      
|Total product revenue                                         |  | $                               | 1,514 |      | $ | 868  
|                                                              |  |                                
|Service revenue                                               |  |                                 | 247   |      |   | 174  
|License and milestone revenue:                                |  |                                 |       |      |   |      
|Related party                                                 |  |                                 | 137   |      |   | 240  
|Other                                                         |  |                                 | 37    |      |   | 1    
|                                                              |  |                                 |       |      |   |      
|Total revenue                                                 |  | $                               | 1,935 |      | $ | 1,283
|                                                              |  |                                 |       |      |   |      
|                                                              | 
|                                                              |  | Three months endedSeptember 30,
|Instrument sales                                              |  | 2006                            |       | 2005
|CellTracks Analyzer II                                        |  |                                 |       |      |   |      
|Veridex                                                       |  |                                 | 2     |      |   | 5    
|Third party customers                                         |  |                                 | 5     |      |   | 2    
|CellSpotter Analyzer                                          |  |                                 |       |      |   |      
|Veridex                                                       |  |                                 |      |      |   |     
|Third party customers                                         |  |                                 |      |      |   | 2    
|                                                              |  |                                 |       |      |   |      
|Total analyzers sold                                          |  |                                 | 7     |      |   | 9    
|                                                              |  |                                
|CellTracks AutoPrep Systems                                   |  |                                 |       |      |   |      
|Veridex                                                       |  |                                 | 2     |      |   |     
|Third party customers                                         |  |                                 | 5     |      |   | 5    
|                                                              |  |                                 |       |      |   |      
|Total AutoPreps sold                                          |  |                                 | 7     |      |   | 5    

We recorded $1.5 million in product revenue in the three months ended September 30, 2006 of which $659,000
was earned from Veridex, a related party. We recorded $868,000 in product revenue in the three month period ended September 30, 2005, of which $483,000 was earned from Veridex. Instrument revenue increased $311,000, or 44%, to $1.0 million from
$715,000 in the quarter ended September 30, 2005. We sold 14 instruments in the three month period ended September 30, 2006 and 14 in the three month period ended September 30, 2005. We sold five CellTracks Analyzer II systems as part
of an upgrade program from the first generation CellSpotter analyzer system in the three month period ended September 30, 2005. These CellTracks Analyzer II systems were sold below cost as part of a program to encourage upgrade of the first
generation CellSpotter Analyzers. Reagent and other product revenue increased $335,000, or 219%, to $488,000 in the third quarter of 2006 as compared to the quarter ended September 2005. As we place more of our instruments in the field, we
anticipate that our reagent and other product revenue will increase.



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Immunicon Corporation and Subsidiaries

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



Service revenue was $247,000 and $174,000 in the three months ended September 30, 2006 and 2005, respectively.
The primary source of our service revenue to date has been from our contract with Pfizer. In March 2006, we announced an extension of our agreement with Pfizer under which we collaborate with Pfizer to aid their efforts to develop and evaluate the
effectiveness of new drug candidates. In the third quarter of 2006, we entered into laboratory service agreements with several pharmaceutical companies, including AstraZeneca UK Limited, or AstraZeneca, and MolMed S.p.A, or MolMed. We expect to
continue to add additional customers to this category in future periods.

License and milestone revenue from related party decreased by $103,000 to
$137,000 for the three months ended September 30, 2006 from $240,000 for the three months ended September 30, 2005. Since inception to September 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 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 made a $250,000 milestone payment to us. 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.

We entered into a research development agreement with AstraZeneca in the third quarter of 2006. We will receive funds, upon acceptance by AstraZeneca, for our
development work at various times during this agreement. These payments are recognized as revenue over the development period, which is anticipated to be nine months. We have recognized $37,000 from this contract.

As a result of the above, total revenue increased by $652,000 to $1.9 million in the three months ended September 30, 2006 compared to $1.3 million in the
corresponding period of 2005.

Costs of goods sold

Costs of goods sold increased to $1.9 million in the three months ended September 30, 2006 from $835,000 in the corresponding period of 2005. This is the result of the fact that 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 $290,000 of product revenue in the third quarter of 2005 had no corresponding cost of goods sold. In addition, effective on October 1, 2005, we ceased to be a development stage company. Certain costs related to
manufacturing in 2005 that were recorded as research and development expense 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, we began outsourcing
certain activities related to the manufacture of instruments. We are in the process of reducing our internal manufacturing costs but this transition process has resulted in some limited duplicate instrument cost of goods sold. These costs should be
reduced once the outsourcing process is completed. This process is expected to be completed before the end of 2006.

Research and development expenses

Research and development expenses decreased by $2.7 million, or 46%, to $3.1 million in the third quarter of 2006 from $5.8 million in the
corresponding quarter of 2005. This reduction is a result of a number of factors, including a reorganization which we implemented in August 2005 whereby we reduced staff by approximately 25% and reduced other expenses. The effect of this workforce
reduction accounts for approximately $684,000 of this decrease. In addition, in the fourth quarter of 2005, we ceased reporting as a development stage company. Therefore, a portion of the manufacturing costs which were previously recorded as
research and development expenses are now fully allocated to cost of good sold. This re-allocation accounts for $626,000 of the reduction in research and development expenses.

Clinical trial expenses decreased in the third quarter of 2006 by $743,000 to $240,000 from $983,000 in the third quarter of 2005. We initiated a clinical trial for the monitoring of metastatic colorectal cancer in
the second quarter of 2004. In January 2005, based on



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Immunicon Corporation and Subsidiaries

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



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. As the patient accrual for both trials was substantially completed at December 31, 2005, our clinical trial expenditures decreased significantly in the third quarter of 2006 compared to the corresponding period in 2005. In
September 2006, we announced that we had achieved our primary and secondary endpoints in our pivotal clinical trial in the management of metastatic colorectal cancer. Commercialization of this clinical indication is subject to a number of factors,
including but not limited to clearance for sale by the FDA. We anticipate that we will submit the data from the trial to the FDA in the first quarter of 2007.

Depreciation expense decreased in the third quarter of 2006 by $137,000 to $290,000 from $427,000 in the third quarter of 2005. This decrease was the result of certain manufacturing costs now allocated directly to cost of goods sold, as
noted above.

Insurance expenses decreased by $100,000 in the third quarter of 2006 over the same period in 2005 due principally to a 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 September 30, 2006 and September 30, 2005 are shown below:



|                                                 |  |                                  |       |      |   |      
|------------------------------------------------ |  | -------------------------------- | ----- | ---- | - | -----
|                                                 |  | Three months ended September 30,
|Research and development expenses (in thousands) |  | 2006                             |       | 2005
|Salaries, benefits and taxes                     |  | $                                | 1,742 |      | $ | 3,049
|Laboratory supplies and expenses                 |  |                                  | 117   |      |   | 105  
|Instrument development costs                     |  |                                  | 131   |      |   | 67   
|Clinical trial expenses                          |  |                                  | 240   |      |   | 983  
|Contracted research costs                        |  |                                  | 190   |      |   | 205  
|Depreciation expense                             |  |                                  | 290   |      |   | 427  
|Insurance expense                                |  |                                  | 72    |      |   | 172  
|All others                                       |  |                                  | 347   |      |   | 753  
|                                                 |  |                                  |       |      |   |      
|Total research and development expenses          |  | $                                | 3,129 |      | $ | 5,761
|                                                 |  |                                  |       |      |   |      

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 $619,000, or 30%, to $2.7 million in the third quarter of 2006 from $2.1 million in
the third quarter of 2005. $336,000 of this increase is due to certain non-recurring expenses related to the relocation of our Chief Executive Officer, Byron Hewett.

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



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



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

We anticipate that the reimbursements to Mr. Hewett and the payments to the relocation company will aggregate between $336,000 and $450,000 but actual costs will
depend on a number of factors, including the final sale proceeds of Mr. Hewetts home in New York. As of September 30, 2006, we have recorded $336,000 for these expenses.

In addition, salary-related costs increased by $247,000 in the third quarter of 2006, due principally to stock-based compensation expense as result of the adoption of SFAS 123R and the issuance of nonvested shares.

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



|                                                   |  |                                  |       |      |   |      
|-------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | -----
|                                                   |  | Three months ended September 30,
|General and administrative expenses (in thousands) |  | 2006                             |       | 2005
|Salaries, benefits and taxes                       |  | $                                | 1,646 |      | $ | 1,043
|Depreciation                                       |  |                                  | 37    |      |   | 75   
|Legal and professional fees                        |  |                                  | 556   |      |   | 605  
|Insurance expense                                  |  |                                  | 63    |      |   | 48   
|Other                                              |  |                                  | 381   |      |   | 293  
|                                                   |  |                                  |       |      |   |      
|Total general and administrative expenses          |  | $                                | 2,683 |      | $ | 2,064
|                                                   |  |                                  |       |      |   |      

Interest and other income

Interest income and other income decreased by $62,000, or 15%, to $367,000 in the quarter ended September 30, 2006 from $429,000 in the quarter ended September 30, 2005. This decrease in interest income was
primarily a result of lower average cash balance available for investment in 2006 compared to 2005 which was somewhat offset by an increase in the average interest rate on invested cash and cash equivalents.

Interest expense

Interest expense decreased by $24,000, or 20%, to
$98,000 for the third quarter of 2006 from $122,000 for the third quarter of 2005. The decrease was due to lower average debt outstanding in the third quarter of 2006 compared to the third 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



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



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 $502,000 and $347,000 for the three months ended September 30, 2006 and September 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.



|                                                              |  |                                  |     |      |   |    
|------------------------------------------------------------- |  | -------------------------------- | --- | ---- | - | ---
|                                                              |  | Three Months Ended September 30,
|Stock-based compensation expenses included in: (in thousands) |  | 2006                             |     | 2005
|Cost of goods sold                                            |  | $                                | 16  |      | $ |   
|Research and development expenses                             |  |                                  | 145 |      |   | 253
|General and administrative expenses                           |  |                                  | 341 |      |   | 94 
|                                                              |  |                                  |     |      |   |    
|Total stock-based compensation expenses                       |  | $                                | 502 |      | $ | 347
|                                                              |  |                                  |     |      |   |    

Income Taxes

We have incurred net operating losses since our inception and have consequently not paid any federal, state or foreign taxes. As of September 30, 2006, we had approximately $128.6 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 $5.6 million in the third quarter of 2006 was $1.5 million, or 21%, lower than the loss of $7.1 million in the third quarter of 2005. As the
result, the net loss per common share of $0.20 in the third quarter of 2006 was $0.06 per share lower than the loss per common share of $0.26 in the third quarter of 2005. Weighted average common shares outstanding during the three months ended
September 30, 2006 were approximately 27.6 million compared to 27.5 million for the same period of 2005.



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Immunicon Corporation and Subsidiaries

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



Nine months ended September 30, 2006 and September 30, 2005

Revenue

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



|                                                              |  |                                |       |      |   |      
|------------------------------------------------------------- |  | ------------------------------ | ----- | ---- | - | -----
|                                                              |  | Nine Months EndedSeptember 30,
|Revenue ( in thousands)                                       |  | 2006                           |       | 2005
|Product revenue including product revenue from related party: |  |                                |       |      |   |      
|Instrument revenue:                                           |  |                                |       |      |   |      
|Related party                                                 |  | $                              | 422   |      | $ | 788  
|Other                                                         |  |                                | 2,609 |      |   | 847  
|Reagents and other product revenue:                           |  |                                |       |      |   |      
|Related party                                                 |  |                                | 951   |      |   | 310  
|Other                                                         |  |                                | 234   |      |   | 55   
|                                                              |  |                                |       |      |   |      
|Total product revenue                                         |  | $                              | 4,216 |      | $ | 2,000
|                                                              |  |                               
|Service revenue                                               |  |                                | 924   |      |   | 274  
|License and milestone revenue:                                |  |                                |       |      |   |      
|Related party                                                 |  |                                | 537   |      |   | 820  
|Other                                                         |  |                                | 38    |      |   | 3    
|                                                              |  |                                |       |      |   |      
|Total revenue                                                 |  | $                              | 5,715 |      | $ | 3,097
|                                                              |  |                                |       |      |   |      
|                                                              | 
|                                                              |  | Nine months endedSeptember 30,
|Instrument sales                                              |  | 2006                           |       | 2005
|CellTracks Analyzer II                                        |  |                                |       |      |   |      
|Veridex                                                       |  |                                | 2     |      |   | 5    
|Third party customers                                         |  |                                | 20    |      |   | 2    
|CellSpotter Analyzer                                          |  |                                |       |      |   |      
|Veridex                                                       |  |                                | 1     |      |   | 4    
|Third party customers                                         |  |                                | 2     |      |   | 6    
|                                                              |  |                                |       |      |   |      
|Total analyzers sold                                          |  |                                | 25    |      |   | 17   
|                                                              |  |                               
|CellTracks Autoprep Systems                                   |  |                                |       |      |   |      
|Veridex                                                       |  |                                | 3     |      |   | 4    
|Third party customers                                         |  |                                | 17    |      |   | 9    
|                                                              |  |                                |       |      |   |      
|Total Autoprep sold                                           |  |                                | 20    |      |   | 13   

We earned $4.2 million in product revenue for the nine months ended September 30, 2006, including $3.0
million in instrument revenue and $1.2 million in reagent and other product revenue. We earned $2.0 million in product revenue in the nine months ended September 30, 2005, including $1.6 million in instrument revenue and $365,000 in reagent and
other product revenue. We sold 45 instruments, including 25 analyzers (22 CellTracks Analyzers II and three CellSpotter Analyzer Systems) and 20 AutoPreps, in the nine month period ending September 30, 2006. We sold 30 instruments, including 17
analyzers (seven CellTracks Analyzers II and ten CellSpotter Analyzer Systems) and thirteen AutoPreps in the nine month period ending September 30, 2005. Of the 22 CellTracks Analyzer II we sold in the current period, five were upgrades from
the first generation CellSpotter Analyzer System. Of the seven CellTracks Analyzer II sold in the prior year period, five were upgrades. These upgrades to 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 $924,000 and $274,000 in the nine months ended September 30, 2006 and
September 30, 2005, respectively. The service revenue was earned primarily from our contract with Pfizer. In March 2006, we announced an extension of our agreement



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



with Pfizer under which we collaborate with Pfizer to aid their efforts to develop and evaluate the effectiveness of
new drug candidates. The collaboration began in February 2003 and has been amended over time. In the third quarter 2006, we entered into additional laboratory service agreements with several pharmaceutical companies, including AstraZeneca and
MolMed. We expect to continue to add additional customers to this category in future periods.

License and milestone revenue from related party decreased
by $283,000 to $537,000 for the nine months ended September 30, 2006 from $820,000 for the corresponding 2005 period. Since inception to September 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 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 made a $250,000 milestone payment to us. We will recognize this revenue over the life of the study, which we estimate will 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 recognized 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 $2.6 million to $5.7 million in the nine months ended September 30, 2006 compared to $3.1 million in the corresponding period
in 2005.

Costs of goods sold

Costs of goods sold
increased $4.3 million to $5.9 million in the nine months ended September 30, 2006 from $1.6 million in the corresponding period of 2005. We reported a loss on product and service sales of $757,000 for the nine months ended September 30,
2006 compared to a gross profit on product sales of $629,000 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 nine months ended September 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, $927,000 of the product revenue was reported without a corresponding cost of goods sold. Secondly, effective on October 1, 2005, we ceased to be a development stage company. Therefore,
certain costs related to the manufacturing that were recorded as research and development expenses in 2005 are being recorded as costs of goods sold in 2006. Finally, during 2006, Immunicon began 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 in 2006. These costs should be reduced once the
outsourcing process is completed. This process is expected to 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 nine months ended September 30,
2006 decreased $7.7 million to $9.5 million, compared to $17.2 million in the corresponding period of 2005. Overall decreases in the current period are principally the result of the reduction in staff and other expense reductions, which were
completed in August of 2005 in order to align costs with our commercialization strategy and revenue growth. The effect of the staff reduction accounts for approximately $2.4 million of the reduced costs. In addition, effective on October 1,
2005, we ceased to be a development stage company. Therefore, prior year quarters included certain manufacturing support costs that were recorded as part of research and development expenses. Since then, a majority of the manufacturing department
costs are applied directly to operations or costs of goods sold. These costs represented approximately $1.9 million of the decrease in research and development expenses. In addition, the portion of stock-based compensation expenses recognized as
part of research and development salaries was $610,000 lower in the nine months period ended September 30, 2006 compared to the corresponding period in 2005.

Clinical trial expenses decreased in the nine months ended September 30, 2006 by $1.9 million to $1.0 million from $2.9 million in the corresponding period 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



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



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. 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 in 2006 compared to 2005. In September
2006 we announced that we had achieved our primary and secondary endpoints in our pivotal clinical trial in the management of metastatic colorectal cancer. Commercialization of this clinical indication is subject to a number of factors, including
but not limited to clearance for sale by the FDA. We anticipate that we will submit the data from the trial to the FDA in the first quarter 2007.

Contracted research costs were $197,000 lower in the nine months ended September 30, 2006 than in the corresponding period 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 staff and other cost reductions which were implemented in August 2005.

Depreciation expense
decreased in the nine months ended September 30, 2006 by $250,000 to $936,000 from $1.2 million in the corresponding period 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 $332,000 in the nine months ended September 30, 2006 over the same period of 2005
related principally to the decrease in directors and officers liability insurance expense in 2006.

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



|                                                 |  |                                 |       |      |   |       
|------------------------------------------------ |  | ------------------------------- | ----- | ---- | - | ------
|                                                 |  | Nine months ended September 30,
|Research and development expenses (in thousands) |  | 2006                            |       | 2005
|Salaries, benefits and taxes                     |  | $                               | 4,853 |      | $ | 9,114 
|Laboratory supplies and expenses                 |  |                                 | 478   |      |   | 603   
|Instrument development costs                     |  |                                 | 543   |      |   | 452   
|Clinical trial expenses                          |  |                                 | 1,020 |      |   | 2,942 
|Contracted research costs                        |  |                                 | 454   |      |   | 651   
|Depreciation expense                             |  |                                 | 936   |      |   | 1,186 
|Insurance expense                                |  |                                 | 218   |      |   | 550   
|All others                                       |  |                                 | 1,005 |      |   | 1,748 
|                                                 |  |                                 |       |      |   |       
|Total research and development expenses          |  | $                               | 9,507 |      | $ | 17,246
|                                                 |  |                                 |       |      |   |       

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

General and administrative expenses

General and administrative expenses increased by $1.4 million, or 23%, to $7.5 million in the nine months ended September 30, 2006 from
$6.1 million in the corresponding period of 2005. Salary-related costs increased by $1.2 million in the nine months ended September 30, 2006, due principally to approximately $783,000 to non-cash compensation charges associated with the
adoption of SFAS 123R and issuance of restricted shares.

In August 2006, the Committee approved a change to the compensation of Mr. Hewett. In order
to facilitate Mr. Hewetts relocation from his home in New York to the Philadelphia area, the Committee unanimously approved the engagement of a relocation company to aid Mr. Hewett in the sale of his home in New York. The agreement
between the relocation company and us provides that the



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



relocation company will provide Mr. Hewett with marketing assistance in the sale of his New York home. The
agreement further provides that, at Mr. Hewetts option, the relocation company will purchase the home from Mr. Hewett at fair market value and include the home in its inventory for sale. We will reimburse the relocation company for
expenses related to the purchase and sale of Mr. Hewetts New York home, including any loss on the sale incurred by the relocation company. Mr. Hewett exercised this option in October 2006 and the relocation company is now seeking to
sell the home.

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

We anticipate that the reimbursements to Mr. Hewett and the payments to the relocation company will aggregate between $336,000 and $450,000 but actual costs will depend on a number of factors, including the final
sale proceeds of Mr. Hewetts home in New York. As of September 30, 2006, we have recorded $336,000 for these expenses.

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



|                                                   |  |                                |       |      |   |      
|-------------------------------------------------- |  | ------------------------------ | ----- | ---- | - | -----
|                                                   |  | Nine Months EndedSeptember 30,
|General and administrative expenses (in thousands) |  | 2006                           |       | 2005
|Salaries, benefits and taxes                       |  | $                              | 4,406 |      | $ | 3,199
|Depreciation                                       |  |                                | 240   |      |   | 209  
|Legal and professional fees                        |  |                                | 1,545 |      |   | 1,545
|Insurance expense                                  |  |                                | 221   |      |   | 133  
|Other                                              |  |                                | 1,089 |      |   | 995  
|                                                   |  |                                |       |      |   |      
|Total general and administrative expenses          |  | $                              | 7,501 |      | $ | 6,081
|                                                   |  |                                |       |      |   |      

Interest and other income

Interest and other income increased by $182,000, or 18%, to $1.2 million in the nine months ended September 30, 2006 from $1.0 million in the corresponding 2005 period. The increase in interest income was
primarily a result of the increases in interest rates on invested funds over the past year.

Interest expense

Interest expense decreased by $53,000, or 14%, to $314,000 for the nine months ended September 30, 2006 from $367,000 for the corresponding period in 2005. The
decrease was due to lower average debt outstanding in the nine months ended September 30, 2006 compared to the corresponding period in 2005.

Stock-based compensation expenses

Stock-based compensation expenses were $1.4 million and $1.1 million for the nine months ended
September 30, 2006 and September 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 depending on the
corresponding department of the related employee.



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



A summary of the stock-based compensation is shown below.



|                                                              |  |                                 |       |      |   |      
|------------------------------------------------------------- |  | ------------------------------- | ----- | ---- | - | -----
|                                                              |  | Nine Months Ended September 30,
|Stock-based compensation expenses included in (in thousands): |  | 2006                            |       | 2005
|Cost of goods sold                                            |  | $                               | 44    |      | $ |     
|Research and development expenses                             |  |                                 | 259   |      |   | 870  
|General and administrative expenses                           |  |                                 | 1,055 |      |   | 272  
|                                                              |  |                                 |       |      |   |      
|Total stock-based compensation expenses                       |  | $                               | 1,358 |      | $ | 1,142
|                                                              |  |                                 |       |      |   |      

Income taxes

We have incurred net operating losses since our inception and have consequently not paid any federal, state or foreign taxes. As of September 30, 2006, we had approximately $128.6 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 $16.3 million in the nine months ended September 30, 2006 was $4.9 million, or 23%, lower than the loss of $21.2 million in the nine months
ended September 30, 2005. As the result, the net loss per common share of $0.59 in the nine months ended September 30, 2006 was $0.27 per share lower than the loss per common share of $0.86 in the prior year period. Weighted average common
shares outstanding during the nine months ended September 30, 2006 was approximately 27.6 million compared to 24.7 million for the same period in 2005. We completed the sale of 4.1 million common stock 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 $13.6 million in the nine month period ended September 30, 2006 to $29.0 million principally due to funding our net loss of $16.3 million.

We spent $12.8 million for operating activities in the nine months ended September 30, 2006 compared to $19.1 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 and other cost reductions implemented in the third quarter of 2005.

Our investing activities provided cash of $9.2 million in the nine months ended September 30, 2006. We received net proceeds from the maturities of investments of $9.8 million and purchased $710,000 in capital
equipment. In the corresponding period in 2005, we used approximately $1.5 million from investing activities as a result of $3.1 million for purchases of capital equipment and leasehold improvements. These purchases were partially offset by the net
proceeds from maturities of our investments of $1.6 million.

Cash decreased by $1.4 million related to our financing activities in the nine months ended
September 30, 2006 and increased $18.6 million from the corresponding nine month period in 2005. In June 2005, we received $18.0 million, net of expenses, through the sale



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



of 4.1 million shares of common stock pursuant to shelf registration statement filed on Form S-3 in May 2005. In
the nine months ended September 30, 2006, we received $707,000 from borrowings and made principal payments on our debt of $2.3 million. In the corresponding period in 2005, we received $2.8 million from borrowings and made principal payments on
our debt of $2.6 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 purchases of capital equipment and for payments on outstanding indebtedness.

Sales of our
common and preferred stock from inception through September 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 |  |            |  |                 |  |                 |        |                             |   | 2,139                    |  | 1,151,242 
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           
|                                                                 |  |            |  |                 |  |                 |        |                             | $ | 156,162                  |  | 27,646,957
|                                                                 |  |            |  |                 |  |                 |        |                             |   |                          |  |           

As of September 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 September 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                     |  | $               | 4,867  |      | $ | 661           |  | $             | 3,442 |            | $ | 764   |  | $ |   
|Operating leases                    |  |                 | 3,771  |      |   | 215           |  |               | 1,724 |            |   | 1,579 |  |   | 253
|Open purchase order commitments (1) |  |                 | 7,456  |      |   | 7,456         |  |               |      |            |   |      |  |   |   
|                                    |  |                 |        |      |   |               |  |               |       |            |   |       |  |   |    
|Total contractual obligations       |  | $               | 16,094 |      | $ | 8,332         |  | $             | 5,166 |            | $ | 2,343 |  | $ | 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 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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We also have contingent obligations for research and development and clinical trial expenditures under our
Development Agreement with Veridex. Specifically, we must pay the first $5.0 million in clinical trial costs for the first cellular analysis product for general population screening for a major cancer, and Veridex is responsible for the next
$5.0 million of such clinical trial costs. We have agreed to negotiate in good faith for the allocation of costs in excess of $10.0 million. As of September 30, 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 September 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 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.



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



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 September 30, 2006 and December 31, 2005, we had $11.9 million and $12.7 million, respectively, in available credit under our credit agreements. The
available borrowing capacity under our SVB credit facility was $8.6 million and expires on December 31, 2006. As of September 30, 2006, the available borrowing capacity under our credit facilities with GECC, was $3.3 million and expires
April 30, 2007. We were in compliance with all provisions of our various loans as of and for the nine months ended September 30, 2006 and September 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 credit agreements with SVB and GECC also restrict our ability to among other things, dispose of property (including intellectual property), change our business, ownership, management or business locations, merge with or
acquire certain other entities, create or incur certain liens or encumbrances on any of its property, incur or amend the terms of certain indebtedness, engage in transactions with affiliates, declare or pay certain dividends or redeem, retire or
purchase shares of any capital stock without their prior approval.

On June 13, 2005, we announced that we, along with the Fox Chase Cance Center, or
Fox Chase, were awarded a Small Business Technology Transfer grant totaling approximately $1.1 million from NIH, which extends over two years. The grant payments are paid directly to us. We then remit Fox Chases portion to them. Under the
terms of the grant we believe that we will be entitled to $475,000 of the grant and that Fox Chase will receive the remainder of $615,000. The NIH grant is intended to fund the development of a new strategy to activiely monitor the effectiveness of
cancer drugs in clinical trials. As of September 30,2006, we have received a total of $587,000 of grant proceeds of which we have paid $350,000 to Fox Chase and recorded the remainder of $237,000 as a reduction of research and development
expense.

On August 29, 2005, we announced actions to align staff levels and other expenses with our current commercialization strategy and reduced
our workforce by 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 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 fiscal year 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 completed the consolidation of office space in the first
half of 2006. We had recorded severance expense of $384,000 in the nine months ended September 30, 2005 as a result of the workforce reduction. As of December 31, 2005, all severance costs relating to this workforce reduction had been
paid. We have recorded total expense of $647,000 related to the workforce reduction and the accelerated depreciation since we announced these actions in August 2005. These items were recorded in our operating expenses.

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



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



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

We anticipate that the reimbursements to Mr. Hewett and the payments to the relocation company will aggregate between $336,000 and $450,000 but actual costs will
depend on a number of factors, including the final sale proceeds of Mr. Hewetts home in New York. As of September 30, 2006, we have recorded $336,000 for these expenses.

Effective August 28, 2006 the Company received certification by the Centers for Medicare and Medicaid Services or CMS to perform laboratory examinations and procedures on human specimens as directed under the
Clinical Laboratory Improvement Act or CLIA.

Based on our operating plans, we believe that our available cash and available borrowings under of lines of
credit will be sufficient to finance operations and capital expenditures until at least September 30, 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 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 $29.0 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 $11.9 million in available lines of credit as of September 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 September 2006, the Financial Accounting Standards Board, or FASB issued
Statements of Financial Accounting Standards, or SFAS, No. 157 Fair Value Measurements, or SFAS 157. SFAS 157 defines fair value, establishes a framework for measuring fair value and requires enhanced disclosures about fair value
measurements. SFAS 157 requires companies to disclose the fair value of their financial instruments according to a fair value hierarchy as defined in the standard. Additionally, companies are required to provide enhanced disclosure regarding
financial instruments in one of the three categories, including a reconciliation of the beginning and ending balances separately for each major category of assets and liabilities. SFAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal years. We believe that the adoption of SFAS 157 will not have a material impact on our consolidated financial statements.

In September 2006, the U.S. Securities and Exchange Commission, or SEC issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements, or SAB 108. SAB 108 provides guidance on how prior year misstatements should be taken into consideration when quantifying misstatements in current year
financial statements for purposes of determining whether the current years financial statements are materially misstated. SAB 108 permits registrants to record the cumulative effect of initial adoption by recording the necessary
correcting adjustments to the carrying values of assets and liabilities as of the beginning of that year with the offsetting adjustment recorded to the opening balance of retained earnings only if material under the dual method. SAB 108
is effective for the first fiscal year ending on or after November 15, 2006, with earlier application encouraged for any interim period of the first fiscal year ending after November 15, 2006, and filed after the publication of the SAB
(September 13, 2006). We assessed the effect of adopting this guidance and determined that there will be no impact on the Companys consolidated financial statements.



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



In July 2006, the 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 No. 123R Share-Based Payment, or 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 operations 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 nine months
ended September 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. See Note 2 for further detail on the impact of SFAS 123R on our condensed consolidated financial statements.

In March 2005, the SEC issued Staff Accounting Bulletin No. 107, Share-Based Payment, or SAB 107, 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),or Release No. 33-8568. 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 beginning with the first interim or annual reporting period of our first fiscal year beginning on or 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.



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

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 September 30, 2006, we had an accumulated deficit $134.8 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 6. Exhibits.



|       |  |                                                                                                                                                                             
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1** |  | President and Chief Executive Officers Compensation (filed with the Registrants Current Report on Form 8-K filed on August 25, 2006 and incorporated by reference
herein).
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                 
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                 
|       | 
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                
|       | 
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                

---

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



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SIGNATURES

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



|                       |  |                       |  |                                                   
|---------------------- |  | --------------------- |  | --------------------------------------------------
|                       |  | IMMUNICON CORPORATION
|                       |  |                      
|Date: November 8, 2006 |  | By:                   |  | /s/ BYRON D. HEWETT                               
|                       |  |                       |  | Byron D. Hewett                                   
|                       |  |                       |  | President and Chief Executive Officer             
|                       |  |                       |  | (Principal Executive Officer)                     
|                       |  |                      
|Date: November 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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EXHIBIT INDEX



|       |  |                                                                                                                                                                             
|------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |  | Description                                                                                                                                                                 
|10.1** |  | President and Chief Executive Officers Compensation (filed with the Registrants Current Report on Form 8-K filed on August 25, 2006 and incorporated by reference
herein).
|       | 
|31.1   |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                 
|       | 
|31.2   |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.                                                                 
|       | 
|32.1   |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.                                                                                                
|       | 
|32.2   |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.                                                                                                

---

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



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