**As filed with the Securities and Exchange Commission on July 6, 2006**

| ** **                                                                                                  | **UNITED STATES  SECURITIES AND EXCHANGE COMMISSION**

**Washington,  D.C. 20549** | OMB APPROVAL |
|-------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|--------------|
| OMB Number: 3235-0288  Expires: September 30, 2007  Estimated average burden  hours per response... 2631.00 |

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**FORM 20-F/A**

**(Mark One)**

o            Registrationstatement pursuant to Section 12(b) or 12(g) of the SecuritiesExchange Act of 1934

**OR**

**x**           AnnualReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Forthe fiscal year ended December 31, 2005**

**OR**

**o**            TransitionReport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Dateof event requiring this shell company report**

**OR**

**o**            ShellCompany Report pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934

**Date of event requiring this Shell CompanyReport**

**Forthe transition period from N/A to N/A**

**Commissionfile number: 0-30962**

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**Crucell N.V.**

(Exact name of Registrantas Specified in its Charter)

**Crucell N.V.**

(Translation of Registrant’sName into English)

**The Netherlands**

(Jurisdiction ofIncorporation or Organization)

**Archimedesweg 4, 2333 CNLeiden, The Netherlands**

(Address of PrincipalExecutive Offices)

Securities registered or tobe registered pursuant to Section 12(b) of the Act.

|                                           | **Title  of each class** | ** **                 |   |  | **Name  of each exchange on which registered** | ** ** |
|-------------------------------------------|--------------------------|----------------------------|--------|--|------------------------------------------------|------------|
| **American Depositary Shares,**           |                     | **Nasdaq National Market** |
| **each representing one ordinary share,** |                     | ** **                 |
| **par  value****€****0.24**          |                     | ** **                 |

 

Securities for which thereis a reporting obligation pursuant to Section 12(g) of the Act.

**None**

(Title of Class)

 

(Title of Class)

Securities for which thereis a reporting obligation pursuant to Section 15(d) of the Act.

**None**

(Title of Class)

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Indicatethe number of outstanding shares of each of the issuer’s classes of capital orcommon stock as of the close of the period covered by the annual report.

**Ordinary Shares, par value41,440,613**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act.   o Yes   x No

If this report is an annualor transition report, indicate by check mark if the registrant is not requiredto file reports pursuant to Section 13 or 15(d) of the Securities ExchangeAct of 1934.   o Yes   x No

Note—Checking the box abovewill not relieve any registrant required to file reports pursuant to Section 13or 15(d) of the Securities Exchange Act of 1934 from their obligations underthose Sections.

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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.   x Yes   o No

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of "accelerated filer and largeaccelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated  filer o |
|---------------------------|--------|---------------------|--------|--------------------------|

 

Indicate by check markwhich financial statement item the registrant has elected to follow.   o Item 17   xItem 18

If this is an annualreport, indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act).   o Yes   x No

(APPLICABLE ONLY TO ISSUERSINVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check markwhether the registrant has filed all documents and reports required to be filedby Sections 12, 13 or l5(d) of the Securities Exchange Act of 1934 subsequentto the distribution of securities under a plan confirmed by a court.   o Yes   o No

 

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**EXPLANATORY NOTE TOFORM 20-F/A**

This note is to certify that in the previously filed 20-Fand 20-F/A, 3 documents, being the Exhibits 12.1, 12.2. and 13.1,were inadvertently filed incorrectly. The omission has been corrected in thisfiling 20-F/A. This filing contains all documents, whereas the previousfilings of  June 29 and June 30,2006 contained separately the text and the Exhibits to the 20-F.

We certify that no other amendments have been made tothe contents of the 20-F file and that this Amendment is solely meant tocorrect the above mentioned omission.

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**TABLE OF CONTENTS**

| Presentation of Financial  and Other Information |   | 1                                                                       |
|--------------------------------------------------|--------|-------------------------------------------------------------------------|
| Forward-Looking  Statements                      |   | 1                                                                       |
| Other                                            |   | 1                                                                       |
| **PART I**                                  |
| Item 1.                                          |   | Identity of Directors, Senior Management and Advisors                   |   | 2 |
| Item 2.                                          |   | Offer Statistics and Expected Timetable                                 |   | 2 |
| Item 3.                                          |   | Key  Information                                                        |   | 3 |
| Item 4.                                          |   | Information on the Company                                              |   | 18 |
| Item 5.                                          |   | Operating and Financial Review and Prospects                            |   | 58 |
| Item 6.                                          |   | Directors, Senior Management and Employees                              |   | 68 |
| Item 7.                                          |   | Major Shareholders and Related Party Transactions                       |   | 84 |
| Item  8.                                         |   | Financial  Information                                                  |   | 87 |
| Item  9.                                         |   | The  Offer and Listing                                                  |   | 88 |
| Item 10.                                         |   | Additional Information                                                  |   | 90 |
| Item 11.                                         |   | Quantitative and Qualitative Disclosures about Market  Risk             |   | 103 |
| Item 12.                                         |   | Description of Securities Other than Equity Securities                  |   | 104 |
| **PART II**                                 |
| Item 13.                                         |   | Defaults, Dividend Arrearages and Delinquencies                         |   | 105 |
| Item 14.                                         |   | Material Modifications to the Rights of Security  Holders               |   | 105 |
| Item 15.                                         |   | Controls and Procedures                                                 |   | 105 |
| Item 16.                                         |   | Reserved                                                                |   | 105 |
| Item 16A.                                        |   | Audit Committee Financial Expert                                        |   | 105 |
| Item 16B.                                        |   | Code  of Ethics                                                         |   | 105 |
| Item 16C.                                        |   | Principal Accountant Fees and Services                                  |   | 105 |
| Item 16D.                                        |   | Exemptions from the Listing Standards for Audit  Committees             |   | 106 |
| Item 16E.                                        |   | Purchases of Equity Securities by the Issuer and  Affiliated Purchasers |   | 106 |
| **PART III**                                |
| Item  17.                                        |   | Financial  Statements                                                   |   | 107 |
| Item  18.                                        |   | Financial  Statements                                                   |   | 107 |
| Item  19.                                        |   | Exhibits                                                                |   | 107 |

 

i

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**PRESENTATION OFFINANCIAL AND OTHER INFORMATION**

We publish our financial statements in euro. In thisdocument, references to (1) “€”, “EUR” and “euro” are tothe currency introduced at the start of the third stage of the EuropeanEconomic and Monetary Union pursuant to the Treaty establishing the EuropeanEconomic Community as amended by the Treaty on European Union, and (2) “$”,“USD” and “dollars” are to the currency of the United States.

All amounts set forth in this annual report, unlessotherwise noted, are in thousands of euro, except share and option data.

On February 22, 2006, we acquired, via a shareexchange, the majority of the outstanding shares of Berna Biotech AG, a Swissstock corporation. This annual report describes the business now conducted bythe combined company, including the manufacture, sales and marketing of theBerna vaccine portfolio. However, as this acquisition took place after the endof the financial year which is the subject of this annual report, the financialinformation and the historical financial statements included elsewhere in thisannual report do no reflect this acquisition.

For more information onBerna Biotech AG, including their historical financial statements, you canvisit their website at *http://www.bernabiotech.com*The contents of this website are not incorporated by reference intothis annual report.

**FORWARD-LOOKINGSTATEMENTS**

This annual report contains forward-lookingstatements. All statements regarding our future financial condition, results ofoperations and business strategy, plans and objectives are forward-looking.Statements containing the words “believes”, “intends”, “expects”, and words ofsimilar meaning are also forward-looking. In particular, the followingare forward-looking in nature: statements with regard to strategy andmanagement objectives; technology and product development efforts; our abilityto realize commercially valuable discoveries; our intellectual propertyportfolio; our ability to develop potential products and technologies suitablefor commercialization; the effects of changes or prospective changes inregulation; and trends in results, operations and overall market trends.

These forward-lookingstatements involve risks, uncertainties and other factors, some of which arebeyond our control, that may cause our results, performance or achievements orconditions in the markets in which we operate to differ from those expressed orimplied in these forward-looking statements. We describe certain of theserisks and uncertainties in Item 3, “Key Information—Risk Factors.” We cautionyou not to place undue reliance on these forward-looking statements,which reflect our management’s view only as of the date of this document.

**OTHER**

We are the owner of over 150 registered trademarks.The most important of these are: Crucell® ,Berna®, the Bernaand Crucell logos, ChromaGenics®,Aerugen®, Te AnatoxalBerna®, Di AnatoxalBerna®, Di TeAnatoxal Berna®,Epaxal®, EpaxalBerna®, Inflexal®, Inflexal Berna®, Vivotif®, Vivotif Berna®, Hepimmune® andFlavimun®, PER.C6®, AdVac®, MAbstract® andSTAR®. In additionwe hold rights to use certain trademarks owned by our partners, such asQuinvaxem from Chiron. All other trademarks, service marks, trade names andregistered marks used in this report are trademarks, trade names or registeredmarks of their respective owners. Crucell N.V. and its subsidiaries own anumber of additional trademarks, including registered trademarks, that are notreferenced in this report.

1

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**PART I**

**Item 1.**                        Identityof Directors, Senior Management and Advisors

This item is notapplicable.

**Item 2.**                     OfferStatistics and Expected Timetable

This item is notapplicable.

2

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**Item 3.**                        KeyInformation

**Selected FinancialData**

The selectedfinancial data presented below as at and for each of the five years in theperiod ended December 31, 2005 has been derived from:

·        inrespect of the three years ended December 31, 2005, our audited financialstatements included elsewhere in this annual report, which have been audited byErnst & Young Accountants, Independent Registered Public AccountingFirm; and

·        inrespect of the two years ended December 31, 2002, our audited financialstatements, which have not been included elsewhere in this annual report, andwhich have been audited by Ernst & Young Accountants, IndependentRegistered Public Accounting Firm.

We have prepared our financial statements inaccordance with accounting principles generally accepted in the United States(U.S. GAAP). The selected financial data should be read in conjunction withItem 5, “Operating and Financial Review and Prospects”, our audited historicalfinancial statements and accompanying notes that are included elsewhere in thisannual report.

3

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|                                                                        | ** ** | **Years ended December 31,**                                                    | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2001**                                                                                       | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                                             | ** ** | **(in thousands, except share/ADS and per share/ADS data)** | ** ** |
| **Consolidated Statements of Operations Data:**                        | ** ** | ** **                                                                                     |       |   |   |   |   |   |   |   |   |
| Revenues:                                                              |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| License fees                                                           |       | €                                                                                         | 7,972      |   | € | 6,664 |   | € | 4,800 |   | € | 12,429 |   | € | 20,848 |   |
| Service fees                                                           |       | —                                                                                         |       | — |   | 404 |   | 5,712 |   | 11,881 |   |
| Government grants and  other                                           |       | 1,209                                                                                          |       | 2,911 |   | 2,220 |   | 4,481 |   | 4,840 |   |
| Total revenues                                                         |       | €                                                                                         | 9,181      |   | € | 9,575 |   | € | 7,424 |   | € | 22,622 |   | € | 37,569 |   |
| Costs and expenses:                                                    |       |                                                                                           |       |   |   |   |   |   |   |   |   |
| Cost of service fees                                                   |       | —                                                                                         |       | — |   | 399 |   | 5,644 |   | 7,156 |   |
| Research and development                                               |       | 17,764                                                                                         |       | 24,880 |   | 22,858 |   | 21,412 |   | 32,751 |   |
| Selling, general and  administrative                                   |       | 9,391                                                                                          |       | 11,129 |   | 9,329 |   | 16,326 |   | 13,918 |   |
| Developed technology  amortization                                     |       | 1,330                                                                                          |       | 1,331 |   | 1,330 |   | 1,966 |   | 1,470 |   |
| Goodwill amortization                                                  |       | 8,826                                                                                          |       | — |   | — |   | — |   | — |   |
| Goodwill impairment                                                    |       | —                                                                                         |       | 30,891 |   | — |   | — |   | — |   |
| Total costs and expenses                                               |       | €                                                                                         | 37,311     |   | € | 68,231 |   | € | 33,916 |   | € | 45,348 |   | € | 55,295 |   |
| Loss from operations                                                   |       | (28,130                                                                                        | )          | (58,656 | ) | (26,492 | ) | (22,726 | ) | (17,726 | ) |
| Interest income, net                                                   |       | 6,205                                                                                          |       | 3,547 |   | 2,143 |   | 1,503 |   | 1,966 |   |
| Foreign currency  gain/(loss)                                          |       | 463                                                                                            |       | (54 | ) | (19 | ) | (108 | ) | 235 |   |
| Equity in losses of  unconsolidated investments                        |       | (2,524                                                                                         | )          | (507 | ) | — |   | — |   | — |   |
| Gain on sale of  securities available for sale                         |       | —                                                                                         |       | — |   | 982 |   | — |   | — |   |
| Net loss                                                               |       | €                                                                                         | (23,986    | ) | € | (55,670 | ) | € | (23,386 | ) | € | (21,331 | ) | € | (15,525 | ) |
| Net loss per  share/ADS—basic and diluted(1)                      |       | €                                                                                         | (0.68      | ) | € | (1.57 | ) | € | (0.65 | ) | € | (0.59 | ) | € | (0.39 | ) |
| Weighted average shares/ADSs outstanding—basic and  diluted  |       | 35,268,457                                                                                     |       | 35,547,635 |   | 35,920,626 |   | 36,382,662 |   | 39,852,064 |   |

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(1)          Theeffects of potential ordinary share equivalents related to stock options andstock plans are excluded from the calculation of diluted net loss per share as includingsuch share equivalents would result in a lower net loss per share.
|                                                  | ** ** | **As of December 31,** | ** ** |
|--------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                       | ** ** | **2001**                              | ** ** | **2002** | ** ** | **2003** | ** ** | **2004** | ** ** | **2005** | ** ** |
| ** **                                       | ** ** | **(in thousands)**               | ** ** |
| **Consolidated Balance Sheet  Data:**            | ** ** | ** **                            |       |   |   |   |   |   |   |   |   |
| Assets:                                          |       |                                  |       |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                       |       | €                                | 120,243    |   | € | 110,645 |   | € | 87,210 |   | € | 76,711 |   | € | 111,734 |   |
| Total current  assets                            |       | €                                | 123,622    |   | € | 113,576 |   | € | 99,753 |   | € | 84,155 |   | € | 131,038 |   |
| Total assets                                     |       | €                                | 174,020    |   | € | 128,956 |   | € | 113,744 |   | € | 98,667 |   | € | 169,543 |   |
| Liabilities and  shareholders’ equity:      |       |                                  |       |   |   |   |   |   |   |   |   |
| Total current  liabilities                       |       | €                                | 10,546     |   | € | 12,799 |   | € | 11,716 |   | € | 14,773 |   | € | 15,977 |   |
| Total long term  liabilities                     |       | —                                |       | € | 5,649 |   | € | 11,045 |   | € | 5,583 |   | € | 16,151 |   |
| Total  shareholders’ equity                 |       | €                                | 163,474    |   | € | 110,508 |   | € | 90,983 |   | € | 78,311 |   | € | 137,415 |   |
| Total liabilities and  shareholders’ equity |       | €                                | 174,020    |   | € | 128,956 |   | € | 113,744 |   | € | 98,667 |   | € | 169,543 |   |

 

4

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**Exchange RateInformation**

Thefollowing table sets forth, for the years indicated, the high, low, average andyear-end noon buying rates in New York City for cable transfers as certifiedfor customs purposes by the Federal Reserve Bank of New York (“Noon BuyingRates”) expressed in euros per USD 1.00.

| **Year ended December 31,** | ** ** | ** ** | ** ** | **High**   | ** ** | **Low**    | ** ** | **Average(1)** | ** ** | **End of   Period** | ** ** |
|--------------------------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|-------------------------------|------------|
| ** **                                 | ** ** | **€** | ** ** | **€** | ** ** | **€** | ** ** | **€**     | ** ** |
| 2001                                       |       | 1.20       |       | 1.05       |       |       | 1.12       |           |       |                          | 1.12       |   |   |
| 2002                                       |       | 1.16       |       | 0.95       |       |       | 1.06       |           |       |                          | 0.95       |   |   |
| 2003                                       |       | 0.97       |       | 0.80       |       |       | 0.89       |           |       |                          | 0.80       |   |   |
| 2004                                       |       | 0.85       |       | 0.73       |       |       | 0.81       |           |       |                          | 0.73       |   |   |
| 2005                                       |       | 0.86       |       | 0.73       |       |       | 0.80       |           |       |                          | 0.84       |   |   |

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(1)          The average of the NoonBuying Rates on the last business day of each month during the periodindicated.

Thefollowing table sets forth, for the previous six months, the high and low NoonBuying Rates expressed in euros per USD 1.00. 

| ** **         | ** ** | **High**   | ** ** | **Low**    | ** ** |
|--------------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | **€** | ** ** | **€** | ** ** |
| December 2005 |       | 0.86       |       | 0.83       |       |
| January 2006  |       | 0.85       |       | 0.81       |       |
| February 2006 |       | 0.85       |       | 0.82       |       |
| March 2006    |       | 0.84       |       | 0.82       |       |
| April 2006    |       | 0.83       |       | 0.79       |       |
| May 2006           |       | 0.80       |       | 0.77       |       |

 

On June 19, 2006, the NoonBuying Rate was USD 1.00 = EUR 0.79. These rates may differ from the actualrates used in the preparation of our financial statements and other financialinformation appearing in this annual report.

**Capitalization andIndebtedness**

Not applicable.

**Reasons for theOffer and Use of Proceeds**

Not applicable.

5

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**Risk Factors**

*You shouldcarefully consider all the information in this annual report, including thesematerial risk factors. The risks we face are not limited to the risks listedhere. Some risks are not yet known to us and some of the risks that we currentlydo not believe to be material to our operations could prove to be material at alater date. All of these risks can materially affect our business, financialcondition and results of operations.*

***We have a historyof net losses and we may not achieve or maintain profitability.***

We have incurrednet losses since our incorporation. At December 31, 2005, we had anaccumulated deficit of €290,049. We expect to havenet losses and negative cash flow in the foreseeable future. Achievingprofitability will depend, in part, on:

·       therate of growth, if any, in our product sales and licensing revenues;

·       ourability to obtain approval for current pipeline products and to developpotential products either on our own or through partnerships, collaborations orstrategic alliances; and

·       thelevel of our expenses.

We may never generate sufficient revenues to achieveprofitability. Growth of our revenues is dependent on expanding current productsales, obtaining approval of the products in our pipeline, the success of ourtechnologies—in particular, PER.C6—and on our success and that of our licenseesin developing commercially successful products based on our technologies.Revenue growth related to our existing products may be dependent on factorsbeyond our control as discussed below under “—Our results fluctuate as a resultof seasonality in our business, particularly with respect to our flu vaccineproduct” and “—Our products may fail at any stage of development or aftermarket introduction due to factors beyond our control.”  Further, we do not have control over theability of our licensees to develop commercially successful products based onour technologies. We expect to continue to invest in research and developmentto enhance our technologies and develop potential products. Even if we doachieve profitability, we may not be able to sustain or increase profitabilityon a quarterly or annual basis.

***We may needadditional capital in the future. If we do not raise this additional capital,we may have to curtail operations and/or scale back our research anddevelopment activities.***

We expect that our futurecapital requirements will be substantial. Changes may occur that would consumeavailable capital resources significantly sooner than we currently expect. Ifour capital resources are insufficient to meet future capital requirements, wewill have to raise additional funds to continue the research and development ofour technologies and potential products. In this regard, on May 10, 2005,we raised net proceeds of €50.1 million in a privateequity offering of our ordinary shares priced at €14.50 per share. Thecapital raised from this private offering of shares supports the accelerationof our product development with new opportunities especially in the field ofantibodies and therapeutic proteins. We also may need to raise additionalcapital if we make any acquisitions involving cash consideration or theissuance of new shares. In this regard, on February 22, 2006, we issued16.7 million ordinary shares in connection with our acquisition of shares ofBerna Biotech.

We may seek additional funding through public orprivate financing, strategic alliances or other arrangements. We may not haveaccess to additional financing and, if we do, it may not be on favorable terms.If we fail to raise sufficient funds, we will have to curtail or ceaseoperations, reduce our capital expenditures, scale back our development of newpotential products, reduce our workforce and license potential products ortechnologies to others that we otherwise would seek to commercialize ourselves.

6

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***We expect that ourinterim results of operations will fluctuate, and this fluctuation could causethe price of our ordinary shares and American Depositary Shares (ADSs) todecline, causing investor losses.***

Our interimoperating results have fluctuated in the past and are likely to do so in thefuture. These fluctuations could cause the price of our ordinary shares andADSs to fluctuate significantly or decline. Some of the factors that couldcause our operating results to fluctuate include:

·       upon ouracquisition of Berna Biotech in February 2006, the timing ofsales and shipments of our existing products;

·       thetiming and recognition of payments related to license agreements andcollaboration arrangements; and

·       generaland industry specific economic conditions, which may affect product sales andmay also affect our own and our licensees’ research and developmentexpenditures.

A large portion of our expenses is relatively fixed,including expenses for personnel, facilities and equipment. If revenues declineor do not grow as anticipated, we may not be able to correspondingly reduce ouroperating expenses and will suffer losses accordingly. In addition, we mayincrease our research costs in 2006, which may increase our operating expensesin the foreseeable future. Due to the possibility of fluctuations in ourrevenues and expenses, we believe that period-to-period comparisons of ouroperating results may not always be a good indication of our future performance.Our operating results in some periods may not meet the expectations of stockmarket analysts and investors. In that case, the price of our ordinary sharesand ADSs would probably decline.

***Our resultsfluctuate as a result of seasonality in our business, particularly with respectto our flu vaccine product.***

Upon our acquisition ofBerna Biotech in February 2006, our influenza vaccine, InflexalV, accounts for a significant proportion of net sales from our vaccinesbusiness. The market for flu vaccines is extremely seasonal. There is a narrowwindow of time for production, regulatory approval and marketing of fluvaccines. Possible delays in stock availability or marketing of the vaccinescould have a significant negative effect on us, since a majority of thedistribution and sales occurs during only a few weeks in the third and/orfourth quarter of every year. Potential delays in any step of the regulatoryapproval, production and marketing process could result in a significant salesreduction for us . In addition, the antigen necessary to produce influenzavaccine is in limited supply, and we generally rely on a single source for oursupply of this antigen. Any interruption or delay in our antigen supply couldhave a materially adverse effect on our sales of Inflexal V and negativelyimpact our earnings and financial position.

***Expected benefitsfrom the Crucell-Berna combination may not be realized.***

We expect theacquisition of Berna Biotech in February 2006 to result in future growthbenefits, cost savings and other benefits. However, our ability to successfullyrealize these benefits and the timing of their realization may be affected by avariety of factors, including:

·       thechallenges of integrating the businesses, management teams and workforce of thetwo companies;

·       unexpectedevents including major changes in the vaccine industry; and

·       aligningnew priorities.

Given these and other risks related to the combinationof Crucell and Berna Biotech, there can be no assurance that the benefits weexpect from the combination will be realized. If the expected benefits of thecombination are not or only partially realized, the market price of ourordinary shares and ADSs may decrease.

7

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***Our products mayfail at any stage of development or after market introduction due to factorsbeyond our control.***

There are inherent risks in the business ofbiotechnological development and production in connection with the developmentof vaccines. Pre-clinical testing, clinical research and regulatory approval ofa pharmaceutical or medical product is a very lengthy and costly process, andthere is a significant risk of failure at each stage of the process, shouldissues arise with respect to the efficacy or safety of a product. Inparticular, pre-clinical and early clinical studies cannot ensure efficacy forhumans, and human studies are thus required for vaccine development. Suchstudies may, however, fail to prove the efficacy of the product candidates andare at constant risk of suspension for posing unreasonable health risks. Therecan be no assurance that any product candidate in our pipeline will eitherreach or successfully complete the clinical research process. Although a numberof our products have reached late stage of development and offer a reasonablyhigh probability of success relative to earlier stage products, the chances offailure remain significant. We have had products fail at this stage ofdevelopment in the past. Any or all of our current late-stage products couldfail to be proved sufficiently safe or effective to be brought to market orcould fail to receive necessary regulatory approvals. Such failures could havea material adverse effect on our business and prospects.

Even if the products currently in late-stagedevelopment are introduced, there can be no assurance that a market for suchproducts will develop or be sustained. If a market does develop, there can beno assurance that our existing facilities and resources will be sufficient tomeet demand. Accordingly, there can be no assurance that we will realize anypotential benefits that may be associated with our late-stage developmentproduct portfolio.

***If we or ourlicensees do not develop commercially successful products we may fail torealize significant sales and royalty revenues in future years.***

Very little data exists regarding the safety andeffectiveness of the type of potential products that we and our licensees aredeveloping. All of our potential products, and those of our licensees,including those based on our PER.C6 technology are either in research or inpre-clinical or clinical development. We and our licensees may not succeed indeveloping commercial products based on PER.C6 technology that are safe andeffective, meet applicable regulatory standards, are capable of beingmanufactured at reasonable cost, or can be marketed successfully.

Development of products requires significantinvestment, including pre-clinical and clinical testing, to demonstrate theireffectiveness prior to their commercial distribution. To a certain extent, weare dependent on the research and performance of third parties to bringpotential products to market. We expect certain potential products to enterclinical trials during 2006. We and our licensees must conduct a substantialamount of additional research and development before any regulatory authoritywill approve any of our or their potential products. Our research anddevelopment or that of our licensees may not establish that our technologies orour or their potential products are safe and effective, in which caseregulatory authorities may not approve them. Further, our government anduniversity licensees and collaborators may have goals, such as academicpublication or data collection, that are not solely focused on producingmarketable products. Problems frequently encountered in connection with thedevelopment and use of new and unproven technologies and the competitiveenvironment in which we and our licensees operate may further limit our andtheir ability to develop commercially successful products.

***If our licensees or partners do not continue to useour potential products, PER.C6 technology or our other technologies, or if theyterminate their agreements with us, we will earn less or no revenue from ouragreements with them.***

License, service and manufacturing revenues andgovernment grants from our potential products, PER.C6 and other technologieshave accounted for a substantial portion of our revenues to date and we 

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expect that they willcontinue to comprise a significant portion of our revenues for the foreseeablefuture. If our current or prospective partners or licensees do not develop andeventually distribute products based on our technologies, or if they terminatethe relationship with us, we may not be able to realize the revenues and growthwe anticipate. We also may not be able to successfully develop and derivelicense or other revenues from new technologies. Our current or prospectivelicensees or partners may use or develop alternative technologies or develop competingproducts or potential products independently or in collaboration with others,including our competitors. The dollar/euro exchange rate may make ourtechnology less competitive or reduce our revenues. If any of our licensees orpartners become involved in a business combination or other major corporatetransaction, this could cause a strategic shift in their business focus and thetechnologies they use. Our agreements with our licensees do not require them todedicate resources to developing and distributing commercial products based onour technologies. Furthermore, our licensees or partners may generallyterminate their agreements with us on short notice. If they do terminate theiragreements with us, we may not be able to enter into new arrangements withother parties to replace those agreements. During 2005, existing licenses witheight licensees were not renewed.

***We face competitionin discovering, commercializing and licensing new technologies frombiotechnology firms in Europe, the United States and elsewhere. Thiscompetition may limit our ability to derive revenues from our technologies andachieve profitability.***

The field of biotechnology is new and rapidlyevolving, and we expect that it will continue to undergo significant and rapidtechnological change. We operate in highly competitive markets and we mayexperience competition from companies that have similar or other technologies, orother products or forms of treatment for the diseases we are targeting. We areaware of a number of commercial initiatives in the fields in which we operatethat may result in marketable products with which we would compete. We also mayexperience competition from companies that have acquired or may acquiretechnology from companies, universities and other research institutions. Asthese companies develop their technologies, they may develop proprietarypositions in the areas of our core technologies or obtain regulatory approvalfor alternative technologies or commercial products earlier than we or ourlicensees do. Other companies are developing products to address the samediseases and conditions that we and our licensees target and may have ordevelop products or potential products that are more effective than those basedon our technologies. We also compete with our licensees in developing newpotential products. It is possible that we will not be able to effectivelycompete with these or other entities, and such competition could hamper ourability to bring products to market or license and derive revenue from ourtechnology. Such an inability to compete could have a material adverse effecton our business, results of operations and ability to achieve profitability.For more information on our competitive position, see Item 4, “Information onthe Company—Competition”.

***We may be unable toobtain regulatory approval to manufacture and market our new products and mayhave regulatory approval of the manufacture and marketing of our existingproducts revoked.***

Regulatory bodies such as the U.S. Food and DrugAdministration (FDA) in the United States of America and comparable authoritieselsewhere, such as the European Medicines Agency (EMEA) and the European Commission,regulate the market introduction of biopharmaceutical products. In the approvalprocess, a product candidate must undergo extensive testing, which can takemany years and require substantial expenditures. The costs of pursuing andsecuring regulatory approval are increasing, necessitating additionalregulatory compliance expenditure on our part. Required testing and trialsinclude a review of the underlying technologies (including the cell line onwhich companies produce biopharmaceuticals) and are particularly rigorous withrespect to vaccines. Product development involving new technologies is highlyuncertain. In addition, different regulatory authorities may impose differentconditions upon the marketing of a given product or may refuse to grant, orrequire additional data before granting, an approval to market a product eventhough the product may have been approved by another 

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regulatory authority. Therecan be no assurance that regulatory approvals will ultimately be obtained tomanufacture and market any such product candidates in which we are, or may inthe future be, interested.

Although the FDA allows PER.C6 cells to be used toproduce clinical materials that are being used in clinical trials at this time,the FDA has in the past raised concerns over the history and some of theproperties of PER.C6 cells. If we or our licensees are unable to satisfyregulatory authorities as to the history and properties of PER.C6 or itsappropriateness as a system from which companies can produce biopharmaceuticals,new regulations could be adopted that would preclude use of PER.C6 cells in thefuture. If this were to occur, our licensing and other revenues from PER.C6will suffer. Our other technologies have not yet been used in clinical trials,and may face significant hurdles in obtaining regulatory approval if and whensuch trials begin.

Once a product is approved, the manufacture andmarketing of the product remains subject to periodic review. Changes inapplicable regulations, breaches of regulatory requirements or the discovery ofproblems related to the manufacture, safety, quality or efficacy of a productmay result in the imposition of fines or restrictions upon the manufacture andsale of such product, including in the worst case withdrawal of the productfrom the market and/or the revocation of the relevant regulatory approvals. Ifthe relevant regulatory authorities do not approve products developed using ourtechnologies, or revokes approval of our existing products, we may not receiveany licensing or royalty revenues, which may have a material adverse impact onour business, financial condition, results of operations and prospects.

***Any potentialhealth risks associated with our products may lead to significant adverseregulatory and market consequences.***

The possibility of product failure or adverse sideeffects poses a variety of risks for manufacturers of pharmaceutical andmedical products. These risks may be more pronounced in the case of theprophylactic vaccines that constitute our core products than with respect toother pharmaceutical and medical products generally. Because such vaccines areadministered to healthy subjects, any adverse health consequences associatedwith such administration may be perceived as less tolerable than side effectsassociated with the treatment of disease. Accordingly, there can be noassurance that even relatively minor potential health risks associated with ourproducts will not give rise to adverse regulatory action, and/or negativemarket perception of us and our products, resulting in a material adverseeffect on our business, financial condition, results of operations andprospects.

***We may havesignificant product liability exposure, and our product liability insurance maybe inadequate to cover product liability or other claims against us.***

Like other manufacturers active in thebiopharmaceutical industry, we may be exposed to product liability and otherclaims if third parties allege that our technologies, potential products orfuture products have caused harm. If a third party successfully sues us for aninjury caused by our products, potential products or products developed usingour technologies, our liability could exceed our total assets. This risk may bemore pronounced in the case of the prophylactic vaccines, which constitute ourmarketed products, than with respect to other pharmaceutical and medicinalproducts generally. Suits against us arising out of clinical trials mayincrease as more licensees utilize our technologies or potential products, therebylessening our control over the manner of use of such technologies and potentialproducts. We maintain product liability insurance in respect of all marketedproducts. We may seek to obtain additional product liability insurance in thefuture, though such additional insurance may be prohibitively expensive, or maynot cover all of our potential liabilities. If we are unable to obtainsufficient insurance coverage at an acceptable cost or if we are otherwiseunable to protect ourselves against potential product liability claims, thiscould prevent or inhibit the commercialization of products that we or ourlicensees develop.

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***In the past, wehave been dependent on a small number of licensees and partners for a majorityof our license revenues and expect to depend on a small number of licensees fora portion of our revenues in the future.***

We have been dependent on a small number of licenseesand partners that have, in the past, accounted for  the majority of our revenues. For the yearended December 31, 2005, three licensees and partners accounted for 60% ofour revenues. For the years ended December 31, 2004, and December 31,2003 three licensees and partners accounted for 56% and 38% of our revenues,respectively. We currently are reliant on a limited number of contracts forrevenues and commercialization of our products and PER.C6 technology, and anytermination or alteration to these agreements would have a substantial adverseeffect on our licensing revenues and financial results.

We are particularly reliant on our agreements withsanofi pasteur (“sanofi”), DSM Biologics (“DSM”) and the National Institute ofHealth (“NIH”) to generate licensing. revenues and we expect that a high levelof licensee and partner concentration will continue in the foreseeable future.In the event that one or more of our major licensees or partners were toterminate or substantially alter their licenses with us for any reason, wecould experience a significant decrease in revenues and an adverse effect onour financial results.

***We may haveconflicts with our licensees that could make collecting payments due to us moredifficult or that could negatively affect our relationship with our current andpotential licensees.***

We may have disagreements with our licensees overroyalty payments due to us and may have difficulty in collecting thesepayments. Our existing license arrangements generally entitle us to receiveroyalty payments for any potential products developed using our technology. Wedepend on our licensees to inform us when they develop products using ourtechnology. If our licensees fail to inform us of their progress in thesedevelopments, we may not know of payments to which we would be entitled. Inaddition, our licensees may have difficulties making payments to us given thecurrent economic climate or other factors. We may also incur significantexpenses in collecting payments or, in some instances, we may not succeed incollecting these payments at all.

Our licensees may dispute the scope of the licensesthat we have granted them, which could negatively affect our relationships withthem and other licensees and our ability to grant additional licenses to othercompanies. A number of our license agreements provide that if more favorableroyalty terms are granted to another licensee pursuant to a license ofsubstantially the same scope, the initial licensee will also be entitled to themore favorable terms. A licensee may claim that other license agreementscontain more favorable terms and that we should extend these terms to it. Thismay lead to a licensee disputing the amounts payable to us.

***If ethical, legaland social issues related to the use of genetic technology, human-basedmaterials and animal testing negatively affect regulatory approval,patentability or market acceptance of our core technologies and of the productsdeveloped using these technologies, we would not be able to generate revenuesfrom those products or our technologies.***

The use of genetic technology and materials derivedfrom human fetal tissue, such as PER.C6 technology, raises many ethical, legaland social issues that could hinder regulatory approval, patentability ormarket acceptance of our technologies and products developed using them.Further, public expressions of concern and adverse events involving newbiopharmaceutical technologies or products (such as stem cells or geneticallymodified foods or organisms) could result in greater governmental regulation ofour technologies and potential regulatory delays relating to the testing orapproval of our own or our licensees’ potential products. Advocacy groups havetaken issue in the past and may take issue in the future with the use ofgenetic technology or materials derived from human fetal tissue, which mayhinder or adversely affect regulatory approval or market acceptance of ourtechnologies and products developed using them. Concerns over the safety of newbiopharmaceutical technologies or products could result in limited 

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acceptance by patients andthe medical community. In addition, we rely on animal testing in some of ourresearch and development and adverse public reaction to our use of animaltesting could also cause us to encounter negative publicity. Any of thesefactors could generate negative publicity or other adverse consequencesregarding our business or industry, and could reduce or eliminate the potentialmarkets for our own or our licensees’ potential products.

***Our efforts toprotect our intellectual property rights or to defend ourselves against anyclaims of infringement may be costly and, if unsuccessful, we may be barredfrom using or licensing our technologies.***

Our commercial success depends in part on our abilityto obtain and maintain adequate protection of our intellectual property rights,including patents, in our technologies and potential products in Europe, theUnited States and elsewhere. However, the patent positions of technology-basedenterprises like us are subject to complex factual and legal issues that maygive rise to uncertainty as to the validity, scope and priority of a particularpatent. There can be no assurance that we will develop products that arepatentable, that patents will be granted under pending or future applicationsor that patents granted to us or our collaborators will be of sufficientbreadth to provide adequate protection against competitors with similartechnologies or products or will not be successfully challenged. If we do notadequately protect our intellectual property, competitors may be able to useour technologies and any potential products we develop and erode ourcompetitive advantage and/or erode the value of our technologies.

Our commercial success also depends in part on notinfringing patents and proprietary rights of third parties. Our work is inareas of technology where a large number of patent rights exist. As ouractivities in the biotechnology and biopharmaceutical markets expand and morepatents are issued, the risk that our technologies and potential products maygive rise to claims of alleged infringement increases. In addition, we may inthe future wish to undertake activities, which raise patent infringementissues.

We routinely monitor the public disclosures of othercompanies operating in our industry regarding their technological developmentefforts to ensure that we do not undertake activities that infringe theirintellectual property rights and to monitor whether those companies’ activitiesmay infringe our intellectual property rights. Due to the inherentimperfections of patent searching, we can never be certain that our monitoringwill be exhaustive, and it is possible there may be third-partyintellectual property rights of which we are not yet aware. If we determinethat other companies’ technological development efforts violate ourintellectual property rights, we intend to take appropriate action. We areaware of a few patents which are potentially relevant to our past, current oranticipated activities. We believe that our current activities do not infringeany valid claims of these patents. Third parties, however, may seek to enforcepatents against us and a court may find against us. Enforcing intellectualproperty rights against others or defending ourselves against claims ofinfringement can be very expensive, and any action in which we are involvedcould result in substantial costs and diversion of management and technicalpersonnel and resources.

Other companies are and may become involved inproceedings regarding patents that cover technologies related to ours. Theoutcome of any intellectual property proceedings in which we or they areinvolved could effectively block our ability to further use or license ourtechnologies or enter into co-development arrangements. It could also impairour or our licensees’ ability to develop and commercialize potential products orproducts, and could result in the award of substantial damages against us. Inthe event of an unfavorable outcome in litigation, we may need to obtainlicenses or redesign our technologies or potential products to avoidinfringement. In the event that we must cease using a technology, we couldencounter delays in license revenue generation, milestone or royalty paymentsor product introductions while we attempt to develop alternative technologiesor potential products. If we do not succeed in such attempts, we may be forcedto cease operations. In addition, if litigation results in a successfulchallenge to one of our patents, then competitors could be free to use thesubject matter covered by the patent, or we may need to license the technologyto others in settlement of such litigation.

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Oppositionsare relatively straightforward proceedings where any third party can seek tohave a patent revoked. The proceedings typically have a stage where thepatent’s opponents and proprietor may each file observations in writing,followed by oral proceedings.  Thedecision, which may be a dismissal of the opposition, a revocation of thepatent or a maintenance of the patent in more limited form, usually takesbetween two to three years from the start of the proceedings. In mostjurisdictions the decision is subject to appeal by the adversely affected partyor parties. If the oppositions against our PER.C6 and AdVac patents aresuccessful we may lose some or all patent protection in Europe.

***Potential patent disputes with GlaxoSmithKline, ifdecided adversely to us, could cause us to lose a significant share of ourfuture revenues.***

Berna’ssubsidiary Green Cross Vaccine Corporation, currently operating under the nameBerna Biotech Korea Corporation, and our partner Chiron, lodged oppositionsagainst a patent of GlaxoSmithKline (GSK) in Korea. The patent is concernedwith multivalent vaccine formulations, such as our pentavalent vaccineregistered in Korea, to be marketed under the trademark Quinvaxem. In responseto the opposition, the patent has been revoked by the Korean IntellectualProperty Office in December 2004 on the grounds that the subject-matterclaimed in the patent lacks novelty. GSK has appealed that decision before the KoreanPatent Court. After a hearing which took place on April 27 2006, theKorean Patent court dismissed the appeal on June 8, 2006. The decisioncould be further appealed by the adversely affected party. If the KoreanSupreme Court were to reverse the decision of the Patent Court and if GSK wereto decide to enforce its patent, Berna Biotech Korea Corp. could be found tohave infringed or be infringing the patent. If we are found to be infringing,we may be forced to delay, or even cancel, our commercial activities with thisvaccine. As a consequence we might lose revenues and our business would beadversely affected.

Inaddition, production of our pentavalent vaccine requires a particular vaccinecomponent that may become the subject of a patent dispute between GSK and us orour supplier of that component. The patent on that particular component, heldby GSK, is currently under opposition before the patent office and a definitiveoutcome on the validity of the patent is expected to take a number of years. Anegative outcome of this opposition proceeding could lead to infringementproceedings between GSK and us or our supplier, although we believe thatneither we nor our supplier would be held to have infringed or be infringingthat patent. The outcome of legal disputes is invariably difficult to predictwith accuracy, but in the event GSK were to prevail in infringement proceedingsagainst us, this would adversely affect our business.

***If we or our licensees are unable to obtain anynecessary licenses from third parties for use of their intellectual property onacceptable terms, we or our licensees may be unable to develop or marketproducts based on our technologies.***

Beforewe can market some of our products or technologies, we may need to obtainlicenses from third parties who have patents or other intellectual propertyrights. We may be unable to earn revenues from products based on ourtechnologies or from our own potential products if a third party does not grantus or our licensees a necessary license or offers a license only onunacceptable terms. For example, in the patent context, others have filed, andin the future are likely to file, patent applications covering technologiesthat we may wish to use or products that are similar to products that may bedeveloped using our technologies. If these patent applications result in issuedpatents, we may need to obtain a license from the proprietors to use theirpatented technology. These licenses may not be available, or may not beavailable on acceptable or commercially reasonable terms. Without theselicenses, we may be required to alter our technologies or potential products,or to avoid or stop certain activities. Our licensees may face similar problems.

***If we lose the services of key personnel or are unableto attract and retain qualified personnel, we may be unable to develop our owntechnologies and potential products and to execute our business plan.***

Weare dependent on the principal members of our management and scientificpersonnel. Because of the experience our senior management has with ourscientific research and development, our financial 

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position and our business and the industry in which weoperate, the loss of the services of any of them might adversely affect ourresults or the ongoing development of our technologies which is necessary toremain competitive and our ability to execute our business plan. The employmentcontracts of each of our management board members contain non-compete provisionsthat would apply for a period of one year after the end of their employmentwith us. We also may not be able to recruit and retain the qualified personnelnecessary to develop our core technologies and potential products and executeour business plan. There is currently a shortage of skilled executives,scientific personnel and intellectual property and regulatory experts in ourindustry, particularly in the markets in which we operate. We believe thisshortage is likely to continue. As a result, competition for skilled personnelis intense, and the turnover rate can be high. Competition for experiencedexecutives, scientists, developers and manufacturers of pharmaceuticalproducts, and other experts from numerous companies and academic and otherresearch institutions may limit our ability to attract and retain qualifiedpersonnel on acceptable terms or may significantly increase our labor costs.The loss of any key personnel and/or the inability to attract and retain highlyskilled personnel on acceptable terms could have a material adverse effect onour business, financial condition, results of operations and prospects.

***We may encounter difficulties in managing our growth.These difficulties could increase our losses.***

Wehave experienced rapid and substantial growth and may continue to experiencesuch growth in the future. This growth may be organic or through theacquisition of other companies or entities, and such growth will continue toplace a strain on our human and capital resources. The aggregate number offull-time equivalent employees increased from 182 at December 31, 2003 to282 at December 31, 2005. The acquisition of Berna Biotech AG brought ourtotal head count in June 2006 to approximately 900 full time equivalents.In addition, we will need to continue to expend funds to manage our operationsand growth effectively. We will also need to continue to expend funds toattract and retain sufficient numbers of talented employees. If we do not havesufficient revenues to address these issues and otherwise make adequateexpenditures, we may not be able to manage our growth effectively. If we areunable to manage our growth effectively, our losses could increase.

***A number of our research and product developmentprograms depend on access to biological materials without which we would beunable to conduct this research and development.***

Tocontinue to develop our core technologies and potential products, we will needaccess to biological materials, such as virus and tissue samples, which may bein limited supply. If we lose or do not obtain access to appropriate biologicalmaterials, or if tighter restrictions are imposed on their use or oninformation generated from them, we could be restricted or prevented fromconducting our research and product development. In addition, governmentregulations could result in restricted access to, or use of, human and otherbiological material samples.

***We rely on a limited number of third-partysuppliers for the supply of crucial materials for the production of ourproducts and for our serum-free medium. Any interruption in this supply wouldinterrupt our production and ability to conduct research and productdevelopment.***

Weand some of our licensees rely on third parties for the supply of theserum-free medium in which we grow our PER.C6 cells. We cannot guarantee thismedium will be available in the future on an industrial or bulk scale. Ifsupply problems force us to use a new medium, we would need to spend time andresources to adapt our technology and processes to that medium, and during thisperiod of adaptation, our use of PER.C6 would be interrupted. Any suchinterruption or other failure of the serum-free medium upon which we currentlyrely could decrease the potential viability and profitability of our PER.C6technology.

Inaddition, we rely on third-party supplies including CSL, Chiron and Bio Farmafor the supply of crucial materials for the production of some of our marketedproducts or those under development, including starting materials as well asantigens present in the final product. This includes, but is not limited to,the supply of A-Singapore flu antigen for the production of the currentlymarketed hepatitis A vaccine 

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Epaxal, flu antigen for the production of thecurrently marketed flu vaccine Inflexal V, DiTePHiB antigen for the pentavalentvaccine currently in Phase III clinical development and DTP antigen for thetetravalent vaccine currently in Phase III clinical development. In particular,a significant shortfall of the supply of A-Singapore flu antigen for theproduction of our hepatitis A vaccine Epaxal before December 31,2007, when our agreement with Chiron for the supply of this antigen terminates,may have a material adverse effect on our ability to produce Epaxal. Inaddition, our agreement with CSL for the supply of flu antigen for theproduction of our flu vaccine Inflexal will terminate as of December 31,2009. Due to the shortage of antigen production capacity worldwide, weanticipate that it may be difficult to establish a new contract for the supplyof flu antigen on the terms and conditions we currently have. If we are unableto establish a new supply agreement, or are only able to establish a newagreement on less favorable terms and conditions, it could increase our costs,and there is no guarantee that we would be able to pass on these increasedcosts to our customers. Any interruption or termination of these supplyrelationships may have adverse effects on our ability to produce and supplythese products as well as on our ability to launch new products in developmentand thus on our overall results.

***We cannot be certain that we will be successful inpublic tenders to provide national governments and supranational organizationswith our vaccine products.***

Forthe sale of our pediatric vaccines, such as the pentavalent vaccine Quinvaxem,we rely to a considerable extent on the public markets, which typically operatevia a tender system. In a tender system, national governments or supranationalorganizations request proposals for the terms under which a vaccinemanufacturer will provide a large quantity of one or more vaccines. The awardof the tender is typically based on a number of factors, including price,quality and often other non-financial attributes. Often, the tender is for aperiod of one or more years, meaning that only the chosen manufacturer will bepermitted to supply the subject vaccine for that length of time. Failure to wina tender therefore, may cause us to be ineligible to supply the relevantnational government or supranational organization for one or more years, and inturn, have a material adverse effect on our business, results of operations andfinancial condition.

***Third parties may bring claims relating to improperhandling, storage or disposal of the hazardous materials we use in ourbusiness, which may require us to spend significant time and financialresources to defend and to pay damages.***

Ourresearch and development processes involve the controlled use of hazardousmaterials, including chemicals and radioactive and biological materials. OurBioSafety Level III (BSL-III) laboratory facilities allow us to work on-sitewith hazardous materials like West Nile virus. Our operations also producehazardous waste products. Given the inherently dangerous nature of certain ofthe materials we may work with in our BSL-III laboratory facilities and otherhazardous materials incident to our work, we cannot eliminate the risk ofaccidental contamination or discharge and any resultant injury from thesematerials. Various laws and regulations govern the use, manufacture, storage,handling and disposal of these materials. We could be subject to civil damagesand significant adverse publicity in the event of an improper or unauthorizedrelease of, or exposure of individuals to, hazardous materials. In addition,claimants may sue us for injury or contamination that results from our use orthe use by third parties of these materials, and our liability may exceed ourtotal assets. Compliance with environmental laws and regulations may beexpensive, and current or future environmental regulations may make us adoptmore labor-intensive, time-consuming or complicated practices orprocedures in connection with our research, development or productionactivities.

***We cannot be certain that our licensing or otheragreements are not in breach of applicable competition laws and will not beconsidered void.***

Wehave not notified the European Commission competition authorities of any of ourlicensing or other agreements or sought clearance from any other competitionauthority. We take the view that these agreements are unlikely to be found toinfringe European Union or other applicable competition regulations. It ispossible, however, that our current or future similar agreements could be foundto 

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infringe applicable competition regulations. In thisevent, among other things, we may be subject to fines, claims of damages andour licensing or other agreements may be considered void and unenforceable. TheTechnology Transfer Block Exemption Regulation in the European Union mayrequire us to review and possibly amend existing license and technologytransfer agreements in the future to comply with this regulation. This reviewprocess may be costly and time consuming and may require renegotiation ofcertain portions of our licenses and other agreements but we do not expect thisprocess to have a material adverse effect on our license portfolio or results.

***Compliance with the internal controls and evaluationsand attestation requirements under the Sarbanes-Oxley Act may be expensive andtime-consuming.***

Pursuantto Section 404 of the U.S. Sarbanes-Oxley Act of 2002, we will berequired, as a foreign private issuer, beginning in fiscal year 2006, toperform an evaluation of our internal controls over financial reporting andhave our auditor publicly attest to such evaluation. We have prepared aninternal plan of action for compliance, which includes a timeline and scheduledactivities, although as of the date of this filing we have not yet finalized itcompletely. Compliance with these requirements is expected to be expensive andtime-consuming. If we fail to complete this evaluation in a timely manner, orif our independent auditor cannot attest to our evaluation in a timely manner,we could be subject to regulatory scrutiny and a loss of public confidence inour internal controls, with a corresponding adverse effect on our share price.

***The anti-takeover provisions in our articles ofassociation and the laws of The Netherlands may prevent a change in controlthat may be in the best interests of our shareholders.***

Our articles of association and the laws of TheNetherlands have anti-takeover effects. Among other things, our articles ofassociation provide that our supervisory board may make binding nominations forthe election of its board members, and only a shareholders’ resolution approvedby an absolute majority of the votes cast, representing more than one-third ofour outstanding shares, can set the nominations aside. Furthermore under Dutchlaw, we may issue preference shares to a foundation, “*StichtingPreferente Aandelen Crucell*”, or the Preferred Foundation, giving itpreferred dividend rights and diluting the voting rights held by the holders ofthe other classes of shares. The chairman of our supervisory board, PieterStrijkert, our chief executive officer, Ronald H.P. Brus and four independentmembers comprise the board of the Preferred Foundation. These and otherprovisions in our articles of association may have the effect of delaying,deterring or preventing a change in control that might otherwise be in the bestinterest of our shareholders or offer them the opportunity to sell theirordinary shares or ADSs at a premium over the market price. See Item 10, “AdditionalInformation” for additional information regarding the preference shares and ourarticles of association.

***U.S. and other non-Dutch holdersof our ordinary shares may not be able to exercise pre-emption rights.***

In the event of anincrease in our share capital, holders of our ordinary shares are generallyentitled to certain pre-emption rights unless these rights are excluded by aresolution of the general meeting of shareholders or of our board of directors,if so designated by the general meeting of shareholders or pursuant to ourarticles of association. However, U.S. holders of our ordinary shares may notbe able to exercise pre-emption rights unless a registration statement underthe Securities Act is declared effective with respect to the shares issuableupon exercise of such rights or an exemption from the registration requirementsis available. No assurance can be given that any registration statement will befiled or, that if filed, will be declared effective, or that any exemption fromregistration would be available to enable the exercise of a U.S. holder’spre-emption rights.

***Our shareholders may have difficulty protecting theirrights as a shareholder and in enforcing civil liabilities because we are aDutch limited liability company.***

Dutchlaw and our articles of association govern issues regarding the legalorganization, internal constitution, corporate authority and the liability ofmembers of our management board and supervisory 

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board. Our offices and all of our assets are locatedoutside the United States. In addition, a majority of the members of oursupervisory board, all of the members of our management board and managementteam are residents of, and most of their assets are located in, jurisdictionsoutside the United States. As a result, it may be difficult to serve process onus or these persons within the United States. It may also be difficult to enforcea U.S. court judgment against them in a U.S. court or in a Dutch court or toenforce a Dutch court’s judgment against them in a U.S. court. This can includeactions under the U.S. securities laws. In addition, it may be difficult toenforce, in original actions brought in courts in jurisdictions located outsidethe United States, liabilities under the U.S. securities laws. For a morecomplete discussion of potential difficulties in protecting your rights, seeItem 10, “Additional Information—Enforcement of Civil Liabilities.”

***Our ordinary shares and ADSs may have a highlyvolatile trading price. You may not be able to resell your ordinary shares orADSs at or above the price you pay for them, the ADSs may vary in value, andour share price may render us vulnerable to a takeover bid.***

Ourordinary shares are listed on Euronext Amsterdam’s Eurolist by Euronext, alsocalled the Amsterdam Stock Exchange. Our ADSs are quoted on the Nasdaq NationalMarket. An active trading market for our ordinary shares or ADSs may notcontinue to develop or be sustained. The ADSs’ low closing price during 2003,2004 and 2005 has been $3.81, $6.38 and $12.30 respectively, and the closingprice as of June 19, 2006 was $18.24. The trading prices of ordinaryshares of biotechnology companies in general have experienced significantvolatility in the past and are likely to continue to be volatile. In addition,any negative change in the public’s perception of the prospects ofbiotechnology companies could depress our ordinary share or ADS priceregardless of our results of operations. Other broad market and industryfactors may affect the trading price of our ordinary shares and ADSs,regardless of our performance.

***If securities or industry analysts do not publishresearch or reports about our business, or if they change their recommendationsregarding our ordinary shares or ADSs adversely, our share or ADS price andtrading volume could decline.***

Thetrading market for our ordinary shares and ADSs will be influenced by the researchand reports that industry or securities analysts publish about us or ourbusiness. If one or more of the analysts who cover us or our industry downgradeour ordinary shares or our ADSs, the market price of the shares or ADSs wouldlikely decline. If one or more of these analysts ceases coverage of us or failsto regularly publish reports on us, we could lose visibility in the financialmarkets, which could cause the market price of our shares or ADSs or tradingvolume to decline.

***We believe that we were or may have been a passiveforeign investment company before 2005, causing certain adverse U.S. tax rules toapply to U.S. holders that held our ordinary shares or ADSs before 2005.***

Althoughwe believe that we were not a “passive foreign investment company” or “PFIC”for U.S. tax purposes with respect to the year 2005 and also do not anticipatebecoming a PFIC with respect to the year 2006 or thereafter, we believe that wewere or may have been a PFIC with respect to the years before 2005. If we werea PFIC in the past, U.S. holders that held our ordinary shares or ADSs at anytime during the years when we were treated as a PFIC and did not make amark-to-market election or a qualified electing fund (“QEF”) election willgenerally continue to be subject to certain adverse U.S. federal tax rules (the“PFIC rules”), even though we later ceased to qualify as a PFIC. In order toavoid being subject to these rules in the future, affected U.S. investorsmay wish to make a deemed sale election with respect to our ordinary shares orADSs. The PFIC rules are extremely complex, and U.S. investors are urgedto consult their own tax advisers regarding the potential consequences to themof making the deemed sale election. See Item 10, “Taxation—Taxation of U.S.Investors—Passive Foreign Investment Company Rules.”

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**Item 4.**                        Informationon the Company

**History andDevelopment of Crucell**

We are a limited liability company incorporated in TheNetherlands with the legal and commercial name Crucell N.V., registered undernumber 28087740. We were incorporated  onOctober 9, 2000, as the holding company for Crucell Holland B.V., formerlycalled IntroGene B.V., following the combination of IntroGene B.V. and U-BiSysB.V. Our principal executive office is located at Archimedesweg 4, 2333 CN Leiden,The Netherlands and our telephone number is +31 (0)71 524 8701. Our agent inthe United States is CT Corporation, 111 Eighth Avenue, New York, New York10011.

On December 31, 2005 we owned three Dutchsubsidiaries, Crucell Holland B.V., U-BiSys B.V. and ChromaGenics B.V., alllimited liability companies incorporated in The Netherlands. Via a shareexchange offer concluded on February 22, 2006, as of April 12, 2006we own slightly more than 98% of Berna Biotech A.G. (“Berna”) a stockcorporation (*Aktiengesellschaft*)under Swiss law. Berna was founded in 1898 when many disease causing bacteriawere being identified for the first time. Then calling itself the Swiss Serumand Vaccine Institute, the company focused on methods to harness the humanimmune system against these pathogens. Berna changed its name to “Berna BiotechAG” in 2001. Its registered office is at Rehhagstrasse 79, 3018 Bern,Switzerland. and currently has reference number CH- 35.3.000.374-7.

Our common shares are listed on Euronext (Amsterdam)and quoted on NASDAQ (New York) in the form of American Depositary Shares(ADS). Since February 22, 2006, our shares are also listed on the SWXSwiss Exchange in Zürich, under the symbol CRX. On April 12, 2006 weannounced that we hold more than 98% of all Berna’s issued shares and we havefiled for the cancellation of the remaining shares held by minorities. Thisstep is in line with goal of fully integrating the business of the twocompanies. The Berna Biotech shares will be delisted from the SWX uponcompletion of the cancellation procedure.

As of February 22,2006 the following companies were subsidiaries of Berna:

| **Company**                              | ** ** | ** **  | ** ** | **Activity** | ** ** | **Direct ownership** | ** ** | **Indirect ownership** | ** ** |
|------------------------------------------|------------|-------------|------------|--------------|------------|---------------------------|------------|-----------------------------|------------|
| Istitut Sieroterapico srl, Milano (I)    |       | DIS         |       |         | 100        | %                         |       |                        |       |   |   |
| Etna Biotech spa,  Catainia (I)          |       | R           |       |         |       |                      |       |                        | 100        | % |   |
| Berna Biotech SA, Madrid (E)             |       | P/DIS       |       |         | 100        | %                         |       |                        |       |   |   |
| Dr. E. Gräub  AG, Bern (CH)    |       | R/DEV/P/DIS |       |         | 100        | %                         |       |                        |       |   |   |
| Berna Veterinär  Ltd, Bern (CH)     |       | DIS         |       |         |       |                      |       |                        | 100        | % |   |
| Rhein Biotech  N.V., Maastricht (NL)     |       | Holding     |       |         | 92.7       | %                         |       |                        |       |   |   |
| Rhein Vaccines  B.V., Maastricht (NL)    |       | Holding     |       |         |       |                      |       |                        | 100        | % |   |
| Green Cross  Vaccine Co, Seoul (Korea)   |       | R/DEV/P/DIS |       |         | 100        | %                         |       |                        |       |   |   |
| Rhein Biotech  GmbH, Düsseldorf (D) |       | R/DEV       |       |         |       |                      |       |                        | 100        | % |   |
| Pevion Biotech  Ltd, Bern (CH)           |       | R           |       |         | 50         | %                         |       |                        |       |   |   |
| Etnavax Holding, Bern (CH)               |       | R           |       |         | 13.4       | %                         |       |                        |       |   |   |

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R: Research; DEV:Development; P: Production; DIS: Distribution

On March 27, 2006 weannounced plans to divest biopharmaceutical and vaccine manufacturer RheinBiotech GmbH in a cash transaction. It will be acquired by Dynavax TechnologiesCorporation, a U.S. based biotech company. On April 5, 2006 wereached agreement on the sale of all our shares in the veterinarypharmaceuticals production company Dr. E. Gräub AG. The company willbecome a subsidiary of Vetinvest GmbH, a German company active in the field ofveterinary medicines. Both divestments are steps towards aligning our portfolioof activities with our strategic priorities.

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**Business overview**

***Profile***

We are a fully integratedbiopharmaceutical company, focusing on the development, production andmarketing of vaccines and antibodies against infectious diseases for privateand public markets worldwide. With the acquisition of Berna Biotech in February2006, we have a portfolio of well known vaccines and a broad pipeline of newpotential vaccines and antibodies. We combine the use of established and newtechnologies such as the PER.C6, MAbstract, AdVacand our virosomal technology as well asour proprietary Hansenula polymorpha expression system. We believe ourproprietary PER.C6 human cell line technology is well suited for the developmentand large-scale manufacturing of a wide range of biopharmaceuticals includingvaccines, antibodies, therapeutic proteins and gene therapy products. Ourresearch and development facilities are located in the Netherlands andSwitzerland, Korea and Germany. We also have manufacturing facilities inSwitzerland, Korea and Spain, and a sales and marketing infrastructure in ourcore markets of Switzerland, Italy, Spain and Korea. Through our portfolio ofcore marketed vaccines, we have established markets in hepatitis B, paediatric,respiratory and travel vaccines. We have approximately 900 employees. As of March 1,2006 our research and development facilities employed approximately 325employees of which one third are outside the Netherlands, primarily in Switzerland.

***Strategy***

We aim to increase revenuegrowth by manufacturing and marketing vaccines and antibodies that addresscurrently unmet medical needs and to leverage our proprietary technologies todevelop monoclonal antibodies and therapeutic protein products to combatinfectious and other diseaeses. We do this by discovering, researching anddeveloping technologies, vaccines and antibodies, using our own fullyintegrated infrastructure for in-house development, production and marketing,and, where useful or necessary, by forging partnerships with other companiesand organizations. We may alter or expand our product pipeline to includeproducts that, in some instances, we may co-develop and market throughcollaborations or strategic alliances with third parties to share risks andcosts. We also will continue licensing our core technologies to other companiesin biotech industry.

***Business drivers***

Our businessstrategy is based on the following business drivers:

·       *Leveraging presence of our marketed vaccines in public and privatemarkets*.   The combined company has established products inhepatitis B, paediatric, respiratory and travel vaccines. We intend to enhanceour position in these markets by highlighting the unique features of theseproducts and by providing outstanding customer service in terms of delivery,reliability and quality and by leveraging our worldwide presence in both publicand private markets.

·       *Product pipeline with competitive advantage*.   Webelieve that each of our selected products either targets unmet medical needs,improves current medications, or is perceived as a marketable product due topredictive study models and/or due to perceived favorable regulatoryconditions. We currently have five vaccine programs in clinical trials of whichthree are in Phase III or registration, and five vaccine programs and oneantibody program in various stages of pre-clinical development, which are basedon our PER.C6 production technology. In addition, we have various discoveryprograms to find new vaccine antibody and therapeutic protein leads.

·       *Ongoing technology licensing program*.   We have a broadbase of excellent technologies with applicability for vaccines, antibodies,other recombinant proteins and gene therapy. In areas where we are notdeveloping our own products, we offer our technologies to the biopharmaceutical

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industry for thedevelopment and production of diverse biopharmaceutical products. The ongoingand extensive PER.C6 technology licensing program and as of yet more limitedlicensing programs for our other technologies support and accelerate ourin-house  product development. Ourlicensing program provides a source of revenue as well as the potential forfuture, additional revenue in the form of royalties from products developed byour licensees. We believe that our licensing program results in increasedawareness in, and acceptance by, the biopharmaceutical industry and theregulatory authorities of our technology as a production technology forbiopharmaceutical products.

***Our Core Products and Technologies***

Our current productportfolio upon completion of the acquisition of Berna Biotech in February 2006contains hepatitis B, paediatric, respiratory and travel vaccines. Our coreproduct portfolio currently consists of four marketed vaccines: Hepavax-Gene,Inflexal V, Epaxal, and Vivotif. Recently our portfolio has been strengthenedwith the addition of the Quinvaxem vaccine.

*Hepavax-Gene*

Hepavax-Gene is aHansenula polymorpha-based recombinant hepatitis B vaccine. Since its launch in1996, more than 350 million doses of Hepavax-Gene have been commerciallydistributed in more than 90 countries, making it the third most used hepatitisB vaccine in the world. A key competitive advantage for Hepavax-Gene is that itsimmunogenic component, HBsAg, is produced in modified yeast using ourproprietary Hansenula polymorpha expression system, which allows for stable andefficient production. We launched a thiomersal-free formulation in 2004 inKorea. In addition, Hepavax-Gene forms the foundation of two combinationpaediatric vaccines, one of which has already received its marketingauthorization from the Korea Food and Drug Administration (KFDA).

*Inflexal V*

Inflexal V is avirosome-adjuvanted influenza vaccine administered by injection. It is thefirst vaccine in our portfolio to use our patented virosome technology. Due tothe absence of aluminium and thiomersal, which in consequence reduces adverseeffects on patients compared to alternative influenza vaccines, the vaccine hasa high tolerability. In addition, it has a good immunogenicity profile, makingit particularly effective with high-risk patients, such as the elderly, in whomthe immune response is generally weaker. Inflexal V was originally introducedin 1997 and was successfully registered through the Mutual Recognitionprocedure in most European markets in October 2001. The vaccine iscurrently registered in 38 countries.

*Epaxal*

Epaxal is the firstvirosome-adjuvanted vaccine for hepatitis A. The vaccine has a hightolerability due to the absence of aluminum and thiomersal and is highlyeffective, offering protective immunity within a few days following the firstdose and, following the second (booster) dose, providing immunity for up to 20years. The product is currently licensed in more than 40 countries world-wideunder the brand names Epaxal and HAVpurand in most of these countries is licensedfor adults and children over the age of one year.

*Vivotif*

Vivotif is a liveattenuated typhoid fever vaccine administered orally. It is the only live oralvaccine indicated for use against Salmonella typhi, the most prevalent of thetyphoid fever-causing bacteria. Vivotif consists of a live strain of Salmonellatyphi that has been altered so that it stimulates an immune response, but notthe disease. The bacteria are enclosed in coated capsules that dissolve in theintestines, releasing 

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the liveorganism. Vivotif exhibits high tolerability and efficacy. Vivotif has anestablished track-record for safety, having been on the market for over twentyyears. The vaccine is indicated for adults and children over the age of five.Vivotif is currently licensed in 44 countries, including the United States.

*QuinvaxemTM*

On March 27, 2006 theKorea Food and Drug Administration (KFDA) has awarded licence to QuinvaxemTM, afully liquid pentavalent (five-component) vaccine we will produce in Korea. QuinvaxemTMcombines antigens for protection against five important childhood diseases:diphtheria, tetanus, pertussis (whooping cough), hepatitis B and Haemophilusinfluenzae type b, one of the leading causes of bacterial meningitis inchildren. It is the first internationally available fully liquid vaccinecontaining all five of the above antigens to reach the market, offering a clearadvantage in terms of convenience of use. QuinvaxemTM was co-developed withChiron Corporation, which provides four of the five components as bulk. Theproduction of this combination vaccine has started immediately. First sales areexpected in the second half of 2006. Supranational organizations are majorcustomers for combination vaccines, which are used in mass vaccination programsin developing countries.

*Complementaryvaccines*

Our core vaccines businessalso includes a range of paediatric and booster vaccines and vaccines forspecial indications which we offer in our key markets and, through regionalsales partners, world-wide. We currently offer, through our partnershipwith Chiron, Di Te AnatoxalTM for diphtheria and tetanus, EncepurTM fortick-borne encephalitis, Menjugatefor meningitis C, Te AnatoxalTM for tetanusand MoRuviratenformeasles/rubella.

*Seasonality*

Our sales of respiratoryvaccines are exposed to seasonal variations. The sales are primarily made inthe second half of the business year. In other respects, our business is notsignificantly seasonal.

***Product development programs***

Our early-stage product development programs comprisevaccines against influenza, West Nile virus, Ebola, malaria, and tuberculosisas well as antibody products against rabies and preclinical research on theblood clotting Factor V. This coagulation factor is a central regulator in theearly phases of blood clot formation.

In late-stage development,our pipeline of vaccines consist of four products, two of which are in PhaseIII clinical trials: Pseudomonas aeruginosa vaccine Aerugenand a paediatric combinationvaccine (DTPw-HepB) against diphteria, tetanus, pertussis (whooping cough) andhepatitis B. The Aerugen vaccine is intended to prevent Pseudomonas aeruginosainfections in patients with cystic fibrosis. The two other vaccines which arein the process of finalizing their registration are  a yellow fever vaccine and a two-dosehepatitis B vaccine. We also have programs in various stages of pre-clinicaldevelopment, including programs  focusedon improved flu/respiratory syncytial virus (RSV), therapeutic hepatitis Bvaccines and Recombinant Live Paramyxovirus vaccines intended to combat HIV.

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***Proprietary technologies***

Our product portfolio is supported through a range ofproprietary technology platforms. Besides revenues generated from product salesupon the completion of our acquisition of Berna Biotech in February 2006, wealso generate revenues from licensing our proprietary technologies topharmaceutical and biotechnology companies, from grants and governmentsubsidies obtained to support the development of our technologies and potentialproducts, and from service fees earned under development contracts with ourpartners. We intend to add revenues in the future from initial license fees,license maintenance fees and milestone and royalty payments from products thatour licensees develop using our technologies.

Our coreproprietary technologies are as follows:

·       *PER.C6 technology.*   Our PER.C6 technology encompasses ahuman cell line production system that we and our licensees use to developbiopharmaceutical products. The PER.C6 technology is currently being applied infour areas for the research, development and/or manufacture of:

(a)           vaccines;

(b)          antibodies and othertherapeutic proteins;

(c)           gene therapy products;and

(d)          functional genomics,which is the study of how individual genes function.

·       *AdVac**technology.*   Our AdVac technology isa recombinant vector technology that we use to develop novel adenoviral-basedproducts. The AdVac technology is being developed to:

(a)           improve upon existingvectors for vaccines and gene therapy; and

(b)          overcomethe problems related to the presence of pre-existing immunity in target populationsagainst the vector, which will potentially allow for more efficacious vaccines.

·       *MAbstract**phage antibody-display technology*.   Thephage antibody-display technology, which we use to display antibody fragmentson the surface of a bacteria-infecting virus called a phage, can be used in thefollowing ways:

(a)           to discoverdisease-associated molecules, which are molecules appearing on the surface ofpathogens such as viruses, bacteria and parasites, or on diseased tissue; and

(b)          todevelop human antibodies, which are antibodies that are derived from human DNA,as therapeutics against infectious disease, or in other disease areas.

·       *STAR technology.*   STAR technology is a gene expressiontechnology based on epigenetic control mechanisms that block repression of geneexpression. It has a potentially broad application for production of proteinson mammalian cell lines such as our PER.C6 human cell technology and the widelyused Chinese hamster ovary (CHO) cell line. In an evaluation program,Genentech, Genzyme, Medarex, Millenium and Xoma are currently investigatingwhether STAR technology can increase production yields of biologicals. We acquiredSTAR technology in 2004 through the purchase of ChromaGenics B.V., a privatelyheld biotechnology company based in Amsterdam. In connection with thepurchase, we also entered into a contingent payment agreement that could resultin an additional payment of €7.0 million upon receiptof revenues generated from the STAR technology and royalties. Neither ourlicensees nor we currently market any human products based on the abovementioned core technologies.

Our virosomal technologyprovides flexibility with respect to the development of modern prophylactic andtherapeutic vaccines. In addition, the yeast expression technology Hansenulapolymorpha provides a highly efficient process production technology which, inaddition to its use in the production of 

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Hepavax-Gene,may be used as a basis for developing and manufacturing new vaccines. Besidesthese, we have access to a number of other useful technology platforms fromthird parties supporting our marketed products or products in development.

**Industry and Scientific Overview**

***Manufacturingsystems for biopharmaceutical products***

Biopharmaceutical productsare therapeutics produced by means of biological production systems. Modifiedbacteria and yeast initially were used to produce the first generation of humanbiopharmaceutical products. The first available human cell-based productionsystems employed human cells that spontaneously acquired the ability to divideindefinitely. These include the MRC-5 and WI-38 cell lines, whichwere both divided from human lung tissue. These cell lines have beensuccessfully used to produce a number of human vaccines including those forrubella, mumps, measles, rabies and hepatitis A. More recent and better definedhuman cell lines were created by extracting a small and well defined part ofthe genome (E1) from the adenovirus type 5 and inserting this into healthyprimary human cells where it subsequently causes stable, indefinite cellgrowth. The immortalized cell and its progeny are called a ‘‘cell line.’’ Anumber of examples of cell lines that were made by E1 immortalization including293, 911, N52.E6 and the PER.C6 cell line.

***Vaccines***

Vaccines are designed toprotect people against potentially life-threatening diseases, including thosecaused by parasites, viruses and bacteria.

***Scientific progress in vaccines.***   Vaccineshave contributed significantly to the improvement of global public health inthe twentieth century. Smallpox was eradicated through the use of vaccines, andpolio is well on its way to eradication. Significant developments include theintroduction of combination vaccines and the development of new vaccinetechnologies that may advance vaccine development. Today, research is underwayto develop efficacious and safe vaccines against viruses such as HIV; againstparasites causing malaria; against bacteria such as those causing tuberculosisand also against inherited or acquired diseases such as cancer.

***Vaccine formats.***   Avariety of vaccine formats are in use today and others are evolving throughongoing research and development efforts. Some of the most common vaccineformats include live-attenuated virus vaccines, inactivated whole-killed virusvaccines, subunit vaccines, DNA vaccines, recombinant vector-based vaccines,synthetic vaccines and peptide-based vaccines.

***Vaccine technology development.***   Alarge variety of vaccine technologies are under development in an attempt toimprove safety and overall vaccine efficacy. The key objectives of currentvaccine technology research and development are to make safer vaccines withoutcompromising efficacy, to generate new vaccines with stronger and broaderimmunogenicity, to make vaccines using more efficient manufacturing processesand to make vaccines easier to administer.

***Antibodies***

Antibodies are proteinsmade naturally by cells of the body’s immune system. They function as one ofthe body’s principal defense mechanisms against pathogens, which are diseasecausing agents such as parasites, viruses or bacteria. Antibodies recognize andbind to invading pathogens, ultimately eliminating them. Thus, antibodies playa crucial role in protecting humans against disease. Because of their bindingcharacteristics, antibodies can distinguish subtle cell differences betweenhealthy and diseased cells. Antibodies are used to develop therapeutic productsthat can trigger the death of a target cell, such as a cancer cell, or bind toand block a key interaction of a disease-related cell, such as an inflammatorycell, to develop therapeutic products that block infectious agents; bind andneutralize toxic products; as tools in 

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scientificresearch such as genomics and proteomics; and to develop diagnostic products todetect viruses or bacteria.

***Scientific progress in antibodies.******  ***Methods forgenerating monoclonal antibodies have evolved considerably over the last 25years. The technology originally involved immunizing mice with a targetmolecule and isolating relevant antibody-producing cells from the mice. Becausemonoclonal antibodies of rodent origin are recognized as foreign proteins andare rapidly eliminated when applied in humans, methods were developed toproduce therapeutic antibodies that are of human origin. These antibodies canbe developed either using transgenic mice or by means of phage antibody-displaytechnology. Transgenic mice are genetically engineered mice that carry humanantibody genes. This allows the immune systems of mice to generate humanantibodies in response to any administered antigenic material. Phageantibody-display technology allows human antibody genes to be cloned intobacteriophages, which are viruses that only infect bacteria. Phages displayingantibody fragments that attach to specific molecules can be selected, enablingisolation of antibodies against targets and/or enabling the identification oftarget molecules. Phage antibody-display libraries are large collections ofantibody-phages for use in identifying the targets and related antibodies.

***Therapeuticproteins***

Proteins are mainconstituents of the human body. They consist of amino acid peptide chainsfolded in a specific conformation, and often contain a number of so-calledposttranslational modifications (one of the later steps in proteinbiosynthesis) which include glycosylation, sulphation, phosphorylation,gamma-carboxylation, and others. Since the 1950s, proteins have beenincreasingly used as therapeutic drugs, especially diseases caused by adeficiency of certain proteins. According to various market research reports  the total market size (based on sales) oftherapeutic proteins was in 2005 over US$38 billion. Hematology, endocrinologyand oncology are the main disease areas in which therapeutic proteins areapplied.

***Scientific progress in recombinant therapeuticproteins.***   Initially therapeutic proteinswere isolated from natural sources such as blood, urine and tissues fromhumans, or in some instances from animals. Clinical experience with theseproteins in the 1960s, and afterwards, revealed a significant risk oftransmission of infectious pathogens, in particularly viruses, from the sourcematerial to the recipient. Hence, production of proteins in vitro wasinvestigated. Since the 1970s, developments in molecular biology have made itpossible to produce proteins in the laboratory. In addition, transgenic animalswere developed that secrete the protein of interest in milk. Today, there are anumber of production platforms for non-mammalian cells such as yeast, as wellas mammalian cells.

Mammalian cell-basedprotein production systems mostly use non-human cell lines such as CHO, BHK andothers. The type of post-translational modifications carried out by theplatform is often determined by the cell-type used. Current thought holds thatrecombinant proteins should be produced by cell lines in culture media that arecompletely devoid of human serum components.

***Vaccine markets***

Important segments of thevaccine market are influenza vaccines, paediatric vaccine combinations thatinclude protection against hepatitis B as well as travel vaccines.

*Influenza*

Influenza, commonly knownas “flu”, affects large sections of the world’s population each year. Thedisease is characterized by annual winter outbreaks, which often reachepidemic, and sometimes pandemic, proportions due to the fact that the viruscan mutate quickly, often producing new strains against which human beings donot have immunity. Typical symptoms of flu include fever and respiratorysymptoms, such as a cough, sore throat, runny or stuffy nose, as well asheadaches, muscle aches, and, often, extreme 

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fatigue.These symptoms are usually relatively mild but can become life threatening invulnerable patient groups, such as the elderly and immunodeficient individuals.Transmission of the flu virus occurs via droplets of respiratory secretionsand, following infection, the incubation period ranges from one to three days.

The influenza vaccinemarket is the fastest growing vaccine market. Global sales of influenza vaccineare, according to a market research report (Datamonitor) and and to Crucell’s own estimates, expected to grow froman estimated US$1.4 billion in 2004 to US$3.7 billion in 2010.

Several factors contributeto the rapid growth of the influenza market. National governments are stronglyin favor of influenza vaccination and tend to continually increase their targetvaccination coverage. Influenza vaccinations save millions of dollars each yearin reduced hospitalizations and fewer lost workdays. The past few years haveseen significant growth in the use of influenza vaccines in China, Taiwan,Mexico, Japan and Eastern Europe.

It is expected that thethreat of a pandemic of avian flu and ongoing activities to increase thepreparedness for a flu pandemic will lead to further growth in theinterpandemic flu markets due to higher awareness of the public at large aswell as due to specific production contracts for vaccines that combat strainsof pandemic flu.

Sanofi pasteur dominatesthe influenza vaccine market with approximately a 50% share of the worldmarket. GlaxoSmithKline (GSK) is also well established, with an approximatemarket share of 15%. Following the ID Biomedical acquisition, GSK is expectedto increase its market share and become a significant participant in the U.S.market. Following Chiron’s acquisition of PowderJect, Chiron is also one of themain producers of the influenza vaccine for the U.S., and commands a leadingposition in Europe. Fluad, Chiron’s adjuvant flu vaccine, is the main directcompetitor of Inflexal V, our influenza product. Fluad has been particularlysuccessful in Germany and Italy. In October 2005 Novartis entered into adefinitive merger agreement with Chiron to acquire all of the remainingpublicly held shares of Chiron it did not currently own.

*Paediatric vaccines including hepatitis B*

Hepatitis B (HBV) is aviral infection of the liver which causes various complications if leftuntreated. Infection with HBV leads to one of three outcomes. An infectedindividual may die of fulminant hepatitis within days or weeks after the onsetof the disease, recover after symptomatic or asymptomatic infection and developlifelong immunity against the disease, or develop chronic infection for whichno specific treatment is available and which may ultimately cause death fromcirrhosis of the liver and liver cancer.

Transmission of HBV occursas a result of the exchange of blood, the exchange of fluids during sexualintercourse, and the exchange of body fluids between an infected mother and anew-born baby during birth (perinatal transmission). Groups of persons at riskfor HBV infection include sexually active men and women, healthcare workers,infants born to infected mothers, injection drug users, hemodialysis patients,hemophiliacs and travelers to endemic areas. According to the WHO,approximately 350 million people are chronically infected.

The market for HBVmonovalent vaccine was close to US$0.5 billion in 2004 according to  a market research report (Frost &Sullivan) and our own recent estimates, split between the United States (50%),Europe (30%) and the rest of the world (20%). However, the market is in steadydecline. This is due to the increasing number of people being vaccinated atbirth with a combination vaccine in the United States and Europe, the largestmarkets. The same trend is seen in the developing countries in the rest of theworld, where there is a strong demand for hepatitis B combination vaccines.

The key participants inthe HBV market are GSK, Merck & Co. and Chiron. In addition to ourmonovalent hepatitis B vaccine, Hepavax-Gene, we have collaborated with Chironto develop a 

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combinationvaccine against hepatitis B, diphtheria, tetanus, pertussis, and Haemophilusinfluenzae type b. The Korea Food and Drug Administration (KFDA) awarded alicense to this product (QuinvaxemTM), which is being produced in Korea.

*Travel vaccines*

Travel vaccines includeall vaccine products that protect against diseases which are not endemic tospecific countries. Generally, the target population groups for these vaccineproducts are individuals traveling to endemic regions, although in regionswhere certain diseases combated by travel vaccines are prevalent, widespreadimmunization programs are sometimes undertaken.

According to the WorldTourism Organization, the number of travelers from developed countries toregions with endemic diseases is set to grow each year. This growth in thenumber of travelers is driven by decreasing relative costs and journey times oftravel, increased accessibility to travel and a social trend to travel abroad.Vaccines for hepatitis A, yellow fever, typhoid and cholera can all beclassified as travel vaccines.

*Hepatitis A.*   HepatitisA (HAV) is a highly contagious infection that causes acute inflammation of theliver. HAV is generally contracted orally through fecal contamination of foodor water, and is considered the least dangerous form of hepatitis because itdoes not lead to chronic inflammation of the liver. HAV commonly spreadsthrough improper handling of food, contact with household members, sharing toysat day-care centers, and eating raw shellfish taken from polluted waters.

The HAV market isestimated to be worth approximately US$340 million in 2004 according to amarket research report (Frost & Sullivan) and our own recentestimates.

GSK, Merck and sanofipasteur dominate the monovalent HAV market. In addition, GSK markets acombination vaccine for HAV and hepatitis B (Twinrix), and sanofi pasteur andGSK have recently introduced combination vaccines for HAV and typhoid fever. Wecurrently market Epaxal for HAV in Europe, Latin America and Asia.

*Typhoid fever.*   Typhoidfever is a debilitating and life-threatening illness caused by the bacteriaSalmonella typhi. Symptoms of typhoid fever include fever, stomach pains,weight loss, loss of appetite, delirium, severe diarrhea (in children) andconstipation (in adults).

Typhoid fever istransmitted by fecal contamination of food or water, or by person to personcontact. Approximately 17 million people worldwide develop typhoid fever eachyear and approximately 4% of patients with typhoid fever die.****The disease is endemic to Africa, Asia(except Japan) and Latin America.

The key participants inthe typhoid market are sanofi pasteur and GSK, with their injected vaccineproducts TyphimViandTypherix. We market Vivotif, the only oral vaccine for active immunization againsttyphoid fever.

**Our Core Technologies**

**PER.C6 technology**

***Overview***

Our PER.C6 technologyprovides a manufacturing system that consists of a human cell line, which canbe used to produce a variety of biopharmaceutical products. We developed thePER.C6 technology from a single source of healthy, human retina cells. Toobtain the PER.C6 cell line, we inserted an exactly defined fragment of the E1region of the genome of the adenovirus type 5 into a healthy human retina cellso that the cell can grow indefinitely. The PER.C6 cell line has beensuccessfully adapted to grow without the need for serum components or materialsthat allow cell attachment (microcarriers) and demonstrates excellent 

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celldensities in bioreactors. These features of our cell line are important toproduce safe biopharmaceutical products in sufficient quantities.

There are four areas inwhich our PER.C6 technology is currently being applied:

*Vaccine production.*   PER.C6technology can be used as a production system for developing and manufacturingboth classical and recombinant vaccines.

·       Forclassical vaccine production, PER.C6 cells are infected with the virus againstwhich the vaccine is meant to protect. The virus is subsequently multiplied onPER.C6 cells to high virus titer, yielding a potent starting material that canbe processed and purified to produce a final formulation of a whole-killed,split or subunit vaccine.

·       Forrecombinant vaccine production, the PER.C6 technology produces delivery agentscalled adenoviral vectors. These vectors have been made replication incompetentand thus are only capable of delivering into the human body a portion of DNAencoding for a protein from the pathogen against which the vaccine is meant toprotect. The DNA inserted into the vector can be derived from a virus, aparasite or even bacteria, providing a versatile vaccine vector platform.

*Protein production.*   PER.C6technology can be used as a production system for developing and manufacturingboth antibodies and other proteins. For both antibody and protein production,DNA encoding for a particular protein of interest is inserted into PER.C6cells. These modified PER.C6 cells will secrete the desired antibody or protein.

*Gene therapy.*   Theprimary function of PER.C6 technology in the field of gene therapy is theproduction of adenoviral vectors—a gene delivery mechanism based on a commonhuman virus—that carries therapeutic genes and facilitates the delivery of thegene into the cells. Since the PER.C6 cell line is the only available cell linethat does not allow any formation of classical replication competentadenoviruses during the production of replication deficient vectors, the cellline may be applied across the entire adenovirus gene therapy field.

*Functional genomics.*   OurPER.C6 technology can be used to produce libraries of adenoviruses into whichindividual human genes can be inserted to perform studies of gene functions.The adenovirus libraries carry many genes with unknown functions, which can beused to determine the function of individual genes in a disease process. Webelieve that our PER.C6 technology, therefore, represents a key analytical toolin the discovery of new genes and their role in biological pathways and humandisease. Galapagos N.V., a functional genomics company in which we hold a 9.8%ownership share, executes these activities exclusively using the PER.C6technology. Please refer to ‘‘—Other collaborations and agreements—GalapagosN.V.’’ for additional information about this company.

***Key features andadvantages***

We believe that our PER.C6technology has the following key advantages over alternative manufacturingsystems:

*High yields.*   PER.C6technology potentially offers a system for high yield, large-scalebiopharmaceutical product production. PER.C6 can be cultured at high densitiesand engineered to produce large quantities of biopharmaceuticals and may reduceproduction expense.

*Scalability in serum-freeconditions.*   PER.C6 cells can be cultured in aserum-free medium, without micro-carriers, using a variety of scaling systems,including bioreactors. This simplifies the expansion from laboratory- toindustrial-scale production, potentially leading to the production ofcost-efficient biopharmaceuticals in large quantities. The use of a serum-freemedium also offers the potential to significantly improve the purification ofbiopharmaceuticals produced using the PER.C6 technology and may facilitateregulatory approval.

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*Biologics Master File atthe FDA.*   We have filed a Cell SubstrateBiologics Master File (BMF) with the U.S. Food and Drug Administration (FDA)describing the PER.C6 technology, including its establishment, development andpotential use in production processes. The FDA will only evaluate the PER.C6technology in the context of Investigational New Drug (IND) applications. We believe that theinformation in the BMF will facilitate the FDA’s appraisal of anybiopharmaceutical product that our licensees or we produce using the PER.C6technology.

*Broad industryendorsement.*   The PER.C6 technology can now claimto have achieved a broad endorsement within the industry, with more than45 licensees and partners. For a list of licensees, see “—Licensing andCollaborations”.

*Human-based.*   Webelieve that antibody and other protein products based on the human basedPER.C6 technology will demonstrate enhanced biological properties, renderingthem potentially more efficacious. In addition, PER.C6 technology efficientlysupports the growth of certain human viruses for vaccine development.

**AdVac**technology

***Overview***

We use our AdVactechnology, in combination with its PER.C6 production technology, to developrecombinant vaccines.

While no adenovirus-basedrecombinant vaccines are currently licensed for human use, the scientificcommunity is testing the ability of these vaccines to counter viruses such asHIV and Ebola, parasites such as malaria and bacteria such as Mycobacteriumtuberculosis. Recombinant vaccines are necessary for these diseases because inactivatedwhole virus vaccine approaches are either ineffective against these particularpathogens, or are too difficult or dangerous to produce. Within the field ofvaccination and gene therapy, adenovirus serotype 5 (Ad5) is the most commonlyused vector.

The portion of the humanpopulation that has been exposed to Ad5 is high, and early clinical trial datademonstrates a clear correlation between the level of pre-existing immunityagainst Ad5 and the frequency of non-response against Ad5-based vaccines.Moreover, immunity and resistance to Ad5 has been proven to vary fromperson-to-person, creating difficulties with respect to vaccine dosing issues.

We designed the AdVactechnology to manage the problem of pre-existing immunity in humans against therecombinant adenovirus serotype 5 (rAd5) vaccine vector, without compromisinglarge-scale production capabilities or the immunogenic properties of rAd5.

AdVac technology is basedon adenovirus vectors that do not regularly occur in the human population, suchas Ad35 and Ad11. The technology supports the practice of inserting DNA codingfor pathogen-derived proteins into a vector. AdVac technology may also be usedto develop gene therapy products.

***Key features andadvantages***

Webelieve our AdVac technology has the following key advantages over the commonlyused vector system:

·       *Safety and efficacy.*Because AdVactechnology is based on adenovirus vectors not commonly found in the humanpopulation, pre-existing immunity to the vector is rare. This may allow for lowerdosage schedules.

·       *Scale and manufacturing.* The cell culturesthat complement AdVac technology are based on PER.C6 technology, and we expecttechnology to help make large-scale manufacturing of recombinant vaccinespossible. We believe that the biopharmaceutical industry requires thiscapability to meet the global demand for vaccines required to eradicateexisting and emerging infectious diseases.

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**MAbstracttechnology**

***Overview***

Our MAbstract technology can be applied for thediscovery of novel drug targets and the identification of human antibodiesagainst those drug targets. MAbstract technology employs a bacteria-infectingvirus called a bacteriophage, or phage, which expresses part of a humanantibody on its surface. The technology employs a library of phages that carrymany different human antibodies. To identify and subsequently isolate relevantantibodies, the library is contacted with pathogens, or cells suspected ofcarrying the drug target, or if the target is already known in advance, thelibrary may be contacted with the target directly. Subsequently, phageantibodies binding to the diseased cells or the known target are separated fromphage-antibodies that do not bind at all, or bind to healthy cells added tosubtract irrelevant phage-antibodies present in the library. Since irrelevantphage antibodies for the target in question are often present in greatabundance, the subtraction step aids in enriching the phage-antibody populationfor potentially relevant, selectively binding phage antibodies.

Once such phage antibodies have been isolated, theycan either be used to subsequently identify the target or a specific bindingplace on the target (referred to as epitope), or be used to subsequentlyisolate the DNA coding for the binding part of the antibody. This part maygenetically be combined with other parts of the antibody that have no functionin binding but have assessory functions in the human immune system. Thus,different formats of antibodies with different modes of action or functions canbe made, but with the same specificity for the target.

We use our MAbstracttechnology to identify antibodies reactive with whole pathogens, or antibodiesagainst protein elements from pathogens, or antibodies directed against targetsalready known to be associated with disease. In addition MAbstract can be usedto identify targets or epitopes on disease-causing agents that were previouslyunknown and may make suitable candidates for antibody-based diagnosis,prevention or therapy of the associated disease.

***Key features and advantages***

MAbstract employs a human-based antibody-displaytechnology. We believe that MAbstract allows for the discovery of therapeuticantibodies with several potential advantages over current technologies usingtransgenic mice. These advantages include the following:

*Subtractionmethod of selection.*   MAbstract technologyselects antibodies for possible therapeutic use and discovers novel drugtargets using whole cells, tissues or infectious agents. The subtraction methodof selection is not available when generating human antibodies in transgenicmice.

*No inherent limitation onantibody specificity.*   MAbstract technology doesnot have the inherent limitation on antibody specificity that is seen intransgenic mice.

*Production using PER.C6technology.*   MAbstract technology has been usedto isolate antibodies for numerous disease applications. Selected antibodyspecificities can be directly reformatted into antibodies for production usingPER.C6 technology.

**Other CoreTechnologies**

*STARtechnology.**  *STARtechnology is a production technology that is particularly useful for theproduction of recombinant human antibodies and proteins. It has a potentiallybroad application and is effective for production of antibodies and proteins onmammalian cell lines such as our PER.C6 human cell technology and the widelyused Chinese hamster ovary (CHO) cell line. The technology has the potential toincrease production yields, thereby reducing production costs. We license ourSTAR technology to the biopharmaceutical industry.

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*Virosomaltechnology.**  *One of thechallenges in vaccine development is the creation of products that containdefined antigens of high purity that efficiently induce a protective immuneresponse. Many antigen preparations are therefore supplemented with adjuvantsto enhance the body’s immune response to the specific antigens. The mostcommonly used and approved adjuvants for human use are aluminum saltderivatives, which are known to cause adverse reactions such as irritation andinflammation at the injection site. Virosome-based vaccines appear not torequire additional adjuvants to enhance immune response. The virosomaltechnology offers a broadly applicable delivery system for antigens, DNA/RNA ortherapeutic drugs. As a result, virosomal based vaccines have superiorimmunogenicity and tolerability.

*Hansenula polymorpha.**  *Gene technology has invaded the production ofindustrial proteins, in particular that of pharmaceuticals. The demand forsuitable expression systems is increasing as developing science results in anincreasing number of targets for the various industrial branches. Theproduction of recombinant proteins has to follow an economic and qualitativerationale which is dictated by the characteristics and the anticipatedapplication of the produced compound. The yeast Hansenula polymorpha production system provides superiorcharacteristics for a wide range of industrial applications. Particularly thelack of pyrogens, pathogens or viral inclusions, its ease of geneticmanipulation and its robustness in industrial scale fermentations add to itsattractiveness for the synthesis of pharmaceutical compounds. Our  hepatitis B vaccine Hepavax-Gene is based onrecombinant production in this yeast.

**Other TechnologyPlatforms**

We, through either our ownresources or through our research collaborations, have in addition to our coreproprietary technologies, access to the following technology platforms.

*Polysaccharide-proteinconjugates*

The causative agents of many common bacterialinfections contain surface structures made of polysaccharides, against whichprotective antibodies are directed. However, vaccines based on polysaccharideantigens alone do not induce a T-cell response and therefore are not able toelicit immunological memory (memory immune responses). By linking the specificantibody-inducing polysaccharides with T-cell activating carrier proteins it ispossible to induce the desired immune response and enhance long term protectionagainst the corresponding pathogen.

A conjugate vaccine in thefinal clinical phase is Aerugen, the first and only vaccine for the prophylaxisof fatal Pseudomonas aeruginosa infections in cystic fibrosis patients. Thepolyvalent conjugate vaccine combines 8 prevalent P. aeruginosa serotypes andthe bacterial exotoxin A. It is the first conjugate vaccine based on alipopolysaccharide component.

*Recombinant livebacteria*

Recombinant live bacteria are harmless but highlyimmunogenic bacteria that elicit immunity against specific pathogens. Thetechnology can also be applied for therapeutic vaccines against cancer.

The ideal way to induce acomplete immune response, at the systemic and the mucosal level, is toadminister vaccines in a manner that mimics the natural route of infection asclosely as possible. Thus immunity to an intestinal disease such as typhoidfever, is best induced by giving the vaccine orally, so that the antigens arepresented directly to the lining of the gut. An added advantage of oralvaccines is the better safety profile, ease of administration and thecorresponding reduction in delivery costs. The diligent use of vaccinescontaining live, attenuated forms (i.e. forms with reduced pathogenicity) ofvarious disease agents achieves the goal of bolstering the T-cell response bymimicking the pathogen’s natural route of antigen-presentation without causingthe actual disease. One of the safest means of attenuating a pathogen is toalter specific genes so that it loses its virulence while retainingantigenicity. In addition to providing immunity against the correspondingvirulent pathogen live attenuated bacteria may also serve as carriers 

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forforeign antigens derived from unrelated pathogens. Such a vaccine may serve adual purpose because it would induce immunity against both, the foreign antigenand the carrier bacterium itself.

*Recombinant liveparamyxoviruses*

The use of live attenuatedviruses in vaccines is a well established method of conferring immunity againsta number of diseases. But these viruses can also be used to introduce genesencoding foreign antigens into their genomes, thus creating a recombinantvaccine that would simultaneously confer immunity against more than onedisease, e.g. measles and malaria. Because the attenuated viruses retain theirhigh immunogenic properties, they induce a strong cellular response againstboth their own and the foreign proteins. This last property makes recombinantviruses (alone or in combination with virosomes) very useful tools for a numberof different therapeutic vaccines targeting a broad spectrum of human diseases,including cancer.

*Therapeutic humanmonoclonal antibodies*

We develop and producefully human monoclonal antibodies (MAb). A monoclonal antibody is a specialclass of antibody that originates from a single clone of lymphocyte. A singleMAb is highly specific for a unique antigen and can be isolated at a high levelof purity. The purity of the product combined with the uniqueness of source andspecificity, as well as high consistency makes MAbs attractive both as researchtools and as potential products.

*Particlepresentation technology*

The immune system isactivated by antigens, or more precisely, by domains on these antigens calledepitopes. For each immune cell, there is only one corresponding antigen/epitopewhich activates it. Our Particle Presentation Technology combines the desiredantigens or epitopes on a carrier (e.g. 20 nm HbsAg particles) in a form thatelicits an efficient immune response. Our therapeutic hepatitis B vaccine,currently in pre-clinical development, uses this technology. This technologycan potentially be applied to the development of other therapeutic vaccines.

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**Licensing andCollaborations**

***Licensees and partners***

Ourcurrent licensees and partners are as follows:

**VACCINES**
| PARTNER/LICENSEE                                                               | ** ** | ** **     | ** ** | **STARTING  DATE** | ** ** | **TECHNOLOGY**              | ** ** | **DISEASE TARGET**      | ** ** | **DEVELOPMENT  STAGE** |
|--------------------------------------------------------------------------------|------------|----------------|------------|--------------------|------------|-----------------------------|------------|-------------------------|------------|------------------------|
| Aeras Global TB Vaccine  Foundation                                            |       | Mar. 2004 |       | PER.C6 and         |       | Tuberculosis                |       | Pre-clinical            |
|                                                                                |       |           |       | AdVac              |       |                        |       |                    |
| Bestewil Holding BV                                                            |       | Jan. 2006 |       | Co-micelles        |       | Influenza                   |       | —                  |
| Chiron Corp.                                                                   |       | Dec. 2004 |       | PER.C6             |       | Alphavirus vectors          |       | Pre-clinical            |
| Harvard School of  Medicine                                                    |       | Oct. 2002 |       | PER.C6 and         |       | SIV                         |       | Pre-clinical            |
|                                                                           |       |           |       | AdVac              |       |                        |       |                    |
| International AIDS Vaccine  Initiative (IAVI)                                  |       | Sep. 2004 |       | AdVac              |       | HIV                         |       | Pre-clinical            |
| Kimron Veterinary  Institute                                              |       | Jul. 2003 |       | PER.C6             |       | West Nile virus—       |       | Market                  |
|                                                                           |       |           |       |               |       | Veterinary vaccine  (avian) |       | authorization in Israel |
| Merck & Co. Inc.                                                      |       | Oct. 2000 |       | PER.C6             |       | Hepatitis C                 |       | Pre-clinical            |
| Merck & Co.  Inc.                                                     |       | Oct. 2000 |       | PER.C6             |       | HIV                         |       | Phase II                |
| Merial LLC                                                                     |       | Oct. 2004 |       | PER.C6             |       | Foot and mouth disease      |       | Pre-clinical            |
| National Institutes of  Health (NIH)                                      |       | Mar. 2002 |       | PER.C6 and         |       | Ebola, Lassa and            |       | Pre-clinical            |
| ** **                                                                     |       |           |       | AdVac              |       | Marburg                     |       |                    |
| National Institutes of Health (NIH)                                       |       | Mar. 2004 |       | PER.C6 and         |       | Malaria                     |       | Pre-clinical            |
|                                                                                |       |           |       | AdVac              |       |                        |       |                    |
| New York University                                                            |       | Aug. 2002 |       | PER.C6 and         |       | Malaria                     |       | Pre-clinical            |
|                                                                           |       |           |       | AdVac              |       |                        |       |                    |
| Sanofi Pasteur                                                                 |       | Dec. 2003 |       | PER.C6             |       | Influenza                   |       | Pre-clinical            |
| Singvax                                                                        |       | Mar. 2005 |       | PER.C6             |       | Japanese Encephalitis       |       | Pre-clinical            |
| Tibotec Pharmaceuticals  Limited                                          |       | Nov. 2005 |       | PER.C6             |       | Undisclosed vaccine         |       | Pre-clinical            |
| Vakzine Project  Management                                                    |       | Dec. 2005 |       | PER.C6             |       | Undisclosed vaccine         |       | Pre-clinical            |
| Vaxin, Inc.                                                               |       | Sep. 2004 |       | PER.C6             |       | Respiratory viruses         |       | Pre-clinical            |
| Walter Reed Army Institute of Research &  GlaxoSmithKline Biologicals |       | Mar. 2003 |       | PER.C6 and         |       | Malaria                     |       | Pre-clinical            |
|                                                                           |       |           |       | AdVac              |       |                        |       |                    |

 

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**ANTIBODIES ANDTHERAPEUTIC PROTEINS**
| PARTNER/LICENSEE                                    | ** ** | ** **     | ** ** | **STARTING DATE** | ** ** | **TECHNOLOGY**          | ** ** | **DISEASE TARGET** | ** ** | **DEVELOPMENT**

**STAGE** |
|-----------------------------------------------------|------------|----------------|------------|-------------------|------------|-------------------------|------------|--------------------|------------|----------------------------|
| Applied Molecular  Evolution, Inc. (Lilly)     |       | Oct. 2002 |       | PER.C6            |       | Portfolio antibodies    |       | Phase I            |
| Chiron Corp.                                        |       | Aug. 2004 |       | PER.C6            |       | HCV protein             |       | Pre-clinical       |
| Ferring International  Research Center SA           |       | May 2005  |       | PER.C6            |       | Women’s healthcare |       | Pre-clinical       |
| Ferring International  Research Center SA           |       | Dec. 2005 |       | PER.C6            |       | Women’s healthcare |       | Pre-clinical       |
| Genentech                                           |       | Feb. 2004 |       | STAR              |       | —                  |       | Evaluation         |
| Genzyme Corporation                                 |       | Dec. 2005 |       | STAR              |       | Portfolio proteins      |       | Pre-clinical       |
| Innogenetics                                        |       | Jan. 2002 |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| IQ Corporation                                      |       | Oct. 2005 |       | PER.C6            |       | Anti-anthrax antibody   |       | Pre-clinical       |
| JCR Pharmaceuticals Co. Ltd     |       | Mar. 2005 |       | PER.C6            |       | Undisclosed proteins    |       | Pre-clinical       |
| Merck &  Co., Inc.                    |       | May 2003  |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| Merus B.V.                                          |       | Jun. 2004 |       | PER.C6            |       | Portfolio oligoclonics  |       | Pre-clinical       |
| Micromet AG                                         |       | Nov. 2004 |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| Millennium Pharmaceuticals                     |       | Apr. 2006 |       | STAR              |       | Portfolio antibodies    |       | Pre-clinical       |
| Mitsubishi Pharma  Corporation            |       | Mar. 2005 |       | PER.C6            |       | Undisclosed proteins    |       | Pre-clinical       |
| MorphoSys AG                                        |       | Sep. 2004 |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| Roche                                               |       | Jan. 2005 |       | PER.C6            |       | Undisclosed proteins    |       | Pre-clinical       |
| Symphogen                                           |       | Apr. 2005 |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| Synergenics/Synco  Biopartners Investments B.V.     |       | Aug. 2004 |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| UCB S.A.                                            |       | Mar. 2006 |       | PER.C6            |       | Portfolio antibodies    |       | Pre-clinical       |
| UMN Pharma                                          |       | Mar. 2006 |       | PER.C6            |       | Undisclosed protein     |       | Pre-clinical       |
| XOMA Ltd                                            |       | Jan. 2006 |       | STAR              |       | Portfolio antibodies,   |       | —             |
|                                                     |       |           |       |              |       | proteins                |       |               |
| Zystor Therapeutics                                 |       | Dec. 2005 |       | PER.C6            |       | Undisclosed protein     |       | Pre-clinical       |

 

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**GENE THERAPY**
| PARTNER/LICENSEE                               | ** ** | ** **     | ** ** | **STARTING DATE** | ** ** | **TECHNOLOGY**         | ** ** | **DISEASE TARGET** | ** ** | **DEVELOPMENT STAGE** |
|------------------------------------------------|------------|----------------|------------|-------------------|------------|------------------------|------------|--------------------|------------|-----------------------|
| Ark Therapeutics                               |       | Nov. 2000 |       | PER.C6            |       | Portfolio              |       | Phase II           |
| BIOA&D Co. Ltd                             |       | May 2006  |       | PER.C6 and        |       | Cardiovascular disease |       | Pre-clinical       |
|                                           |       |           |       | ceNOS             |       |                   |       |               |
| Edwards Life Sciences Corp.               |       | Nov. 2004 |       | PER.C6            |       | Portfolio              |       | Pre-clinical       |
| EMD Lexigen Pharmaceuticals Corp. (Merck KgaA) |       | Dec. 2001 |       | PER.C6            |       | Portfolio              |       | Pre-clinical       |
| GeneMax Corp.                                  |       | Aug. 2003 |       | PER.C6            |       | Portfolio              |       | Pre-clinical       |
| GenVec Inc.                                    |       | Jul. 2002 |       | PER.C6            |       | Cardiovascular         |       | Phase II           |
| GlaxoSmithKline Ltd.                           |       | Feb. 1999 |       | PER.C6            |       | Portfolio              |       | Pre-clinical       |
| Merck &  Co., Inc.               |       | Nov. 1998 |       | PER.C6            |       | Portfolio              |       | Pre-clinical       |
| Merial Ltd.                                    |       | Dec. 2005 |       | PER.C6            |       | Veterinary             |       | Pre-clinical       |
| NeoTropix                                      |       | Mar. 2004 |       | PER.C6            |       | Oncology               |       | Pre-clinical       |
| Selective Genetics Inc.                        |       | Jun. 2001 |       | PER.C6            |       | Portfolio              |       | Phase I/II         |
| Transgene SA                                   |       | Apr. 2001 |       | PER.C6            |       | Portfolio              |       | Phase I/II         |
| Vascular Biogenics Ltd                         |       | Mar. 2005 |       | PER.C6            |       | Portfolio              |       | Pre-clinical       |

 

**ALLIANCES WITHCONTRACT MANUFACTURERS FOR PRODUCTION**
| PARTNER/LICENSEE                          | ** ** | ** **     | ** ** | **STARTING DATE** | ** ** | **TECHNOLOGY**                                               | ** ** | **AREA** |
|-------------------------------------------|------------|----------------|------------|-------------------|------------|--------------------------------------------------------------|------------|----------|
| Cambrex                                   |       | Aug. 2004 |       | PER.C6            |       | Medium development                                           |
| DSM Biologics                             |       | Dec. 2002 |       | PER.C6            |       | Therapeutic proteins  (including antibodies)                 |
| Gene Medicine  Japan, Inc.           |       | Oct. 2003 |       | PER.C6            |       | Recombinant  vaccines & gene therapy products Asia) |
| Hyclone, Inc.                        |       | Dec. 2003 |       | PER.C6            |       | Medium development                                           |
| Invitrogen Corp.                          |       | Jun. 2003 |       | PER.C6            |       | Medium development                                           |
| JRH Biosciences Inc.                      |       | May 2004  |       | PER.C6            |       | Medium development                                           |
| Molecular Medicine BioServices, Inc. |       | Dec. 2001 |       | PER.C6            |       | Recombinant  vaccines & gene therapy products (USA) |
| Saskatchewan Research  Council            |       | Dec. 2005 |       | PER.C6            | ** ** | Recombinant  vaccine & gene therapy products        |
| Sigma-Aldrich Corp.                       |       | Dec. 2003 |       | PER.C6            |       | Medium development                                           |

 

**FUNCTIONAL GENOMICS**
| PARTNER/LICENSEE        | ** ** | ** **     | ** ** | **STARTING DATE** | ** ** | **TECHNOLOGY** | ** ** | **AREA** |
|-------------------------|------------|----------------|------------|-------------------|------------|----------------|------------|----------|
| Galapagos Genomics N.V. |       | Jun. 1999 |       | PER.C6            |       | Genomics       |

 

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***License agreementstructure and payments***

Our licenseescan elect to take either a license for commercial development or a license forresearch only. In addition, we have issued exclusive licenses to certainlicensees. Our research licenses granted in the areas of antibodies and genetherapy typically cover the entire portfolio of antibodies and genes, respectively,that the customer may wish to use in the future.

Thegeneral payment structure under the terms of our commercial licenses is asfollows:

·       *one-time issuance fee**:*We usually charge our licensees a one-time issuance fee, the amount of which isdetermined by the nature of the license, e.g., whether the license is forcommercial development or research use, whether the license is exclusive ornon-exclusive, and the area of use of the license.

·       *license maintenance:* our licensees usuallypay annual fixed payments to maintain their licenses. The license maintenancefee is generally offset against any royalty payments accruing from the time ofinitial commercial sales.

·       *milestone payments:* certain licensesprovide for additional fees to be paid if the applicable licensee achievescertain agreed upon targets, or milestones. Milestone payments are typicallynot offset against future royalty payments.

·       *royalty payments**:*with the exception of a limited number of licenses (including Transgene SA,MedImmune, Millipore and Galapagos N.V.), and the majority of our contractmanufacturers and service providers, we will receive a percentage of the valueof any net sales that the licensee may generate related to the eventualproduct. Royalty payments are typically only payable once they exceed thelicense maintenance fees. Our license agreements generally do not containstacking provisions, meaning that royalty payments are not reduced in the eventthat total payments by the licensee to all licensors go above a certainpercentage. We have received minor royalty payments from one licensee,Molecular Medicine BioServices, Inc., a contract manufacturingorganization that licensed the PER.C6 technology to offer manufacturing ofrecombinant vaccines and gene therapy products.

·       *service fees:* as part of variouscollaboration agreements, we receive service fees for work performed under suchagreements. Revenues and costs associated with completed contract services arerecognized when the service is completed and the collectibility of thereceivable is deemed probable. Revenues associated with time and materialservice contracts are recognized when costs are incurred and the collectibilityof the receivable is deemed probable.

Research only licensesprovide for lower issuance and license maintenance fees and do not provide forroyalty payments. Generally our research only licenses permit the license to beconverted into a commercial development license, but typically do not allow(late) clinical development and commercial distribution of any product usingthe licensed technology.

Our commercial developmentlicense agreements generally provide that the applicable commercial licensewill expire after the expiration of the last applicable patent or 10 to 15years after the first commercial sale of a product developed under theagreement with that licensee. Our research only licenses generally expire twoto five years after their effective date. Most of our licenses may be  terminated on 90 days’ notice from thelicensee. Under our license agreements, because the technology that we transferis fully developed, we are not required to deliver any updated technology toany of our licensees, though we update our know-how with respect to ourtechnology from time- to- time through Biologics Master Files to which ourlicensees have access.

*Exclusive Licenses.*   Wehave issued certain licenses on an exclusive basis. These licenses generally state that wewill not provide the licensed technology to a party other than the exclusivelicensee for use in the area covered by the exclusive license. These licensesalso generally provide for higher payments. In 

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December 2003we granted Aventis Pasteur (now sanofi pasteur) an exclusive license for thedevelopment and commercialization of PER.C6-based influenza vaccines. Theagreement includes provision for milestone payments, annual payments andresearch and development funding, as well as high single-to double-digitroyalties on future PER.C6-based influenza vaccine sales. The agreementalso includes financial diligence provisions designed to encourage sanofipasteur to obtain successful regulatory approval in the United States andcountries of the European Union  for thePER.C6-based influenza vaccine as promptly as possible.

In 2004, we granted anexclusive license to the International AIDS Vaccine Initiative (IAVI) for thedevelopment of an AIDS vaccine based on our AdVac technology. Other exclusivelicenses include our agreements with DSM Biologics for the licensing of PER.C6technology for proteins and antibodies, and for contract manufacturing ofrecombinant proteins and monoclonal antibodies under PER.C6 licenses, Merck &Co. for a PER.C6-cell produced HIV/AIDS vaccine and HCV vaccine, whichlatter license is co-exclusive, and Ferring for certain female health proteins. An extension toour agreement with Merck relates to our PER.C6 Cell Substrate Biologics MasterFile (BMF), BB-MF 8453 in the U.S., and equivalents in other jurisdictions. Wewill work with Merck on matters relevant to maintaining the BMF, including theprovision of technical assistance and guidance from Merck as appropriate. Webelieve that this agreement broadens our relationship with Merck and helps toensure that our BMF will be upgraded in line with evolving regulatoryguidelines.

***Manufacturing Service Arrangements***

We have signedmanufacturing service agreements with a number of our licensees and partners.Under these agreements, we have produced and may produce in the future clinicalbatches of adenoviral materials, antibodies, or other materials using ourPER.C6 cell line for the applicable licensee. We have received and may receivein the future initial fees upon signing and subsequent payments upon deliveryof the batches we produce in accordance with the specifications of theagreement.

We follow goodmanufacturing practice level (GMP) manufacturing services for our customers. Wehave built a small-scale production facility in Leiden, The Netherlands, and in2000 we obtained the license required for the manufacture of clinical trialmaterials at this facility from the Dutch regulatory authorities. To date wehave used the facility to manufacture clinical grade adenoviral vectors. Theproduction facility consists of classified clean rooms suitable formanufacturing purified bulk drug products. We continuously explore additionalor alternative uses for our GMP production facility. Production and testing isdone under quality assurance control. Full batch documentation is generated andreviewed for product release according to EU and U.S. regulations.

**Research and development**

***Overview of ourlate-stage pipeline***

*Yellow fever vaccine*

An infectious diseasetransmitted by mosquitoes, yellow fever is prevalent in tropical regions ofAfrica and South and Central America. Approximately 200,000 cases and 30,000fatalities occur each year. Endemic areas have increased over the past twentyyears, and because the yellow fever virus circulates in nature independently ofhumans, it has not been possible to eradicate it. Also there is a worldwideshortage in the supply of yellow fever vaccines. Since 1963, one of the mostreliable vaccines for yellow fever has been produced by the Robert KochInstitute in Berlin. Over 2.5 million doses of the vaccine have beendistributed. Based on attenuated viruses grown on chick embryos, the vaccine issafe, highly immunogenic and well tolerated. Protection starts from ten daysafter a single dose and persists for ten years. In 1999 we acquired the rightsand know-how for this vaccine from the Robert Koch Institute. Technologytransfer has been successfully completed and we are in the process offinalizing the registration process.

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*Pseudomonasaeruginosa vaccine Aerugen*

Cystic fibrosis is agenetically induced abnormality of the mucus-producing glands in the lungs,affecting some 40,000 people across Europe. The disease is frequentlycomplicated by Pseudomonas aeruginosa infections, which are very difficult totreat and severely impair the quality of life and life-expectancy of thepatients. Aerugen is the first and only vaccine for the active prophylaxis ofPseudomonas aeruginosa infections in cystic fibrosis patients. It is a polyvalentconjugate vaccine, combining eight prevalent serotypes from Pseudomonasaeruginosa and exotoxin A. Aerugen specifically targets the progressivedestruction of lungs caused by Pseudomonas infections. Immunization with thisvaccine has been shown to preserve lung function in cystic fibrosis patients bypreventing infection and progressive colonization by P. aeruginosa. Theclinical results build on ten years experience with the use of the vaccine inpatients with cystic fibrosis.

The final clinical phaseinvolved some 470 patients in 46 centers located in four European countries.Aerugen was also the first vaccine to be acknowledged as an “Orphan Drug” inEurope. “Orphan Drugs” are pharmaceuticals or biologicals specially developedto combat rare diseases. The European directive on Orphan Drugs, which has beenin force since April 2000, offers special incentives for companiesdeveloping drugs against rare diseases, including market exclusivity for up toten years. For the registration and marketing of the vaccine in Europe, we haveformed an alliance with Orphan Europe, a pharmaceutical company whichspecializes in the development and marketing of “Orphan Drugs” in Europe. Anexclusive commercialization and license agreement with CSL Limited for the marketingof Aerugen in Australia and New Zealand was signed in June 2005. Acollaboration with Solvay Pharmaceuticals regarding an exclusivecommercialization and license agreement for Aerugenin the United States of America, Canada,Latina America and other international markets was signed in 2005.

*Paediatriccombination vaccines (DTPw-HepB-Hib, DTPw-HepB)*

Forty years ago a baby received only one injectionduring its first year of life. Today in the United States of America babiesreceive up to 15 shots against different diseases during their first year.

Paediatric combinationvaccines, which address several diseases in one injection, clearly simplify theimmunization process, reduce discomfort during vaccination and lower the riskof infection associated with multiple injections. Combination vaccines alsomean considerable cost savings. Supranational organizations such as UnitedNation’s Children’s Fund (UNICEF) and the Global Alliance for Vaccines andImmunization (GAVI) strongly recommend the development and further improvementof combination vaccines for use in mass vaccination programs in developingcountries. We currently have one program on paediatric combination vaccines.Recently we received marketing authorization from the Korean authorities forthe marketing of a combination vaccine against diphtheria, tetanus, pertussis(whooping cough) hepatitis B and Haemophilus influenzae type b, which webelieve is the first fully liquid pentavalent DTPw-HepB-Hib vaccine availableanywhere in the world.

***Overviewof our early-stage pipeline***

Our PER.C6 technology, complemented by our AdVac andMabstracttechnologies,drives the development of our early-stage product pipeline. We continue todevelop our technologies while selecting product leads for further developmentbased on careful product selection criteria that support our long-termbusiness objectives. We currently have several potential products in variousstages of pre-clinical development. We may enter into collaborative and/orstrategic alliance arrangements with third parties to co-develop and marketproducts that we may develop.

Our primary focus is the development of a range ofnovel vaccine and antibody products in the area of infectious diseases. Wecurrently have a number of core programs:

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*PER.C6.*   Ourinfluenza vaccine, developed in collaboration with sanofi pasteur, and our WestNile virus vaccine are both being developed using our PER.C6 technology. Phase1 testing of our West Nile vaccine has recently started in Belgium. PER.C6-basedinfluenza vaccines are preparing to enter clinical development. A Phase I trialin healthy adults is expected to start in the third quarter of 2006, with aPhase I trial in the elderly following in the fourth quarter. A Phase Ipediatric trial is scheduled to begin in 2007. Trials in healthy adults areexpected to enter Phase II next year.

*PER.C6and AdVac.*   Our Ebola and malaria vaccines arerecombinant vaccines based on PER.C6 that also use AdVactechnologies. In addition to these coreprograms, a collaboration with the Aeras Global TB Vaccine Foundation isongoing for the pre-clinical and clinical development of candidate tuberculosis(TB) vaccines based on PER.C6andAdVac. Phase I clinical testing of our TB vaccine is scheduled to begin in thesecond quarter of 2006, while malaria and Ebola vaccine  Phase I testingis scheduled to begin in the third quarter of 2006.

*PER.C6and MAbstract.*   In 2003 our Antibody DiscoveryGroup also turned its attention towards infectious diseases, and in 2004 thediscovery of its first two human monoclonal antibody products was announced.The first, for protection against SARS, is currently on hold, while our rabiesantibodies announced in November 2004 became an additional core productprogram.

To maintain our competitive position we continuallyresearch improvements to and potential new versions of the above mentioned coretechnologies. In addition to testing for additional applications of ourexisting PER.C6 technology, we are researching the creation of new cell linesfrom a variety of cell sources.

A short description ofeach of our main potential products in the early-stage pipeline, and thediseases those products target, follows.

**Influenza**

Each year approximately 10-20% of the world’spopulation contracts influenza, and an estimated 250,000 to 500,000 people dieannually from influenza-associated complications according to the World HealthOrganization. As well as these annual epidemics, a major genetic shift in theinfluenza virus can occasionally lead to a deadly new virus strain to which thehuman population does not have immunity, resulting in a global pandemic.Concerns currently exist that a new avian influenza strain (H5N1) endemic amongbirds in Asia, and showing high pathogenicity for humans, could present agenuine pandemic threat.

Influenza vaccines are classically produced onembryonated chicken eggs. However, various challenges have led the biopharmaceuticalindustry and the scientific community to explore other ways of producinginfluenza vaccines. Currently, cell culture systems are being developed forinfluenza vaccine production based on African Green Monkey Kidney (VERO) cellsand Madin Darby Canine Kidney (MDCK) cells. These cell systems often need to begrown on  micro-carriers, which makes theproduction process expensive and difficult to scale. In contrast, PER.C6 cellsgrow well in suspension and are easily scalable, potentially permitting theproduction of cost-efficient vaccines in large quantities. Virus yields on VEROcells have been shown to be significantly lower than the yields grown on PER.C6cells. PER.C6 cells can produce all influenza strains that we have tested,possessing the different receptors required for the production of both humanstrains and the avian strains that may present a pandemic threat.

In December 2003, weentered into a strategic agreement with sanofi pasteur to further develop andcommercialize novel influenza vaccines using our PER.C6 production technology.Sanofi pasteur is the world leader in vaccines, and has been the largestsupplier of influenza vaccines for more than 50 years, providing more than 100million doses worldwide during the 2003-04 season. Since the inception ofthe collaboration, production processes have been under development, with theproduction of a GMP master cell bank already completed. sanofi pasteur, with usas a subcontractor, was awarded a US$97 million 

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contract by the U.S. Department of Health and HumanServices (HHS) in April 2005 for clinical development of PER.C6-basedinfluenza vaccine and other related activities. Phase I clinical trialsfor the pandemic flu vaccine are scheduled to begin in September 2006.Phase I clinical trials for the interpandemic, or seasonal, flu vaccine inhealthy adults are scheduled to begin in the third quarter of 2006 and in theelderly in the fourth quarter of 2006, followed by pediatric trials scheduledto begin in 2007.

**West Nile virus**

Named after the West Nile district of Uganda where thedisease was discovered in 1937, West Nile virus infection can lead to mortalityin humans and animals by causing a fatal form of encephalitis, or inflammationof the brain, according to U.S.Geological Survey. It is estimated that 20% of the people who becomeinfected with West Nile virus will develop West Nile fever. Persons over 50years of age have the highest risk of developing a severe disease, such asmeningitis, an inflammation of the membrane around the brain and the spinalcord, or encephalitis.****Since 1999,West Nile virus has caused disease in more than 16,000 U.S. citizens, leadingto 650 deaths.

Continued efforts are being made to find suitabletreatments and vaccines to stop this virus. The virus may become a recurringthreat in the United States. In 2003 and 2004, a number of West Nile viruscases were reported in Europe.

In June 2003, we announced our decision todevelop a vaccine against the West Nile virus based on our PER.C6 technology.Our vaccine uses an inactivated whole virus concept, which is different fromvaccines currently under development by our competitors. Currently there is novaccine or antiviral therapy available to protect humans against West Nilevirus.

In a separate but related program, we enteredcollaboration with Kimron Veterinary Institute of Israel in June 2003,granting Kimron a commercial license to our PER.C6 technology to develop a West Nileveterinary vaccine for use in geese and other birds susceptible to the virus inIsrael. This veterinary vaccine achieved market authorization in Israel on June 3,2004. Production has started for the 2005 West Nile season. Kimron hasannounced that it intends to replace its existing West Nile veterinary vaccine,which is produced using mouse brain cells, with the PER.C6-based vaccine.

The significance to ourhuman vaccine program is that a PER.C6-based vaccine protects against theIsrael 1998 Goose strain of West Nile virus. The fact that this strain isclosely related to the New York 1999 strain, which caused the West Nileoutbreaks in the U.S., supported our decision to develop a West Nile vaccinefor humans. Our dossier for clinical trial was submitted in Belgium in November 2005and  approved in December 2005. Anagreement with The Netherlands Vaccine Institute (NVI) was announced in November 2004for the manufacture of the vaccine at NVI’s new BioSafety Level 3 plant for usein the human clinical trials.

**Ebola**

Ebola fever is one of the most lethal viral diseases,with a mortality ranging from 50% to 90% according to the World HealthOrganization. Ebola outbreaks occur regularly in tropical Africa, affectingboth human and great ape populations. To date, approximately 2,000 cases havebeen reported since the virus was first discovered in 1976. The Ebola virusbelongs to the group of ‘hemorrhagic fever viruses’, which also includes thehighly pathogenic Marburg and Lassa viruses. Ebola virus causes a diseasecharacterized by high fever and massive internal bleeding. Because no vaccineor therapy is presently available, Ebola virus is on the Centers for DiseaseControl (CDC), National Institutes of Allergy and Infectious Diseases (NIAID),and U.S. Department of Defense Category “A” list of bioterror agents. In 2003the U.S. government announced that once available, an Ebola vaccine may bestockpiled as part of its preparedness for bio-terror attacks under ProjectBioShield, a comprehensive effort to develop and make available modern,effective drugs and vaccines to protect against attack by biological andchemical 

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weapons. The BioShield Actwas enacted in July 2004, with a total appropriation of US$5.6 billionacross all programs.

Numerous attempts to vaccinate against Ebola virususing inactivated virus or protein-based vaccine modalities have failed, anddeveloping a live attenuated vaccine is considered too dangerous. However, ithas been shown in experiments conducted by the Vaccine Research Centre (VRC) ofthe U.S. National Institutes of Health (NIH) in 2005 that a single-doseimmunization with a recombinant adenovirus (expressing Ebola virus proteins)vaccine protects monkeys against an otherwise lethal challenge with wild-typeEbola virus. Based on these results, we decided to develop an Ebola vaccine.The vaccine could provide protection from the lethal virus in the event ofbiological warfare.

In May 2002 we entered into a CollaborativeResearch and Development Agreement (CRADA) with the VRC of the NIH to developjointly, test and manufacture an adenovirus-based Ebola vaccine. Under theterms of the agreement, we have an option for exclusive worldwidecommercialization rights to the Ebola vaccine resulting from thiscollaboration. In August 2002, the CRADA was extended to cover vaccinesagainst Marburg and Lassa infections. The recombinant vaccine will encompassthe glycoproteins and the nucleoprotein of Ebola virus, but cannot replicate inhumans. This method thus provides a very important safety advantage, whileensuring that a strong humoral and cellular immune response is elicited againstthe Ebola virus.

Under a separate production contract with NIH, we aremanufacturing adenovirus Ebola vaccine vectors according to current goodmanufacturing practice (cGMP) requirements. In March 2005 we extended theCRADA with NIH and continue to develop this vaccine and will use the Ebolavaccine results in the development of Marburg and Lassa vaccines. In addition,we obtained an exclusive license to certain NIH patents to develop andcommercialize recombinant vaccines against Ebola. The patents cover valuablevaccine components, such as Ebola antigens and vectors. In addition, the licensecovers “one-shot” emergency vaccination strategies that have proven to beeffective in relevant animal models.

In experiments conducted by the VRC together with theU.S. Army Medical Research Institute of Infectious Diseases (USAMRIID) duringthe first half of 2004, our vaccine candidate confirmed single-dose protectionof monkeys against Ebola. What set the results of this trial apart from theearlier successful trial, which established a proof-of-concept, was that thevaccine in this instance was produced on PER.C6 cells. All preclinical materialwas produced at our FDA-compliant production facilities in Leiden. Forpotential safety reasons, VRC switched the development of the vaccine from theuse of the wild-type Ebola glycoprotein sequences to mutant sequences, after asingle dose of this new candidate vaccine showed protection of monkeys againstEbola. We expect to initiate clinical trials of this vaccine in the thirdquarter of 2006.

In 2002 the FDA issued theso-called ‘‘two animal’’ or animal efficacy rule, which states that efficacystudies in man may not be required to obtain a product license for specialcategories of products as long as efficacy is established in two independentanimal models and safety in man. We believe our Ebola vaccine may be acandidate for regulatory approval under this rule, and the use of the twoanimal rule could potentially speed up the approval process for our Ebolavaccine.

**Malaria**

Malaria is a life-threatening infectious diseasecaused by the plasmodium parasite and transmitted from person-to-person throughthe bite of a female Anopheles mosquito. It is one of today’s top three killersamong communicable diseases. The disease currently represents one of the mostprevalent infections in tropical and subtropical areas causing severe illnessin 300 to 500 million individuals worldwide according  to the World Health Organization****and causing one to three million deathsevery year. Most of these deaths occur among children and pregnant women in thedeveloping world, especially in sub-Saharan Africa. Unfortunately, mortalityassociated with severe or complicated malaria still exceeds 

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10-30%. Thewidespread occurrence and elevated incidence of malaria are a consequence ofdiscontinued malaria control programs and increasing numbers of drug-resistantparasites and insecticide-resistant parasite vectors. Other factors includeenvironmental and climatic changes, civil disturbances and increased mobilityof populations. Although the overwhelming majority of morbidity and mortalityassociated with malaria occur in the developing world, this disease alsoaffects travelers.

Currently there is no commercially available vaccineto protect against malaria. Our candidate malaria vaccine is based on our AdVactechnology and produced using our PER.C6 technology. In a study carried out bythe Department of Medical Molecular Parasitology at New York University, theefficacy of our malaria vaccine candidate was tested in NYU’s mouse malariamodel. The study showed that a single administration of a prototype AdVacvaccine, a recombinant adenovirus 35 (rAd35) vector expressing the malariaparasite-derived immunogenic circumsporozoite antigen, protects mice uponchallenge with the mouse specific parasite.

In March 2003, we entered into collaboration withthe Walter Reed Army Institute of Research (WRAIR) and GlaxoSmithKlineBiologicals (GSK) under a Cooperative Research and Development Agreement(CRADA). Pursuant to this agreement, we have completed work with WRAIR and GSKto evaluate our AdVac malaria vaccine candidate directed against the humanmalaria parasite Plasmodium falciparum. Our vaccine candidate was tested as astand-alone vaccine and in combination with GSK’s RTS,S malaria vaccinecandidate. The GSK malaria vaccine candidate RTS,S has, as a stand-alonevaccine, been shown to confer partial protection to human volunteers in both alaboratory challenge model conducted at WRAIR and under natural challengeconditions in a field study conducted in the Gambia.

Phase IIb pediatric trials conducted with RTS,S inMozambique and reported in The Lancet medical journal in October 2004demonstrated further promising results, with the vaccine protecting someinfants against infection and making the course of the disease less serious andlife threatening in others.

Studies in monkeys conducted during 2004 as part ofthe CRADA resulted in excellent immune responses for our AdVac-based malariavaccine. Further, in March 2004 it was announced that the NationalInstitute of Allergy and Infectious Diseases (NIAID), part of the U.S. NationalInstitutes of Health (NIH), will support the development of our candidate malariavaccine. The agreement has an estimated value of up to US$3.5 million andcovers process development of the candidate AdVac-based malaria vaccineincluding the production of clinical trial material and Investigational NewDrug (IND) filing. The work is being done under a subcontract agreement withScience Applications International Corporation (SAIC). We expect the vaccine toenter clinical trials in the third quarter of 2006.

In December 2004 wereceived a grant up to a maximum of €2 million from the DutchMinistry of Economic Affairs in support of our malaria research and AdVactechnology development. Research carried out under this grant will aim toexpand the number of antigens able to be carried by an rAd35-vectoredvaccine, such as our AdVac-based malaria candidate.

**Tuberculosis**

Mycobacterium tuberculosis (TB) represents one of themost prevalent infectious diseases throughout the world. It is estimated that 2billion people are infected with TB, representing a third of the world’spopulation. Each year sees 8 million new cases and 2 million deaths as a resultof the disease according to the World Health Organization.

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TB is spread when people who have the active form ofthe disease cough or sneeze and people nearby breath in these bacteria andbecome infected. Only 5-10% of infected but otherwise healthy peopledevelop an active TB disease. Most people who carry the bacteria suffer noobvious symptoms and cannot pass on the disease to others during this latentphase of the infection. But if the immune system is weakened, active TB diseasecan occur. This occurs most in people infected with HIV/AIDS, which severelyweakens the immune system.

The increased incidence of TB is a consequence of thespread of HIV/AIDS, the emergence of multi-drug resistant strains of TBand variability in protective efficacy of the only currently available vaccine,Bacillus Calmette-Guérin (BCG). Although the BCG vaccine offers protectionagainst the most serious forms of TB in childhood, its efficacy wanes over aperiod of 10-15 years after the vaccination. A need for an alternativevaccination approach has emerged in the last two decades.

In March 2004 we announced a new collaborationwith the Aeras Global TB Vaccine Foundation on the pre-clinical and clinicaldevelopment of candidate TB vaccines. The Crucell-Aeras TB vaccine program isfocusing on improvement of BCG, using our PER.C6 and AdVac technologies. Aerashas agreed to pay us up to US$2.9 million, contingent upon meeting certaindevelopment milestones, for process development and production of clinicalmaterial of TB vaccine candidates. We expect that the vaccine will enter Phase1 clinical trial in Europe in the third quarter of 2006.

**Rabies**

Rabies is a viral disease of mammals most oftentransmitted through the bite of a rabid animal. The virus infects the centralnervous system, causing encephalopathy and ultimately death if medicaltreatment is not sought before symptoms appear. Rabies is prevalent in all thecontinental regions of Europe, Asia, America and Africa. Greenland andcountries in Eastern Europe also have rabies in their animal populations.Globally, approximately 10 million people a year are treated after exposure torabies. Some 40,000 to 70,000 people are thought to die of the disease eachyear, mainly in China and India according to various medical publications.

Post-exposure treatment for rabies is 100% effectiveand involves the use of a vaccine plus antibodies. Neither vaccine norantibodies are effective independent of one another.

Current supply and quality of rabies vaccine issufficient, but anti-rabies antibodies (Human Rabies Immune Globulin (HRIG) andEquine Rabies Immune Globulin (ERIG)) are widely recognized as beinginsufficient in quality and supply, as well as posing safety concerns becausethey originate from human or equine serum. Market opportunities for rabiestreatments are projected to grow significantly as affected countries such asIndia and China grow in affluence.

We have developed a human monoclonal antibody productin collaboration with two leaders in the rabies antibody field, the ThomasJefferson University (TJU) based in Philadelphia and the U.S. Centers forDisease Control and Prevention (CDC) in Atlanta, using MAbstract and PER.C6technology.

In experiments conducted during 2004 in collaborationwith TJU under a Collaborative Research and Development Agreement (CRADA) withthe CDC, the antibody product demonstrated protection in the industry standardhamster model at least equivalent to HRIG.

We are currently producingclinical trial materials and we expect to submit a dossier to the FDA forclinical trials in the third quarter of 2006. Multiple Phase I studies areplanned in the U.S. starting in the fourth quarter of 2006 and in thePhilippines in the first quarter of 2007.

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**Other Collaborations and Agreements**

***Galapagos N.V.***

Galapagos N.V. (“Galapagos”)is a discovery company focused on the rapid identification of disease-modifyingdrug targets through the functional screening of human disease models, and thesubsequent progression of these targets into drug discovery. The company islisted on the Euronext Brussels and Euronext Amsterdam stock exchanges (tickersymbol: GLPG).

Founded in Belgium in 1999as a joint venture between IntroGene (our predecessor) and Tibotec-Virco(acquired by Jansen Pharmaceutica, a Johnson & Johnson company), itwas established to put PER.C6 technology to use in the field of functionalgenomics, a set ofbiological techniques which are used to identify or confirm the biochemicalrole of a newly discovered gene within cells and to understand how this rolemight be related to disease pathways.

Research activities atGalapagos encompass internal programs in osteoporosis, rheumatoid arthritis,osteoarthritis and Alzheimer’s disease, as well as numerous partnerships withpharmaceutical, nutraceutical and biotechnology companies. A newly establishedservices unit, Galadeno, provides reagents and functional screens to suchcompanies for the rapid identification and validation of novel drug targets.Partners of Galapagos include Bayer, Boehringer Ingelheim, Celgene, Johnson &Johnson, Organon, Pfizer, Procter & Gamble, Vertex and Wyeth.

Galapagos holds anexclusive license to our PER.C6 technology for conducting activities in thefield of functional genomics research. Under the license, Galapagos uses PER.C6technology in conjunction with Tibotec’s bioinformatics technology to generateadenoviral gene libraries. Tibotec and we have agreed not to compete with theactivities of Galapagos, which holds the rights to the products and technologythat it develops.

In May 2005,Galapagos completed an initial public offering reducing our ownership interestto 11.7%. Due to the reduction in our ownership interest, we re-evaluated ourposition in Galapagos and designated the investment in Galapagos as commonstock as securities available for sale. As securities available for sale, theinvestment is carried at market value and unrealized holding gains are excludedfrom earnings and reported as other comprehensive income in shareholders’equity until realized. Galapagos represents a financial investment for us, andwe expect that we may sell our interest at some point in the future. As of December 31,2005 our ownership decreased to 9.8%, which we currently still own.

***Etnavax Holding AG***

In June 2005 EtnavaxHolding AG was founded. Etnavax is active in the field of immunoprophylaxis andimmunotherapy. Berna Biotech contributed in cash up to an amount whichrepresents 13.4% of the share capital. As we are able to exercise a significantinfluence through board representation and special shareholder agreements,Etnavax Holding AG is treated as an investment in an associate subsequent toour acquisition of Berna in February 2006.

***Pevion Biotech AG***

In 2002 Pevion Biotech wasfounded by Berna as joint venture with Bachem AG. The company is dedicated tocreating novel virosomal formulated vaccines and bringing them from researchinto clinical development. We indirectly own 50% of the share capitalsubsequent to our acquisition of Berna in February 2006.

***Chiron***

In 2001, subsidiaries ofBerna entered into a worldwide collaboration agreement with Chiron, to developand commercialize a liquid pentavalent pediatric combination vaccine to preventHepatitis B, 

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Diphteria,Tetanus, Pertussis and Haemofilus influenzae b. This agreement was amendedin 2004. Under the agreements, the parties agreed to jointly develop,manufacture, register and market the product, which is now registered asQuinvaxem. In addition to the right to manufacture the product on behalf of theparties, Berna has the commercial rights to market the product worldwide, with theexception of two undisclosed countries, in the public markets via supranationalinstitutions such as PAHO, WHO, GAVI and UNICEF. Chiron has the worldwiderights, with the exception of the two countries, to market the vaccine inprivate markets. In addition, the agreements provide for Chiron to supply Bernawith the DTP and Hib components required to manufacture the vaccine. Theparties agreed not to compete outside the collaboration in the pediatricmarkets.

***CSL Pharmaceuticals***

In November 2001 Berna enteredinto an agreement with CSL Pharmaceuticals, pursuant to which CSL supplies fluantigen to Berna for the manufacture and sale of virosome-based flu vaccines,such as Inflexal. Under the agreement, Berna is entitled to a minimum quantityof seasonal flu antigens, which is adjusted upward each year. However, due toexternal factors, such as slower growth rates of certain seasonal flu strains,even the minimum quantities may be difficult to obtain in time for a particularyear’s flu season, or at all. This may affect revenues in any given year inwhich this occurs. The agreement terminates after 2009. Due to the shortage ofantigen production capacity worldwide, it may be difficult to renew thecontract against the same terms and conditions, or at all. If this riskmaterializes it will adversely affect Berna’s results.

***Universitycollaborations***

We collaborate with anumber of universities worldwide in the areas of vaccines, antibodies, celllines, gene therapy, cancer and cardiovascular disease. Some of ourcollaborations provide for royalty payments to be made to the universities inthe event of product sales arising out of the collaborations. Generally, thesecollaborations specify that Crucell provides the applicable university with aspecific amount of funding, and in consideration of such, Crucell receivescertain intellectual property rights and access to the results of theuniversity research.

***Consultingarrangements***

**We hirepeople with high-level experience in our fields of interest to provide advice andconsulting services. We generally pay consultants on a per project basis andtheir term generally runs year-to-year. We require consultants, among otherthings, to adhere to confidentiality undertakings, and generally we have theright to all intellectual property created during the term of the consultingagreement.**

**Intellectual property**

Our success and ability tocompete depends in large part on our ability to protect our proprietarytechnology and information, and to operate without infringing the intellectualproperty rights of others. We rely on a combination of patent, trademark andtrade secret laws, as well as confidentiality, assignment and licensingagreements, to establish and protect our proprietary and intellectual propertyrights. Our policy is to actively seek patent protection of our intellectualproperty in the United States and Europe, as well as in other jurisdictions asappropriate.

In addition to retainingoutside patent counsel, we also employ European and Dutch patent attorneys thatfile, prosecute, defend and enforce patent rights as well as manage our patentportfolio. Our patent portfolio comprises 780 active cases (i.e. grantedpatents in force or pending patent applications) as of December 31, 2005 ((i.e*.* excluding Berna Biotech patentpositions). We aggressively protect our inventions and employ aproactive filing strategy with respect to patent applications. Our portfoliomanagement involves active commercialization and enforcement strategiescombined with disposal of cases that we no longer consider commerciallyattractive.

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Thefollowing table reflects the total number of active cases (pending or granted)through December 31, 2005, organized according to our different fields ofoperation before the acquisition of Berna. All figures include acquired andjointly owned patent cases, but exclude patent positions licensed-in from thirdparties. Patent filings classified under vaccines relate to AdVac-based andclassical vaccines. Patent filings classified under antibodies relate toantibodies and/or drug targets, excluding the enabling technologies. Patentfilings classified under technology primarily relate to cell-based productiontechnology, adenoviral vector technology, STAR-technology and relatedtechnology, functional genomics and target and antibody discovery technology.

| ** **   | ** ** | **Patent Filings** | ** ** |
|--------------|------------|-------------------------|------------|
| ** **   | ** ** | **Pending**             | ** ** | **Granted** | ** ** | **Total Active** | ** ** |
| Vaccines     |       |                    | 190        |   |   |   | 114 |   |   |   | 304 |   |   |
| Antibodies   |       |                    | 77         |   |   |   | 21 |   |   |   | 98 |   |   |
| Technology   |       |                    | 160        |   |   |   | 100 |   |   |   | 260 |   |   |
| Gene Therapy |       |                    | 55         |   |   |   | 63 |   |   |   | 118 |   |   |
| **Total**    | ** ** | ** **              | **482**    |   | ** ** | ** ** | **298** |   | ** ** | ** ** | **780** |   |   |

 

***Patentfilings***

In 2005 we filed patent applications for 12 newinventions, in the fields of vaccines (5), antibodies (4) andtechnology (4). Our new filings in the vaccine field in 2005 reflect ourefforts to further strengthen our patent portfolio in support of productdevelopment programs in that area. The new filings in the area of antibodiesreflect our continuing research and development in the field of infectiousdiseases. The new filings in the technology area relate to our continuingeffort to protect and commercialize the PER.C6 technology and related uses ofthe PER.C6 cell lines, as well as the STAR technology. Since we are notactively involved in gene therapy research and development, no new filings weremade in that area during 2005.

We maintain a geographically diversified filingstrategy, depending on our technological and business needs, as well as itsview of long-term economic trends and developments in legal systems in variousparts of the world. As of December 31, 2005, we have 109 pendingapplications in the EU(1), 138 pending applications in the U.S.(2), 24 international patent applications (so-called ‘‘PCT(3) applications’’) and 211 applicationsin the rest of the world(4).

A significant number of our pending patentapplications are filed under the Patent Cooperation Treaty (PCT), which offersa cost-effective method to seek provisional worldwide protection in more than100 countries and territories for the duration of 30 or 31 months from thefiling date. The decision to divide the PCT application into territories inwhich a granted patent is desired may be postponed until the obtainable scopeof protection and the technical and commercial usefulness of the inventionbecomes clearer. During the pendency of a European patent application, a singleapplication may designate 30 countries but is counted as one pendingapplication. As soon as the European patent application is granted it may bevalidated for each of the designated countries by filing a translation into theofficial language of that designated state. Once such a translation has beenfiled, we count each such patent as a separate patent.

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(1)            EU refers to filings made under the European patentconvention. The EU figures do not include European patent applicationsdesignated in Patent Cooperation Treaty (PCT) applications while still in theinternational phase.

(2)            U.S. figures do not include U.S. patent applicationsdesignated in PCT applications while still in the international phase.

(3)            Figures reflect PCT applications still in theinternational phase. Our PCT applications routinely designate all territoriesand contracting states that are party to the Patent Cooperation Treaty per theinternational filing date.

(4)            Rest of world consists of Australia, Brazil, Canada,China, India, Israel, Japan, Hong Kong, Mexico, New Zealand, Norway, Russia,Singapore, South Africa and South Korea. Rest of world figures do not includePCT applications designating these countries while still in the internationalphase.

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**Patents**

At December 31, 2005 we owned or co-owned 198granted patents in the EU territory, 38 patents in the U.S. and 62 patents inthe rest of the world**excludingpatents owned by Berna Biotech.

On February 22, 2006, Berna Biotech owned orco-owned 15 pending patent applications and 133 granted patents, of which115 in the EU territory, 6 in the United States of America and 12 in the restof the world.

The following is asummary of the intellectual property rights related to our major products andproduct developments.

*Aerugen.**  *Aerugen is protected by our patent ‘‘Conjugatevaccine against infections by gram-negative bacteria’’ which will expirein 2006. However, because of its designation as an orphan drug in Europe andthe United States, Aerugeniseligible to benefit from a period of marketing exclusivity (7 years in theUnited States and up to 10 years in Europe) following expiration of its patentprotection in 2006. This period of exclusivity will apply only if Aerugenbecomes licensed. We intend to apply for and expect to receive a license forAerugen following completion of Phase III testing.

*Epaxal and Inflexal V.**  *Epaxaland Inflexal V are the two virosomal products which are protected by the patentfamily ‘‘Immunostimulating and immunopotentiating reconstituted influenzavirosomes and vaccines containing them’’, which will expire in 2012. Inaddition, the hepatitis A strain used to produce Epaxal is claimed in a patentfamily which will expire in 2012.

*Hepavax-Gene..*   The active substance of this monovalentrecombinant hepatitis B vaccine is HbsAg which is no longer protected by patentin Europe and most countries in the rest of the world. The SupplementaryProtection Certificates with respect to Hepavax-Gene are still valid in Sweden,Italy, and France. However, we are not currently considering western Europeancountries for product registration and marketing. The production technology isbased on our proprietary Hansenula polymorpha expression technology.

*Two-dosehepatitis.*   The two-dose hepatitis B isenabled by formulating HbsAg with a special adjuvant, for which we haveobtained a worldwide co-exclusive license from Corixa Corporation for bothprophylactic and therapeutic application. The patents of Corixa Corporation willexpire in 2017 in the U.S. and in 2018 in Europe.

We seek patent protection, whenever possible,commercially feasible and appropriate, in respect of any technology or productdevelopment that is important to our business. Together with our affiliates in Germany,Italy and Korea, we have several platform technologies and consequently ourintellectual property activities concentrate on protecting their technologiesand any improvements thereof in the main worldwide vaccine markets of Europe, theUnited States, Canada, Japan and Australia. However, because some vaccinemarkets are outside these countries, we have also sought protection in othercountries, such as Korea. The IP portfolio is constantly reviewed to decide onmaintenance of individual patents or patent families considering parameterssuch as actual product performance, product development, patent term, optionsfor commercialization/outlicensing of non-core IP. Our IP tasks arecoordinated, patents are filed on a worldwide basis by specialized patentattorneys.

Our patent-relatedactivities do not afford complete protection to our intellectual propertyrights. Patents in the biotechnology and biopharmaceutical fields involvecomplex factual and legal questions. Patents may not be issued in respect ofour pending applications or in respect of future applications that we file. Inaddition, a patent that is issued to us may be narrower than our application orfound to be invalid. Others may make attempts to copy, reverse engineer ordesign around aspects of our technology, or to obtain and use information thatwe regard as proprietary. Our patent filings may be subject to challenges.

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***Patent enforcementand proceedings***

We may need to litigate orinstitute administrative proceedings such as oppositions to a patent to enforceor uphold our intellectual property rights or determine the validity and scopeof the proprietary rights of others. Likewise, from time to time it may benecessary to defend our patents in litigation or administrative patentproceedings such as opposition proceedings. We believe that litigation can playa significant role in defining and protecting our intellectual property rights.We are aware, however, that legal and administrative proceedings can be costlyand time-consuming, and result in a diversion of resources. As an alternativeto litigation, we may enter into licensing, including cross-licensing,arrangements as a means of clarifying the status of our intellectual propertyrights.

In October 2004 wecommenced patent infringement proceedings against CEVEC Pharmaceuticals in theDistrict Court of Düsseldorf, Germany, arguing that CEVEC’s cell line infringesa recently granted European patent for our PER.C6technology. In December 2004 CEVECPharmaceuticals acknowledged three out of four of our claims, but chose todefend the remaining claim. In May 2006 we withdrew the one remainingclaim following submission of a written statement by CEVEC that it abandonedall rights over the cell bank and that it will not use the cell bank in futurein any way that infringes our PER.C6 patent.

In 2005 Serono, Probiogenand CEVEC Pharmaceuticals have each individually filed oppositions before theEuropean Patent Office against one or more of our PER.C6 patents.

Cell Genesys has filedopposition against our European patent related to our AdVAc technology.

In 2005 Crucell lodgedopposition against a European patent held by Chiron related to certain aspectsof the production of influenza viruses in cell culture.

Berna’s subsidiary GreenCross Vaccine Corporation, currently operating under the name Berna BiotechKorea Corporation, and our partner Chiron, lodged oppositions against a patentof GlaxoSmithKline (GSK) in Korea. The patent is concerned with multivalentvaccine formulations, such as our pentavalent vaccine registered in Korea, tobe marketed under the trademark Quinvaxem. In response to the opposition, thepatent has been revoked by the Korean Intellectual Property Office inDecember 2004 on the grounds that the subject-matter claimed in the patentlacks novelty. GSK has appealed that decision before the Korean Patent Court. Aftera hearing which took place on April 27 2006, the Korean Patent courtdismissed the appeal on June 8, 2006. The decision could be furtherappealed by the adversely affected party. If the Korean Supreme Court were toreverse the decision of the Patent Court and if GSK were to enforce its patent,Berna Biotech Korea Corp. could be found to have infringed or be infringing thepatent. If we are found to be infringing, we may be forced to delay, or evencancel, our commercial activities with this vaccine. As a consequence we mightlose revenues and our business would be adversely affected.

In addition, production ofour pentavalent vaccine requires a particular vaccine component that may becomethe subject of a patent dispute between GSK and us or our supplier of thatcomponent. The patent on that particular component, held by GSK, is currentlyunder opposition before the patent office and a definitive outcome on thevalidity of the patent is expected to take a number of years. A negativeoutcome of this opposition proceeding could lead to infringement proceedingsbetween GSK and us or our supplier, although we believe that neither we nor oursupplier would be held to have infringed or be infringing that patent. Theoutcome of legal disputes is invariably difficult to predict with accuracy, butin the event GSK were to prevail in infringement proceedings against us, thiswould adversely affect our business.

In addition to protectingour intellectual property rights, our commercial success also depends on ourability to operate without infringing the intellectual property rights ofothers. We monitor patent applications to the extent available, patents issuedand publications of discoveries in scientific or patent literature to keepabreast of the activities of others in our field and, with the assistance ofour internal and external patent counsel and other external advisors, assesswhether our activities or products infringe the patents or proprietary rightsof third parties. A number of third parties have been granted patents that 

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covertechnologies related to ours and similar patents may be granted in the future.We believe that our current activities do not infringe any valid claims ofpatents or any other proprietary rights of third parties. We will consider theintellectual property rights of others as we continue to identify and developpotential products and may have to enter into licensing or other agreements oruse alternative technologies.

Research has beenconducted for many years in the fields of biotechnology and biopharmaceuticals.This has resulted in a substantial number of issued patents and an even largernumber of patent applications. The U.S. Patent Office maintains patentapplications that are filed only in the United States in secrecy until patentsissue, and publication of patent applications elsewhere and of discoveries inthe scientific or patent literature frequently occurs substantially later thanthe date of the underlying discoveries. Moreover, patents that appear not toaffect our activities may be construed broadly. As such, we or our licenseesmay be found to infringe the patents or violate other proprietary rights ofthird parties and may be enjoined from pursuing research, development orcommercialization of our or their products or be required to pay damages. Inthese circumstances, licensing or other arrangements for addressing theseinfringements or violations may not be available, or may not be available oncommercially acceptable terms.

***Technology licensesfrom third parties***

We license technology andpatents for specific use as part of our technology platforms from a number ofthird parties. We entered into a technology license agreement with Xoma in thefield of bacterial expression technology. This license allows us to developdiagnostic and therapeutic antibodies in the field of infectious disease usingphage-display technology. The agreement provides us with options to expand thelicense to cover additional disease fields. Under the terms of the agreement,we pay Xoma milestone payments and royalties on products as and when developedand marketed using the licensed technology.

We also hold a licenseunder the phage antibody display patent portfolio owned or controlled byCambridge Antibody Technology and MRC, a cross-license with Transgene S.A.under which we granted to Transgene a non-exclusive PER.C6license for the manufacture andsale of certain types of vectors for use in gene therapy, and a license tophage antibody-display technology and part human, or chimeric, binding proteinsand molecules from Enzon Corporation’s subsidiary, SCA Ventures, Inc.

We also have exclusivelicenses or an option for an exclusive license to a number of genes, which wemay use in the development of products in the area of gene therapy. In somecases we will be required to make royalty payments in the event of productsales based on these genes.

In the field of vaccines,we have concluded an agreement with the Rockefeller University in New York.According to the agreement, we have the exclusive rights to use and exploit theRockefeller patents related to *ex vivo* and *in vivo* targeting of dendritic cells with the use of viralvectors.

When licensing ourtechnology to third parties we seek to obtain access to any improvement patentsvia so-called grant-back provisions to reduce the risk of being exempted fromusing such improvements for our own benefit, or that of our licensees.

***Trademarks***

New trademarks for ourproducts are registered on a worldwide basis. Distribution and agencyagreements normally include a clause specifying that, at the termination of theagreement, trademark and product registration rights return to us. We are theowner of over 150 registered trademarks. The most important in the largestsales markets are: Crucell, Berna, the Berna and Crucell Logo, ChromaGenics,Aerugen, Te Anatoxal Berna, Di Anatoxal Berna, Di Te Anatoxal Berna, Epaxal,Epaxal Berna, Inflexal, Inflexal Berna, Vivotif, Vivotif Berna, Hepimmune andFlavimun, PER.C6, AdVac, MAbstract and STAR. In addition we hold rights to use trademarks held by our partners,such as Quinvaxem from Chiron.

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**LegalProceedings**

In addition to the mattersdiscussed under “Intellectual Property—Patent Enforcement and Proceedings’’ wehave been notified of the following matter:

In January 2006, MenariniRicerche S.p.A. notified Berna that it believes it is entitled tocompensation for damages allegedly incurred as a consequence of Berna’stermination of contract negotiations in 2005. These contract negotiationsconcern contract manufacturing activities by Berna on behalf of Menarini. Weare not aware of any misconduct on Berna’s part that could lead to a successfulclaim for compensation of the alleged damages, nor do we believe the damages,if incurred, will be found to be attributable to Berna’s behavior. In February2006, Menarini requested Berna to waive the statute of limitations in respectof this claim, which Berna refused.

***Competition Law***

The Technology TransferBlock Exemption Regulation (EC 772/2004) that entered into force on May 1,2004 may require us to review and possibly amend existing license andtechnology transfer agreements to comply with this regulation. This reviewprocess may be costly and time consuming and may require renegotiation ofcertain portions of our licenses and other agreements. Based on Crucell’smarket position, such evaluation is not foreseen in the coming year.

**Regulation**

We operate in a highlyregulated industry. Our activities involve the use of hazardous materials,including chemicals and radioactive and biological materials, and animaltesting, all of which are subject to regulation. Environmental laws andregulations and laws and regulations relating to safe working conditions,laboratory conditions, and laboratory and manufacturing practices also apply toour operations. We conduct our operations in a manner designed to comply withapplicable regulations and we believe that we have all the licenses and permitsrequired to carry out our current activities.

Our ability and that ofour licensees to commercially distribute biopharmaceuticals depends in part onthe extent to which governmental health administration authorities, healthinsurance companies, government health policies, health maintenanceorganizations, or HMOs, and other organizations are willing to pay for the costsof these products. The willingness of governments and HMOs to pay for the costsof newly developed health care products is uncertain. There are efforts bygovernmental payers and HMOs to contain or reduce the costs of health care andwe expect that there will continue to be a number of legislative proposals todo so.

Obtaining product approvalis a costly and time-consuming process. All of our potential products, andthose of our licensees, are either in research or development. Any products ourlicensees or we develop will require regulatory clearances prior to clinicaltrials and additional regulatory clearances prior to being produced anddistributed commercially. These regulatory processes are generally stringentand time-consuming. We expect the European Medicines Agency (EMEA) in theEuropean Union, the Food & Drug Administration (FDA) in the UnitedStates, the College ter Beoordeling van Geneesmiddelen (CBG) in The Netherlandsand comparable agencies in other countries to subject new biopharmaceuticalproducts to extensive regulation. These regulatory requirements with which weand our licensees will have to comply will evolve over time due to the noveltyof the biopharmaceutical products and therapies currently under development.Fortunately, the harmonization of these requirements is promoted at aninternational level (International Conferences on Harmonization (ICH)) to avoidunnecessary repetition of studies when seeking approval in various countries.Under the current definitions, we believe that products developed using ourtechnologies will be regulated either as biological products or as drugs.

Before marketing a(bio)pharmaceutical product, companies require regulatory approval from therelevant authorities. To obtain this approval, pre-clinical animal studies andhuman clinical trials must be 

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conductedto demonstrate the safety and efficacy of the product candidates. Clinicaltrials are the means by which experimental drugs or treatments are tested inhuman volunteers. New therapies typically advance from laboratory researchtesting through animal pre-clinical testing and finally through several phasesof clinical human testing. On successful completion of the clinical trials anddemonstration that the product can be manufactured in a safe and consistentmanner, approval to market the biopharmaceutical may be requested from the EMEAin Europe, the FDA in the United States or their counterparts in othercountries.

Clinicaltrials are normally done in three phases:

·       *Phase I:* First clinical trial of a new compound, generallyperformed in a small number of healthy human volunteers, to assess clinicalsafety, tolerability as well as metabolic and pharmacologic properties.

·       *Phase II:* Clinical studies that test the safety and efficacyof the compound in patients with targeted disease with the goal of determiningthe appropriate doses for further testing and evaluating study design as wellas identifying common side effects and risks.

·       *Phase III:* Large-scale clinical studies with several hundredor several thousand patients to establish safety and effectiveness forregulatory approval for indicated uses and to evaluate the overall benefit-riskrelationship.

Ourresearch and development and production activities are undertaken in a numberof countries around the world. These activities are subject to strictregulatory requirements of national and supranational authorities in thecountries in which they are undertaken such as requirements governing thetesting, manufacturing and marketing of pharmaceutical products. In mostcountries, it is necessary to obtain an approval to market a pharmaceutical ormedical product. The grant of such an approval is subject to a detailedevaluation of data submitted by the applicant related to the quality, safetyand efficacy of the product. Many countries, including member states of the EUand the United States, impose extensive testing and data submissionrequirements and conduct rigorous technical appraisals of product candidates.In addition, different regulatory authorities may impose different conditionsupon the marketing of a given product or may refuse to grant or requireadditional data before granting an approval to market a product even though theproduct may have been approved by another regulatory authority. Pre-clinicaltesting, clinical research and regulatory approval of a pharmaceutical ormedical product is a very lengthy and costly process.

Once a product isapproved, the manufacturing and marketing of the product remains subject toperiodic review. Changes in applicable regulations, breaches of regulatoryrequirements or the discovery of problems related to the manufacturing, safety,quality or efficacy of a product may result in the imposition of restrictionsupon the manufacturing and sale of such product, including at worst withdrawalof the product from the market and/ or the revocation of the relevantregulatory approvals.

***The European Union***

There is a broad range oflegislation in force in member states of the European Union governing testing,manufacturing and marketing biopharmaceutical products, both at an individualstate level as well as on a Union-wide level (European Union Directives). Theselaws impose specific requirements on various topics including pre-clinical andclinical testing and the operation of laboratories and manufacturing sites.Furthermore, there are specific directives and other legislation on, amongother things, pricing, distribution, labeling and advertising of medicinalproducts.

At the Union-wide level,legislation on medicinal products was first enacted in Directive 65/65/EEC: “onthe approximation of provisions laid down by law, regulation or administrativeaction relating to medicinal products”. Subsequent Directives (75/318/EEC,75/319/EEC and 93/39/EEC) further amended and expanded the original provisions,resulting in a system for the regulation of drugs, or medicinal products asthey are called in the EU, based on the principle of mutual recognition. Underthis mutual 

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recognitionprocedure, the applicant first submits its product for review to one or more EUmember states. The first member state that decides to evaluate the product iscalled the reference member state.

After the reference memberstate has assessed the medicinal product for quality, safety, and efficacy andhas granted a national marketing authorization, other member states that havereceived copies of the application have 90 days for evaluation before they mustgrant authorization as well. In case of refusal, the application will be sentto the Committee for Human Medicinal Products (CHMP) for arbitration.

An alternative,centralized, approach for registration was provided by Directive 93/41/EEC andCouncil Regulation No 2309/93, which established EU procedures for theauthorization and supervision of medicinal products for human and veterinaryuse and established a European Medicines Agency (EMEA). Under this centralizedprocedure, which has been implemented for so-called high technology medicinalproducts, and especially for those those derived from biotechnologicalprocesses, applicants submit their dossier for authorization to the EMEA. TheEMEA coordinates the assessment process by appointing two EU member states as arapporteur and co-rapporteur, respectively, who will assess the application andprepare draft reports for review by the CHMP. The CHMP issues an opinion on theproduct’s quality, safety and efficacy and sends its opinion to the EuropeanCommission, which drafts a decision based on that opinion. After consultingwith its standing committee, the European Commission may grant a marketingauthorization, subject to adequate evidence of quality, safety and efficacy.The marketing authorization granted is valid in all EU member states. Forbiopharmaceuticals the centralized procedure is mandatory.

Since May 1, 2004,the Clinical Trial Directive (2001/20/EC) has been in effect. The aim of thisdirective is to harmonize the process for authorization and conduct of clinicaltrials as it is implemented in the individual EU member states. As a result ofthe Clinical Trial Directive, the Good Manufacturing Practice (GMP)requirements for the manufacture of investigational drugs have been changed,and a specific requirement for product release by a Qualified Person has beenincluded in the requirements. Also, regulatory inspections of manufacturingfacilities for investigated drugs have been made obligatory, where in the pastthis was on a voluntary basis in most European countries. Manufacturers ofpharmaceutical products operating within the EU must hold a manufacturer’sauthorization and must comply with the requirements of GMP incorporated into EUlegislation (2003/94/EC). These requirements are intended to set minimumstandards with respect to manufacturing facilities and the way of operatingthese facilities. Failure to comply with these requirements may result in thesuspension or revocation of the manufacturer’s manufacturing authorization. Inthe Netherlands we have a license to manufacture clinical trial material underGMP conditions. To maintain this license we are inspected every two years bythe Dutch regulatory authorities. The most recent inspections were in July 2005for our temporary BSL-3 manufacturing facilities at NVI in Bilthoven, andin November 2005 for our facilities in Leiden. Both inspections weresatisfactory. Additionally we employ two Qualified Persons in Leiden forproduct release according to the European Clinical Trial Directive.

Manufacturers ofpharmaceutical products operating within the EU must hold a manufacturer’sauthorization and must comply with the requirements of ‘‘Good ManufacturingPractice’’ incorporated into EU legislation. These requirements are intended toset minimum standards with respect to manufacturing facilities. Failure tocomply with these requirements may result in the suspension or revocation ofthe manufacturer’s manufacturing authorization. EU legislation provides for acentralized procedure for authorizations to market certain specificpharmaceutical products. The procedure is initiated with the submission of anapplication for a marketing authorization to the European Agency for theEvaluation of Medicinal Products. This agency processes the application andco-ordinates an evaluation of the product candidate. EU legislation providesfor mutual recognition, whereby an authorization for a product granted in onemember state is recognized by and forms the basis for granting an authorizationin other member states. The wholesale distribution of pharmaceutical productswithin the EU is regulated by ‘‘Good Distribution Practice’’ guidelines.

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***Switzerland***

Marketing a newpharmaceutical product requires a product marketing authorization. InSwitzerland this is granted by Swissmedic if rigorous pre-clinical and clinicaltrials have shown that the product fulfils the legal criteria of quality,safety and efficacy. Marketing authorizations and maintenance of approvedproducts in our home markets are of major importance.

In addition to therequirements of pre-marketing authorization, production licenses for themanufacture of pharmaceuticals in Switzerland is an important requirement.Obtaining and maintaining this license requires a production standard accordingto Good Manufacturing Practice (GMP). We believe rules and regulations inSwitzerland set standards comparable with those of the EU. Crucell has at itsdisposal all  necessary licenses tomanufacture pharmaceuticals in Switzerland.

***United States***

The Federal Food, Drug andCosmetic Act regulates both drugs and biological products, and the PublicHealth Service Act also regulates biological products. The areas that these twoActs and related regulations govern include testing, manufacturing, safety,efficacy, labeling, storage, record keeping and advertising and other promotionalpractices. The FDA must approve a product or provide alternative clearancesbefore clinical testing or manufacturing and marketing of biologics or drugsmay begin.

To gain FDA approval toconduct clinical trials, pre-clinical studies must generally be conducted inthe laboratory and in animal model systems to gain preliminary information onan agent’s efficacy and to identify any major safety concerns. Applicantssubmit the results of these studies, in addition to information regarding themanufacture of the medicinal product, as a part of an application for anInvestigational New Drug, or IND. Furthermore, the IND application includes adetailed description of the clinical investigations.

The clinical studies aredesigned to demonstrate the safety and efficacy of the new drug. The FDAreceives reports on the progress of each phase of clinical testing, and it mayrequire the modification, suspension, or termination of clinical trials if anunwarranted risk is presented to patients. In 2002, the FDA issued theso-called ‘‘two animal rule.’’

According to this rule,extensive clinical trials in humans intended to demonstrate efficacy may not benecessary when it is unpractical or unethical to perform efficacy trials.Instead, the efficacy must be demonstrated in relevant animal models, whilesafety trials in human volunteers will continue to be required.

After all studies and trials of a new product havebeen completed, applicants must submit all data to the FDA for review in orderto obtain marketing approval. If the product is regulated as a biologic,applicants must submit a Biologic License Application, or BLA. If the productis classified as a new drug, a New Drug Application, or NDA is required. TheNDA or BLA must include results of product development activities, pre-clinicalstudies and clinical trials in addition to detailed manufacturing information.

The FDA subjects NDAs or BLAs to a detailed andpotentially time-consuming approval process. The FDA may ultimately decide thatthe application does not satisfy its criteria for approval or may requireadditional pre-clinical or clinical studies. Before marketing clearance issecured, the manufacturing facility will be inspected for compliance withcurrent Good Manufacturing Practices requirements by FDA inspectors and will beinspected periodically for continuing compliance by FDA inspectors. Afterapplicants obtain FDA regulatory clearances, the FDA subjects a marketedproduct to continual review, and subsequent discovery of previously unknownproblems or failure to comply with the applicable regulatory requirements mayresult in restrictions on the marketing of a product or mandated withdrawal ofthe product from the market as well as possible civil or criminal sanctions.

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In addition to the FDA requirements, the NIH hasestablished guidelines for research involving recombinant DNA molecules. Theseguidelines apply to all recombinant DNA research that the NIH conducts orsupports, including proposals to conduct clinical research involving DNAtherapeutics, including our collaboration with the NIH to develop Ebola andmalaria vaccines. The NIH review of clinical trial proposals is a publicprocess and usually involves review and approval by its Recombinant DNAAdvisory Committee. In addition, before a product can receive approval from theFDA, a process for manufacturing the product in accordance with goodmanufacturing practice requirements must be developed. Failure to comply withgood manufacturing practice or other U.S. regulatory requirements could resultin a product being denied approval from the FDA or, once approval for a productis issued, could result in the FDA withdrawing its approval until regulatorycompliance is re-established.

***Biologics Master File.***   ThePER.C6 cell substrate Biologics Master File (BMF) is the regulatory dossierfiled with the FDA in the United States, which describes various aspects of ourPER.C6 technology. The companies to which we license our PER.C6 technology can referto the BMF and need not compile their own history of the PER.C6 cell line whenthey seek regulatory approval of any biopharmaceutical product that they mayproduce using it. This may assist our licensees in applications they may maketo the FDA for products manufactured using the PER.C6 technology. We arerequired to supplement our BMF when new information arises.

During 2003, we expandedour cooperation agreement with Merck & Co., Inc., which relatesto the PER.C6 cell substrate Biologics Master File in the U.S. and equivalentauthorities in other jurisdictions. Under the terms of the agreement, we agreedto work closely with Merck on matters relevant to maintenance of the PER.C6cell substrate BMF, including the provision of technical assistance andguidance from Merck as appropriate.

***SouthKorea***

The Korean Food and DrugAdministration (“KFDA”) is the regulatory authority for the regulation of the vaccineindustry in Korea. KFDA is one of the leading regulatory authorities in Asiaand employs competent staff for the review of vaccine product submissions, thecontrol of manufacturing and the release of vaccines of Korean production. KFDAregulates vaccines under the Korean Pharmaceutical Law, which establishes therequirements for the lawful marketing of pharmaceutical products, i.e. quality,efficacy and safety. Different kinds of product permits are foreseen for theapproval of products for the domestic market, respectively for the exportsituation. International standards as established by the InternationalConference on Harmonization for the structure and content of product dossiersare recognized by KFDA while the authority reserves the right to ask forspecific input and data as result of the regulatory review. The timelines forthe review of submission dossiers are defined by the law and, therefore,predictable to a certain extent.

***Regulationoutside the European Union, Switzerland, the United States and South Korea***

Highly regulated countriessuch as the United States of America, Australia and Canada are to bedistinguished from those where similar regulation is only just emerging.Harmonization of standards and formats between the EU, the United States andJapan, which is coordinated by the International Conference on Harmonization,will have a global impact. In some countries, limitations may be placed on theprice at which products may be sold and the amount of royalties payable to licensors.

**Competition inProduct and Technology Development**

The field of biotechnologyis one of rapid change and innovation. We expect that this industry willcontinue to experience significant technological and other changes in the yearsahead. We operate in highly competitive markets and we may experiencecompetition from companies that have similar or other 

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technologies,and other products or forms of treatment for the diseases we are targeting. Wealso may experience competition from companies that have acquired or mayacquire technology from universities and other research institutions. As thesecompanies develop their technologies, they may develop proprietary positions inthe areas of our core technologies or obtain regulatory approval for alternativetechnologies or commercial products earlier than we or its licensees do. Othercompanies are developing products to address the same diseases and conditionsthat we and our licensees target and may have or develop products that are moreeffective than those based on our technologies. We also compete with ourlicensees in developing new products.

***Vaccines***

With respect to vaccines, other companies usealternative non-human expression platform technologies. We are aware oflicensed vaccines that are produced in cell substrates such as MDCK (MadinDarby Canine Kidney cells) and VERO (monkey cells) as well as on productionplatforms based on embryonated chicken eggs. There are also mouse brain-derivedinactivated vaccines that are produced in several Asian countries. We are alsoaware of other human expression technologies such as WI-38 and MRC-5for licensed and marketed vaccines, as well as human cell lines supportingproducts in development such as (HEK)-293. Other biotechnology andpharmaceutical companies that are focused on developing vaccines againstinfectious diseases include Wyeth, sanofi pasteur, Merck & Co.,GlaxoSmithKline (including IDB/Shire), Chiron, Acambis, Baxter, GenVec,Bavarian Nordic, Baxter, Solvay, Vical and Nobilon.

In the area of influenza, we are aware that Solvay hasobtained registration in the Netherlands for a vaccine based on MDCK cells. Weare aware of other biotechnology and pharmaceutical companies that currentlyare developing influenza vaccines based on MDCK cells, including GlaxoSmithKline(including IDB/Shire), Nobilon and Chiron. In addition, we are aware thatBaxter has obtained approval in Austria for its VERO-based influenza vaccine.For other European markets Baxter appears to have stopped at Phase II in December 2004.

In the area of West Nile virus, we are aware thatAcambis is conducting a Phase I clinical safety study in humans with its WestNile ChimeriVax vaccine. This vaccine uses a genetically engineered yellowfever 17D live virus containing the genes encoding the antigens responsible forprotection against West Nile virus. We are also aware that Vical is developinga DNA-based West Nile virus vaccine that uses portions of the genetic code of apathogen to cause the host to produce specific features of the pathogen thatmay induce an immune response. This method could potentially offer superiorsafety, ease and reliability of manufacturing, as well as storage and handlingadvantages, compared with conventional vaccines that use live, weakened or deadpathogens to produce an immune response. In addition, other parties are workingon human West Nile virus vaccine research. The University of Queensland isworking on a vaccine based on the relatively harmless Kunjin virus, aflavivirus found in Australia, and Hawaii Biotech received significant fundingfrom the NIH in December 2004 in support of the pre-clinical developmentof its West Nile vaccine candidate.

In the area of Ebola, we are aware that Vical isconducting Phase I clinical efficacy studies with its DNA-based Ebola vaccineand has initiated GMP manufacturing for the NIH with whom they are jointlydeveloping the vaccine. We are aware that Health Canada, a federal governmentorganization, is conducting pre-clinical studies with its Ebola vaccine that isbased on a live replication competent Vesicular Stomatitis Virus (VSV) vector.We are also aware that the U.S. Army Medical Research Institute of InfectiousDiseases (USAMRIID) is conducting pre-clinical studies with its recombinantEbola vaccine, which is based on Ebola virus-like-particle (VLP) technology.USAMRIID is also involved in a CRADA with AVI BioPharma in testing the latter’santisense drugs against Ebola. AVI BioPharma received funding from the U.S.Senate Committee on Appropriations in June 2004 to support this and itswork on Marburg virus.

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In the area of malaria, we are aware of two companiesconducting Phase I/II clinical studies with malaria vaccine candidates based onvirus-like-particle (VLP) technology: GlaxoSmithKline Biologicals (GSK) andApovia. GSK has secured significant funding from NGOs for its malaria vaccineRTS,S. We are also aware that Oxford (The Wellcome Trust Centre for HumanGenetics) and GSK are jointly developing a malaria vaccine using live vectortechnology, and that this vaccine is in Phase I/IIa clinical studies. Inaddition, Oxford is conducting Phase I/II clinical studies with threeadditional malaria vaccine candidates based on live vector technology, as wellas pre-clinical studies with one additional vaccine candidate based on livevector technology. We are aware that the Pasteur Institute is conducting PhaseI/IIa clinical studies with its malaria vaccine candidate, which is based onLong Synthetic peptide technology (LSA-3).

For tuberculosis, a numberof companies, government bodies and academic institutes around the world areworking on the development of new vaccines. The NIAID in the U.S. is involvedin a range of early-stage efforts relating to live-attenuated, subunit andnaked DNA type vaccine candidates. Our partner, the Aeras Global TB VaccineFoundation, is working on various other programs including a live recombinantTB vaccine with the David Geffen School of Medicine at UCLA, which entered itsfirst clinical trial in March 2004. In October 2004 Nature Medicineannounced an Oxford University subunit vaccine, designed to work in tandem withthe existing BCG vaccine, had successfully completed safety trials withpositive T-cell responses.

***Antibodies***

Other biotechnology companies, including CelltechGroup plc and Protein Design Laboratories, Inc., currently generatehumanized antibodies, and Medarex, Inc., GenMab AG, and Abgenix Corp.produce fully-human antibodies from transgenic mice. MorphoSys AG and CambridgeAntibody Technology Group plc generate fully-human antibodies using phageantibody-display libraries that are similar to ours. Companies such as DyaxCorp., XOMA and SCA Ventures, Inc., a subsidiary of Enzon Corporation, arealso working in the field of phage display libraries and related technologies.

In the area of infectiousdisease antibodies, potential competitors include serum antibody companies suchas Chiron and Baxter, and monoclonal antibody companies like Neutec Pharma,MedImmune, XTL Bio, Inhibitex and Biosynexis. For rabies specifically, ourantibody product may offer an alternative to the existing Rabies ImmuneGlobulin products, both Human (HRIG) and Equine (HRIG), that are currentlypaired with rabies vaccine for effective post-exposure treatment.

***Production of recombinant proteins and monoclonal antibodies***

Monoclonal antibodies and recombinant proteins areproduced by other companies on a variety of platforms. Simple proteins that donot demand extensive post-translational modifications are produced in bacterialsystems (E. coli). For example, the human recombinant insulin is producedentirely on E. coli.

Monoclonal antibodies and complex recombinant proteinsare produced mainly on mammalian cell lines like Chinese Hamster Ovary (CHO),murine myeloma cells like NS0 and Sp2/0, and occasionally on human 293 cells.CHO, NS0 and Sp2/0 are used for commercial production of monoclonal antibodiesand other recombinant proteins by companies including Genentech, Biogen,Centocor, Amgen, Lonza and Boehringer Ingelheim. We are aware of a human cellline expression platform used for production of recombinant proteins, the 293human cell line, which shares some of the advantages of the PER.C6 cell line.The 293 human cell line is utilized by Eli Lilly & Company to producea protein for the treatment of adult severe sepsis. The FDA and the EMEA haveapproved this product and it is currently available for use. We are aware thatscientists have published research describing human cell culture systems thatappear to have similarities to our PER.C6 cell line.

In addition to microbialand mammalian cell culture systems, transgenic animals and plants are alsoexploited for the manufacture of complex recombinant proteins. Transgenicrabbits are, for example, used 

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for themanufacture of recombinant C1 inhibitor by Pharming. This product is currentlyin Phase III clinical testing for angio-edema. Other examples are GTCtherapeutics which produces amongst other things, monoclonal antibodies intransgenic goats, and PPL therapeutics manufactures a number of complexrecombinant proteins, amongst which are blood clotting factors, in transgenicsheep. Transgenic plants are also used as a platform for the manufacture ofmonoclonal antibodies and complex recombinant proteins. Cell culture systemsderived from plants are currently used as well, like moss and cultured plantcells, which are currently used for manufacturing recombinant proteins. None ifthe products produced in transgenics have reached the market yet.

***Adenoviral vector technology and other recombinantvectors***

With respect to vectordevelopment, we are aware of several competing technologies, including those ofGenVec and Merck & Co., which may pose a threat to the commercialviability of our AdVac technology. In particular, Merck & Co. researchhas established methods that may prevent problems relating to pre-existingimmunity to adenovirus 5 vectors. We jointly own intellectual property on othervectors with Harvard.

**Property, Plant andEquipment**

Our corporate offices and research activities arelocated in facilities of approximately 7,800 square meters in Leiden, TheNetherlands. We sub-lease 1,000 square meters of this space to PharmingTechnologies B.V. and 500 square meters to Galapagos N.V. In addition, we lease770 square meters of space adjacent to these corporate offices, of which 439square meters is subleased to a third party. Our plant and productionfacilities in the Netherlands are located in a separate building in the LeidenBioScience Park, including 265 square meters of production space, 75 squaremeters of quality-control laboratories and 228 square meters of office space.The lease contract of this facility ends September 1, 2006, except for theproduction space, which ends April 30, 2007. The section of the mainbuilding that we use in Leiden includes 2,100 square meters of laboratories,with BioSafety Level (BSL) 1, BSL 2 and BSL 3 labs, including an animalfacility. The remainder of the main building is divided into 2,800 squaremeters of office space and 1,400 square meters for storage, technical areas,washrooms, waste destruction and sterilization.

Uponour acquisition of Berna in February 2006, we also have office space,laboratories, production facilities, animal facilities and storage space inSwitzerland, Spain, Germany and Korea. The following table sets out informationregarding our main facilities outside the Netherlands:

| **Location**                       | ** ** | ** **                                                                                                                                                                  | ** ** | **Use** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------|
| Bern, Switzerland (two  locations) |       | Research and development  (including animal facilities) 8,618 m2 and production facilities  (12,427 m2); office  space (5,635 m2)  and storage buildings 15,988 m2  (owned) |
| Madrid, Spain                      |       | Production  facilities (1600 m2),  storage buildings (2400 m2)  and office space/labs 1409 m2 (owned)                                                                  |
| Seoul, Korea                       |       | Development and  production facilities (2,201 m2), animal facilities (999 m2), storage facilities (1,243  m2), office  space 1,819 m2 (leased until 2010)              |

 

Our manufacturing facilities in Switzerland areFDA/EMEA-approved and are used primarily for the production of Inflexal,Vivotif, Epaxal, MoruViraten, Aerugen, yellow fever and mammalian cellculture-based products. Our facilities in Thoerishaus include facilities forlyophilization and a Center of Mammalian Cell Culture.

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Our manufacturing facilities in Korea are World HealthOrganization-approved and are used primarily for the production of Hepavax-Geneand for formulating and filling vials. The manufacturing process used at ourKorean facilities are based on the patented Hansenula polymorpha yeastexpression technology.

In Spain, the center of our European filling andpackaging operations, we operate a filling line for syringes.

On August 27, 2005 we signed a turn-key contractwith Pharmaplan GmbH, Oberursel, Germany, for the erection of a new GMPproduction facility of 4,100 square meters. This new facility in Leiden will bebuilt as a BioSafety Level (BSL) 3 facility, in which two concurrent productscan be produced, on either BSL 2 and/or BSL 3 safety level. The building willconsist of 1,200 square meters of production space; 220 square meters ofquality control labs; 185 square meters BSL 3 research and development labs; 80 squaremeters filling (up to 2,000 ampoules); 40 square meters of buffer and mediumpreparation; 310 square meters of offices; 350 square meters of storageand 1,715 square meters for utilities, washing area, waste destruction andsterilization and technical areas. We expect the new production facility to beoperational during the course of 2007.

We have a new center forbacterial vaccine research, development and production in Bern. Themultifunctional facility includes not only laboratories but also a pilot plantfor the production of new bacterial vaccines. The center will also serve as theproduction facility for Aerugen.

**Insurance**

We have in place generalthird party public and product liability insurance. Our policy would not coverany of our activities in the United States of America or Canada, has a limit ofliability and has certain additional conditions to coverage and deductibles. Wedo not insure our phage antibody-display library or PER.C6 mastercell bank, though identical copies of the same cell bank are stored in multiplelocations in Europe. We carry insurance relating to theft, fire and damage tothe moveable assets within our facilities and other customary insurancecoverage for most of our activities, including liability insurance coverage forthe members of the management board, management committee and the supervisoryboard.

**Sales and Business Development**

***BusinessDevelopment***

We currently employ eightpeople in our business development operations in the Netherlands. Our businessdevelopment strategy has historically involved contacting prospective licenseesand partners, assessing their interest in our technologies and products, and,if the prospective licensee or partner indicates interest, negotiating alicense and/or collaboration agreement pursuant to which we deliver theapplicable technology to, or collaborate with, the licensee or partner. Forsome of the contracts we provide services, for which we are paid at differentrates.

***Marketingand sales***

Upon our acquisition of Berna in February 2006, we haveour own sales and marketing infrastructure in our core markets Switzerland,Italy, Spain and Korea. To ensure broader market access for our products, wehave established a strong network of partnerships for commercialization, suchas those with Orphan Europe, Solvay and CSL for Aerugen. Through our dedicatedsales force for supranational organizations, our own sales and marketinginfrastructures in Korea and key European markets, and our network ofdistributors in other countries, we have established a global position in bothpublic and private markets. 

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**Item 5.**                        Operatingand Financial Review and Prospects

The following discussion contains forward-lookingstatements based upon current expectations that involve risks anduncertainties. When used in this annual report, the words “intend”, “anticipate”,“believe”, “estimate”, “plan”, and “expect” and similar expressions as theyrelate to us are included to identify forward-looking statements. Ouractual results and the timing of certain events could differ materially fromthose anticipated in these forward-looking statements as a result ofcertain factors, including those set forth below and elsewhere in this annualreport. See “Forward-looking Statements” and Item 3, “Key Information—RiskFactors.” You should read the following discussion in conjunction with ourconsolidated financial statements and the notes thereto, which we have includedelsewhere in this annual report.

All amounts in this Item 5are in thousands of euro, except share and option data.

**Operating results**

**Overview**

**General**

We are a fully integrated biopharmaceutical company,focused on developing, producing and marketing vaccines and antibodies against infectious diseases for private andpublic markets worldwide. We have a portfolio of well-known vaccines and abroad pipeline of potential new vaccines and antibodies. We combine proprietarytechnologies to discover, develop and produce a variety of biological productsfor the prevention and treatment of infectious diseases. Unlike thetechnologies generally employed in our industry, our technologies enable thedevelopment and production of biological products that may overcome thelimitations inherent in many currently available products. We face a variety ofchallenges and opportunities in bringing our products to market and respondingto the dynamics of the biotechnology industry, which is characterized by rapidchange and intense competition.

Due to our acquisition of Berna in February 2006, ourproduct portfolio has expanded significantly and our strategy has evolved toinclude a strong emphasis on generating product sales, primarily vaccines. Ourstrategy to develop additional products such as novel vaccines revolves aroundcontinued investment in research and product development, particularly relatedto infectious diseases, expanding the portfolio of licensees using ourproprietary technology, partnering with global industry leaders, and working toimprove our operating results and financial strength.

Our financial strength and ability to adapt to thecurrent market and economic conditions are dependent, in part, on the successof our existing products, the cost of bringing novel vaccines to market in ourchosen field, the success of our licensees in developing commercial productsusing our technology, and effective management of our working capital.

Through fiscal year 2005 we generated revenuesprimarily through licensing our proprietary technology to other companies inour industry. In May 2005, we privately placed 3,600,000 ordinary shares at €14.50 pershare, resulting in net proceeds and cash of €50,112. In areaswhere we are not developing our own products, we offer our PER.C6 technology tothe biopharmaceutical industry for the development and production of diversebiopharmaceutical products. Within our chosen areas of focus, we sometimescollaborate with leading biopharmaceutical manufacturers to develop products orprocesses. In February 2006, we successfully completed the exchange offerfor Berna Biotech AG shares. As a result of the acquisition of Berna BiotechAG, we expect to generate additional revenues and cash flows through producingand marketing vaccines for private and public markets worldwide.

In 2005, our revenues increased to €37,569from €22,622in 2004 and €7,424in 2003. During this period, our total headcount increased from 210 to 282employees on a full-time basis. At December 31, 

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2005, 240 of our 282 fulltime equivalent employees were engaged in, or directly supported, research anddevelopment activities.

Our total cost and expenses were €33,916in 2003, €45,348in 2004 and €55,295in 2005. These amounts included non-cash charges of €4,026, €4,532,and €5,748related to developed technology amortization and stock based employeecompensation in 2003, 2004 and 2005 respectively. Non-cash expenses relating towarrants and non-employee stock options amounted to €616, €4,246and €3,043in 2003, 2004 and 2005 respectively. We incurred a loss from operations of €17,726in 2005 compared to losses from operations of €22,726 in 2004. At December 31,2005, our accumulated deficit was €290,049 and our totalshareholders’ equity was €137,415. Although we expect to incuroperating and net losses for this and next year, we foresee a break-even in thevery near future.

With the discussion of ourfinancial condition and results of operations that follows, we intend toprovide information that will assist in understanding our financial statements,the changes in certain key items in those financial statements from year toyear, and the primary factors that accounted for those changes, as well as howcertain accounting principles, policies and estimates affect our financialstatements.

**Critical AccountingPolicies**

The methods, estimates andjudgments we use in applying our most critical accounting policies have asignificant impact on the results we report in our financial statements. TheU.S. Securities and Exchange Commission has defined the most criticalaccounting policies as the ones that are most important to the portrayal of ourfinancial condition and results, and requires us to make difficult andsubjective judgments, often as a result of the need to make estimates ofmatters that are inherently uncertain. Based on this definition, our mostcritical policies on our historical operations include revenue recognition, theassessment of recoverability of our intangible assets, which impacts the valuationof intangible assets, and the determination of the fair value of stock-basedcompensation, which impacts compensation expense. Below we discuss thesepolicies further, as well as the estimates and judgments involved. Thedevelopment and selection of our critical accounting estimates have beendiscussed by management with our audit committee.

***Revenueand Revenue Recognition***

Revenue from sales of products is recognized upontransfer of the significant risks and rewards of ownership to the customer.Revenue is reported net of sales taxes, rebates and return of goods. We did notrecognizeany revenues from sales of products in 2005, but expect to in 2006 due to ouracquisition of Berna.

In 2005, wegenerated revenues from licensing our proprietary technology and servicesperformed together with or on behalf of licensees or partners. Licensing ourPER.C6 technology to third parties is a key element of our strategy toestablish PER.C6 as the cell-line of choice in the biopharmaceutical industry.Our license agreements generally provide for a non-refundable payment uponsigning, a non-refundable fixed annual or semi-annual payment (which isgenerally creditable against future royalty payments) payable in arrears androyalty payments calculated as a percentage of the net sales of the licenseeusing our technology. The payment upon signing under these license agreementsis generally larger than the subsequent annual or semi-annual payments. Certainlicense agreements provide for additional non-refundable license fees to bepaid upon the achievement of contractually defined milestones.

We recognize initial fees related to the licensing ofour technology as revenues over the period of our significant continuingperformance obligations, if any, and upon persuasive evidence of an arrangementand delivery of the associated technology. Under certain arrangements, we haveno continuing performance obligations after delivery of the associatedtechnology under the license agreement or any 

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other arrangement with thelicensee. In such arrangements, the initial license fees recognized as revenuerelate to the complete transfer of our fully developed technology to thelicensee and represent the culmination of the earnings process.

While for the majority of our license agreements wehave no significant continuing performance obligations subsequent to thedelivery of the associated technology, under certain arrangements wecollaborate with a licensee to achieve certain specified results. Under theseagreements, we have significant continuing performance and/or fundingobligations related to research and development subsequent to the delivery ofthe licensed technology. Therefore, as part of various collaborationagreements, we receive service fees for work performed under such agreements.We recognize non-refundable up-front payments as revenue over the expectedperiod of our significant continuing involvement, the term of which isconsistent with our development plans. Our two most significant collaborationagreements are with DSM Biologics and sanofi pasteur. In 2005 and 2004, werecognized revenue of €9,448 and €5,250related to our arrangement with DSM and €8,645 and €5,792related to our arrangement with sanofi pasteur, respectively.

Certain of our license arrangements provide foradditional non-refundable license fees to be paid to us upon the achievement ofmilestones. We recognize such additional license fees as revenue when theamounts become due and payable.

In addition to the initial fee, our arrangementsgenerally provide that the licensees make semi-annual or annual payments (“licensemaintenance fees”) to maintain the license for a subsequent term. Generally,licensees may terminate the license and related maintenance fees upon 30 days’to 90 days’ notice. We recognize annual and semi-annual non-refundable licensemaintenance fees as revenues when the amounts become fixed and payable. Theaggregate of annual or semi-annual license maintenance fees paid generally willreduce any royalty payments which may be due based on future product sales ofthe licensee, if any, under the license agreement. Although we have notreceived royalty payments from our licensees to date, we will recognizeroyalties as revenue when they become fixed and payable, to the extent wereceive such royalties in the future.

We also earn revenues from government grants receivedfrom the Dutch government and the European Union. We expect to continue togenerate revenues from such government grants in the future. We have also filedgrant proposals and expect to generate additional revenues from grants fromnon-governmental, semi-governmental and governmental bodies in the UnitedStates. Grants generally take the form of reimbursements for specific expensesincurred in connection with approved scientific research activities. We intendto continue to apply for available public grants and non-governmentalorganization support in the future, though the timing and amount of any grantrevenues are uncertain. We recognize revenues from grants when we incur therelated expenses and collectibility of the grant is probable.

We also intend to generaterevenues in the future from the commercial distribution of biopharmaceuticalproducts we are working to develop using our core technologies. We intend tomarket any such products through collaborations or strategic alliances withthird parties, particularly pharmaceutical and biopharmaceutical companies. Thetiming and nature of these arrangements will depend on a number of factors,including the product’s likelihood of clinical success, its stage ofdevelopment, its commercial potential and the resources and abilities of ourprospective partner.

***IntangibleAssets***

We perform tests forimpairment of intangible assets whenever events or circumstances suggest thevalue of such assets may be impaired. At December 31, 2005, our intangibleassets consisted entirely of developed technology with a net carrying value of €2,577.To evaluate potential impairment of developed technology, we assess whether thefuture cash flows related to the asset will be greater than its currentcarrying value. Accordingly, while our cash flow assumptions are consistentwith the plans and estimates 

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we areusing to manage the underlying business, there is significant judgment indetermining the cash flows attributable to our developed technology over itsestimated useful life. However, a reduction of the projected annual cash flowsattributable to our developed technology of up to 50% would still not haveresulted in an impairment charge.

***Stock-BasedCompensation***

We account for stock-based compensation underthe fair value method in accordance with Statement of Financial AccountingStandards (SFAS) No. 123 “Accounting for Stock-Based Compensation”.We generally value stock options issued based upon the Black-Scholesoption pricing model, which requires us to make several key judgmentsincluding: the expected life of issued stock options, the expected volatilityof our stock price, and the expected dividend yield to be realized over thelife of the stock option or stock warrant, and recognize this value as anexpense over the period in which the options vest.

Compensation cost for share **-**based awards with performance conditions, which are valuedbased on the grant-date fair value of the award, are recognized based on theprobable outcome of that performance condition. Compensation costs for share **-**based awards containing a market conditionare recognized provided that the requisite service is rendered, regardless ofwhen, if ever, the market condition is satisfied. The effect of a marketcondition is reflected in the grant-date fair value of an award and thegrant-date fair value is calculated using a lattice model.

Stock compensation expense for options granted tonon-employees has been determined in accordance with Emerging Issues Task Force(“EITF”) No. 96-18, “Accounting for Equity Instruments that areIssued to Other than Employees for Acquiring, or in Conjunction with Selling,Goods or Services” as the fair value of the consideration received or the fairvalue of the equity instrument issued, whichever is more readily measured.

Estimates have beenprepared based upon our historical experience and our best estimation of thefuture. Changing any of the above assumptions, particularly the expectedvolatility of our stock price or the expected life of our stock options, wouldhave a significant impact on the amount of compensation expense recognized.

**Results ofOperations**

**Years Ended December 31,2003, 2004 and 2005**

***Revenues***

Thefollowing table shows our revenues for each of the years in the three-yearperiod ended December 31, 2005, and the percentage changes between these periods.

| ** **                          | ** ** | **Year ended December 31,** | ** ** | **% change** | ** ** | **% change** | ** ** |
|-------------------------------------|------------|--------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                          | ** ** | **2003**                                   | ** ** | **2004**          | ** ** | **2005**          | ** ** | **2003-2004** | ** ** | **2004-2005** | ** ** |
| License revenues                    |       | €                                     | 4,800      |              | €     | 12,429            |       | € | 20,848 |   |   | 158.9 |   |   |   | 67.7 |   |   |
| Service fees                        |       | 404                                        |       | 5,712             |       | 11,881            |       |   | 1,313.9 |   |   |   | 108.0 |   |   |
| Government grants and other revenue |       | 2,220                                      |       | 4,481             |       | 4,840             |       |   | 101.8 |   |   |   | 8.0 |   |   |
| Total revenues                      |       | €                                     | 7,424      |              | €     | 22,622            |       | € | 37,569 |   |   | 204.7 |   |   |   | 66.1 |   |   |

 

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Our total revenues increased by 66.1% in 2005 comparedwith 2004, and increased by 204.7% in 2004 compared with 2003. In 2005, theincrease in total revenues compared to 2004 is primarily due to an increase inlicense revenues from new and existing contracts, and realization ofcontractual milestones of €8,419 or 67.7%, anincrease in service fees for collaboration agreements of €6,169or 108.0%, and an increase in government grants and other revenues of €359or 8.0%. The increase in 2004 compared to 2003 was primarily due to an increasein license revenues of €7,629 or 158.9%. The increase in licenserevenue was principally due to an increase in license revenues from new andexisting license arrangements. In 2005, we recognized revenue of €4,754from 15 new PER.C6 license arrangements versus €3,886 from twenty newPER.C6 license arrangements in 2004. Also, a significant initial license feefrom an arrangement we entered into with sanofi pasteur in 2003 was notimmediately recognized as revenue, but was deferred and is being recognized asrevenue over three years, the period of our expected continuing involvement. In2005 we  recognized €4,200as revenues relating to this arrangement.

Revenues generated from government grants and otherrevenue increased 8.0% in 2005 to €4,840 after an increase of101.8% in 2004. The increase in 2005 is primarily a result of additionalsubsidies that were granted by the Dutch government and additional revenuesrecognized in connection with our production facility. The increase in 2004 wasa result of a similar development. Total fees recognized as revenues inconnection with our production facility in 2005 and 2004 were €702and €1,040,respectively.

In the past, we haveexperienced significant fluctuations in quarterly revenues and expect tocontinue to experience such fluctuations in the future.

***Costs and Expenses***

Thefollowing table shows our costs and expenses for each of the years in thethree-year period ended December 31, 2005, and the percentage changebetween these periods.

| ** **                             | ** ** | **Year ended  December 31,** | ** ** | **% change** | ** ** | **% change** | ** ** |
|----------------------------------------|------------|-----------------------------------|------------|--------------|------------|--------------|------------|
| ** **                             | ** ** | **2003**                          | ** ** | **2004**     | ** ** | **2005**     | ** ** | **2003-2004** | ** ** | **2004-2005** | ** ** |
| Cost of service fees                   |       | €                            | 399        |         | €     | 5,644        |       | € | 7,156 |   | 1,314.5 |   | 26.8 |   |
| Research and development(1)            |       | 22,858                            |       | 21,412       |       | 32,751       |       | (6.3 | ) | 53.0 |   |
| Selling, general and administrative(2) |       | 9,329                             |       | 16,326       |       | 13,918       |       | 75.0 |   | (14.7 | ) |
| Developed technology amortization      |       | 1,330                             |       | 1,966        |       | 1,470        |       | 47.8 |   | (25.2 | ) |
| Total costs and expenses               |       | €                            | 33,916     |         | €     | 45,348       |       | € | 55,295 |   | 33.7 |   | 21.9 |   |

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(1)          Research and developmentexpenses for the year ended 2005, 2004 and 2003 respectively include stockoptions expense amounting to €1,279,  €944 and €973,respectively.

(2)          Selling, general andadministrative expenses for the year ended 2005, 2004 and 2003 respectivelyinclude stock options expense amounting to €1,421,  €1,622 and €1,723,respectively.

*Costof Service Fees.**  *Costsof service fees comprise direct labor, materials, and overhead costs related towork performed under various collaboration agreements. These costs increasedyear over year, as the number of activities performed under the variouscollaboration agreements increased as well.

*Researchand Development Expenses.**  *In 2005, research and development expense,represented 59.2% of our total costs and expenses, compared to 47.2% in 2004.We expect that research and development expenses will continue to be asignificant portion of our overall expenses, primarily to support developmentof our technology platforms and research on potential products based on theseplatforms. Research and development expenses consist primarily of salaries andother personnel-related expenses for research and development personnel,including employee stock option expenses, laboratory expenses, technologypurchases, patent related fees, technology license fees, depreciation andamortization of tangible assets 

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related to research anddevelopment, and lease expenses. Research and development expenses also includefees we pay to third parties who conduct research on our behalf.

Research and development expenses increased by 53.0%in 2005 compared to 2004 after a decrease of 6.3% in 2004 compared with 2003.The increase in 2005 was due to a significant increase in R&D staffing levels,reflecting the scaling up of our core activity. The decrease in 2004 was due to anincrease in the allocation of research and development-related expenses to costof service fees.****The number ofresearch and development employees increased from 169 at the end of 2004 to 240at the end of 2005.

*Selling,General and Administrative Expenses.**  *Selling, general and administrativeexpenses consist primarily of salaries and other personnel-relatedexpenses, including employee stock option expenses, for personnel in the areaof finance, human resources, business development, investor relations, legaland general management, costs of professional services (such as financial,legal, and accounting) and lease expenses.

In 2005, selling, general and administrative expenseswere €13,918,a decrease of 14.7% compared to €16,326 in 2004. Thisdecrease was primarily driven by warrants and non-employee stock options thatvested in 2004, thereby decreasing such expenses in 2005.

Selling, general and administrative expenses increasedby 75.0% in 2004 compared with 2003. The increase in 2004 was primarily drivenby increases in non-cash expenses of €4,800. Non-cash expensesconsisted of a €3,100increase in non-employee stock option and warrant expenses as a result of shareprice increases, and a €1,700 non-cash increase in compensationexpense. These are related to a one-time, non-cash reduction of compensationexpenses in 2003 in connection with changes to an employee option plan,discussed below. The remaining increase in selling, general and administrativeexpenses was mainly due to increases in insurance premiums, advisory costs andcompensation expenses over the year.

In addition to employee salaries, our compensationprogram includes the issuance of options to employees as a means of attractingand retaining talented personnel. As described in Note 8 to our financialstatements, our stock option plan provides for the issuance of stock optionswith an exercise price that equals or exceeds the fair value of our ordinaryshares on the date of grant. Under the terms of a cash bonus plan, inconnection with the award of certain options in the past, if an employeemaintains continuous employment with us for a period of four to five years andexercises the option in the last month of the option term, the employeereceives a cash bonus. We recognize compensation expense ratably during theemployment period required under the cash bonus plan.

In January 2003, the supervisory board approved astock option plan whereby employees previously awarded options with an exerciseprice of €21.00 were able to exchange such options foran equal number of new options with an exercise price of €3.49.In conjunction with the replacement of these options, participating employeesforfeited their right to receive the cash bonus related to the €21.00option award. Accordingly, we recorded a reduction to compensation expense of €2,300related to the forfeited cash bonus awards. This reduction to compensationexpense is one-time, non-cash charge and is not indicative of operationalchanges that will benefit future periods.

In April 2004, the supervisory board approved astock option plan whereby employees and supervisory board members are grantedoptions with an exercise price 126% greater than the average closing stockprice of the Company on the three days preceding the option grant date and havea five year life. The options are subject to profit retribution provisions.Such provisions entitle the Company to receive a portion of the profits uponthe sale of the shares, calculated as the difference between the total proceedsfrom the sale of shares, and the aggregate selling price. The portion of theprofits payable to us decreases ratably over three years. The relevant portionof any profits derived by the employee from the sale of shares received onexercise of options must be remitted to us if the employee terminatesemployment prior to the end of the three-year period.

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In December 2004, the supervisory board approveda new option plan for 2005 providing for the grant of stock options toemployees other than management committee members (see Item 6 “ManagementCommittee”) for a maximum of 1% of issued ordinary shares per year with amaximum of 15% of the option pool. Options granted under this stock option planare exercisable when the options have vested. Granted options vest straightline over a period of 4 years. Compensation costs are recognized inaccordance with the accelerated method. The options expire 5 years afterdate of grant. Upon termination of employment with the Company, options must beexercised within 90 days. Options granted under the stock option plan aregranted at exercise prices, which equal the fair value of the Company’sordinary shares at the date of grant.

*Developed TechnologyAmortization.**  *Amortizationof developed technology was €1,470 and €1,966in 2005 and 2004, respectively. The amortization relates to developedtechnology acquired in 2004 and acquired in connection with a businesscombination in June 2000. The decrease compared to 2004 is caused by thefact that the developed technology acquired in 2000 was fully amortized as of June 30,2005. The increase of amortization expense in 2004 compared to 2003 is causedby additional amortization expense relating to the technology acquired in March 2004.We amortize the developed technology using the straight-line method over a 5-yearperiod. The carrying value per December 31, 2005 of €2,577fully represents the developed technology acquired in 2004.

***Interest Income***

Thefollowing table shows our net interest income for each of the years in thethree-year period ended December 31, 2005, and the percentage changebetween these periods. 
|                      | ** ** | **Year ended December 31,** | ** ** | **% change** | ** ** | **% change** | ** ** |
|----------------------|------------|--------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **           | ** ** | **2003**                                   | ** ** | **2004**          | ** ** | **2005**          | ** ** | **2003-2004** | ** ** | **2004-2005** | ** ** |
| Interest income, net |       | €                                     | 2,143      |              | €     | 1,503             |       | € | 1,966 |   |   | (29.9 | )% |   |   | 30.8 | % |   |
|                      |            |                                            |            |                   |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |

 

Net interest income increased 30.8% in 2005 comparedwith 2004 and decreased 29.9% in 2004 compared with 2003. The increase in 2005is primarily due to the increase in cash and cash equivalents, as a result ofthe private share placement in May 2005, which generated €50,100.The decrease in 2003 was primarily the result of lower average interest yieldson available cash balances and lower cash balances due to the funding ofoperations.

Interest expenses relatingto capital lease contracts, entered into in the Netherlands, are included inthe foregoing. Those expenses amounted to €212in 2004 and €132in 2005.

**Liquidity andCapital Resources**

As of December 31, 2005, we had €111,734in cash and cash equivalents.

To date, we have financed our operations primarilythrough equity issuances (including exercises under stock-based compensationplans). Since our initial public offering in 2000, which generated net proceedsof €128,003,proceeds from equity issuances amounted to €60,684, including €57,535in 2005. €50,100of the 2005 proceeds are related to the private share placement in May, whilethe remainder is related to stock option exercises. In 2005, 2004 and 2003, wereceived proceeds of nil, €741 and €1,258,respectively, from sale and leaseback transactions.

We made capital investments in property, plant andequipment of €3,448 in 2003, €2,114 in 2004 and €10,366in 2005. The 2005 investments are mainly related to the new GMP productionfacility. To finance the construction of the new production facility, we enteredinto a mortgage loan agreement for a maximum amount of €17,091.As of December 31, 2005 we have drawn a total of €8,982and in January 2006 received reimbursement for construction costs under theloan, amounting to €6,771incurred prior to December 31, 

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2005. The loan has a 15-yearterm and bears interest at 4.55 percent for the first five years, after whichtime the rates will be renegotiated. The loan is secured by the land andbuilding, and a compensating balance arrangement with a bank in the amount of €10,000.For the first year, interest is accrued to the loan and no payments ofprincipal or interest are required. The loan will be repaid through monthlypayments over 15 years, starting January 1, 2007, with a balloon repaymentof €10,000 after 15 years.

In 2004 we acquired the outstanding capital stock ofChromaGenics B.V., a privately held biotechnology company based in Amsterdam,the Netherlands. The acquisition has been accounted for as an acquisition ofdeveloped technology. We paid €4,017 in cash and enteredinto a contingent payment agreement that could require us to make an additionalpayment of €7,000upon our receipt of revenues generated from the STAR technology. After thepayments of the contingent consideration, we will pay a royalty on revenuesgenerated from the STAR technology through the date the STAR technology patentexpires.

Our cashflow from financing activities increased from €905in 2003 to €1,456 in 2004 and increasedto €65,335 in 2005. The increasein 2004 was primarily due to the increase in proceeds from  issuances of ordinary shares as a result ofstock option exercises. The increase in 2005 was primarily a result ofproceeds from the private placement of ordinary shares in May 2005, andthe issuance of ordinary shares in relation to the exercise of employee stockoptions.

The year 2006 will be marked by the integration ofCrucell and Berna Biotech. We have a strong cash position, which we believemakes it possible to continue financing important development programs. Weintend to make investments in maintenance and process improvement of ourexisting production facilities. Our need for a pilot plant to producepreclinical and clinical materials without having to resort to relativelyexpensive outsourcing did not diminish as a consequence of the Bernaacquisition, thus in 2006 we began construction of a BSL level 3 cGMP plant atLeiden. The facilities should be ready for occupation in spring 2007. We expectto invest a total of approximately €30 million in the plantwhich we expect to finance by a combination of a mortgage loan and an equipmentlease. We may use a portion of our cash to acquire or invest in complementarybusinesses, products or technologies, or to license-in the right to usecomplementary technologies. We believe our current cash balances and operatingrevenues will be sufficient to satisfy our anticipated cash needs for workingcapital and capital expenditures for at least the next 24 months. However, itis possible that we will seek additional financing within this timeframe. Wemay raise additional funds through public or private financing, strategicalliances or other arrangements. We may not be able to raise additionalfunding. Further, any additional equity financing will be dilutive toshareholders, and debt financing, if available, may involve restrictivecovenants. Our failure to raise capital when needed will harm our business and operatingresults.

**Taxation**

We have to date incurred net losses and, accordingly,have not paid corporate income taxes. The maximum corporate income tax rate inThe Netherlands for the year 2005 is 31.5%. We have recorded a valuationallowance equal to 100% of the value of our tax loss carry forwards. At the endof 2005, the Netherlands government enacted a tax rate reduction. As a resultof this change in law, the Netherlands maximum statutory tax rate will bereduced to 29.6% in 2006 and 29.1% in 2007. Furthermore the Netherlandsgovernment intends to reduce the maximum statutory tax rate to 26.9% as of2007. No certainty exists whether the intentions of the Netherlands governmentwill be executed.

Tax losses can be carriedforward indefinitely and set off against future taxable profits. However, on January 1,2001, a bill was enacted in the Netherlands that may limit the ability to setoff tax losses against future profits when the beneficial ownership of acompany changes. This law could limit our ability to realize the benefits ofour tax loss carry forwards in the future. Further, the Netherlands governmenthas announced it intends to abolish the ability to offset tax losses carriedforward in time indefinitely. The 

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exactintentions are not yet clear. No certainty exists whether these intentionsindeed will be executed. We had tax loss carry forwards of €103,714,€85,766,and €68,802at December 31, 2005, December 31, 2004 and December 31, 2003,respectively.

**Research andDevelopment**

Our research and developmentspending totaled €32,751, €21,412and €22,858for the years 2005, 2004 and 2003, respectively. For a description of ourresearch and development practices and policies, see “Item 4. Information onthe Company—Research and Development.”

**Trend Information**

Please see “OperatingResults” and “Item 4. Information on the Company” for trend information.

**Off-Balance SheetArrangements**

As of December 31,2005 we have no unconsolidated special purpose financing or partnershipentities or other off-balance sheet arrangements that have or are reasonablylikely to have a current or future effect on our financial condition, changesin financial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources, that is material to investors.

**Tabular Disclosureof Contractual Obligations and Commercial Commitments**

Futureminimum payments for all contractual obligations for years subsequent to December 31,2005 are as follows: 

| ** **                             | ** ** | **Total**  | ** ** | **Less than  one year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------|------------|--------------------|------------|--------------------|------------|----------------------------------|------------|
| **Contractual Obligations**            | ** ** | ** ** |       |                              |       |               |       |               |       |                             |       |   |   |   |   |   |   |   |   |
| Operating leases                       |       | 8,640      |       |                              | 1,847      |               |       |               | 3,038      |                             |       |   | 3,654 |   |   |   | 101 |   |   |
| Capital leases, short term             |       | 898        |       |                              | 898        |               |       |               | —     |                             |       |   | — |   |   |   | — |   |   |
| Research, license and other            |       | 3,733      |       |                              | 2,115      |               |       |               | 1,618      |                             |       |   | — |   |   |   | — |   |   |
| Other long-term liabilities agreements |       |       |       |                              |       |               |       |               |       |                             |       |   |   |   |   |   |   |   |   |
| Long term  portion of capital leases   |       | 398        |       |                              | —     |               |       |               | 398        |                             |       |   | — |   |   |   | — |   |   |
| Long term  debt(1)                     |       | 17,091     |       |                              | —     |               |       |               | 1,060      |                             |       |   | 1,214 |   |   |   | 14,817 |   |   |
| Total                                  |       | €     | 30,760     |                              |       | €             | 4,860      |               |       |                             | €     | 6,114 |   |   |   | €4,868 |   |   |   | € | 14,918 |   |   |
|                                        |            |            |            |                                   |            |                    |            |                    |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)   Long termdebt includes scheduled principal payments representing the outstanding balanceat December 31, 2005 and additional borrowings anticipated by the Companyto be used in completing construction of a new production facility.

**Recent AccountingPronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued a revision of FASB statement No. 123,Accounting for Stock-Based Compensation (“SFAS No. 123 (R)”). Thisstatement supersedes Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementationguidance. SFAS No. 123 (R) addresses the accounting for share-basedpayment transactions in which a company receives employee services in exchangefor either equity instruments of the company or liabilities that are based onthe fair value of the company’s equity instruments or that may be settled bythe issuance of such equity instruments. SFAS No. 123 (R) eliminatesthe ability to account for share-based compensation transactions using theintrinsic method and generally requires that such transactions be accounted forusing a “fair-value”-based method and recognized as expense in our consolidatedstatement of operations. During 2005 the SEC issued new rules that allows 

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companies to implementSFAS No. 123 (R) as of the beginning of the first annual reportingperiod that begins after June 15, 2005. We will adopt SFAS 123 (R) asof January 1, 2006. The adoption of SFAS 123 (R) will not havean impact on the statement of operations for stock options granted and therelated expense to be recorded related thereto prior to adoption and we do notbelieve the adoption of SFAS 123 (R) will result in significantdifferences in valuing and expensing stock options as compared to its currentpolicies.

In June 2005 the Emerging Issue Task Force of theFASB issued EITF 05-6 “Determining the Amortization Period for LeaseholdImprovements Purchased Lease Inception or Acquired in a Business Combination”.On September 15, 2005 the Emerging Issue Task Force reached consensus onhow to amortize leasehold improvements that are placed in service significantlyafter and not contemplated at the beginning of the lease term. Leaseholdimprovements acquired in reporting periods beginning after June 29, 2005should be amortized over the shorter of the useful life of the asset or a termthat includes required lease periods and renewals that are deemed to bereasonably assured. The adoption of EITF 05-6 will not have a significantimpact on our financial statements.

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**Item 6.**                        Directors,Senior Management and Employees

**Directors, SeniorManagement and Board Practices**

We have a two-tier boardstructure consisting of a management board (*raadvan bestuur*), which manages our business, and a supervisory board (*raad van commissarissen*), which supervisesand advises our management board.

At the annual generalmeeting of shareholders in 2005, our shareholders approved the amendment of ourarticles of association. Most of the amendments to the articles of associationare necessary to eliminate the priority shares, references to priority sharesand the rights of the holders of priority shares or have to do with the authorityto resolve to issue shares or limit or exclude pre-emptive rights. For moreinformation on our articles of association see Item 10—“Memorandum and Articlesof Association.”

***Supervisory Board***

Our supervisory board mustapprove certain resolutions of our management board, which are specified in ourarticles of association. In addition, our supervisory board may give ourmanagement board written notice of other corporate actions that it wishes toapprove. In fulfilling their duties, all members of our supervisory board mustserve our best interests.

Our articles ofassociation provide that at least three supervisory board members must serve onour supervisory board. We must fill any vacancies on the supervisory board assoon as possible, but until they are filled the remaining members of oursupervisory board constitute a competent board. Under Dutch law, supervisoryboard members cannot serve as members of our management board.

The members of oursupervisory board are appointed for terms ending on the date of the firstannual meeting of shareholders that is held four years after the date of theirappointment. They may be reappointed for two consecutive terms of four years.Our supervisory board nominates its members. To be binding, there must be atleast two nominees for each vacancy on the supervisory board. The generalmeeting can override these binding nominations by a vote of an absolutemajority of the votes cast. This vote must represent more than one third of ourissued share capital. If the supervisory board does not make any nominationswithin three months after the vacancy has occurred, our general meeting ofshareholders can fill supervisory board vacancies. If the supervisory boardmade a non binding nomination, then an appointment in deviation with thenomination is only possible by a resolution of the general meeting ofshareholders taken by an absolute majority of the votes cast, representing atleast one third of our issued capital. The supervisory board members retireaccording to a rotation plan that the supervisory board establishes.

Our supervisory boardappoints its own chairman and must adopt rules for its own internalgovernance and establish committees. The supervisory board must, in any event,establish an audit committee, a remuneration committee and a nominationcommittee. Passing supervisory board decisions requires a majority of the votescast at a meeting of our supervisory board, unless otherwise provided for inthe articles of association or the by-laws of the supervisory board. The supervisoryboard is assisted by a company secretary.

A supervisory board membercan be suspended or dismissed at any time by a resolution of our generalmeeting of shareholders passed by an absolute majority of the votes cast. Thisvote must represent more than one third of our issued share capital if theresolution to suspend or dismiss a supervisory board member is not proposed byour supervisory board. Within three months after a suspension, our generalmeeting of shareholders must either dismiss the supervisory director, terminatethe suspension or extend it. The total suspension may not exceed three months.

The general meeting ofshareholders determines the supervisory board members’ compensation. Incontrast to the provisions of the Dutch corporate governance code, until theend of our 2004 fiscal year we  

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paid oursupervisory board members in options on our ordinary shares as well as cash,and as of the beginning of our 2005 fiscal year in ordinary shares and cash, orcash only, at the member’s discretion and reimburse them for their expenses.See “Remuneration of the Management Board and Supervisory Board.”

**Thebusiness address of each supervisory board member is the address of ourprincipal executive office in Leiden, The Netherlands. As of May 31**, 2006 oursupervisory board members held an aggregate of 280,610 of our ordinary shares. See “Share Ownership.”

Thefollowing table sets forth the name, age and position of each of the members ofour supervisory board:

Pieter Strijkert retired andstepped down as chairman and member of the Supervisory Board on June 2,2006 and was succeeded by Jan Oosterveld.
| Name              | ** ** | ** ** | ** ** | **Age**  | ** ** | **Position** | ** ** | **Service period  according to  rotation scheme** |
|-------------------|------------|------------|------------|----------|------------|--------------|------------|---------------------------------------------------|
| Pieter Strijkert  |       | 70         |       | Chairman |       | 2009         |
| Jan Oosterveld    |       | 62         |       | Member   |       | 2008         |
| Phillip Satow     |       | 64         |       | Member   |       | 2009         |
| Claes Wilhelmsson |       | 67         |       | Member   |       | 2007         |
| Seán Lance   |       | 58         |       | Member   |       | 2007         |
| Arnold Hoevenaars |       | 57         |       | Member   |       | 2009         |
| Dominik Koechlin  | ** ** | 46         |       | Member   |       | 2010         |
| Jürg Witmer  | ** ** | 57         |       | Member   |       | 2010         |
| Claude  Thomann   | ** ** | 54         |       | Member   |       | 2010         |

 

Mr. Hoevenaars was appointed by the annual meeting ofshareholders held in June 2005.

At theextraordinary general meeting of shareholders, scheduled in relation to theexchange offer for the Berna Biotech shares, held on January 10, 2006, theproposal to appoint 3 new members of the supervisory board, upon the ExchangeOffer becoming or being declared unconditional, was adopted. Subsequent to thedeclaration in February 2006 that the Exchange Offer was unconditional, Mr. Koechlin,Mr. Witmer and Mr. Thomann, all former members of the supervisoryboard of Berna Biotech, joined our supervisory board.

Mr. Domenico Valerio, who was our president, chiefexecutive officer and chairman of our management board from June, 2000 until January 2004,was appointed a member of our supervisory board, effective January 1,2005, at our annual meeting of shareholders in June 2004. In January 2005,Mr. Valerio and we agreed that he would not serve as a member of oursupervisory board, but would continue to serve us in an advisory role with anemphasis on investor and public relations.

The following paragraphs contain brief biographies ofeach of our supervisory board members:

*PieterStrijkert* has served as chairman of our supervisoryboard since our incorporation. He also served as chairman of the supervisoryboard of IntroGene from 1994 to October 2000, and as chairman of thesupervisory board of U-BiSys from 1998 to October 2000. He currentlyserves on the boards of Chiron Corporation, a position he has held since 1987,and Paratek Pharmaceuticals, Inc., a position he has held since 1998. Heserved as chairman of the supervisory boards of Pharming from 1995 to 2001, andfor deVGen N.V. and PamGene B.V. from 2000 to 2003. From 1985 to 1995 he was amember of the managing board of Gist-Brocades N.V. Mr. Strijkert has a PhDfrom the University of Utrecht.

*JanOosterveld* retired from Royal Philips Electronics N.V.on April 1, 2004, after an international career of 32 years. He wasresponsible for Corporate Strategy, Corporate Alliances and the joint ventures 

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with LGE on Cathode RayTubes (CRT’s) and Liquid CristalDisplays (LCD’s). In the latter responsibility he was the Chairman ofthe Board of LG. Philips Ltd, which went public in April 2004 andVice-Chairman of the Board of LG. Philips Displays BV. He was also the CEO ofPhilips Asia Pacific. He graduated as a Mechanical Engineer from the TechnicalUniversity Eindhoven, and holds an MBA from the Instituto de EstudiosSuperiores de la Empresa (IESE) in Barcelona. He was appointed Professor atIESE in 2003. Mr. Oosterveld has served as a member of our supervisoryboard since May 2004. He was appointed as member during the annual generalmeeting of shareholders on June 3, 2004. He is also a member of the Boardof Barco, Kortrijk, Belgium, Atos Origin, Paris, France, Cookson ElectronicsGroup, London, UK and Continental, Hannover, Germany.

*PhillipSatow* has served as a member of our supervisory boardsince our incorporation. He spent 14 years at Pfizer, Inc. where his lastposition was vice president, Pfizer Europe. From 1985 to 1997, he was executivevice president of marketing at Forest Laboratories, Inc. From 1998 to 1999he was president of Forest Pharmaceuticals, executive vice president of ForestLaboratories Inc. and a member of its board of directors. Mr. Satowcurrently serves on the public boards of Forest Laboratories Inc. (FRX), andEyetech Pharmaceuticals Inc. (EYET) and is Chairman and CEO of JDSPharmaceuticals LLC, a privately held pharmaceutical company. Mr. Satowreceived a Masters in Economics from Georgetown University.

*ClaesWilhelmsson* has served as a member of our supervisoryboard since May 2003. He was previously the Executive Director of researchand development of AstraZeneca PLC from 1999 to July 2002, where he wasresponsible for AstraZeneca’s global R&D. He joined Astra in 1985 and heldvarious positions until the company merged with Zeneca in 1999. Prior toworking for Astra, he was a lecturer and researcher at the University ofGöteborg in Sweden, where he also completed his medical education and PhD. Hecurrently serves on the boards of a number of biotechnology and start-up companies.Dr. Wilhelmsson previously served on the board of AstraZeneca PLC.

*SeánLance* has served as a member of our supervisory boardsince January 2004. Mr. Lance is the past chairman of ChironCorporation. He joined Chiron as president and chief executive officer in 1998.From 1985 to 1998 he was employed at Glaxo Holdings where his last position wasgroup chief operating officer and CEO designate. He is a past president of theInternational Federation of Pharmaceutical Manufacturers Association. Mr. Lanceis a chartered company secretary and administrator and he also holds apost-graduate qualification in Advanced Financial Management.

*ArnoldHoevenaars***hasserved as a member of our supervisory board since June 2005 and has beenattending our supervisory board meetings as an observer since July 2004. Mr. Hoevenaars is a charteredaccountant in the Netherlands, and his previous positions include, amongothers, Chairman of the Management Board of the Achmea Group, Chairman of theBoard of Directors and Chairman/CEO of the Executive Board of Eureko B.V. andmember of the Management Board and Chief Financial Officer of Royal BoskalisWestminster N.V.

*DominikKoechlin* has served as a member of our SupervisoryBoard since February 2006 upon settlement of Crucell’s exchange offer forBerna Biotech AG, where he was a member of the Board of Directors. His careerbegan in 1986 as a financial analyst at Bank Sarasin & Cie in Basel.In 1990 he was a founding partner of Ellipson AG, a consultancy specialized instrategy, corporate finance and sustainability. In 1996 he became a member ofthe executive board of Telecom PTT, now known as Swisscom AG. In 1999 he tookover responsibility for all of Swisscom’s international participations. He hasserved on the boards of Debitel AG (Stuttgart), Bluewin AG, Swisscom USA andwas chairman of the board of UTA (Vienna) and a member of the supervisory boardof Cesky Telecom (Prague). He is currently a member of the supervisory boardsand audit committees of LGT Bank (Liechtenstein), EGL AG and Swissmetal AG, anda board member at SAM, M2 and Corris AG. Expiry of Term: 2010

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*Jürg Witmer*has served as a member of our Supervisory Board since February 2006 uponsettlement of Crucell’s exchange offer for Berna Biotech AG, where he was amember of the Board of Directors. Dr Witmer started his professionalcareer in 1978 as legal counsel of Hoffmann-La Roche AG in Basel. In 1982 hewas appointed as personal assistant to the CEO of the Roche Group and in 1984became Regional Manager of Roche Far East, based in Hong Kong. He was promotedto General Manager in 1988 before returning to Switzerland as head of CorporateCommunications and Public Affairs at Roche. In 1994 he took over as GeneralManager of Roche’s operations in Austria and parts of Eastern Europe, before becomingCEO at Givaudan Group in Geneva. In this function he lead the spin-off ofGivaudan from the Roche Group and its Swiss stock exchange listing. InApril 2005 he took over the chair of the Board of Directors of Givaudan.Dr Witmer is also a member of the Board of Directors of Bank Sal. Oppenheim Jr. &Cie (Schweiz) AG.

*Claude Thomann*has served as a member of our Supervisory Board since February 2006 uponsettlement of Crucell’s exchange offer for Berna Biotech AG, where he was amember of the Board of Directors. He began his career as a lawyer in 1979 atthe Kellerhals firm in Berne where he became a partner in 1985 and managingpartner from 1989 to 2000. He is a member of the Board of Directors ofSecuritas AG (Bern), Keymile Holding AG (Freienbach SZ), Keymile AG (Bern) andBonotec AG (Konolfingen BE) and Chairman of the Medicinal-Cluster Berne and ofthe Compensation Fund of the Bernese Entrepreneurs. Dr Thomann is also managingdirector of various employers’ associations and legal advisor to the SwissCancer League and the Swiss Institute for Applied Cancer Research.

***Remuneration Committee***

Our supervisory board hasestablished a remuneration committee. The remuneration committee determines ourpolicy on remuneration of all members of our management board and managementcommittee. See “Remuneration of the Management Board and SupervisoryBoard—Remuneration Policy”. The members of our remuneration committee arePhillip Satow (Chairman), Pieter Strijkert, Claes Wilhelmsson and JanOosterveld.

***Audit Committee***

Our supervisory board has established an auditcommittee. The audit committee consists of three supervisory board members whoare independent within the meaning of the Nasdaq listing rules. This committeeis responsible for, among other things, reviewing our annual and interimreports and accounts and monitoring our auditors’ involvement in that process.The ultimate responsibility for reviewing our annual and interim accounts lieswith our supervisory board. The members of our audit committee are ArnoldHoevenaars (Chairman), Seán Lance and Dominik Koechlin.

***Nomination Committee***

Our supervisory board hasestablished a nomination committee. The nomination committee consists of allsupervisory board members. This committee (a) draws up selection criteriaand appointment procedures for members of the supervisory board and themanagement board, (b) periodically assesses the size and composition ofthe supervisory board and the management board and makes a proposal for acomposition profile of the supervisory board, (c) periodically assessesthe functioning of individual members of the supervisory board and themanagement board, and reports on this to the supervisory board and (d) supervisesthe policy of the management board on the selection criteria and appointmentprocedures for senior management. The committee also makes proposals forappointments of management board members to the supervisory board and forappointments of supervisory board members to the supervisory board.

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***Scientific Committee***

Our supervisory board hasestablished a scientific committee. The scientific committee consists of onesupervisory board member who is independent within the meaning of the Nasdaqlisting rules. This committee is responsible for, among other things, reviewingprogress in our research and development activities. The chairman and solemember of our scientific committee is Claes Wilhelmsson.

***Management Board***

Our managementboard manages our general affairs and business, under the supervision of oursupervisory board. Under our articles of association, the management boardrequires prior approval of the supervisory board for resolutions to:

·       expandinto a new, or cease an existing, line of business;

·       participatein, sell an interest in, or change its participation in, or otherwise take aninterest in, or assume the management of another business enterprise;

·       enterinto, terminate or amend any joint venture or pooling arrangement;

·       acquirefixed assets exceeding price limits set by the supervisory board; and

·       enterinto financial commitments exceeding price limits set by the supervisory boardor for longer than a year.

Under Dutch law, in certain circumstances, managementboard actions may require the approval of the general meeting of shareholders.

Our supervisory board determines the size of ourmanagement board after consultation with our chief executive officer. Ourgeneral meeting of shareholders appoints the members of our management boardfrom nominations made by our supervisory board. To be binding, there must be atleast two nominees for each vacancy on our management board. The generalmeeting of shareholders can override these binding nominations by a vote of anabsolute majority of the votes cast. This vote must represent more than onethird of our issued share capital. If our supervisory board does not nominateanyone for a specific position within three months after the vacancy hasoccurred, our general meeting of shareholders can appoint a replacement by anabsolute majority of votes. If the supervisory board makes a non-binding nomination,then an appointment contrary to the nomination is only possible by a resolutionof the general meeting of shareholders taken by an absolute majority of thevotes cast, representing at least one third of our issued capital.

Our management board may establish rules governingits internal organization. Our supervisory board must approve the adoption ofand any changes to these rules. Our management board may charge each member ofthe management board with particular duties. The allocation of duties requiresthe approval of the supervisory board. Resolutions of our management boardrequire a majority of votes cast, unless provided otherwise in the by-laws ofthe management board. The management board may appoint a company secretary whowill assist the management board. The appointment and removal of the companysecretary requires the prior approval of the supervisory board.

A management board member can be suspended ordismissed and a suspension can be lifted by a resolution of an absolutemajority of the votes cast at a shareholders meeting. This vote must representmore than one third of the issued share capital if the resolution to suspend ordismiss a management board member is not proposed by our supervisory board. Oursupervisory board may also suspend (but not dismiss) a member of our managementboard. We must hold a general meeting of shareholders within three months aftera suspension to either terminate or extend it. The total suspension may notexceed three months.

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Our supervisory board determines the compensation andbenefits of the members of our management board, on a proposal by theremuneration committee, within the scope of the remuneration policy adopted bythe general meeting of shareholders. The business address of the members of ourmanagement board is the same as the address of our principal executive officein Leiden, The Netherlands.

Thename, age and position of the members of our management board are:

| **Name**         | ** ** | ** ** | ** ** | **Age**                                                                  | ** ** | **Position** |
|------------------|------------|------------|------------|--------------------------------------------------------------------------|------------|--------------|
| Ronald H.P. Brus |       | 42         |       | Chairman of the management board, president and chief  executive officer |
| Jaap Goudsmit    |       | 54         |       | Chief scientific officer                                                 |
| Leonard  Kruimer |       | 47         |       | Chief  financial officer                                                 |

 

Leonard Kruimer, our chieffinancial officer, joined the management board as of January 1, 2005.

***Management Board Service Contracts***

The contracts for the management board members havebeen entered into for an indefinite period and provide for a notice period ofup to six months upon termination by the Company and a notice period of threemonths upon termination by the individual. A dismissal arising from an unwantedchange of control will result in a severance arrangement limited to two years’worth of base salaries for the management board members.

The contracts of themanagement board members contain non-compete provisions that would apply for aperiod of one year after the end of their employment with us.

***Management committee***

We have a management committee that advises themanagement board on strategic, general managerial and executive matters andassists the management board in implementing these matters. The managementboard determines the number of members of the management committee. Members ofthe management committee are appointed and dismissed by the management board,with the approval of our supervisory board. The management committee generallymeets once a month, and works closely with other members of our managementteam. Our management board may establish rules governing its relationshipwith our management committee. Our supervisory board must approve the adoptionof and any changes to these rules.

As aresult of the acquisition of Berna Biotech AG, K. Sommer and S. Rothen joinedour management committee in March 2006. The following table sets forth thename, age and position of each of the members of our new management committee:
| Name                 | ** ** | ** ** | ** ** | **Age**                                                              | ** ** | **Position** |
|----------------------|------------|------------|------------|----------------------------------------------------------------------|------------|--------------|
| Ronald H.P. Brus     |       | 42         |       | Chairman of management board, president and chief  executive officer |
| Jaap Goudsmit        |       | 54         |       | Chief scientific officer                                             |
| Leonard Kruimer      |       | 47         |       | Chief financial officer                                              |
| Simon Rothen         |       | 43         |       | Chief operation officer                                              |
| Kuno Sommer          |       | 49         |       | Chief business officer                                               |
| René K. Beukema |       | 42         |       | General counsel and corporate secretary                              |
| John  Lambert        |       | 53         |       | Executive  vice president                                            |

 

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The followingparagraphs contain brief biographies of the members of our management board andthe members of our management committee:

*RonaldH.P. Brus* is chairman of the management board andpresident and chief executive officer since January 26, 2004, and has beena member of our management committee since our incorporation. He was executivevice president, business development at IntroGene from 1997 to 2000 and chiefoperating officer at Crucell from March 2003 through to his appointment aspresident and chief executive officer. From 1994 to 1996, he wasproduct-planning physician at Forest Laboratories (New York) and from 1990 to1994 he was medical director for Zambon B.V. He holds a medical degree (M.D.)from the University of Groningen.

*JaapGoudsmit* is a member of the management board since January 26,2004. He was our Senior Vice President Vaccine Research from September 2001until July 2002 and member of our management committee from July 2002as Executive Vice President Vaccine R&D. In September 2002 he wasappointed Chief Scientific Officer and head of Research and Development. Hechaired the Academic Medical Center of the University of Amsterdam the ResearchInstitute for Infectious Diseases and the Institute for Science Education. Hewas the founding chair of the Scientific Advisory Committee of theInternational AIDS Vaccine Initiative (IAVI) and the founding co-chair of theEuropean Vaccine Effort against HIV/AIDS (EuroVac). Since 1989 he has been aprofessor at the University of Amsterdam and the Academic Medical Center. Heholds a medical degree (MD) and a PhD from the University of Amsterdam and is aboard certified medical microbiologist.

*LeonardKruimer* became a member of the management board on January 1,2005. He has been our chief financial officer and a member of our managementcommittee since our incorporation. He held the same position at IntroGene from1998 to 2000. From 1996 to 1998 he was an independent consultant with companiessuch as Pepsico and Royal Boskalis Westminster N.V. From 1988 to 1995, he heldsenior executive positions at Continental Can Europe, GE Capital/TIP Europe andKwik-Fit Europe B.V. He was a consultant at McKinsey & Co. and hasworked with Price Waterhouse. He holds a Masters in Business Administrationfrom Harvard Graduate School of Business Administration, a degree from theUniversity of Massachusetts, Amherst, and is a CPA in New York State.

*SimonRothen**,***servedas chief operations officer of Berna Biotech since 2004. He joined BernaBiotech in 1998 where he fulfilled several positions in production, quality,IT/IS, supply chain and operations. He studied at and worked for Novartisbiotechnology at ETH Zurich where he earned his Ph.D. in bioprocess engineeringin 1997, before joining Berna Biotech Pharma BiotechnologyDevelopment & Production (Technical Cell Biology).

*KunoSommer* was chief executive officer of Berna Biotechfrom 2000 until 2006. He studied economic science at Basel University andearned a doctorate in political science. Before 1990, he held various positionswith Roche AG Vitamin Marketing. From 1990 to 1994, he served as Head of theNorth American branch of the Roche animal feed and health division. From 1995he served as manager of Roche global marketing for the vitamin and specialitychemicals division in Basel. Mr. Sommer was CEO of Givaudan-Roure inGeneva and member of the executive committee of Roche AG in 1998/99.

*RenéK. Beukema* has been our general counsel and corporatesecretary since our incorporation. He held the same position at IntroGene from1999 to 2000. From 1994 to 1999 Mr. Beukema was Senior Legal Counsel forGE Capital/TIP Europe. From 1991 to 1994, he was legal counsel for TNT ExpressWorldwide N.V. He has a Masters in Law from the University of Amsterdam.

*John Lambert*****holds, through his own organization, J G Solutions Ltd, thepost of executive vice-president of Crucell , and is responsible for strategydevelopment. Prior to this he was Vice President and Officer of Chiron andPresident of Chiron Vaccines between March 2001 and February 2005.Before joining Chiron, he provided consulting and coaching at the chiefexecutive level to organizations both in 

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the United Kingdom and internationally. From 1998 to 2000, Mr.Lambert was the President of Aventis Pasteur MSD, based in Lyon, France, wherehe headed the vaccines venture formed between Pasteur Mérieux Connaught (nowSanofi Pasteur) and Merck & Co. following four years as that company’sVice President of Operations. From 1987 to 1994, he held various positions withthe Pasteur Mérieux Connaught Group, in increasing levels of responsibility,starting off as Managing Director, Mérieux UK Ltd.

***Disclosure Committee***

In March 2003, we established a disclosurecommittee designed to help senior management, particularly the chief executiveofficer and chief financial officer, in the maintenance and evaluation of ourdisclosure controls and procedures. The disclosure committee gathers allrelevant financial and non-financial information and assesses materiality,timeliness and necessity for disclosure of such information. The disclosurecommittee is comprised of the members of the management committee and themanagement team. The management team members are the director of finance andplanning, vice president of intellectual property and licensing, director forquality affairs, executive director vaccine research, director antibodyresearch, director investor relations and communications, director human resourcesand manager facilities. Members of the disclosure committee have direct accessto our external legal counsel and our external auditor. The disclosurecommittee reports to the chief executive officer and chief financial officer.The chief executive officer and chief financial officer have also re-emphasizedthe importance of internal controls at our Company in an effort to facilitatecontinuous improvement of internal control procedures and reporting.

We believe that theestablishment of the disclosure committee and additional actions taken forfurther improvement of disclosure and internal controls comply with therequirements of the Sarbanes-Oxley Act of 2002 and recent regulationspromulgated by the Securities and Exchange Commission under that Act.

**Remuneration of theManagement Board and Supervisory Board**

Netherlands legislationrequires full disclosure of individual management board and supervisory boardremuneration. We have included the required disclosures below.

***Remuneration Policy***

The remuneration committee is charged by thesupervisory board to review and recommend specific compensation and benefitlevels for the members of the management board and the members of themanagement committee in consultation with the management board. In addition,the remuneration committee reviews the general compensation and benefitpolicies for our employees.

The remuneration committee advises on policies andreviews and determines objectives relevant to the compensation of the membersof the management board and members of the management committee. Remunerationconsists of a fixed salary portion and a variable bonus portion that is linkedto our overall performance and the achievement of set objectives. Theremuneration committee evaluates the performance of members of the managementboard and management committee in view of those objectives and advises on thefixed and variable compensation of members of the management board and themanagement committee. In advising on short and long term incentive compensationfor members of the management board and management committee, the remunerationcommittee considers among other factors our financial and commercialperformance, scientific performance and progress, and the accrual of our value.External compensation survey data available for the biotechnology industry arealso used as another factor to benchmark the compensation levels. It is the aimof the remuneration committee to position the remuneration packages for membersof the management board and management committee 

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at competitive levels. Thebonus paid to the management board is paid in connection with achievement ofcertain objectives set by the supervisory board.

Theremuneration committee has advised the supervisory board and the supervisoryboard has reviewed the remuneration policy and structure for the managementboard during 2004 in light of the Dutch corporate governance code and marketcompetitiveness. At the annual general meeting of shareholders in 2005, ourshareholders approved this remuneration policy. The remuneration policy for2005 and consecutive years is based on four key principles:

·       in2005, overall remuneration levels need to be sufficient to attract, retain andmotivate top management given the dynamic business environment in which wecompete for talent;

·       basesalaries should be broadly in line with average market levels, whereas short-and long-term incentive levels should reflect an upside potential in case ofoutstanding performance;

·       toenhance the effectiveness of the short-term incentive, clearly measurable andchallenging targets are set, which reflect our strategic focus in theshort-term; and

·       thelong-term incentive plan should ensure a focus on longer-term strategicperformance targets, which aim for shareholder alignment and motivation andretention of qualified executives.

*Remuneration structure2005.*   The balance in fixed and variable pay forat target performance for the CEO amounts to 47% fixed and 53% variablecompensation. For the other two management board members, the balance equals56% fixed and 44% variable compensation.

*Base Salary.*   In2005, base salary levels of the management board have been increased by 2% inorder to account for an inflation correction. Each consecutive year thesupervisory board considers whether base salary levels should be adjusted bytaking account of our external and internal business environment.

*Short-term incentive.*   Atthe annual general meeting of shareholders in 2005, our shareholders approvedthe short-term share-based incentive plans.

During 2004, ourshort-term incentive plan was revised in light of our short-term strategicfocus and the Dutch corporate governance code. The short-term incentive plan tobe used in 2005 was therefore retroactively applied in 2004. The short-termincentive is linked to the achievement of predetermined collective milestonesin combination with a budget hurdle and individual milestones. The collectivemilestones are based on pre-determined annual milestones for research,development, business development, finance, intellectual property and corporatelegal affairs. The specific details of the milestones are not disclosed asthese qualify as commercially sensitive information. All predeterminedcollective milestones are contingent upon achievement of our annualpre-determined cash burn rate, which we define as the amount of net cash spentas a result of our operations.

In addition, part of theshort-term incentive award is based on individual milestones, assessed on thebasis of predefined measurable milestones set for each executive. Thesemilestones depend on the specific responsibilities of the individual and areapproved by our supervisory board. All milestones linked to the short-termincentive plan are revised annually and approved by our supervisory board toensure that they remain challenging but realistic.

Thetable below shows the relative weight of the collective and individual milestones:

| **Management Board** | ** ** | **Collective  milestones** | ** ** | **Individual  milestones** |
|----------------------|------------|----------------------------|------------|----------------------------|
| **CEO, CFO,  CSO**   | ** ** | **70%**                    | ** ** | **30%**                    |

 

**The target bonus of the CEO amounts to 75% of base salary and for thechief financial officer and chief scientific officer a target bonus of 50% ofbase salary is applicable. In the event performance exceeds expectations to aconsiderable extent, up to 125% of the target bonus could be rewarded as amaximum bonus.**

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**The bonus is payable in restricted shares or cash, optional to theparticipant. Our management board members are encouraged to opt for restrictedshares to maximize alignment of shareholders’ interest. Therefore when optedfor cash, a penalty of up to 25% reduction will be applied.**

***Long-term incentive.******  ******At the annual general meeting of shareholders in 2005, ourshareholders approved the long-term share-based incentive plans.***

**As part of the overall review of theremuneration policy and our structure, the Remuneration Committee analyzed thelong-term incentive plan during 2004****.** The analysisassessed whether the vehicle used (stock options) sufficiently supported ourlong-term strategic objectives. As a result of this study, the remunerationcommittee recommended our supervisory board replace award of stock options withaward of performance shares.

Target long-term incentive levels amount to 40% ofbase salary for the CEO and 30% for the chief scientific officer and the chieffinancial officer. When achieving maximum performance, a maximum of 200% of thetarget award can be awarded. Overall, no vesting takes place for below medianperformance.

The performance shares will be conditionally****granted and vest if pre-set performancetargets have been met at the end of a three-year performance period. The performancetargets are based on a combination of absolute share price growth on the stockmarkets, and our Total Shareholder Return (“TSR”). TSR reflects the returnreceived by a shareholder, taking into account both the change in share priceand dividends received, while assuming dividends are re-invested in us.

The absolute share price growth serves as a hurdlewhich****must be overcome to qualify for anypossible vesting of the shares. After the share price hurdle is met, the TSRperformance measurement is twofold: relative to a peer group consisting of 26constituents of the Goldman Sachs European Biotech Index and relative to theNASDAQ Biotech Index. Fifty percent of the conditionally awarded shares vestsubject to our ranking within the Goldman Sachs European Biotech Index on thedate of vesting. The table below shows the vesting scheme:

**Goldman Sachs European Biotech Index Vesting Scheme**

| **Ranking** | ** ** | ** ** | ** ** | **Vesting as % of 50%  of target award** | ** ** |
|-------------|------------|------------|------------|------------------------------------------------------------------------|------------|
| 1           | ** ** |       | 200        | %                                                                      |       |
| 2           | ** ** |       | 183        | %                                                                      |       |
| 3           | ** ** |       | 167        | %                                                                      |       |
| 4           | ** ** |       | 150        | %                                                                      |       |
| 5           | ** ** |       | 133        | %                                                                      |       |
| 6           | ** ** |       | 117        | %                                                                      |       |
| 7           | ** ** |       | 100        | %                                                                      |       |
| 8           | ** ** |       | 89         | %                                                                      |       |
| 9           | ** ** |       | 79         | %                                                                      |       |
| 10          | ** ** |       | 68         | %                                                                      |       |
| 11          | ** ** |       | 57         | %                                                                      |       |
| 12          | ** ** |       | 46         | %                                                                      |       |
| 13          | ** ** |       | 36         | %                                                                      |       |
| 14          | ** ** |       | 25         | %                                                                      |       |
| 15–27  | ** ** |       | 0          | %                                                                      |       |

 

*Pension.*   Atthe beginning of our 2005 fiscal year a new pension plan for our managementboard was introduced. The new plan is still a defined contribution plan, with apensionable age of 65 years. Both the employer and the employee contributionare adjusted with regard to the fiscal requirements. The employee contributionis set at 7% of the pensionable salary (base pay minus an offset). The tablebelow 

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outlines the annualcontribution rates, including the employee contribution. The risk premium forthe survivor’s pension will be financed separately by the employer.

**Total contributionrates of our Board members**

| **Age**  | ** ** | ** ** | ** ** | **Contribution rate** | ** ** |
|----------|------------|------------|------------|----------------------------|------------|
| 25 to 30 |       |       | 8.4        | %                          |       |
| 30 to 35 |       |       | 10.2       | %                          |       |
| 35 to 40 |       |       | 12.5       | %                          |       |
| 40 to 45 |       |       | 15.2       | %                          |       |
| 45 to 50 |       |       | 18.7       | %                          |       |
| 50 to 55 |       |       | 23.0       | %                          |       |
| 55 to 60 |       |       | 28.6       | %                          |       |
| 60 to 65 |       |       | 36.1       | %                          |       |

 

*Management Board*

Thetotal remuneration and related costs of the members of the management boardover the past three years, excluding stock options, is as follows:

| ** **         | ** ** | **Year ended December 31,** | ** ** |
|--------------------|------------|--------------------------------------------|------------|
| ** **         | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Salaries           |       | €                                     | 874        |   | € | 598 |   | € | 356 |   |
| Bonuses            |       | 1,058                                      |       | 494 |   | — |   |
| Pension costs(1)   |       | 189                                        |       | 215 |   | 91 |   |
| Severance costs(2) |       | —                                     |       | 454 |   | — |   |
| **Totals**         | ** ** | **€**                                 | **2,121**  | ** ** | **€** | **1,761** | ** ** | **€** | **447** | ** ** |

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(1)          Pension costs include disability insurance costs.

(2)          In connection with his stepping down as our chief executiveofficer, president and chairman of our management board, we agreed to pay Mr. Valerioan amount equal to €454 in severance and up to €19as partial compensation for advisory costs. On January 26, 2004, we alsoentered into an advisory agreement with Mr. Valerio under which hereceived an advisory fee totaling €227 through the end of 2004.

Theremuneration of the individual members of our management board during 2005,excluding stock options, was as follows:

| ** **       | ** ** | **Base salary** | ** ** | **Bonus** | ** ** | **Other  Benefits(1)** | ** ** | **Total** | ** ** |
|------------------|------------|----------------------|------------|-----------|------------|------------------------|------------|-----------|------------|
| Ronald H.P. Brus |       |                 | €     | 321       |       |                   | €     | 505       |       |   | € | 36 | ** ** |   | **€** | **862** | ** ** |
| Jaap Goudsmit    |       |                 | 313        |      |       | 308                    |       |      | 162        | ** ** |   | **783** | ** ** |
| Leon Kruimer     |       |                 | 240        |      |       | 245                    |       |      | 49         | ** ** |   | **534** | ** ** |
| **Totals**       | ** ** | ** **           | **€** | **874**   |       | ** **             | **€** | **1,058** | ** ** | ** ** | **€** | **247** | ** ** |   | **€** | **2,179** | ** ** |

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(1)          “Other benefits” include pensions, company cars, social securitycosts and disability insurance.

For details regarding share and option ownership byour management board members, see “Share and Option Ownership.”

Pension, retirement andsimilar arrangements for our management board members consist of a defined contributionplan, and we do not have further pension obligations beyond the annual premiumcontribution.

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***Supervisory Board***

Beginning in 2005, compensation of all SupervisoryBoard members consists of a fixed fee in cash and an annual share grant. Thefixed fee in cash amounts to €25 per Supervisory Boardmember. The Chairman will receive a fixed fee of €40. The annual share grantawarded to each member of the Supervisory Board, including the Chairman, shallequal 2,500 ordinary shares. This amount will be revised on a tri-annualbasis. The shares should be held for as long as an individual is a member ofthe Supervisory Board. Instead of the share grant, a Supervisory Board membermay also choose to receive a cash amount equaling the value of 2,500 shares atthe date of grant minus 25%. The shares (or cash equivalent minus 25%) shall beawarded in 2006 for the first time, as in December 2004 stock options wereawarded to the Supervisory Board with respect to the year 2005. Committee feesand Committee Chairmanship fees are no longer granted. A tax-free expenseallowance of €4.9is awarded annually to the Chairman of the Supervisory Board.

In 2004 the remuneration was based on a fixed amountof €5per member, an additional payment of €5 for each chairmanship ofa committee, and payments based on the actual number of supervisory boardmeetings attended, as well as an additional payment of €4.9to cover expenses for the chairman. We reimburse our supervisory board membersfor their travel and associated expenses incurred in connection withsupervisory board meetings. The remuneration for the members of the supervisoryboard is determined by the general meeting of shareholders.

During2005 and 2004, the individual members of the supervisory board received thefollowing remuneration, excluding stock options.

| ** **              | ** ** | **2005**  | ** ** | **2004**  | ** ** |
|-------------------------|------------|-----------|------------|-----------|------------|
| Pieter Strijkert        |       | 44.9      |       | 24.9      |       |
| Jan Oosterveld          |       | 25.0      |       | 22.5      |       |
| Phillip Satow           |       | 25.0      |       | 20.0      |       |
| Claes Wilhelmsson       |       | 25.0      |       | 20.0      |       |
| Seán Lance         |       | 25.0      |       | 22.5      |       |
| Arnold  Hoevenaars(1)   |       | 25.0      |       | N/A       |       |
| Jean Deleage(2)         |       | N/A       |       | 5.0       |       |
| Patrick van  Beneden(3) |       | N/A       |       | 5.0       |       |
| **Totals**              |       | **169.9** | ** ** | **119.9** |       |

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(1)          Arnold Hoevenaars becamea member of the supervisory board on June 2, 2005, and has been attending supervisoryboard meetings as an observer since July 2004.

(2)          Mr. Jean Deleageresigned from the supervisory board in June 2004.

(3)          Mr. Patrick vanBeneden resigned from the supervisory board in June 2004.

For details regardingshare and option ownership by our supervisory board members, see “Share andOption Ownership.”

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**Share and OptionOwnership**

As ofDecember 31, 2004, December 31, 2005 and May 31, 2006, membersof our management board and supervisory board held the following options and asof May 31, 2006, the following ordinary shares. Options generally expirein December or January of the relevant year.

| **Name of holder** | ** ** | ** ** | ** ** | **Numbers of  ordinary  shares held as  of 31 May,  2006** | ** ** | **% of  total  ordinary  shares** | ** ** | **Options held  as of  December 31,  2004** | ** ** | **Year of  expiration** | ** **                                         | **Exercise  price(s)** | ** ** | **Granted  2005** | ** **                         | **Exercised  2005** | ** ** | **Forfeited  2005** | ** **                           | **Options  held as of  December 31,  2005** | ** ** | **Options  held as of  May 31,  2006** | ** **                                     |
|------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------|------------|----------------------------------------|------------|------------------------------------------------------------|------------|------------------------------|----------------------------------------------------|------------------------|------------|-------------------|------------------------------------|---------------------|------------|---------------------|--------------------------------------|------------------------------------------------------------|------------|-------------------------------------------------------|------------------------------------------------|
| **Management board:**        | ** ** |       | ** ** | ** **                                                                          |       |                                   | ** ** |                                                       |       |                         |                                               |                   |       |              |                               |                |       |                |                                 |                                                       |       |                                                  |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ronald  H.P. Brus            |       |       | 134,249    | ** **                                                                          |       |                                   | 0.23       |                                                       |       |                         | 56,250  75,000  250,000  225,000  90,000  125,000  |                   |       |              | 2005  2005  2009  2011  2011  2011 |                |       |                | 11.43  7.35  9.40  3.49  2.64  5.94  |                                                       |       |                                                  | —  —  —  —  —  — |   |   |   | 56,250  75,000  —  —  —  — |   |   |   | —  —  —  —  —  — |   |   |   | —  —  250,000  225,000  90,000  125,000 |   |   |   | —  —  250,000  200,000  90,000  125,000 |   |   |
| Jaap  Goudsmit               |       |       | 116,600    | ** **                                                                          |       |                                   | 0.20       |                                                       |       |                         | 100,000  100,000  100,000  85,000  60,000  125,000 |                   |       |              | 2005  2006  2006  2009  2011  2011 |                |       |                | 7.96  5.92  3.66  9.40  2.64  5.94   |                                                       |       |                                                  | —  —  —  —  —  — |   |   |   | 100,000  —  —  —  —  — |   |   |   | —  —  —  —  —  — |   |   |   | —  100,000  100,000  85,000  60,000  125,000 |   |   |   | —  —  100,000  85,000  60,000  125,000 |   |   |
| Leon  Kruimer                |       |       | 17,952     | ** **                                                                          |       |                                   | 0.03       |                                                       |       |                         | 26,25085,000  105,000  125,000                     |                   |       |              | 2005  2009  2011  2011             |                |       |                | 11.43  9.40  3.49  5.94              |                                                       |       |                                                  | —  —  —  —                 |   |   |   | 26,250  —  —  — |   |   |   | —  —  —  — |   |   |   | —  85,000  105,000  125,000 |   |   |   | —  85,000  85,000  125,000 |   |   |
| Subtotal                     |       |       | 268,801    | ** **                                                                          |       |                                   | 0.46       |                                                       |       |                         | 1,732,500                                          |                   |       |              |                               |                |       |                |                                 |                                                       |       |                                                  | —                                         |   |   |   | 257,500 |   |   |   | — |   |   |   | 1,475,000 |   |   |   | 1,330,000 |   |   |
| **Supervisory  board:**      | ** ** |       | ** ** | ** **                                                                          |       |                                   |       |                                                       |       |                         |                                               |                   |       |              |                               |                |       |                |                                 |                                                       |       |                                                  |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Pieter  Strijkert            |       |       | 187,688    | ** **                                                                          |       |                                   | 0.32       |                                                       |       |                         | 79,474  4,500  8,000  10,000  24,000  10,000       |                   |       |              | 2005  2005  2005  2009  2001

2011 |                |       |                | 0.49  11.43  7.16  11.55  3.49  6.48 |                                                       |       |                                                  | —  —  —  —  —  — |   |   |   | 79,474  4,500  8,000  —  —  — |   |   |   | —  —  —  —  —  — |   |   |   | —  —  —  10,000  24,000  10,000 |   |   |   | —  —  —  10,000

24,000  10,000 |   |   |
| Jan  Oosterveld              |       |       | 4,500      | ** **                                                                          |       |                                   | 0.01       |                                                       |       |                         | 10,000  10,000                                     |                   |       |              | 2009  2009                         |                |       |                | 8.81  11.55                          |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | 10,000  10,000 |   |   |   | 10,000  10,000 |   |   |
| Phillip  Satow               |       |       | 58,800     | ** **                                                                          |       |                                   | 0.16       |                                                       |       |                         | 3,000  7,000  10,000  22,000  10,000               |                   |       |              | 2005  2005  2009  2011  2011       |                |       |                | 11.43  7.16  11.55  3.49  6.48       |                                                       |       |                                                  | —  —  —  —  —         |   |   |   | 3,000  7,000  —  —  — |   |   |   | —  —  —  —  — |   |   |   | —  —  10,000  22,000  10,000 |   |   |   | —  —  10,000  22,000  10,000 |   |   |
| Claes  Wilhelmsson           |       |       | 2,500      | ** **                                                                          |       |                                   | —     |                                                       |       |                         | 10,000  10,000                                     |                   |       |              | 2009  2011                         |                |       |                | 11.55  6.48                          |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | 10,000  10,000 |   |   |   | 10,000  10,000 |   |   |
| Seán Lance              |       |       | —     | ** **                                                                          |       |                                   | —     |                                                       |       |                         | 10,000  10,000                                     |                   |       |              | 2009  2011                         |                |       |                | 11.55  7.86                          |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | 10,000  10,000 |   |   |   | 10,000  10,000 |   |   |
| Arnold  Hoevenaars           |       |       | 2,500      | ** **                                                                          |       |                                   | —     |                                                       |       |                         | 5,000  10,000                                      |                   |       |              | 2009  2009                         |                |       |                | 8.81  11.55                          |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | 5,000  10,000 |   |   |   | 5,000  10,000 |   |   |
| Jürg  Witmer            |       |       | 15,910     | ** **                                                                          |       |                                   | 0.03       |                                                       |       |                         | —  —                                     |                   |       |              | —  —                     |                |       |                | —  —                       |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | —  — |   |   |   | —  — |   |   |
| Dominik  Koechlin            |       |       | 3,841      | ** **                                                                          |       |                                   | 0.01       |                                                       |       |                         | —  —                                     |                   |       |              | —  —                     |                |       |                | —  —                       |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | —  — |   |   |   | —  — |   |   |
| Claude  Thomann              |       |       | 4,871      | ** **                                                                          |       |                                   | 0.01       |                                                       |       |                         | —  —                                     |                   |       |              | —  —                     |                |       |                | —  —                       |                                                       |       |                                                  | —  —                                 |   |   |   | —  — |   |   |   | —  — |   |   |   | —  — |   |   |   | —  — |   |   |
| Subtotal                     |       |       | 280,610    | ** **                                                                          |       |                                   | 0.48       |                                                       |       |                         | 262,974                                            |                   |       |              |                               |                |       |                |                                 |                                                       |       |                                                  | —                                         |   |   |   | 101,974 |   |   |   | — |   |   |   | 161,000 |   |   |   | 161,000 |   |   |
| **Total**                    |       |       | 549,411    | ** **                                                                          |       |                                   | 0.94       |                                                       | ** ** | ** **                   | **1,995,474**                                      |                   |       |              |                               |                |       |                |                                 |                                                       | ** ** | ** **                                            | **—**                                     |   | ** ** | ** ** | **359,474** |   | ** ** | ** ** | **—** |   | ** ** | ** ** | **1,636,000** |   | ** ** | ** ** | **1,491,000** |   |   |

 

We account for stock-based compensation underthe fair value method in accordance with the provisions of Financial AccountingStandards Board Statement No. 123 (SFAS 123), Accounting for Stock-BasedCompensation. Under SFAS 123, the fair market value of a stock option isdetermined at the time of grant and recorded on our balance sheet as deferredcompensation, which we then amortize over the vesting period. At December 31,2005, we had €2,933 of deferred compensation. See note 8 toour financial statements included elsewhere in this annual report.

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In December 2004, the supervisory board approveda new option plan for 2005 providing for the grant of stock options toemployees other than management committee members (see Item 6 “ManagementCommittee”). Options granted under this stock option plan are exercisable whenthe options have vested. Granted options vest straight line over a period of 4years. Compensation costs are recognized in accordance with the acceleratedmethod. The options expire 5 years after date of grant. Upon termination ofemployment with the Company, options must be exercised within 90 days. Optionsgranted under the stock option plan are granted at exercise prices, which equalthe fair value of the Company’s ordinary shares at the date of grant.

In April 2004, the supervisory board approved anew option plan whereby employees and supervisory board members are grantedoptions with an exercise price 126% greater than the average closing stockprice of the Company on the three days preceding the option grant date and havea five year life. The options are subject to profit retribution provisions.Such provisions entitle us for a period of three years from issuance to receivea portion of any profits upon the sale of the shares, calculated as thedifference between the total proceeds from the sale of shares, and theaggregate selling price. The portion of the profits payable to the Companydecreases ratably over three years. The relevant portion of any profits derivedby the employee from the sale of shares received on exercise of options must beremitted to us if the employee terminates employment prior to the end of thethree year period. A total of 963,500 options with an exercise price of €9.40per share were granted under the new option plan, resulting in deferredcompensation of €3,141.Compensation expense is recognized ratably over a period of three years; €1,047or €1.09per option per twelve months. As of September 2004, under Dutch law, stockoptions and share plans need the prior approval of the general meeting ofshareholders.

As of May 31,2006, there were 4,701,750 options (orapproximately 8% of our issued share capital)available to be granted to our employees and to our supervisory board members.

**CorporateGovernance Developments**

We continuously monitor and assess applicablecorporate governance rules, including recommendations and initiatives regardingprinciples of corporate governance. These include those that have beendeveloped in the United States both by the NASDAQ National Market (“Nasdaq”)and by the SEC pursuant to the Sarbanes-Oxley Act of 2002, some of whichalready are applicable and some of which will be applicable to the Companyduring 2006, and the Dutch corporate governance code (the “Code”), which cameinto effect as of the financial year starting on or after January 1, 2004.According to Dutch law, a public company should include in its annual report astatement about the compliance with the principles and best practice provisionsof the Code that are aimed at the management board or supervisory board. Thegovernmental decree requires that a company states in its annual report if itdid not comply with the principles or best practice provisions of the Code, orif it does not have the intention to do so during current or followingfinancial years.

Important principles of the Code are:

·       strengtheningthe role of the supervisory board and its committees and to increase itsindependence, quality and expertise;

·       strengtheningthe role of the shareholders with respect to control on the functioning of themanagement board and the supervisory board, as well as with respect tonomination and remuneration of members of the management board and thesupervisory board;

·       facilitatingand stimulating shareholders to use their voting power and to activelyparticipate in the general meeting of shareholders;

·       definingthe role of the external auditor vis-à-vis the supervisory board as itsprincipal contact; and

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·       maintainingan appropriate internal risk and control system.

We are currentlyimplementing applicable provisions of the Code and the Sarbanes-Oxley Act of2002, and subsequent SEC and Nasdaq rules that have been issued pursuant thereto.

**Exemptions fromCertain Nasdaq Corporate Governance Rules**

Nasdaq rules providethat Nasdaq may provide exemptions from the Nasdaq corporate governancestandards to a foreign issuer when those standards are contrary to a law, rule orregulation of any public authority exercising jurisdiction over such issuer orcontrary to generally accepted business practices in the issuer’s country ofdomicile. We have received from Nasdaq exemptions from certain Nasdaq corporategovernance standards that are contrary to the laws, rules, regulations orgenerally accepted business practices of The Netherlands. These exemptions andthe practices followed by our company are described below:

·       Weare exempt from Nasdaq’s quorum requirements applicable to meetings of shareholders.In keeping with Netherlands law and Netherlands generally accepted businesspractice, our articles of association provide that there are no quorumrequirements generally applicable to general meetings of shareholders.

·       Weare exempt from Nasdaq’s requirements regarding the solicitation of proxies andprovision of proxy statements for meetings of shareholders. We informshareholders of meetings in a public notice, but we do not solicit proxies forgeneral meetings of shareholders. Netherlands law does not have a regulatoryregime for the solicitation of proxies and the solicitation of proxies is not agenerally accepted business practice in The Netherlands. In connection with ourAmerican Depositary Shares (“ADSs”), the Bank of New York, as depositary underour depositary agreement relating to our ADSs, distributes proxy materials toholders of our ADSs.

·       Weare exempt from Nasdaq’s requirements regarding shareholder approval. Inkeeping with Netherlands law and Netherlands generally accepted businesspractices, our articles of association do not include a shareholder approvalrequirement. Our articles of association provide that the general meeting ofshareholders may resolve to amend our articles of association, or dissolve,merge or demerge the Company, if our supervisory board first proposes themeasure.

·       We do not distribute annualreports to all of our shareholders in accordance with Nasdaq rules. As ourshares are bearer shares according to Netherlands law, we are not able todistribute to shareholders copies of annual and interim reports. Copies of suchreports are available to shareholders at our corporate headquarters, and arefiled with Nasdaq and the Bank of New York as depositary under our depositaryagreement relating to our ADSs. Under the terms of the depositary agreement,the Bank of New York distributes our annual reports to holders of our ADSs.

**Limitation ofLiability and Indemnification Matters**

Pursuant to Dutch law, each member of our supervisoryand management boards is responsible to the Company for the proper performanceof his or her assigned duties. They are also responsible for taking measures toprevent the consequences of any improper performance of duties by anothermember of our supervisory or management board. Our articles of associationprovide that our supervisory and management board members are discharged fromliability for their actions as board members, if our general meeting ofshareholders adopts a resolution to that effect. This discharge extends only toactions or omissions disclosed in or apparent from the adopted annual accountsor otherwise communicated to our general meeting of shareholders.

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This discharge of liability may be limited bymandatory provisions of Dutch law, such as in the case of bankruptcy. UnderDutch law, our supervisory board members and the members of our managementboard generally cannot be held personally liable for decisions made exercisingtheir reasonable business judgment.

Our articles of association provide that we shallgenerally indemnify any person who is or was a member of our supervisory boardor our management board or one of our employees, officers or agents, andsuffers any loss as a result of any action in connection with their service tous, provided they acted in good faith in carrying out their duties.

This indemnificationgenerally will not be available if the person seeking indemnification actedwith gross negligence or willful misconduct in the performance of their dutiesto the Company. A court in which an action is brought may, however, determinethat indemnification is appropriate nonetheless.

**Employees**

As of December 31, 2005, we had 282 full-timeequivalents direct and indirect employees, all located in The Netherlands, ofwhom 240 were engaged in, or directly support, research and developmentactivities, while the remaining 42 were employed in administrative and businessdevelopment positions. The acquisition of Berna Biotech AG in February 2006brings the total head count to approximately 900 full time equivalents, spreadover The Netherlands, Switzerland, Spain, Italy and Korea.

As of December 31, 2004, we had 210 full-timeequivalents direct and indirect employees of whom 171 were engaged in, ordirectly support, research and development activities and 39 were employed inadministrative and business development positions.

As of December 31, 2003, we had 182 full-timeequivalents direct and indirect employees of whom 151 were engaged in, ordirectly support, research and development activities and 31 were employed inadministrative and business development positions.

In 2003, we established aworkers council for our employees in compliance with certain Dutch legalrequirements. The workers council is a representative body that consists ofseven elected employees. The management board is required to seek thenon-binding advice of the workers council before making certain majordecisions, such as those relating to a major acquisition, a change of controlor the appointment or dismissal of a management board member. The workerscouncil must also be consulted in connection with any material change affectingall employees or certain groups of employees, including with respect to anychanges to our employee benefits programs. No collective bargaining agreementsare applicable to our employees. We believe that our relations with ouremployees are generally good.

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**Item 7.**                        MajorShareholders and Related Party Transactions

**Major Shareholders**

The following table sets forth certain informationconcerning the beneficial ownership of our ordinary shares as of May 31, 2006 by:

·       eachshareholder who is known by us to beneficially own (approximately) 5% or moreof our outstanding ordinary shares; and

·       oursupervisory board members and management board members, each as a group.

Percentage of beneficialownership is based on an aggregate of 58,907,026****ordinary shares outstanding at May 31, 2006 except asotherwise noted:

| ** **                                                               | ** ** | **Ordinary Shares  Beneficially Owned(1)** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **Beneficial Owner**                                                | ** ** | ** **                                           | ** ** | **Number of  Ordinary Shares** | ** ** | **Holding (%)** | ** ** |
| Aviva plc                                                                |       |                                                 | —     |   |   |   | 5.02 | (2) |   |
| A. van Herk  B.V.                                                        |       |                                                 | —     |   |   |   | 10.3 | (3) |   |
| FID Growth  Company Fund                                                 |       |                                                 | —     |   |   |   | 4.93 | (4) |   |
| Ordinary shares held by the members of our management  board as  a group |       |                                                 | 268,801    |   |   |   | 0.46 |   |   |
| Ordinary shares held by our supervisory board members as  a group        |       |                                                 | 280,610    |   |   |   | 0.48 |   |   |
|                                                                          |            |                                                      |            |  |  |  |  |  |  |  |  |

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(1)          Under Rule 13d-3 of the Exchange Act, more thanone person may be deemed to beneficially own certain ordinary shares (if, forexample, persons share the power to vote or the power to dispose of theordinary shares). In addition, a person is deemed to beneficially own ordinaryshares if the person has the right to acquire the ordinary shares (for example,upon exercise of an option) within 60 days of the date as of which theinformation is provided. As a result, the percentage of outstanding ordinaryshares of any person as shown in this table does not necessarily reflect theperson’s actual ownership or voting power with respect to the number ofordinary shares actually outstanding. In addition, filings with The NetherlandsAuthority for the Financial Markets (*AutoriteitFinanciële Markten*) with respect to shareholdings in publiccompanies do not specify the number of shares held by the filing party.

(2)          Percentage holding is derived from a filing made by Avivaplc. with The Netherlands Authority for the Financial Markets (*Autoriteit Financiële Markten*) on February 1,2005. The number of shares held was not filed.

(3)          Percentage holding is derived from a filing made by A. vanHerk with The Netherlands Authority for the Financial Markets (*Autoriteit Financiële Markten*) on January 10,2006. The number of shares held was not filed.

(4)          Percentage holding is derived from a filing made by FIDGrowth Company Fund with the Netherlands Authority for the Financial Markets (*Autoriteit Financiële Markten*) on March 2,2006. The number of shares held was not filed.

As of May 31, 2006 there were 10,684,766 ADSs,each representing one ordinary share, all of which were held of record by nineregistered holders in the United States (including The Depository TrustCompany). The number of ADSs at May 31, 2006 represent 18% of our ordinaryshares that were issued and outstanding on that date.

To the best of ourknowledge, we are not directly or indirectly controlled by any othercorporation, foreign government or other entity.

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***Obligations of Shareholders to Disclose Holdings underNetherlands Law***

***Current situation***

The Netherlands’ Act on Disclosure of Holdings inListed Companies (the “Major Holdings Act”) applies to any person or entitythat, directly or indirectly, acquires or disposes of an interest in the votingrights and/or the capital of a public limited company incorporated under thelaws of The Netherlands that is officially listed on a stock exchange withinthe European Union (the “EU”). Disclosure is required when, as a result of anacquisition or disposal, the percentage of voting rights or capital interestacquired or disposed of by a person or an entity reaches, exceeds or fallsbelow 5, 10, 25, 50 or 66.67percent. With respect to us, the Major Holdings Act wouldrequire any person or entity whose interest in our voting rights and/or capitalreached, exceeded or fell below those percentage interests to notify in writingboth us and The Netherlands Authority for the Financial Markets (*Autoriteit Financiële Markten*or*AFM*) immediately after the acquisition ordisposal of the triggering interest in our share capital. Upon receipt of thenotification, the AFM will disclose the information, as notified, to the publicby means of an advertisement in a newspaper distributed throughout TheNetherlands.

In addition, the membersof our management and supervisory boards are required to immediately notify theAFM of any change in our shares or options they hold or voting rights inrespect of these shares. The AFM will disclose this information in a public registeron its website. Noncompliance with the obligations of the Major Holdings Actcan lead to criminal prosecution. In addition, a civil court can issue ordersagainst any person who fails to notify or incorrectly notifies in accordancewith the Major Holdings Act, including suspension of the voting rights inrespect of such person’s ordinary shares.

***New developments***

A legislative proposal is pending in the DutchParliament, entitled the Act on Disclosure of Voting and Capital Interest inListed Companies (Wet Melding Zeggenschap en Kapitaalbelang in EffectenuitgevendeInstellingen) (the “Act on Disclosure”). The Act on Disclosure is expected tocome into force in the course of 2006 and will implement part of theTransparency Directive (2004/109/EC). The proposal currently includes thefollowing material changes with regard to the notification obligations ofshareholders in Dutch listed companies:

(a)          once in every calendaryear, every holder of a capital interest (in terms of capital or voting rights)of 5% or more must renew its notification to reflect changes in the percentageheld in the listed company, including changes as a consequence of changes inthe total issued share capital; and

(b)         ashareholder will be required to notify the AFM whenever the percentage of itscapital interest (in terms of capital or voting rights) exceeds or falls belowthe revised threshold of 5%, 10%, 15%, 20%, 25% of our outstanding sharecapital. A shareholder who holds more than 25% of the voting rights or of ourissued capital should notify the AFM upon any acquisition or disposal of votingrights or shares.

**RelatedParty Transactions**

***Transactions Involving Our SeniorManagement***

The following table describes all loans made to members ofour management board and senior management since January 1, 2001. We havenot made any loans to any of our supervisory board members. The interest rate onall loans was 4.4% per annum in 2003, 3.5% per annum in 2004, and 3.5% perannum in 2005. We set these interest rates in relation to Dutch income tax law,which changes on an annual basis. These loans become payable at the time sharesreceived on exercise of related options are sold or, if the employee ceases towork for us before this time, immediately. We extended these loans prior to July 30,2002, the date legislation was passed in the United States, prohibiting thegrant of additional loans to 

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company officers, and no loans orour senior management have been extended since that date. The loans to thepersons listed below were extended in connection with options granted to themon our ordinary shares, and related taxes. 

| **Name**             | ** ** | ** ** | ** ** | **Largest amount of loan**outstanding sinceJanuary 1, 2001 | ** ** | **Amount of loan**outstanding atMay 31, 2006 | ** ** | **Current**Interest Rate | ** ** |
|----------------------|------------|------------|------------|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------|------------|
| Ronald H.P. Brus     |       |       | €     | 132                                                                                      |       |                                                                  |       | €                        | 111        |   |   |   | 3.5 | % |   |
| Jaap Goudsmit        |       |       | €     | 25                                                                                       |       |                                                                  |       | €                        | —     |   |   |   | 3.5 | % |   |
| René K. Beukema |       |       | €     | 59                                                                                       |       |                                                                  |       | €                        | 52         |   |   |   | 3.5 | % |   |

 

Loans to Ronald H.P. Brus for anamount of €13 provide that he will not owe us interest with respect to the entireprincipal of these loans. In each case, we cancel a certain portion of theinterest owed to us and the associated income tax, and attribute such cancelledamounts to salary for income tax purposes.

Neither we nor any of oursubsidiaries was a party to any material transactions, or proposedtransactions, in which any director, any executive officer, any spouse orrelative of any of the foregoing, or any relative of any such spouse had or wasto have a direct or indirect material interest.

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**Item8.**                        Financial Information

See Item18, “Financial Statements.”

**LegalProceedings**

In theordinary course of business, we have been involved in certain disputes. Neitherwe, nor any of our subsidiaries, has been party to any legal or arbitrationproceedings that may have, or have had during the 12 months preceding the dateof this document, a significant effect on our financial position or any of oursubsidiaries nor, as far as we are aware, are any such legal proceedingspending or threatened, except for those disclosed in Item 4.

**Dividendsand Dividend Policy**

Neitherwe or our principal Dutch subsidiaries, Crucell Holland B.V., U-Bisys B.V. andChromagenics B.V. have ever declared or paid dividends. We do not intend to paydividends on our ordinary shares for the coming years, and thereafter only onthe condition that our financial performance is adequate and it is in theshareholders’ interest to pay dividends instead of investing the proceeds intothe company. Any payment of future dividends and the amounts thereof willdepend upon earnings, statutory and financial requirements and other factorsdeemed relevant by our management board, and will be subject to withholding taxin The Netherlands. In the event that we pay dividends in the future, holders ofour ADSs will be entitled to receive payments in U.S. dollars in respect ofdividends on the underlying ordinary shares in accordance with a depositagreement dated October 26, 2000, between The Bank of New York and us.

**SignificantChanges**

Otherthan as disclosed in this annual report, no significant change has occurredsince December 31, 2005, the date of our most recent audited financialstatements.

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**Item9.**                        The Offer and Listing

Our ordinary shares are traded in the United States solely in the form of ADSs,each ADS representing one ordinary share. Each ADS is evidenced by an AmericanDepositary Receipt issued by The Bank of New York acting as Depositary inrespect thereof.

As of May 31, 2006, 58,907,026 ordinary shares were issued andoutstanding. On the same date, there were 10,684,766 ADSs, each representingone ordinary share.

Our ordinary shares have been listedon Eurolist by Euronext Amsterdam N.V. (formerly Amsterdam Exchanges N.V.)since October 25, 2000 and the ADSs have been quoted on the NasdaqNational Market since October 27, 2000, both under the symbol “CRXL”.Since 22 February 2006, our shares have been listed on the SWX SwissExchange (in Zürich, under the symbol “CRX”) as a result of our acquisition ofBerna Biotech.

The following table sets forth the range of high andlow closing prices, in U.S. dollars, for our ADSs on the Nasdaq National Marketfor the periods indicated.

| ** **                                              | ** ** | **ADSs**   | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **High**   | ** ** | **Low** | ** ** |
| **Annual information for the past five years**          | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2001                                                    |       | 12.25      |       | 4.88 |   |
| 2002                                                    |       | 6.40       |       | 2.45 |   |
| 2003                                                    |       | 6.16       |       | 1.54 |   |
| 2004                                                    |       | 13.77      |       | 6.38 |   |
| 2005                                                    |       | 29.95      |       | 12.30 |   |
| **Quarterly  information for the past two years**       | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2004**                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                                           |       | 8.57       |       | 6.38 |   |
| Second Quarter                                          |       | 9.19       |       | 6.86 |   |
| Third Quarter                                           |       | 8.56       |       | 6.83 |   |
| Fourth Quarter                                          |       | 13.77      |       | 8.42 |   |
| **2005**                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                                           |       | 15.29      |       | 12.30 |   |
| Second Quarter                                          |       | 24.64      |       | 14.20 |   |
| Third Quarter                                           |       | 26.81      |       | 20.00 |   |
| Fourth Quarter                                          |       | 29.95      |       | 23.85 |   |
| **2006**                                                | ** ** | ** ** | ** ** | ** ** | ** ** |
| First Quarter                                           |       | 28.62      |       | 23.92 |   |
| **Monthly  information for the most recent six months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| December 2005                                           |       | 26.90      |       | 23.85 |   |
| January 2006                                            |       | 27.35      |       | 24.48 |   |
| February 2006                                           |       | 25.20      |       | 24.70 |   |
| March 2006                                              |       | 28.62      |       | 23.92 |   |
| April 2006                                              |       | 28.82      |       | 25.60 |   |
| May 2006                                                |       | 27.26      |       | 22.41 |   |

 

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Ourordinary shares trade on Eurolist by Euronext Amsterdam N.V. through thebook-entry facilities of NEGICEF, Euroclear and Clearstream Luxembourg. For theordinary shares the International Securities Identification Number (ISIN) codeis NL0000358562, the Amsterdam Security Number is 35856 and the Common Code is11907164.

The following table sets forth the range of high and lowclosing prices, in euros, for our ordinary shares in The Netherlands for theperiods indicated.

| ** **                                              | ** ** | **Ordinary Shares** | ** ** |
|---------------------------------------------------------|------------|--------------------------|------------|
| ** **                                              | ** ** | **High**                 | ** ** | **Low** | ** ** |
| **Annual information for the past five years**          | ** ** | ** **               |       |   |   |
| 2001                                                    |       | 13.30                    |       | 5.40 |   |
| 2002                                                    |       | 7.29                     |       | 2.50 |   |
| 2003                                                    |       | 4.92                     |       | 1.40 |   |
| 2004                                                    |       | 10.10                    |       | 4.83 |   |
| 2005                                                    |       | 24.77                    |       | 9.50 |   |
| **Quarterly  information for the past two years**       | ** ** | ** **               |       |   |   |
| **2004**                                                | ** ** | ** **               |       |   |   |
| First Quarter                                           |       | 6.93                     |       | 4.83 |   |
| Second Quarter                                          |       | 7.61                     |       | 5.62 |   |
| Third Quarter                                           |       | 7.03                     |       | 5.65 |   |
| Fourth Quarter                                          |       | 10.10                    |       | 6.67 |   |
| **2005**                                                | ** ** | ** **               |       |   |   |
| First Quarter                                           |       | 11.67                    |       | 9.50 |   |
| Second Quarter                                          |       | 20.39                    |       | 10.29 |   |
| Third Quarter                                           |       | 22.01                    |       | 16.30 |   |
| Fourth Quarter                                          |       | 24.77                    |       | 19.72 |   |
| **2006**                                                | ** ** | ** **               |       |   |   |
| First Quarter                                           |       | 23.49                    |       | 20.07 |   |
| **Monthly  information for the most recent six months** | ** ** | ** **               |       |   |   |
| December 2005                                           |       | 22.57                    |       | 19.72 |   |
| January 2006                                            |       | 22.42                    |       | 20.14 |   |
| February 2006                                           |       | 21.21                    |       | 20.65 |   |
| March 2006                                              |       | 23.49                    |       | 20.07 |   |
| April 2006                                              |       | 23.29                    |       | 20.86 |   |
| May 2006                                                |       | 21.43                    |       | 17.41 |   |

 

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**Item10.**                 Additional Information

**Memorandum and Articles ofAssociation**

Set outbelow is a summary of material information concerning our shares, which are ourordinary shares together with our preference shares, and related materialprovisions of our articles of association and of Book 2 of the Dutch Civil Code(*Boek 2 van het Burgerlijk Wetboek*).This summary is not complete and is qualified in its entirety by reference toour articles of association and to Dutch law.

***General***

We wereincorporated as a limited liability company (*naamlozevennootschap*) on October 9, 2000 by deed executed before Mr. R.J.J.Lijdsman, civil law notary. Our corporate seat is in Leiden, The Netherlands,and we have offices at Archimedesweg 4, 2333 CN Leiden, The Netherlands. We areregistered in the trade register of the Chamber of Commerce and Industry forLeiden under number 28087740. The statement of no objection of the Minister ofJustice in respect of our deed of incorporation was issued on October 9,2000 under number N.V. 1133178. Our agent in the United States is CT Corporation,111 Eighth Avenue, New York, New York 10011.

***Corporate Purpose***

Ourobjects include acquiring, establishing and managing companies in our field,controlling and using intellectual property, and funding our operations.

***Limitation of Liability andIndemnification Matters***

Pursuant to Dutch law, each memberof our supervisory and management boards is responsible to us for the properperformance of his or her assigned duties. They are also responsible for takingmeasures to prevent the consequences of any improper performance of duties byanother member of our supervisory board or our management board. Our articlesof association provide that our managing board members and our supervisoryboard members are discharged from liability for their actions as board members,if our general meeting of shareholders adopts a resolution to that effect. Thisdischarge extends only to actions or omissions disclosed in or apparent fromthe adopted annual accounts or otherwise communicated to our general meeting ofshareholders.

This discharge of liability may belimited by mandatory provisions of Dutch law, such as in the case ofbankruptcy. Under Dutch law, our supervisory board members and members of ourmanagement board generally cannot be held personally liable for decisions madeexercising their reasonable business judgment.

Our articles of association providethat we shall generally indemnify any person who is or was a member of oursupervisory board or our management board or one of our employees, officers oragents, and suffers any loss as a result of any action in connection with theirservice to us, provided they acted in good faith in carrying out their duties.

Thisindemnification generally will not be available if the person seekingindemnification acted with gross negligence or willful misconduct in theperformance of their duties to us. A court in which an action is brought may,however, determine that indemnification is appropriate nonetheless.

***Share Capital***

Ourauthorized share capital amounts to €40,800 divided into: 85,000,000 ordinary shares and85,000,000 preference shares, each with a par value of €0.24.

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At December 31,2005, there were 41,440,613 ordinary shares issued and outstanding. Nopreference shares are currently issued and outstanding. The ordinary shares canbe issued in bearer or registered form. The preference shares can only beissued in registered form. No share certificates will be issued for shares inregistered form.

***OrdinaryShares***

Ourordinary shares may be in registered or bearer form and will be in bearer formunless the shareholder indicates otherwise in writing. Only bearer ordinaryshares can trade on Euronext Amsterdam.

***BearerOrdinary Shares***

All ofour bearer ordinary shares will be embodied in a single global sharecertificate which will not be exchanged for single or multiple physicalsecurities and which we will deposit with NECIGEF for safekeeping on behalf ofthe parties entitled to the ordinary shares in bearer form.

Theordinary shares represented by the single global share certificate may only betransferred through the book-entry system maintained by NECIGEF. A participantin the collective deposit (verzameldepot) of a securities institution admittedto NECIGEF may, at his own expense, require conversion of one or more of hisbearer ordinary shares into ordinary shares in registered form.

***RegisteredOrdinary Shares***

We enterholders of registered ordinary shares in the register of shareholders. We donot issue share certificates. However, the shareholder may request an extractfrom the shareholders’ register regarding the ordinary shares registered in hisname. We are required to provide this free of charge. Dutch law requires thattransfers of registered ordinary shares be recorded in a written instrument towhich we are a party or which is served on us, or that the transaction beacknowledged by us.

***PriorityShares***

In linewith the provisions of the Dutch corporate governance code and ourcorporate governance, our management and supervisory boards believe that theuse of priority shares should be considered a form of permanent protectionagainst possible takeovers, which should be abolished. Instead, our managementand supervisory boards believe preference shares, which provide temporaryanti-take-over protection, are more appropriate.

At theannual general meeting of shareholders in 2005, our shareholders approved theamendment of our articles of association to eliminate the priority shares andthe rights of the holders of the priority shares. The right of the priority shareholders to make binding nominations for the appointment ofour supervisory board members now lies with our supervisory board. Theamendment of our articles of association was effected on November 21,2005.

***PreferenceShares***

As ofthe date of this annual report, we have not issued any preference shares. On October 25,2000, we established a foundation called Stichting Preferente Aandelen Crucell,also referred to as the Preferred Foundation. The Preferred Foundation’s objectis to safeguard our interests and those of our affiliates through acquiring andmanaging our preference shares and by exercising the rights attaching to theseshares, in particular, the voting rights.

In connection with theabolition of our priority shares and in order to achieve adequate temporaryprotection, the agreement between us and the Preferred Foundation was amendedto grant an option to the Preferred Foundation to acquire a number ofpreference shares equal to the number of our outstanding shares, necessary tomatch the total number of statutory votes on all of the ordinary shares 

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thenoutstanding. The amendment allows the Preferred Foundation to acquire a numberof shares equal to 100% of our then outstanding shares; prior to the amendment,it could only acquire a number of shares equal to 50% of our then outstandingshares. The new agreement was explained to our shareholders at the annualgeneral meeting of shareholders in 2005. ThePreferred Foundation must pay at least 25% of the nominal value of thepreference shares it acquires from us. If we acquire any preference shares, theymay be cancelled.

A boardof governors of up to five persons directs the Preferred Foundation. PieterStrijkert, in his capacity as chairman of our supervisory board, and PieterBouw, Mick W. den Boogert, Sweder van Wijnbergen and Gerard P. Krans, have beenappointed to the board of governors. A majority of these members may not bemembers or former members of our management or supervisory board, or anemployee of any of our advisers, any of our banks or us. These independentmembers are appointed by the board of governors. The non-independentmembers are appointed by our supervisory board after consultation with ourmanagement board.

Membership of the board of governors of the PreferredFoundation terminates upon:

·       voluntary retirement, reaching the age of 72, deathor bankruptcy;

·       for our non-independent members, resignation,or dismissal by the members of our supervisory board;

·       for our independent members, if they cease to beindependent;

·       dismissal by the complete board of the PreferredFoundation; or

·       periodicretirement in accordance with a rotation plan to be drawn up by the PreferredFoundation’s board of governors, however, these members may be reappointed.

***Issue of Shares and Pre-emptive Rights***

Ourgeneral meeting of shareholders, or our management board if the general meetingof shareholders has delegated the power to it, has the authority to decide onany further issuance of shares or rights to subscribe for shares and on theterms and conditions of such issuance. Our management board is the authorizedcorporate body (*orgaan*) for thispurpose until June 1, 2010 and this authorization may at any time beextended for periods of up to five years. Our management board’s authority toissue shares is limited to our authorized share capital.

Ourmanagement board can issue shares of any class if it has the approval of oursupervisory board. Without specific authorization from our general meeting ofshareholders our management board may not issue preference shares or grantoptions for such shares if, as a result, more preference shares than other shareswill or could become outstanding.

Eachholder of ordinary shares has pre-emptive rights to subscribe for any ordinaryshares that we issue and has pre-emptive rights to subscribe if we grant rightsto subscribe for ordinary shares. Pre-emptive rights are in proportion tothe percentage of our outstanding ordinary shares that the holder owns.Pre-emptive rights do not apply to ordinary shares issued for a non-cashcontribution, to ordinary shares issued to our employees or ordinary sharesissued to a person who exercises a previously-acquiredright to subscribe for ordinary shares. Holders of preference shares do nothave pre-emptive rights if we issue ordinary shares, and holders of ordinaryshares have no pre-emptive rights to purchase preference shares if we issuepreference shares.

If ourmanagement board has been delegated the authority to issue shares, it can limitor exclude any pre-emptive rights as long as the general meeting ofshareholders has granted it that power and our supervisory board approves. Atpresent, our management board is authorized to do this. This authorization 

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is valid until June 1, 2010 and the general meeting ofshareholders may at any time extend this authorization for periods of up tofive years.

Ourshares cannot be issued below par. The ordinary shares must be fully paid upupon issue. Preference shares may be issued without being fully paid up, but atleast one-quarter of the nominal amount must be paid up upon subscription, andeach issue of preference shares must have the same amount paid up. Ourmanagement board may determine the day and the amount of a further call forpayment on preference shares.

***Acquisitionby Us of Shares in Our Own Capital***

We may acquire our own shares if the following conditionsare met:

·       our general meeting of shareholders has authorizedour management board to acquire the shares;

·       the authorization specifies the number of shareswhich we may acquire, the manner in which they may be acquired and the limitswithin which the price must be set;

·       our shareholders’ equity, after deduction of theprice of acquisition, is not less than the sum of the paid and called upportion of the share capital and the reserves that provisions of Dutch law orour articles of association require us to maintain; and

·       the aggregate par value of the shares to be acquired,together with the shares in our share capital that we already hold directly,indirectly or as pledgee, does not equal more than one-tenth the aggregate parvalue of our total issued share capital.

We maynot acquire our own shares if they have not been fully paid-up. Theauthorization by the general meeting of shareholders may be for a term of up to18 months.

We andour subsidiaries may not vote shares which we or they hold. We may acquireshares to transfer them to our employees or the employees of our groupcompanies under designated stock option plans without authorization.

***CapitalReduction***

If ourmanagement board proposes, our supervisory board approves and Dutch lawpermits, the general meeting of shareholders can reduce our issued sharecapital by cancellation of shares or reduction of the nominal value of shares.

**Other Key Provisions of our Articlesof Association**

***VotingRights and Shareholders’ Meetings***

We must hold annual general meetings of shareholders withinsix months of the end of our fiscal year. The annual meeting is held, amongother things, to adopt our annual accounts. We must hold extraordinary generalmeetings of shareholders whenever:

·       shareholders and holders of depositary receipts forshares together representing at least one-tenth of our outstanding sharecapital request it in writing, listing the topics to be discussed; and

·       our management board or our supervisory board deemsappropriate.

Generalmeetings of shareholders may only be held in the municipalities of Leiden,Amsterdam, Haarlemmermeer (including Schiphol Airport and Schiphol-Rijk),Utrecht, Rotterdam and The Hague.

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Each shareholder can attend generalmeetings in person or by proxy, address the meeting and vote. Each share,whether ordinary or preference, confers one vote on the shareholder. Themanagement board must be notified in writing of a registered shareholder’sintention to attend the general meeting of shareholders. The holders of bearerordinary shares can vote if a NECIGEF participant sends a written statement asto their shareholdings to our offices. Resolutions are passed by absolutemajority of votes cast unless stated otherwise in Dutch law and our articles ofassociation.

The general meeting of shareholderscan amend our articles of association, dissolve us, merge us or demerge us onlyif proposed by the supervisory board.

Dutchlaw and our articles of association do not impose any limitations on non-Dutchownership or voting of our ordinary shares.

***Annual Accounts***

We havea calendar fiscal year. Dutch law requires that within five months after theend of our fiscal year, unless the general meeting of shareholders has extendedthis period for a maximum of six months, our management board must makeavailable to the shareholders a report with respect to that fiscal year. Thisreport must include the financial statements and a report of an independentaccountant. The annual report is submitted to the annual general meeting ofshareholders for adoption. See “Management—Limitation of Liability andIndemnification Matters”.

***Dividends***

Annual dividends may only be paidout of profits as shown in the adopted annual financial statements. We may notmake distributions if the distribution would reduce our shareholders’ equitybelow certain reserves required by Dutch law or our articles of association.The profits must first be used to set up and maintain reserves required byDutch law and must then be set off against certain financial losses. Thepreference shares will be paid their dividends, which will be a certainpercentage of their nominal value, first. With supervisory board approval, ourmanagement board then decides whether and how much of the remaining profit theywill reserve. Any profits remaining can be paid as a dividend on the ordinaryshares. With the approval of our supervisory board and subject to Dutch law,our management board can pay an interim dividend. The payment of an interimdividend in our or another entity’s shares requires the additional approval ofour general meeting of shareholders.

We canmake distributions to shareholders at the charge of one or more of ourreserves. Holders of shares are entitled to the full dividend for the fiscalyear 2000 and subsequent fiscal years. Any dividends that are not claimedwithin five years of their declaration revert to us.

***Amendment of Our Articles ofAssociation and Liquidation Rights***

Thegeneral meeting of shareholders may only resolve to amend our articles ofassociation or to dissolve, merge or demerge us on the proposal of oursupervisory board. The class of shareholders affected must approve a resolutionto amend the articles of association to change the rights of the class. If weare dissolved and liquidated, after we pay all debts and liquidation expenses,the holders of preference shares have first rights to payment of any dividendsnot fully paid to them in previous years and of the nominal value of theirpreference shares. Any remaining assets will be distributed to the holders ofordinary shares.

**Enforcementof Civil Liabilities**

We are incorporated under the lawsof The Netherlands, and the majority of the members of our supervisory board,all of the members of our management board and management team and all of theexperts named in this document are residents of, and most of our and theirassets are in, jurisdictions 

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outsidethe United States. As a result, it may not be possible for you to effect serviceof process within the United States upon us or these persons, or to enforceagainst us or these persons in courts in the United States, judgments of thesecourts predicated upon the civil liability provisions of United Statessecurities laws. In addition, it is not clear whether a Dutch court wouldimpose civil liability on us, members of our management board or supervisoryboard or management team or any of the experts named in this document in anoriginal action based solely upon the federal securities laws of the UnitedStates brought in a court of competent jurisdiction in The Netherlands. Dutchlaw, furthermore, does not recognize a shareholder’s right to bring aderivative action on behalf of a corporation.

Ourlegal counsel in The Netherlands, Allen & Overy, has advised us thatbecause there is no treaty on the reciprocal recognition and enforcement ofjudgments in civil and commercial matters between the United States and TheNetherlands, courts in The Netherlands will not automatically enforce a finaljudgment rendered by a United States court. In order to obtain a judgmentenforceable in The Netherlands, claimants must litigate the relevant claimagain before a Dutch court of competent jurisdiction. Under current practice, however,a Dutch court will recognize a final and conclusive judgment rendered by aUnited States court if the Dutch court finds that:

·       theUnited States court assumed jurisdiction on grounds which are acceptable froman international law perspective;

·       thefinal judgment results from proceedings compatible with Dutch concepts of dueprocess; and

·       thefinal judgment does not contravene public policy of The Netherlands.

If the Dutch courtrecognizes the final judgment, that court generally will grant the samejudgment without litigating again on themerits.

**MaterialContracts**

On December 18, 2002 we enteredinto a collaboration agreement with DSM Biologics Holding, Inc., DSMBiologics Company, Inc. and DSM Biologics Company, B.V. Under the terms ofthe agreement, we granted DSM anexclusive license to our PER.C6 technology for the contract manufacturing ofrecombinant proteins and monoclonal antibodies. We will receive licensing feesover a four year period, depending on the achievement of certain cumulativemilestones, and are obligated to commit to certain expenditures in connectionwith the development of the PER.C6 production platform. DSM is entitled to apercentage of all non-service fees under the contract, in addition to anexclusive license to the technology that includes the right to sublicense.

In December 2005 the Companyand DSM announced that they will strengthen and expand the development of thePER.C6 protein and monoclonal antibody licensing business. The two companieswill create an integrated solution for the production of recombinant proteinsand monoclonal antibodies on PER.C6 in order to increase licensing and royaltyincome and accelerate the development and roll-out of the PER.C6 technologyplatform in the market. The existing collaboration agreement was amended andterminated, resulting in release of deferred revenues and recognition ofcertain milestones and agreed to by DSM.

On December 31, 2003, weentered into a collaboration and license agreement with Aventis Pasteur S.A.(now sanofi pasteur) to develop and commercialize influenza vaccine productsbased on our PER.C6 technology. Under the terms of the agreement, we grantedsanofi pasteur an exclusive license to research, develop, manufacture andcommercialize influenza vaccine products based on our PER.C6 technology. Wereceived an up-front payment and will receive milestone payments, annualpayments, research and development funding totaling €30 million, and high single-up to double-digit royalties on future PER.C6-based influenzavaccine sales. We retain commercialization rights for Japan, where sanofipasteur will supply finished vaccine products to us and we will pay a royaltyon sales to sanofi pasteur.

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On April 13,2005 we entered into a manufacturing contract with the Vaccine Research Center(VRC), part of the National Institute of Allergy and Infectious Diseases(NIAID) of the National Institutes of Health (NIH), to manufacture up to tenbatches of clinical material of the PER.C6-based Ebola vaccine in its ownmanufacturing facility. These materials will be used for Phase I and earlyPhase II clinical studies in humans. We will receive up to €21.4 million (US$27.6million) from the VRC for the manufacturing of these clinical lots, over aperiod of 5 years, commencing April 15, 2005.

**ExchangeControls**

Thereare currently no Dutch laws, decrees or regulations that restrict the export orimport of capital, including, but not limited to, foreign exchange controls, orthat affect the remittance of dividends or other payments to non-Dutchresidents or to U.S. holders of our securities except as otherwise set forth inItem 10, “Taxation”.

**Taxation**

Thefollowing is a summary of the material Dutch and U.S. tax consequences of aninvestment in ordinary shares or ADSs. This summary does not discuss everyaspect of taxation that may be relevant to a particular investor who is subjectto special treatment under any applicable law, and is not intended to beapplicable in all respects to all categories of investors. This summary alsoassumes that our business will be conducted in the manner outlined in thisdocument. Changes in our organizational structure or the manner in which weconduct our business may invalidate this summary. The laws upon which thissummary is based are subject to change, perhaps with retroactive effect. Achange to these laws may invalidate the contents of this summary, which willnot be updated to reflect changes in the laws. Prospective investors shouldconsult their professional tax advisors regarding their particular personal taxconsequences of acquiring, owning and disposing of our ordinary shares or ADSs.

**CertainDutch Tax Consequences for Holders of Ordinary Shares or ADSs**

Thissummary describes the principal tax consequences that will generally apply inthe case of an investment in the ordinary shares or ADSs under Dutch tax lawsin force and in effect as of the date hereof, and is subject to changes inDutch law, including changes that could have retroactive effect. Not everypotential tax consequence of such investment under the laws of The Netherlandswill be addressed.

***Dutch Taxation of ResidentShareholders***

The summary ofcertain Dutch taxes set out in this section “Dutch Taxation of ResidentShareholders” is only intended for the following investors:

(1)         individualswho are resident or deemed to be resident or who have opted to be resident inThe Netherlands for purposes of Dutch taxation and who invest in the ordinaryshares or ADSs, excluding individuals who invest in the ordinary shares orADSs that form part of a substantial interest in us and excluding individualswho are our employees or who are deemed to be our employees or employees of anyentity related to us (the “Dutch Individuals”); and

(2)         corporate entities (includingassociations which are taxable as corporate entities) that are resident ordeemed to be resident in The Netherlands for purposes of Dutch taxation and whoinvest in the shares or ADSs, excluding:

(a)           corporate entities that are not subjectto Dutch corporate income tax;

(b)          pension funds (*pensioenfondsen*) and other entities that are wholly orpartly exempt from Dutch corporate income tax;

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(c)           corporate entities that hold ordinaryshares or ADSs that qualify for application of the participation exemption (aslaid down in the Dutch Corporate Income Tax Act 1969); and

(d)          investment institutions (*beleggingsinstellingen*) as defined in theDutch Corporate Income Tax Act 1969;

(the “Dutch Corporate Entities”).

Generally, a holder of ordinaryshares or ADSs will not have a substantial interest if he, his spouse, certainother relatives (including foster children) or certain persons sharing hishousehold, do not hold, alone or together, whether directly or indirectly, theownership of, or certain other rights over, ordinary shares representing 5% ormore of our total issued and outstanding capital (or the issued and outstandingcapital of any class of shares), or rights to acquire ordinary shares, whetheror not already issued, that represent at any time 5% or more of our totalissued and outstanding capital (or the issued and outstanding capital of anyclass of shares) or the ownership of certain profit participating certificatesthat relate to 5% or more of our annual profit and/or to 5% or more of ourliquidation proceeds. A deemed substantial interest is present if (part of) asubstantial interest has been disposed of, or is deemed to have been disposedof, on a non-recognition basis, unless, in the case of an actual disposal, theconsideration received forms part of a substantial interest.

***Individualand Corporate Income Tax.***   *Dutch Individuals not engaged or deemed to be engaged in an enterpriseand Dutch Individuals for whom the benefits derived from the ordinary shares orADSs are not treated as “results from other activities*.*”* Under current legislation, the taxable benefit from aDutch (private) Individual’s “savings and investments” (sparen en beleggen) isset annually at 4% of the average of the so-called “yield basis”(rendementsgrondslag) at the beginning and at the end of a year, insofar as theaverage exceeds the “exempt net asset amount” (heffingvrij vermogen). Suchtaxable benefit is reduced by such portion of the personal allowance as has notbeen taken into account in respect of certain other types of income. Thisbenefit shall be taxed at the rate of 30%. For Dutch Individuals who invest inthe ordinary shares or ADSs, the ordinary shares or ADSs will form part of theyield basis. The ordinary shares or ADSs will be taken into account in theyield basis at their fair market value. If the actual benefits from theordinary shares or ADSs exceed 4% of the yield basis, these benefits (capitalgains and income) are not taxable.

*DutchIndividuals engaged or deemed to be engaged in an enterprise, Dutch Individualsfor whom the benefits derived from the ordinary shares or ADSs are treated asresults from other activities, and Dutch Corporate Entities.*   Any benefits derived or deemed to be derived from theordinary shares or ADSs (including any capital gains realised on the disposalthereof) that are attributable to an enterprise carried on by a DutchIndividual or to an enterprise in which he has an interest, are generallysubject to income tax charged at progressive rates in his hands. The sameapplies to a Dutch Individual for whom the benefits derived from the ordinaryshares or ADSs are treated as results from other activities. Any benefitsderived or deemed to be derived from the ordinary shares or ADSs (including anycapital gains realised on the disposal thereof) that are held by a DutchCorporate Entity are generally subject to corporate income tax in its hands.

***Withholding Tax.******  ***Dividends we distribute generally are subject to awithholding tax imposed by The Netherlands at a rate of 25%. The concept “dividendswe distribute” used in this section includes, but is not limited to:

(1)         distributionsin cash or in kind, deemed and constructive distributions and repayments ofpaid-in capital not recognized for Dutch dividend withholding tax purposes;

(2)         liquidation proceeds, proceeds ofredemption of the ordinary shares or ADSs or, as a rule, consideration for therepurchase of the ordinary shares or ADSs by us in excess of the averagepaid-in capital recognised for Dutch dividend withholding tax purposes;

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(3)         the par value of the ordinary shares orADSs issued to a holder of the ordinary shares or ADSs or an increase of thepar value of the ordinary shares or ADSs, as the case may be, to the extentthat it does not appear that a contribution, recognised for Dutch dividendwithholding tax purposes, has been made or will be made; and

(4)         partial repayment of paid-in capital,recognised for Dutch dividend withholding tax purposes, if and to the extentthat there are net profits (*zuivere winst*),unless:

(a)           the general meeting of our shareholdershas resolved in advance to make such repayment; and

(b)          the par value of the ordinary shares orADSs concerned has been reduced by an equal amount by way of an amendment ofthe articles of association.

Dutch Individuals and DutchCorporate Entities generally can credit the dividend withholding tax againsttheir income tax or corporate income tax liability and will be entitled to arefund of dividend withholding tax insofar as such tax, together with any othercreditable domestic and/or foreign taxes, exceeds their aggregate income tax orcorporate income tax liability. A condition to avoid “dividend stripping” isthat the recipient of proceeds from the ordinary shares or ADSs qualify as thebeneficial owner thereof. A recipient of proceeds from the ordinary shares orADSs is not considered to be the beneficial owner thereof if the amount ofdividend, following a set of transactions, is ultimately wholly or partlyreceived by another person, if this other person also maintains, directly orindirectly, an interest in the ordinary shares or ADSs.

***Gift andInheritance Taxes.******  ***A gift tax liability will arise in The Netherlandswith respect to an acquisition of the ordinary shares or ADSs by way of a giftmade by a Dutch Individual or a Dutch Corporate Entity. An inheritance taxliability will arise in The Netherlands with respect to an acquisition ordeemed acquisition of the ordinary shares or ADSs on the death of a DutchIndividual.

Forpurposes of Dutch gift and inheritance taxes, an individual who holds Dutchnationality will be deemed to be resident in The Netherlands if he has beenresident in The Netherlands at any time during the ten years preceding the dateof the gift or his death. For purposes of the Dutch gift tax, an individual notholding Dutch nationality will be deemed to be resident in The Netherlands ifhe has been resident in The Netherlands at any time during the twelve monthspreceding the date of the gift.

***Dutch Taxation of Non-ResidentShareholders***

This section “Dutch Taxationof Non-resident Shareholders” describes certain Dutch tax consequences for aholder of the ordinary shares or ADSs who is neither resident, nor deemed to beresident, and who has not opted to be treated as a resident in The Netherlandsfor purposes of Dutch taxation (a “Non-Resident Shareholder”).

Withholding Tax. Dividends we distribute generally aresubject to a withholding tax imposed by The Netherlands at a rate of 25%.Reference is made to the section “Dutch Taxation of Resident Shareholders—WithholdingTax” for a description of the concept “dividends distributed by us.”

If a double taxation convention is in effect betweenThe Netherlands and the country of residence of a Non-Resident Shareholder,such Non-Resident Shareholder may, depending on the terms of that doubletaxation convention, be eligible for a full or partial exemption from, orrefund of, Dutch dividend withholding tax. See the section “Taxation of U.S.Investors—Taxation of Dividends” for a discussion of the partial exemptionavailable under the convention with the United States.

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A further condition to avoid “dividend stripping” isthat the Non-Resident Shareholder qualifies as the beneficial owner of thedividend. A Non-Resident Shareholder is not considered to be the beneficial owner of the dividend, if the amount of this dividend,following a set of transactions, is ultimately wholly or partly received byanother person and this other person also maintains, directly or indirectly, aninterest in the ordinary shares or ADSs.

***Taxes on Income and Capital Gains.******  ***A Non-Resident Shareholder will not be subject to anyDutch taxes on income or capital gains in respect of dividends we distribute(other than the withholding tax described above) or in respect of any gainrealised on the disposal of the ordinary shares or ADSs, provided that:

(1)         suchNon-Resident Shareholder does not have an enterprise or aninterest in an enterprise that is, in whole or in part, carried on through apermanent establishment or a permanent representative in The Netherlands and towhich enterprise or part of an enterprise, as the case may be, the ordinaryshares or ADSs are attributable; and

(2)         such Non-Resident Shareholder does nothave a substantial interest or a deemed substantial interest in us.

Reference is made to thesection “Dutch Taxation of Resident Shareholders” for a description of theconcepts “substantial interest” and “deemed substantial interest.”

***Gift and Inheritance Taxes.******  ***No liability for gift or inheritance taxes will arisein The Netherlands with respect to an acquisition of the ordinary shares orADSs by way of a gift made by, or on the death of, a Non-Resident Shareholder,unless:

(1)         suchNon-Resident Shareholder at the time of the gift has or at the time of hisdeath had an enterprise or an interest in an enterprise that is or was, inwhole or in part, carried on through a permanent establishment or a permanentrepresentative in The Netherlands and to which enterprise or part of anenterprise, as the case may be, the ordinary shares or ADSs are or wereattributable; or

(2)         in the case of a gift of the ordinaryshares or ADSs by an individual who at the time of the gift was a Non-ResidentShareholder, such individual dies within 180 days after the date of the gift,while (at the time of his death) being resident or deemed to be resident in TheNetherlands.

For purposes of Dutch gift andinheritance tax, an individual who holds Dutch nationality will be deemed to beresident in The Netherlands if he has been resident in The Netherlands at anytime during the ten years preceding the date of the gift or his death. Forpurposes of the Dutch gift tax, an individual not holding Dutch nationalitywill be deemed to be resident in The Netherlands if he has been resident in TheNetherlands at any time during the twelve months preceding the date of thegift.

***Other Taxes and Duties.******  ***No Dutch registration tax, transfer tax, stamp dutyor any other similar documentary tax or duty will be payable in The Netherlandsin respect of or in connection with the subscription, issue, placement,allotment or delivery of the ordinary shares or ADSs.

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**Taxation of U.S. Investors**

The following is a summary of the material U.S. federalincome tax considerations regarding the purchase, ownership and disposition ofordinary shares or ADSs to an eligible U.S. holder. You are an eligible U.S.holder if you are a resident of the United States for purposes of the taxtreaty between The Netherlands and the United States (the “tax treaty”) and arefully eligible for benefits under the tax treaty. You generally will beentitled to the benefits of the tax treaty if you are:

·       the beneficial owner of ordinary shares or ADSs (andof the dividends paid with respect to such ordinary shares or ADSs);

·       an individual resident of the United States, a U.S.corporation, or a partnership, estate or trust to the extent your income issubject to taxation in the United States as the income of a resident, in yourhands or in the hands of your partners or beneficiaries;

·       not resident in The Netherlands for Dutch taxpurposes; and

·       not subject to an anti-treaty shopping rule.

Yougenerally will not be eligible for the benefits of the tax treaty, andtherefore will not be an eligible U.S. holder, if you hold ordinary shares orADSs in connection with the conduct of business through a permanentestablishment, or the performance of services through a fixed base in TheNetherlands, or you are not resident in the United States for U.S. taxpurposes.

Thesummary does not purport to be a comprehensive description of all of the taxconsiderations that may be relevant to your decision to purchase ordinaryshares or ADSs. In particular, the summary does not address considerations thatmay be applicable to you if you will not hold ordinary shares or ADSs ascapital assets, or if you are a taxpayer subject to special tax rules, such asa bank, tax-exempt entity, insurance company, a regulated investment company, apension fund, a real estate investment trust, a dealer in securities orcurrencies, a person that holds ordinary shares or ADSs as part of anintegrated investment (including a “straddle”) comprised of ordinary shares orADSs and one or more other positions, and a person who owns or is deemed to own10% or more of any class of our stock. The summary is based on laws, treatiesand regulatory interpretations in effect on the date of this document, all ofwhich are subject to change. You should consult your own advisers regarding thetax consequences of an investment in the ordinary shares or ADSs in light ofyour particular circumstances, including the U.S. tax considerations discussedbelow and the effect of any state, local or other national laws.

**Based on our audited financialstatements and relevant market data, we believe that we were not treated as a “passiveforeign investment company” or “PFIC” for U.S. federal income tax purposes withrespect to the year 2005. In addition, based on our current expectationsregarding the value and nature of our assets, the sources and nature of ourincome, and relevant market data, we do not anticipate becoming a PFIC in theyear 2006 or thereafter. We believe, however, that we were or may have been aPFIC for U.S. federal income tax purposes with respect to the years before 2005.In order to avoid being subject to unfavorable U.S. federal income tax rules applicableto PFICs (the “PFIC rules”) with respect to our ordinary shares or ADSs in thefuture, U.S. holders that held our ordinary shares or ADSs at any time before2005 may wish to make a deemed sale election with respect to their ordinaryshares or ADSs. See “Passive Foreign Investment Company Rules.”**

For U.S.federal income tax purposes and for purposes of the tax treaty between TheNetherlands and the United States, beneficial owners of ADSs will be treated asthe owners of the underlying ordinary shares represented by those ADSs.

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***Taxationof Dividends***

Subjectto the discussion below under “Passive Foreign Investment Company Rules,” thegross amount of dividends distributed by us (including amounts withheld inrespect of Dutch withholding tax) generally will be subject to U.S. federalincome taxation as foreign source dividend income, and will not be eligible forthe dividends received deduction. Subject to certain exceptions for positionsthat are hedged or held for less than 60 days, an individual U.S. holdergenerally will be subject to U.S. taxation at a maximum rate of 15% in respectof dividends received after 2002 and before 2009, unless we were in the yearprior to the year in which the dividend was paid, and are, in the year in whichthe dividend is paid, a PFIC. As described above, we believe that we were not aPFIC for U.S. tax purposes with respect to the year 2005, and also do notanticipate becoming a PFIC with respect to the year 2006. We, however, believethat we were or may have been a PFIC with respect to the year 2004. Dividends paidin euros will be included in income in a U.S. dollar amount calculated byreference to the exchange rate in effect on the date of receipt by you (or bythe depositary in the case of ADSs). If such dividends are converted into U.S.dollars on the date of receipt, you generally should not be required torecognize foreign currency gain or loss in respect of the dividend income. Ifyou receive a refund of Dutch withholding tax under the tax treaty between TheNetherlands and the United States, you may be required to recognize foreigncurrency gain or loss to the extent the amount of the tax treaty refund (indollars) received by you differs from the U.S. dollar equivalent of the refundamount on the date the dividends were received.

You mayclaim the benefit of the reduced withholding rate of 15 percent that isavailable under the tax treaty between The Netherlands and the United States bysubmitting a duly completed Form IB 92 USA that has been certified by afinancial institution (typically the entity that holds the ordinary shares orADSs as custodian for the holder). If we receive the required documentationprior to the relevant dividend payment date, we may apply the reducedwithholding rate at source. If you fail to satisfy these requirements prior tothe payment of a dividend, you may claim a refund of the excess of the amountwithheld over the tax treaty rate by filing Form IB 92 USA together with asupplemental statement with the Dutch tax authorities. Pension funds andtax-exempt organizations qualifying for a complete exemption from tax are notentitled to claim tax treaty benefits at source, and instead must file claimsfor refund by filing Form IB 95 USA.

Subjectto applicable limitations and to the special considerations discussed below,Dutch withholding tax at the 15% tax treaty rate will be treated as a foreignincome tax that is eligible for credit against your U.S. federal income taxliability or, at your election, may be deducted in computing taxable income.Foreign tax credits will not be allowed for withholding taxes imposed inrespect of certain short-term or hedged positions and may not be allowed inrespect of arrangements in which your expected economic profit, after non-U.S.taxes, is insubstantial. You should consult your own advisers concerning theimplications of these rules in light of your particular circumstances.

***Taxationof Capital Gains***

Subjectto the discussion below under “Passive Foreign Investment Company Rules,” gainor loss realized by you on the sale or other disposition of ordinary shares orADSs will be capital gain or loss in an amount equal to the difference betweenyour basis in the ordinary shares or ADSs and the amount realized on thedisposition (or its dollar equivalent, determined at the spot rate on the dateof disposition, if the amount realized is denominated in a foreign currency).The gain or loss will be long-term gain or loss if the ordinary shares or ADSswere held for more than one year. The net amount of long-term capital gainrecognized by an individual U.S. holder generally is subject to taxation at amaximum rate of 20%; however, net long-term capital gain recognized by anindividual U.S. holder after May 5, 2003 and before January 1, 2009generally is subject to taxation at a maximum rate of 15%.

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***PassiveForeign Investment Company Rules***

Unfavorable U.S. tax rules (the “PFIC rules”) apply tocompanies that are considered passive foreign investment companies (“PFICs”).We will be classified as a PFIC in a particular taxable year if either:

·       75% or more of our gross income is treated as passiveincome for purposes of the PFIC rules; or

·       the average percentage of the value of our assetsthat produce or are held for the production of passive income is at least 50%.

Based onour audited financial statements and relevant market data, we believe that wewere not treated as a PFIC for U.S. federal income tax purposes with respect tothe year 2005. In addition, based on our current expectations regarding thevalue and nature of our assets, the sources and nature of our income, andrelevant market data, we do not anticipate becoming a PFIC in the year 2006 orthereafter. We believe, however, that we were or may have been a PFIC for U.S.federal income tax purposes with respect to the years before 2005.

If weare classified as a PFIC in any year, then a U.S. holder who holds sharesduring that year and does not make a mark-to-market election or a qualifiedelecting fund (“QEF”) election will be subject to a special tax at ordinaryincome tax rates on certain dividends that we pay and on gains realized on thesale of ordinary shares or ADSs (“excess distributions”) in all subsequentyears, without regard to whether we were a PFIC in the year the excessdistribution was received. The amount of this tax will be increased by aninterest charge to compensate for tax deferral, calculated as if the excessdistributions had been earned ratably over the period the U.S. holder held itsordinary shares or ADSs. Classification as a PFIC may also have other adversetax consequences, including the denial of a step-up in the basis of ordinaryshares and ADSs at death.

If wewere a PFIC in the past, U.S. holders that held our ordinary shares or ADSs atany time during the years when we were a PFIC and did not make a mark-to-marketelection or a QEF election will generally continue to be subject to the PFIC rules describedabove, even though we later ceased to qualify as a PFIC. You can generallyavoid the future application of the PFIC rules by making a deemed saleelection with respect to your ordinary shares or ADSs for your taxable yearthat includes the last day of our last taxable year during which we qualifiedas a PFIC (the “termination date”). If you make the deemed sale election withrespect to our ordinary shares or ADSs, you generally will be treated as havingsold all your ordinary shares or ADSs for their fair market value on thetermination date. The deemed sale generally will be taxed to you as an excessdistribution. Any loss realized on the deemed sale will not be recognized. Ifyou made a mark-to-market election or a QEF election with respect to yourordinary shares or ADSs in the past, you will not be required to include anymark-to-market gain or loss with respect to our ordinary shares or ADSs (in thecase of the mark-to-market election) or to include your pro rata share of ourordinary earnings and net capital gain (in the case of the QEF election) forthe years during which we do not qualify as a PFIC.

**The PFIC rules are extremelycomplex, and you should consult your own tax advisers regarding the U.S.federal income tax considerations discussed above and the desirability ofmaking a deemed sale election.**

***U.S.Backup Withholding Tax***and Information Reporting

Payments in respect of the ordinary shares or ADSs that are madein the United States or by a U.S.-related financial intermediary will besubject to information reporting and may be subject to backup withholdingunless you:

·       are a corporation or other exempt recipient; or

102

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·       provide an IRS Form W-9or an acceptable substitute form, certifying your taxpayer identificationnumber and that no loss of exemption from backup withholding has occurred.

If youare not a U.S. person, you generally are not subject to these rules, but may berequired to provide certification of non-U.S. status in order to establish thatyou are exempt.

**Dividendsand Paying Agents**

Notapplicable.

**Statementby Experts**

Notapplicable.

**Documentson Display**

We are subject to the informationalrequirements of the Securities Exchange Act of 1934, as amended, and inaccordance therewith file information with the U.S. Securities and ExchangeCommission (“SEC”). You may read and copy this information at the followinglocation:

PublicReference Room100 F Street, N.E.Washington, D.C. 20549

Please call the SEC at 1-800-SEC-0330 forfurther information on the public reference room. Copies of these materials canalso be obtained by mail at prescribed rates from the Public Reference Section ofthe Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C.20549. Our ADSs are quoted on the Nasdaq National Market, and consequently, theperiodic reports and other information filed by us with the Commission can beinspected at the offices of the Nasdaq National Market, 1735 K Street, N.W.,Washington, D.C. 20006. The primary market for our ordinary shares is EuronextAmsterdam. We make our filings with the SEC by electronic means. Any filings wemake electronically are available to the public over the internet at theCommission’s website at *http://www.sec.gov*and at our website at *http://www.crucell.com.*

**Item11.**                 Quantitative and Qualitative Disclosures about MarketRisk

We areexposed to market risk related to changes in interest rates and foreigncurrency exchange rates between the U.S. dollar, Swiss Franc, Korean Won, andthe Euro.

*InterestRate Sensitivity*

We areexposed to interest rate fluctuations in connection with our cash and cashequivalents that have maturities of less than three months, and in connectionwith a portion of our short term loans. Substantially all of our cash and cashequivalents consist of bank deposits. We also hold a limited amount ofcommercial paper issued by European institutions that are at least AA-rated andthat have a maturity of less than three months. The securities in ourinvestment portfolio are not leveraged, are classified as available-for-saleand are, due to their very short-term nature, subject to minimal interest raterisk. We currently do not hedge interest rate exposure. Because of theshort-term maturities of our investments, we do not believe that an increase inmarket rates would have any negative impact on the realized value of ourinvestment portfolio.

103

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*FairValue Interest Rate Risk*

Themajority of our loans bear fixed interest, exposing us to fair value interestrate risks. We currently do not hedge fair value interest rate exposures.

*ForeignCurrency Exchange Risk*

Themajority of our revenue, expense and capital purchasing activities aretransacted in Euros and, subsequent to our acquisition of Berna Biotech inFebruary 2006, in Swiss Francs. However, since we are party to sales, purchasesand financing activities  all over theworld, mainly as a consequence of the acquisition of Berna Biotech, we are alsoexposed to changes in exchange rates between the euro and the U.S. dollar, KoreanWon and Australian Dollar. Because revenues are converted to euros for purposesof our financial reporting, we can benefit from a weaker euro and can beadversely affected by a stronger euro relative to a foreign currency.Accordingly, changes in foreign exchange rates, and in particular a strengtheningof the euro, vis-à-vis a foreign currency, may adversely affect ourconsolidated sales and operating margins as expressed in euros. We currently donot hedge currency exposure. However, we may hedge currency exposure in thefuture if we believe it is appropriate to do so.

**Item 12.**      Description ofSecurities Other than Equity Securities

This item is not applicable.

104

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**PART II**

**Item13.**                 Defaults, Dividend Arrearages and Delinquencies

None.

**Item14.**                 Material Modifications to the Rights of SecurityHolders

None.

**Item 15.**                 DisclosureControls and Procedures

We have evaluated, with the participation of our chiefexecutive officer and chief financial officer, the effectiveness of ourdisclosure controls and procedures as of December 31, 2005. There areinherent limitations to the effectiveness of any system of disclosure controlsand procedures, including the possibility of human error and the circumventionor overriding of the controls and procedures. Accordingly, even effectivedisclosure controls and procedures can only provide reasonable assurance ofachieving their control objectives. Based upon our evaluation, our chief executiveofficer and chief financial officer concluded that the disclosure controls andprocedures as of December 31, 2005 were effective to provide reasonableassurance that information required to be disclosed in the reports we file orsubmit under the Securities Exchange Act of 1934, as amended, is recorded,processed, summarized and reported, within the time periods specified in theapplicable rules and forms, and that it is accumulated and communicated toour management, including our chief executive officer and chief financialofficer, as appropriate to allow timely decisions regarding requireddisclosure.

**Item 16.**                 Reserved

**Item16A.**         Audit Committee Financial Expert

Themembers of our audit committee are all independent, non-executive members ofthe supervisory board. Our audit committee is in compliance with all of therelevant rules and regulations of The Netherlands. We believe that themembers of our audit committee have sufficient financial and other experienceto perform their responsibilities on the committee. Notwithstanding thecommittee members’ financial and other experience, the audit committee does notinclude a “financial expert” as that term is strictly defined in the rules promulgatedunder the Sarbanes-Oxley Act of 2002.

**Item16B.**        Code of Ethics

During2003, we adopted a code of business conduct and ethics that applies to allemployees of the Company, including our principal executive officer andprincipal financial officer. The code of business conduct and ethics has beenfiled as an exhibit to our Form 20-F for the fiscal year ended December 31,2003 and can also be accessed on our website at *http://www.crucell.com.*No amendments or waivers of the codeof ethics were made or granted during 2005.

**Item16C.**        Principal Accountant Fees and Services

The Sarbanes-Oxley Act of 2002requires that audit committees pre-approve all services provided by the Company’sindependent auditor. This process is critical to the auditor maintainingindependence. Our process requires that all services provided by theindependent auditor be pre-approved by the audit committee.

105

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During 2004 and 2005 we paid the following amounts to ourauditors Ernst & Young for audit services, audit-relatedservices, tax services and other services:

| ** **         | ** ** | **Year ended  December 31,** | ** ** |
|--------------------|------------|----------------------------------------|------------|
| ** **         | ** ** | **2004**                               | ** ** | **2005** | ** ** |
| Audit fees         |       | €                                 | 267        |   | € | 636 |   |
| Audit-related fees |       | 66                                     |       | 12 |   |
| Tax fees           |       | —                                 |       | 31 |   |
| Total              |       | €                                 | 333        |   | € | 679 |   |

 

**Auditfees**

Auditfees include fees associated with the annual audit, interim reviews, requiredstatutory audits and services that only the independent auditor can reasonablyprovide, such as services associated with documents issued in connection withsecurities offerings.

**Audit-relatedfees**

Audit-relatedfees include accounting consultations on financial and accounting reportingstandards.

**Tax fees**

Tax fees primarily represent services provided related to miscellaneousconsultations on tax matters.

**Item16D. Exemptions from the Listing Standards for Audit Committees**

Notapplicable.

**Item16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers**

Neither we nor any affiliatedpurchaser have purchased any of our equity securities during the year ended December 31,2005.

106

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**PART III**

**Item17.      Financial Statements**

The registrant hasresponded to Item 18 in lieu of responding to this item.

**Item 18.      Financial Statements**

See pages F-1 through F-27of this Form 20-F, included herein.

**Item 19.**                 Exhibits

| Exhibit   Number | ** ** | **Description** |
|------------------|------------|-----------------|
|             | 1.1        |            |   | Deed of  Incorporation of the Company* |
|             | 1.2        |            |   | Amended Articles of Association |
|             | 4.1        |            |   | Summary and Lease Agreement dated November 18, 1998,  between IntroGene B.V. and Amboz B.V.** |
|             | 4.2        |            |   | Summary and Lease Agreement dated November 27, 1997,  between IntroGene B.V. and CAM Implants B.V.** |
|             | 4.3        |            |   | Lease Agreement dated July 1, 2002 between Crucell  Holland B.V. and Oppenheim Property Services B.V. (English translation)*** |
|             | 4.4        |            |   | Collaboration Agreement dated December 18, 2002 by and  between Crucell N.V. and Crucell Holland B.V., and DSM Biologics  Holding, Inc., DSM Biologics Company, Inc., and DSM Biologics  Company, B.V. (English translation)***† |
|             | 4.5        |            |   | Employment contract between Crucell Holland B.V. and  R.H.P. Brus—Under revision for Dutch Corporate Governance compliance—filing  will follow |
|             | 4.6        |            |   | Employment contract between Crucell Holland B.V. and  Prof. Dr. J. Goudsmit—Under revision for Dutch Corporate Governance  compliance—filing will follow |
|             | 4.7        |            |   | Employment contract between Crucell Holland B.V. and L.  Kruimer—Under revision for Dutch Corporate Governance compliance—filing will  follow |
|             | 4.8        |            |   | Collaboration and License Agreement dated  December 31, 2003 by and between Crucell Holland B.V. and Aventis  Pasteur S.A. (now sanofi pasteur)†**** |
|             | 4.9        |            |   | Transaction Agreement dated December 1, 2005 by and  between Crucell N.V. and Berna Biotech AG |
|             | 4.10       |            |   | Supply Agreement dated November 12, 2001 and the Letter  of Amendment to the same Agreement, dated June 24, 2004 between CSL Limited and  Berna Biotech Limited |
|             | 4.11       |            |   | Collaboration Agreement, dated December 1, 2000, between  Chiron Behring GmbH & Co. and Rhein Biotech N.V. and Green Cross Vaccine  Corporation |
|             | 4.12       |            |   | Turn Key Contract dated August 27, 2005, between Crucell  Holland B.V. and Pharmaplan International GmbH |
|             | 8.1        |            |   | List of Subsidiaries of Crucell N.V. |
|             | 12.1       |            |   | Certification of CEO pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002 |
|             | 12.2       |            |   | Certification  of CFO pursuant Section 302 of the Sarbanes-Oxley Act of 2002 |

107

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|        | 13.1 |   |   | Certification  of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act  of 2002 |
|--------|------|--------|--------|-----------------------------------------------------------------------------------------------|
|   | 99.1 |   |   | Crucell  Code of Ethics ****                                                                  |

 

Confidential treatment has been granted with respect to portions of theexhibit indicated by a dagger (†). The omitted portions have been filedseparately with the Securities and Exchange Commission.

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*                                 Aspreviously filed with the Securities and Exchange Commission on October 24,2000 by Crucell N.V. in an Exhibit to the Form F-1.

**                          Aspreviously filed with the Securities and Exchange Commission on June 28,2001 by Crucell N.V. in an exhibit to the Form 20-F.

***                   Aspreviously filed with the Securities and Exchange Commission on April 18,2003 by Crucell N.V. in an exhibit to the Form 20-F.

****            Aspreviously filed with the Securities and Exchange Commission on February 27,2004 in an exhibit to the Form 20-F.

*****     Aspreviously filed with the Securities and Exchange Commission on April 14, 2005in an exhibit to the Form 20-F.

108

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**SIGNATURE**

Theregistrant hereby certifies that it meets all of the requirements for filing onForm 20-F/A and that it has duly caused and authorized theundersigned to sign this annual report on its behalf.
| CRUCELL N.V. |
|--------------|
| By:          |   | /s/ RONALD H. P. BRUS |   | By: |   | /s/ LEONARD KRUIMER |   |
|         |   | Ronald H.  P. Brus |   |   |   | Leonard  Kruimer |
|         |   | *Chief  Executive Officer* | * * | * * | * * | *Chief  Financial Officer* |

 

Date: June 30,2006

109

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**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS**

| Report of Independent  Registered Public Accounting Firm                                                             |   | F-2 |
|----------------------------------------------------------------------------------------------------------------------|--------|-----|
| Consolidated  Balance Sheets as of December 31, 2005 and 2004                                                   |   | F-3 |
| Consolidated Statements of Operations for the years  ended December 31, 2005, 2004 and 2003                     |   | F-4 |
| Consolidated Statements of Shareholders’ Equity for  the years ended December 31, 2005, 2004 and 2003 |   | F-5 |
| Consolidated Statements of Cash Flows for the years  ended December 31, 2005, 2004 and 2003                     |   | F-6 |
| Notes to the Consolidated Financial Statements                                                                       |   | F-7 |

 

F-1

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Supervisory Directors and Shareholders ofCrucell N.V.

We have audited the accompanying consolidated balancesheets of Crucell N.V. as of December 31, 2005 and 2004, and the relatedconsolidated statements of operations, shareholders’ equity and cash flows foreach of the three years in the period ended December 31, 2005. Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. We were not engaged to perform an audit of the Company’s internalcontrol over financial reporting. Our audits included consideration of internalcontrol over financial reporting as a basis for designing audit procedures thatare appropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, and evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion.

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Crucell N.V. at December 31,2005 and 2004, and the consolidated results of its operations and its cashflows for each of the three years in the period ended December 31, 2005,in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG ACCOUNTANTS

Amsterdam, The NetherlandsJanuary 24, 2006

F-2

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**CRUCELL N.V.CONSOLIDATED BALANCE SHEETS(amounts in thousands)**

| ** **                                                                                                                                                                      | ** ** | **December 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                      |       |                        |       |                        |       |   |   |   |   |
| Current assets:                                                                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Cash and cash equivalents                                                                                                                                                       |       |                        | €     | 111,734                     |       |   |   | € | 76,711 |   |   |
| Trade accounts receivable, net of allowance for  doubtful accounts of €176 and €240 at December 31, 2005 and 2004,  respectively                                 |       |                        | 1,824      |                        |       |   | 2,020 |   |   |
| Accrued income                                                                                                                                                                  |       |                        | 10,330     |                        |       |   | 3,880 |   |   |
| Prepaid expenses and other current assets                                                                                                                                       |       |                        | 7,150      |                        |       |   | 1,544 |   |   |
| Total current assets                                                                                                                                                            |       |                        | 131,038    |                        |       |   | 84,155 |   |   |
| Non-current assets:                                                                                                                                                             |       |                        |       |                        |       |   |   |   |   |
| Securities available for sale                                                                                                                                                   |       |                        | 11,299     |                        |       |   | — |   |   |
| Property, plant and equipment, net                                                                                                                                              |       |                        | 24,629     |                        |       |   | 10,465 |   |   |
| Developed technology, net                                                                                                                                                       |       |                        | 2,577      |                        |       |   | 4,047 |   |   |
| Total non-current assets                                                                                                                                                        |       |                        | 38,505     |                        |       |   | 14,512 |   |   |
| **Total assets**                                                                                                                                                                |       |                        | €     | 169,543                     |       |   |   | € | 98,667 |   |   |
| **Liabilities  and shareholders’ equity**                                                                                                                                  |       |                        |       |                        |       |   |   |   |   |
| Current liabilities:                                                                                                                                                            |       |                        |       |                        |       |   |   |   |   |
| Accounts payable                                                                                                                                                                |       |                        | €     | 1,999                       |       |   |   | € | 2,108 |   |   |
| Accrued compensation and related benefits                                                                                                                                       |       |                        | 2,949      |                        |       |   | 1,917 |   |   |
| Short term portion of deferred revenues                                                                                                                                         |       |                        | 3,906      |                        |       |   | 6,373 |   |   |
| Accrued invoices                                                                                                                                                                |       |                        | 3,519      |                        |       |   | 1,311 |   |   |
| Short term portion of obligations under capital  leases                                                                                                                         |       |                        | 898        |                        |       |   | 1,212 |   |   |
| Other accrued liabilities                                                                                                                                                       |       |                        | 2,706      |                        |       |   | 1,852 |   |   |
| Total current liabilities                                                                                                                                                       |       |                        | 15,977     |                        |       |   | 14,773 |   |   |
| Long term  liabilities:                                                                                                                                                         |       |                        |       |                        |       |   |   |   |   |
| Long term debt                                                                                                                                                                  |       |                        | 15,753     |                        |       |   | — |   |   |
| Obligations under capital leases                                                                                                                                                |       |                        | 398        |                        |       |   | 1,385 |   |   |
| Deferred revenues                                                                                                                                                               |       |                        | —     |                        |       |   | 4,198 |   |   |
| Total long term liabilities                                                                                                                                                     |       |                        | 16,151     |                        |       |   | 5,583 |   |   |
| **Shareholders’  equity:**                                                                                                                                                 |       |                        |       |                        |       |   |   |   |   |
| Preference shares, €0.24 par value; 85,000,000 shares  authorized; none issued and outstanding as of December 31, 2005 and  2004, respectively                        |       |                        | —     |                        |       |   | — |   |   |
| Ordinary shares, €0.24 par value; 85,000,000 shares  authorized; 41,440,613 and 36,873,421 shares issued and outstanding at  December 31, 2005 and 2004, respectively |       |                        | 9,946      |                        |       |   | 8,850 |   |   |
| Additional paid-in capital                                                                                                                                                      |       |                        | 409,346    |                        |       |   | 349,167 |   |   |
| Notes receivable from officers and employees                                                                                                                                    |       |                        | (194       | )                           |       |   | (224 | ) |   |
| Deferred compensation                                                                                                                                                           |       |                        | (2,933     | )                           |       |   | (4,958 | ) |   |
| Accumulated other comprehensive income                                                                                                                                          |       |                        | 11,299     |                        |       |   | — |   |   |
| Accumulated deficit                                                                                                                                                             |       |                        | (290,049   | )                           |       |   | (274,524 | ) |   |
| Total shareholders’ equity                                                                                                                                                 |       |                        | 137,415    |                        |       |   | 78,311 |   |   |
| **Total  liabilities and shareholders’ equity**                                                                                                                            |       |                        | €     | 169,543                     |       |   |   | € | 98,667 |   |   |

 

The accompanying notes are an integral part of these financial statements.

F-3

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**CRUCELL N.V.CONSOLIDATED STATEMENTS OF OPERATIONS(amounts in thousands, except share data)**

| ** **                                                  | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                  | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **REVENUES:**                                               |       |                                       |       |   |   |   |   |
| License                                                     |       | €                                     | 20,848     |   | € | 12,429 |   | € | 4,800 |   |
| Service fees                                                |       | 11,881                                     |       | 5,712 |   | 404 |   |
| Government grants and other                                 |       | 4,840                                      |       | 4,481 |   | 2,220 |   |
| **Total  revenues**                                         |       | 37,569                                     |       | 22,622 |   | 7,424 |   |
| **COSTS  AND EXPENSES:**                                    |       |                                       |       |   |   |   |   |
| Cost of service fees                                        |       | 7,156                                      |       | 5,644 |   | 399 |   |
| Research and development(1)                                 |       | 32,751                                     |       | 21,412 |   | 22,858 |   |
| Selling, general and administrative(2)                      |       | 13,918                                     |       | 16,326 |   | 9,329 |   |
| Developed technology amortization                           |       | 1,470                                      |       | 1,966 |   | 1,330 |   |
| **Total  costs and expenses**                               |       | 55,295                                     |       | 45,348 |   | 33,916 |   |
| **LOSS  FROM OPERATIONS**                                   |       | (17,726                                    | )          | (22,726 | ) | (26,492 | ) |
| Interest income, net                                        |       | 1,966                                      |       | 1,503 |   | 2,143 |   |
| Foreign currency gain/(loss)                                |       | 235                                        |       | (108 | ) | (19 | ) |
| Gain on sale of securities available for sale               |       | —                                     |       | — |   | 982 |   |
| **NET  LOSS BEFORE PROVISION FOR INCOME TAXES**             |       | (15,525                                    | )          | (21,331 | ) | (23,386 | ) |
| Provision for income taxes                                  |       | —                                     |       | — |   | — |   |
| **NET  LOSS**                                               |       | €                                     | (15,525    | ) | € | (21,331 | ) | € | (23,386 | ) |
| **BASIC  AND DILUTED NET LOSS PER SHARE:**                  |       |                                       |       |   |   |   |   |
| Net loss per  share-basic and diluted                       |       | €                                     | (0.39      | ) | € | (0.59 | ) | € | (0.65 | ) |
| Weighted average  shares/ADSs outstanding-basic and diluted |       | 39,852,064                                 |       | 36,382,662 |   | 35,920,626 |   |

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(1)          Research and developmentexpenses for the year ended 2005, 2004 and 2003 respectively include stockoptions expense amounting to €1,279, €944and €973,respectively.

(2)          Selling, general andadministrative expenses for the year ended 2005, 2004 and 2003 respectivelyinclude stock options expense amounting to €1,421, €1,622and €1,723,respectively.

The accompanying notes are an integral part of these financial statements.

F-4

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**CRUCELL N.V.CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY(amounts in thousands of euro, except share data)**

| ** **                                                                                               | ** ** | **Ordinary shares** | ** ** | **Additional  Paid-in** | ** ** | **Notes  receivable  from** | ** ** | **Deferred**  | ** ** | **Accumulated  other  comprehensive** | ** ** | **Accumulated** | ** ** | **Total  Shareholders’** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|-----------------------------|------------|---------------|------------|---------------------------------------|------------|-----------------|------------|-------------------------------|------------|
| ** **                                                                                               | ** ** | **Shares**               | ** ** | **Amount**              | ** ** | **Capital**                 | ** ** | **employees** | ** ** | **compensation**                      | ** ** | **income**      | ** ** | **deficit**                   | ** ** | **equity** | ** ** |
| **Balance at January 1, 2003**                                                                      |       | 35,649,938               |       |                    | €     | 8,556                       |       |          | €     | 336,652                               |       |            | €     | (901                          | )          |   |   | € | (3,992 | ) |   |   | € | — |   |   |   | € | (229,807 | ) |   |   | € | 110,508 |   |   |
| Issuance of ordinary shares                                                                              |       | 356,386                  |       |                    | 86         |                        |       | 224           |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 310 |   |   |
| Deferred compensation                                                                                    |       | —                   |       |                    | —     |                        |       | 3,186         |       |                                  | —     |            |       |                          | (3,186     | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of deferred compensation                                                                    |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | 2,696      |   |   |   | — |   |   |   | — |   |   |   | 2,696 |   |   |
| Issuance of warrants to cquire ordinary shares in  exchange for services                                 |       | —                   |       |                    | —     |                        |       | 616           |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 616 |   |   |
| Repayment on notes receivable from employees                                                             |       | —                   |       |                    | —     |                        |       | —        |       |                                  | 239        |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 239 |   |   |
| Comprehensive loss: Net loss                                                                             |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | (23,386 | ) |   |   | (23,386 | ) |   |
| Total comprehensive loss                                                                                 |       |                     |       |                    |       |                        |       |          |       |                                  |       |            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   | (23,386 | ) |   |
| **Balance at December 31, 2003**                                                                    |       | 36,006,324               |       |                    | €     | 8,642                       |       |          | €     | 340,678                               |       |            | €     | (662                          | )          |   |   | € | (4,482 | ) |   |   | € | — |   |   |   | € | (253,193 | ) |   |   | € | 90,983 |   |   |
| Issuance of ordinary shares                                                                              |       | 867,097                  |       |                    | 208        |                        |       | 1,201         |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 1,409 |   |   |
| Deferred compensation                                                                                    |       | —                   |       |                    | —     |                        |       | 3,042         |       |                                  | —     |            |       |                          | (3,042     | ) |   |   | — |   |   |   | — |   |   |   |   |   |   |
| Amortization of deferred compensation                                                                    |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | 2,566      |   |   |   | — |   |   |   | — |   |   |   | 2,566 |   |   |
| Issuance of warrants and non-employee stock options  to acquire ordinary shares in exchange for services |       | —                   |       |                    | —     |                        |       | 4,246         |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 4,246 |   |   |
| Repayment on notes receivable from employees                                                             |       | —                   |       |                    | —     |                        |       | —        |       |                                  | 438        |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 438 |   |   |
| Comprehensive loss:                                                                                      |       |                     |       |                    |       |                        |       |          |       |                                  |       |            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net loss                                                                                                 |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | (21,331 | ) |   |   | (21,331 | ) |   |
| Total comprehensive loss                                                                                 |       |                     |       |                    |       |                        |       |          |       |                                  |       |            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   | (21,331 | ) |   |
| **Balance at December 31, 2004**                                                                    |       | 36,873,421               |       |                    | €     | 8,850                       |       |          | €     | 349,167                               |       |            | €     | (224                          | )          |   |   | € | (4,958 | ) |   |   | € | — |   |   |   | € | (274,524 | ) |   |   | € | 78,311 |   |   |
| Issuance of ordinary shares                                                                              |       | 4,567,192                |       |                    | 1,096      |                        |       | 56,439        |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 57,535 |   |   |
| Deferred compensation                                                                                    |       | —                   |       |                    | —     |                        |       | 675           |       |                                  | —     |            |       |                          | (675       | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Amortization of deferred compensation                                                                    |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | 2,700      |   |   |   | — |   |   |   | — |   |   |   | 2,700 |   |   |
| Issuance of warrants and non-employee stock options  to acquire ordinary shares in exchange for services |       | —                   |       |                    | —     |                        |       | 3,043         |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 3,043 |   |   |
| Stock based incentive plan                                                                               |       | —                   |       |                    | —     |                        |       | 22            |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 22 |   |   |
| Repayment on notes receivable from employees                                                             |       | —                   |       |                    | —     |                        |       | —        |       |                                  | 30         |            |       |                          | —     |   |   |   | — |   |   |   | — |   |   |   | 30 |   |   |
| Comprehensive loss:                                                                                      |       |                     |       |                    |       |                        |       |          |       |                                  |       |            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Unrealized gain on securities available for sale                                                         |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | —     |   |   |   | 11,299 |   |   |   | — |   |   |   | 11,299 |   |   |
| Net loss                                                                                                 |       | —                   |       |                    | —     |                        |       | —        |       |                                  | —     |            |       |                          | —     |   |   |   | — |   |   |   | (15,525 | ) |   |   | (15,525 | ) |   |
| Total comprehensive loss                                                                                 |       |                     |       |                    |       |                        |       |          |       |                                  |       |            |       |                          |       |   |   |   |   |   |   |   |   |   |   |   | (4,226 | ) |   |
| **Balance  at December 31, 2005**                                                                   |       | 41,440,613               |       |                    | €     | 9,946                       |       |          | €     | 409,346                               |       |            | €     | (194                          | )          |   |   | € | (2,933 | ) |   |   | € | 11,299 |   |   |   | € | (290,049 | ) |   |   | € | 137,415 |   |   |

 

The accompanying notes are an integral part of these financial statements.

F-5

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**CRUCELL N.V.CONSOLIDATED STATEMENTS OF CASH FLOWS(amounts in thousands of euro)**

| ** **                                                                                   | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Operating activities**                                                                     |       |                                       |       |   |   |   |   |
| Net loss                                                                                     |       | €                                     | (15,525    | ) | € | (21,331 | ) | € | (23,386 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities:                 |       |                                       |       |   |   |   |   |
| Depreciation                                                                                 |       | 2,973                                      |       | 2,982 |   | 2,712 |   |
| Loss on disposal of plant and equipment                                                      |       | —                                     |       | — |   | 460 |   |
| Stock based employee compensation, including  incentive plan stock awards                    |       | 4,278                                      |       | 2,566 |   | 2,696 |   |
| Intangible amortization                                                                      |       | 1,470                                      |       | 1,966 |   | 1,330 |   |
| Provision for bad debts                                                                      |       | (64                                        | )          | 190 |   | 150 |   |
| Gain on sale of securities available for sale                                                |       | —                                     |       | — |   | (982 | ) |
| Revenue recognized in exchange for securities  available for sale                            |       | —                                     |       | — |   | (324 | ) |
| Issuance of warrants and non-employee stock options  to acquire ordinary shares for services |       | 3,043                                      |       | 4,246 |   | 616 |   |
| Change in operating  assets and liabilities:                                                 |       |                                       |       |   |   |   |   |
| Trade accounts receivable                                                                    |       | 260                                        |       | 7,337 |   | (8,688 | ) |
| Accrued income                                                                               |       | (6,450                                     | )          | (2,564 | ) | 202 |   |
| Prepaid expenses and other current assets                                                    |       | (5,606                                     | )          | 797 |   | (1,037 | ) |
| Accounts payable                                                                             |       | (109                                       | )          | 21 |   | (320 | ) |
| Accrued compensation and related benefits                                                    |       | (524                                       | )          | 242 |   | (2,225 | ) |
| Deferred revenues                                                                            |       | (6,665                                     | )          | (3,248 | ) | 7,787 |   |
| Other accrued liabilities                                                                    |       | 2,973                                      |       | 972 |   | (1,285 | ) |
| Net cash used in operating activities                                                        |       | (19,946                                    | )          | (5,824 | ) | (22,294 | ) |
| **Investing  activities**                                                                    |       |                                       |       |   |   |   |   |
| Purchases of developed technology.                                                           |       | —                                     |       | (4,017 | ) | — |   |
| Purchases of property, plant and equipment                                                   |       | (10,366                                    | )          | (2,114 | ) | (3,448 | ) |
| Proceeds from sale of plant and equipment                                                    |       | —                                     |       | — |   | 96 |   |
| Proceeds from sale of securities available for sale                                          |       | —                                     |       | — |   | 1,306 |   |
| Net cash used in investing activities                                                        |       | (10,366                                    | )          | (6.131 | ) | (2,046 | ) |
| **Financing  activities**                                                                    |       |                                       |       |   |   |   |   |
| Proceeds from the issuance of ordinary shares, net of  offering costs                        |       | 57,535                                     |       | 1,409 |   | 310 |   |
| Proceeds from issuance of long term debt                                                     |       | 8,982                                      |       | — |   | — |   |
| Notes receivable from officers and employees                                                 |       | 30                                         |       | 438 |   | 239 |   |
| Principal payments under capital lease obligation                                            |       | (1,212                                     | )          | (1,132 | ) | (902 | ) |
| Proceeds from sale and lease-back of plant and  equipment                                    |       | —                                     |       | 741 |   | 1,258 |   |
| Net cash provided by financing activities                                                    |       | 65,335                                     |       | 1,456 |   | 905 |   |
| Net increase/(decrease) in cash and cash equivalents                                         |       | 35,023                                     |       | (10,499 | ) | (23,435 | ) |
| **Cash and cash equivalents at beginning of period**                                         |       | 76,711                                     |       | 87,210 |   | 110,645 |   |
| **Cash and cash equivalents at end of period**                                               |       | €                                     | 111,734    |   | € | 76,711 |   | € | 87,210 |   |
| Supplemental disclosures:                                                                    |       |                                       |       |   |   |   |   |
| Interest paid                                                                                |       | €                                     | 132        |   | € | 212 |   | € | 221 |   |
| Supplemental  disclosure of non-cash activities:                                             |       |                                       |       |   |   |   |   |
| Property, plant  and equipment acquired under unfunded mortgage loan agreement at year end   |       | €                                     | 6,771      |   | € | — |   | € | — |   |

 

The accompanying notes are an integral part of these financial statements.

F-6

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (amounts in thousands of euro, except share data)**

**Note 1.   BusinessActivities and Basis of Presentation**

Crucell N.V. (the “Company”), headquartered in Leiden,The Netherlands, combines innovative technological platforms to providepowerful and effective means to discover, develop and produce a variety of biopharmaceuticalsfor the treatment of human diseases. The Company operates in one businesssegment, the research and development of biopharmaceuticals for the treatmentof human disease using the Company’s proprietary technologies.

The consolidated financial statements have beenprepared in conformity with accounting principles generally accepted in theUnited States of America and include the accounts of the Company and its wholly-ownedsubsidiaries, Crucell Holland B.V., U-BiSys B.V. and ChromaGenics B.V.Investments in 20% to 50% owned affiliates in which the Company has the abilityto exercise significant influence over the investee, but less than acontrolling voting interest, are accounted for under the equity method ofaccounting. All significant intercompany accounts and transactions have beeneliminated in consolidation.

On March 11, 2004Crucell Holland B.V. acquired the outstanding capital stock of ChromaGenicsB.V., a privately held biotechnology company based in Amsterdam, TheNetherlands. The acquisition has been accounted for as an acquisition ofdeveloped technology. The Company paid €4,017in cash as well as entered into a contingent payment agreement that couldresult in an additional payment of €7,000 upon receipt ofrevenues by the Company generated from the STAR technology. After the paymentsof the contingent consideration, the Company will pay a royalty on revenuesgenerated from the STAR technology through the date the STAR technology patentexpires.

**Note 2.   Summaryof Significant Accounting Policies**

**Risks andUncertainties and Use of Estimates**

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the amounts reported in the consolidated financialstatements and accompanying notes. Actual results could differ from thoseestimates.

**Revenue Recognition**

The Company generates revenues principally from thelicensing of its proprietary technology and services performed together with oron behalf of licensees or partners. Under certain arrangements, the Company hasno continuing performance obligations after delivery of the associatedtechnology under the license agreement or any other arrangement with thelicensee. In such arrangements, initial license fees are recognized as revenueupon persuasive evidence of an arrangement and delivery of the associatedtechnology, which relates to the complete transfer of fully developedtechnology by the Company and represent the culmination of the earningsprocess. The Company’s arrangements provide for continuing support of itstechnology at standard consulting rates. Revenues derived from consultingservices, which are not essential to licensee’s ability to use the Company’stechnology, are recognized as earned during the period that the consultingservices are performed.

In certain arrangements, the Company collaborates withthird parties to develop novel products or processes using the Company’sproprietary technology. Such arrangements generally include an initial licensefee upon the delivery of the Company’s proprietary technology and incrementalfees for the 

F-7

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 2.**   Summary of Significant AccountingPolicies (Continued)

Company providing ongoingresearch and development activities. The research and development activitiesperformed by the Company are substantive and critical to the licensees’exploitation of the delivered technology. Upon persuasive evidence of anarrangement and delivery of the associated technology, the Company recognizesinitial fees from such arrangements as revenues over the period of itscontinuing performance obligations. Incremental fees from research anddevelopment activities are recognized as revenues earned over the period of thedevelopment collaboration or the manufacturing obligation. All fees receivedunder the Company’s collaboration agreements are non-refundable.

Certain license arrangements provide for additionalnon-refundable license fees to be paid upon the achievement of milestones. Suchadditional license fees are recognized as revenue when the amounts become dueand payable upon achievement of the milestone.

In addition to the initial fee, the Company’sarrangements generally provide that the licensee make semi-annual or annualpayments (“license maintenance fees”) to maintain the license for a subsequentterm. Generally, licensees may terminate the license and related maintenancefees upon 30 days’ to 90 days’ notice. Annual and semi-annual licensemaintenance fees are recognized as revenues when the amounts become fixed andpayable. The aggregate of annual or semi-annual license maintenance fees paidwill generally reduce any royalty payments which may be due based on futureproduct sales of the licensee, if any, under the license agreement. Royaltiesare recognized as revenue when they become fixed and payable.

As part of various collaboration agreements, theCompany receives service fees for work performed under such agreements.Revenues, and relating costs, associated with completed performance servicesare recognized when the service is completed and the collectibility of thereceivable is deemed probable. Revenues associated with time and materialperformance contracts are recognized when costs are incurred and thecollectibility of the receivable is deemed probable.

The Company receivescertain government grants that support the Company’s research effort in definedresearch projects. These grants generally provide for reimbursement of approvedcosts incurred as defined in various grants. Revenues associated with thesegrants are recognized when costs under each grant are incurred in accordancewith the terms and conditions of the grant and the collectibility of thereceivable is deemed probable.

**Cost of ServiceFees**

Costs of service feescomprise direct labor, materials, and overhead costs, incurred in performingwork under various collaboration agreements.

**Research andDevelopment Expenses**

Research and developmentcosts are expensed as incurred. Research and development expenses are comprisedof the following types of costs incurred in performing research and developmentactivities: salaries and benefits (including stock-based compensation),allocated overhead and facility costs, 

F-8

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 2.**   Summary of Significant AccountingPolicies (Continued)

preclinicalstudy costs, clinical trials, amortization of developed technology, contractservices and other outside costs.

**Stock-BasedCompensation**

The Company accounts for stock-basedcompensation under the fair value method in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 123 “Accounting for Stock-BasedCompensation”. The Company generally values stock options issued based upon theBlack-Scholes option pricing model and recognizes this value as anexpense over the period in which the options vest. Compensation cost for sharebased awards with performance conditions, which are valued based on thegrant-date fair value of the award, are recognized based on the probableoutcome of that performance condition. Compensation costs for share basedawards containing a market condition are recognized provided that the requisiteservice is rendered, regardless of when, if ever, the market condition issatisfied. The effect of a market condition is reflected in the grant-date fairvalue of an award and the grant-date fair value is calculated using a latticemodel.

Stock compensation expensefor options granted to non-employees has been determined in accordance withSFAS No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18,“Accounting for Equity Instruments that are Issued to Other than Employees forAcquiring, or in Conjunction with Selling, Goods or Services,” as the fair valueof the consideration received or the fair value of the equity instrumentissued, whichever is more readily measured.

**Income Taxes**

The liability method is used in accounting for incometaxes. Under this method, deferred tax assets and liabilities are recognizedfor the tax effect of incurred net operating losses and for tax consequencesattributable to differences between the balance sheet carrying amounts ofexisting assets and liabilities and their respective tax bases. If it is morelikely than not that the carrying amounts of deferred tax assets will not berealized, a valuation allowance is recorded to reduce the carrying amounts ofthose assets.

Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxable incomein the years in which those temporary differences are expected to be recoveredor settled. The effect on deferred tax assets and liabilities of a change intax rates is recognized in the results of operations in the period thatincludes the enactment date.

**Net Loss Per Share**

Basic net loss per shareis computed based on the weighted-average number of ordinary sharesoutstanding during the period. Diluted net loss per share is computed based onthe weighted-average number of ordinary shares outstanding, including thedilutive effect of stock options, if any. Basic and diluted net loss per shareare the same for all periods presented because the impact of outstanding stockoptions and warrants is anti-dilutive.

F-9

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 2.**   Summary of Significant Accounting Policies (Continued)

**Cash and CashEquivalents**

The Company considers allhighly liquid investments with an original maturity of three months or less,which are convertible to a known amount of cash and bear an insignificant riskof change in value, to be cash equivalents.

**Long-Lived Assets**

Property, plant and equipment is recorded at cost,less accumulated depreciation and accumulated impairment losses. Where an itemof property, plant and equipment comprises major components having differentuseful lives, they are accounted for as separate items of property, plant andequipment. Depreciation is computed using the straight-line method over thefollowing estimated useful lives: computer equipment, three years; furnitureand laboratory equipment, five years; and leasehold improvements, the shorterof the lease term or ten years. Land is not depreciated. Intangible assetsconsist of developed technology acquired in connection with businesscombinations in 2000 and the purchase of certain technology in 2004. Developedtechnology is amortized over five years.

The Company complies withSFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets,” which requires that long-lived assets be reviewed for impairmentwhenever events or changes in circumstances indicate the carrying amount of theassets might not be recoverable. Conditions that would necessitate animpairment assessment include an impairment of goodwill of the associatedassets, a significant decline in the observable market value of an asset, asignificant change in the extent or manner in which an asset is used, or asignificant adverse change  that wouldindicate that the carrying amount of an asset or group of assets is notrecoverable. For long-lived assets to be held and used, the Company recognizesan impairment loss only if its carrying amount is not recoverable through itsundiscounted cash flows and measures the impairment loss based on thedifference between the carrying amount and fair value. There was no impairmentof long-lived assets, including intangible assets, during the three year periodended December 31, 2005.

**CapitalizedInterest Costs**

Interest costs directlyattributable to the acquisition, construction or production of qualifying assets,which are assets that necessarily take a substantial period of time to getready for their intended use or sale, are added to the cost of those assets,until such time as the assets are substantially ready for their intended use orsale. All other interest costs are recognized in profit or loss in the periodin which they are incurred. No interest costs have been capitalized in theyears ended December 31, 2005, 2004 and 2003.

**Foreign Currency**

The Company’s functionalcurrency is the Euro. The Company makes payments primarily in Euro and receivespayments in Euro and US dollars. Transaction gains and losses arising fromtransactions denominated in US dollars and or other non-Euro currencies areincluded in the Consolidated Statement of Operations under “Foreign currencygain/loss”. At each balance sheet date, monetary assets and liabilities thatare denominated in foreign currencies are translated at the rates prevailing onthe balance sheet date.

F-10

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 2.   Summaryof Significant Accounting Policies (Continued)**

**FinancialInstruments**

The Company’s financialinstruments include primarily cash and cash equivalents, accounts receivableand other current assets, securities available for sale, accounts payable,accrued and other liabilities, capital lease obligations and long-term debt.Due to the short-term nature of the cash and cash equivalents, accountsreceivable and other current assets, accounts payable, accrued and otherliabilities, and capital lease obligations, the carrying amounts of theseassets and liabilities approximate their fair value. Securities available forsale are carried at fair value on the consolidated balance sheets. The fairvalue of the Company’s long term debt approximates fair value, based on currentincremental borrowing rates of the Company.

**SecuritiesAvailable for Sale**

Equitysecurities available for sale that have readily determinable fair values arestated at market value determined by quoted market prices, based on the Company’sdesignation of such securities at the time of purchase or when an event occurscausing the Company to re-evaluate its investments. Unrealized holdinggains and losses for securities available for sale are excluded from earningsand reported in other comprehensive income until realized.

**ComprehensiveIncome (Loss)**

For the years endedDecember 31, 2005, 2004 and 2003 respectively, comprehensive loss amountedto €4,226,€21,331and €23,386,respectively. The difference between net loss and comprehensive loss for theyear ended December 31, 2005 relates to the unrealized gain the Companyrecorded for its securities available for sale on its investment in GalapagosN.V. (see Note 4).

**Concentration ofCredit Risk**

The Company extends creditbased on an evaluation of the customer’s financial condition, without requiringcollateral. The Company monitors its exposure related to credit losses andmaintains allowances for anticipated losses.

F-11

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 2.**   Summary of Significant Accounting Policies (Continued)

**Trade AccountsReceivables and Allowance for Doubtful Accounts**

Tradeaccounts receivables do not carry any interest and are stated at their nominalvalue as reduced by appropriate allowances for uncollectible amounts. Thecollectibility of accounts receivable is assessed based on a combination offactors. In cases where the Company is aware of circumstances that may impair aspecific customer’s ability to meet its financial obligations, the Companyrecords a specific allowance against amounts due, and thereby reduces the netrecognized receivable to the amount the Company reasonably believes will becollected. For all other customers, the Company recognizes allowances fordoubtful accounts based on the length of time the receivables are past due, thecurrent economic conditions and the Company’s historical experience.

| **Allowance for doubtful accounts deducted from accounts receivable** | ** ** | ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| Beginning balance  January 1,                                                                       |       | €     | 240        |     | €     | 150      |       | €   | 100        |   |
| Write-off of bad  debt                                                                                   |       | —     |       | (100     | )          | (100     | )          |
| Additions to  allowance                                                                                  |       | 77         |       | 190      |       | 150      |       |
| Release of  allowance, due to subsequent collections                                                     |       | (141       | )          | —   |       | —   |       |
| Ending balance  December 31,                                                                        |       | €     | 176        |     | €     | 240      |       | €   | 150        |   |

 

**Reclassification**

Certain prior yearbalances have been reclassified to conform to the current year’s presentation.

**New AccountingPronouncements**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued a revision of FASBstatement No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123(R)”). This statement supersedes Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, and its related implementationguidance. SFAS No. 123 (R) addresses the accounting for share-basedpayment transactions in which a company receives employee services in exchangefor either equity instruments of the company or liabilities that are based onthe fair value of the company’s equity instruments or that may be settled bythe issuance of such equity instruments. SFAS No. 123 (R) eliminatesthe ability to account for share-based compensation transactions using theintrinsic method and generally requires that such transactions be accounted forusing a “fair-value”-based method and recognized as expense in the consolidatedstatement of operations. SFAS No. 123 (R) is effective as of thebeginning of the first annual reporting period that begins after June 15,2005. The adoption of SFAS 123 (R) will not have an impact on the statementof operations for stock options granted and the related expense to be recordedrelated thereto prior to adoption and the Company does not believe the adoptionof SFAS 123 (R) will result in significant differences in valuing andexpensing stock options as compared to its current policies.

In June 2005 theEmerging Issue Task Force of the FASB issued EITF 05-6 “Determining theAmortization Period for Leasehold Improvements Purchased Lease Inception orAcquired in a Business Combination”. On September 15, 2005 the EmergingIssue Task Force reached consensus on how to 

F-12

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 2.**   Summary of Significant Accounting Policies (Continued)

amortizeleasehold improvements that are placed in service significantly after and notcontemplated at the beginning of the lease term. Leasehold improvementsacquired in reporting periods beginning after June 29, 2005 should beamortized over the shorter of the useful life of the asset or a term thatincludes required lease periods and renewals that are deemed to be reasonablyassured. The adoption of EITF 05-6 will not have a significant impact onthe Company’s financial statements.

**Note 3.   PrepaidExpenses and Other Current Assets**

Prepaid expenses and other current assets includesdebt acquisition costs amounting to €700 incurred in December 2005.These costs will be amortized over the term of the mortgage loan of 15 years.Amortization is charged to the statements of operations as interest expense.Debt acquisition costs will begin to be amortized in fiscal year 2006 and noamortization expense has been recognized in the year ended December 31,2005.

In connection with thepublic offer for Berna Biotech AG, Crucell incurred costs amounting toapproximately €3,500 that are capitalizedas prepaid acquisition costs as of December 31, 2005. Upon acceptance ofthe offer, these expenses will be part of the purchase price, and subject topurchase price allocation.

**Note 4.   EquityInvestment in Galapagos N.V.**

In June 1999, the Company together with TibotecGroup N.V., an unrelated party, established a 50/50 joint venture, GalapagosN.V. (“Galapagos”), registered in Mechelen, Belgium to carry out certainfunctional genomics research activities. In 2002, the Company’s ownershipinterest decreased to 20.8%. This investment was accounted for under the equitymethod through 2002 at which point the Company’s proportional share ofGalapagos net loss reduced the carrying amount of the investment to zero.

In May 2005,Galapagos completed an initial public offering reducing the Company’s ownershipinterest further to 11.7%. Due to the reduction in its ownership interest, theCompany re-evaluated its position in Galapagos and designated the investment inGalapagos common stock as securities available for sale. As securitiesavailable for sale, the investment is carried at market value and unrealizedholding gains are excluded from earnings and reported as other comprehensiveincome in shareholders’ equity until realized. The Company’s ownership interestis less than 10% as of December 31, 2005.

F-13

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 5.   IntangibleAssets**

Intangible assets originated from the merger withU-BiSys B.V. in 2000 and from the acquisition of ChromaGenics B.V.’s developedtechnology in 2004.

The movement of intangibleassets for the years 2005, 2004 and 2003 is presented below:

| ** **                               | ** ** | **Developed  Technology** | ** ** |
|------------------------------------------|------------|---------------------------|------------|
| Balance, net,  January 1, 2003      |       |                      | €     | 3,326 |   |   |
| Amortization                             |       |                      | (1,330     | ) |   |
| Balance, net,  December 31, 2003(1) |       |                      | €     | 1,996 |   |   |
| Purchase of  developed technology        |       |                      | 4,017      |   |   |
| Amortization                             |       |                      | (1,966     | ) |   |
| Balance, net,  December 31, 2004(1) |       |                      | €     | 4,047 |   |   |
| Amortization                             |       |                      | (1,470     | ) |   |
| Balance, net,  December 31, 2005(1) |       |                      | €     | 2,577 |   |   |

----

(1)          Developed technology isnet of accumulated amortization of €8,093, €6,623,and €4,657at December 31, 2005, 2004 and 2003, respectively.

The purchase of developedtechnology in 2004 relates to the acquisition of ChromaGenics B.V. (see Note1.). The estimated aggregate amortization expense for each of the nextrespective five years is €803, €803,€803,€168,and €0respectively.

**Note 6.   Property,Plant and Equipment**

Property,plant and equipment consist of the following:

| ** **                                      | ** ** | **December 31,** | ** ** |
|-------------------------------------------------|------------|-----------------------|------------|
| ** **                                      | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Land                                            |       | €                | 1,500      |   | € | — |   |
| Furniture and  laboratory equipment             |       | 14,386                |       | 13,223 |   |
| Leasehold  improvements                         |       | 4,204                 |       | 4,204 |   |
| Computer  equipment                             |       | 1,732                 |       | 1,534 |   |
| Assets under  construction                      |       | 14,478                |       | 318 |   |
|                                            |       | 36,300                |       | 19,279 |   |
| Less accumulated  depreciation and amortization |       | (11,671               | )          | (8,814 | ) |
| Property, plant and  equipment, net             |       | €                | 24,629     |   | € | 10,465 |   |

 

At December 31, 2005 and 2004, the Company heldlaboratory equipment under capital leases with a cost of €4,021and €4,021,respectively, and a net book value of approximately €1,186 and €2,266,respectively. Such leases are secured by the value of the underlying assets.The capital lease equipment is amortized over the useful life of the equipment,or the lease term, whichever is shorter. Interest expense on lease obligations,which approximates cash payments for interest during the year, was €132,€212and €221during the years ended December 31, 2005, 2004 and 2003, respectively.

F-14

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 6.**   Property, Plant and Equipment (Continued)

At December 31, 2005the Company has contractual commitments for the construction of a productionfacility with the remaining commitment amounting to approximately €10,500.

**Note 7.   LongTerm Debt**

In December 2005, the Company entered into amortgage loan agreement for a maximum amount of €17,091,to finance the construction of the new production facility. As of December 31,2005 the Company has drawn a total of €8,982 and has included anadditional €6,771in long term debt which is reimburseable under its loan for construction costsinvoiced in December 2005. This additional amount has been included in longterm debt as the Company has the ability and intent to fund these costs withthe available credit under the mortgage loan agreement. The loanhas a 15-year term and bears interest at 4.55 percent for the first fiveyears, after which time the rates will be renegotiated. The loan is secured bythe land and building and a compensating balance arrangement with a bank in theamount of €10,000.For the first year, interest is accrued to the loan and no payments ofprincipal or interest are required. The loan will be repaid through monthlypayments over 15 years, starting January 1, 2007, with a balloon repaymentof €10,000after 15 years.

Principalpayments on the mortgage loan, when fully drawn, are due as follows at December 31,2005:

| The borrowings are  repayable as follows: |   |   |   |
|-------------------------------------------|--------|--------|--------|
| 2006                                      |   | € | — |   |
| 2007                                      |   | 338    |   |
| 2008                                      |   | 352    |   |
| 2009                                      |   | 370    |   |
| 2010                                      |   | 387    |   |
| Thereafter                                |   | 15,644 |   |
| Total                                     |   | 17,091 |   |
|                                           |        |        |        |  |

 

The difference between thetotal per the above scheduled payments and the balance at December 31,2005 represents additional borrowings anticipated under the mortgage loanagreement by the Company to be used in completing construction of the newproduction facility. Any differences between principal payments among the abovescheduled payments and scheduled payments based on the outstanding borrowingsas of December 31, 2005 if no additional borrowings were to be drawn wouldprimarily result in a reduction of the thereafter amounts above.

**Note 8.   Shareholders’Equity**

**Share Capital**

The Company’s authorized share capital amounts to €40,800divided into: 85,000,000 ordinary shares, and 85,000,000 preference shares,each with a par value of €0.24. As of December 31, 2005, therewere 41,440,613 ordinary shares issued and outstanding. No preference sharesare issued and outstanding as of December 31, 2005.

F-15

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 8.**   Shareholders’ Equity (Continued)

In May 2005, theCompany privately placed 3,600,000 ordinary shares at €14.50per share, resulting in net proceeds for the Company of €50,112.

As of December 31,2004 the Company had 10 issued and outstanding priority shares, all of whichwere held by Stichting Prioriteit Crucell (Priority Foundation). The PriorityFoundation, which was able to make binding nominations for the supervisoryboard members, transferred the priority shares to the Company in exchange for €0.24per priority share. The nomination right has been transferred to the NominationCommittee of the supervisory board. The outstanding priority shares have beenrevoked and swapped for ten ordinary shares per November 21, 2005.

All of the preferenceshares are held by a foundation called Stichting Preferente Aandelen Crucell(Preferred Foundation). The board of governors comprises of the Company’schairman of the supervisory board and four other independent members. Thepreference shares are held by the Preferred Foundation in which the Company hasentered into an agreement that allows it to acquire preference shares up to100% of the number of outstanding shares. The Preferred Foundation must pay atleast 25% of the nominal value of the preference shares it acquires from theCompany. If any preference shares are acquired by the Company, they must becancelled. The Preferred Foundation’s objective is to safeguard the Company’sinterests and those of its affiliates, through acquiring or managing thepreference shares and by exercising the rights attached to the shares, inparticular the voting rights.

**Repurchase of Shares**

Pursuant to a resolutionof the shareholders, the Company may repurchase up to 10 percent of itsoutstanding share capital through December 2, 2006. No repurchases haveoccurred through December 31, 2005.

**Stock–Based Compensation**

*Stock Option Plans*

The Company maintainsstock option plans whereby the remuneration committee of the supervisory boardmay grant options to employees, directors and members of the supervisory board,which are described further below. The compensation cost that has been includedin operating expenses for those plans was €2,700,€2,566and  €2,696 in 2005, 2004 and2003 respectively.

In December 2004, thesupervisory board approved a new option plan for 2005 providing for the grantof stock options to non-management committee members for a maximum of 1% ofissued ordinary shares. Options granted under this stock option plan areexercisable when the options have vested. Granted options vest straight lineover a period of 4 years. Compensation costs are recognized in accordance withthe accelerated method. The options expire 5 years after date of grant. Upontermination of employment with the Company, options must be exercised within90 days. Options granted under the stock option plan are granted atexercise prices, which equal the fair value of the Company’s ordinary shares atthe date of grant.

All options granted under previous stock option plans(the “Prior Plans”) are exercisable immediately upon grant. Upon exercise ofthe options, employees are subject to profit-retribution provisions. Suchprovisions entitle the Company to receive a portion of the profits upon thesale of the shares, calculated as 

F-16

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 8.**   Shareholders’ Equity (Continued)

the differencebetween the total proceeds from the sale of shares and the aggregate exerciseprice. The portion of the profits payable to the Company decreases ratably overthree to four years. The relevant portion of any profits derived by theemployee from the sale of shares received on exercise of options must beremitted to the Company if the employee terminates employment prior to the endof the relevant period. The options expire four to eight years from the date ofgrant, or earlier upon termination of employment with the Company. Upontermination of employment with the Company, options must be exercised within90 days. Compensation costs for Prior Plans are recognized in accordance withthe straight-line method. Generally, options granted under the Prior Plans aregranted at exercise prices which exceed the fair value of the Company’sordinary shares at the date of grant. No further grants are to be made from thePrior Plans.

In connection with theaward of certain options in the past, a cash bonus plan is applicable. Inaccordance with the terms of a cash bonus plan, if an employee maintainscontinuous employment with the Company for a period of four years, and defersexercising awarded options until the last month of the option term, theemployee receives a cash bonus. The Company recognizes compensation expenseratably during the employment period required under the cash bonus plan. In2003, the cash bonus plan was eliminated for certain employees resulting in areduction to compensation expense of approximately €2,300.

In January 2003, thesupervisory board approved an option plan (the “2003 Plan”) whereby previouslyawarded options to employees and members of the supervisory board with anexercise price of €21.00 per share could beexchanged for an equal number of new options (the “replacement options”). Thereplacement options have an exercise price of €3.49, which was 161% ofthe average closing stock price of the Company on the three days preceding theoption grant date, and have an eight year life. The replacement options areexercisable immediately, but are subject to profit retribution provisions. Suchprovisions entitle the Company to receive a portion of the profits upon the saleof the shares, calculated as the difference between the total proceeds from thesale of shares, and the aggregate selling price. The portion of the profitspayable to the Company decreases ratably over three years. The relevant portionof any profits derived by the employee from the sale of shares received onexercise of options must be remitted to the Company if the employee terminatesemployment prior to the end of the three year period. A total of 1,295,650options with an exercise price of €21.00 per share werereplaced under the new option plan, resulting in incremental deferredcompensation of €1,516or €1.17per option. Compensation expense is recognized ratably over a period of threeyears. Options issued subsequent to January 2003 are subject to the termsof the 2003 Plan. Options issued under this option plan have an eight year lifeand will be issued at exercise prices equal to 161% of the average closingstock price of the Company on the three days preceding the option grant date.The options are immediately exercisable, and are subject to profit retributionprovisions which lapse over a period of three years. No further grants areavailable to be made from the 2003 Plan.

InMay 2003, the supervisory board approved amendments to the terms of outstandingand future options held by members of the management board, which include theCompany’s chief executive officer, chief financial officer, chief operatingofficer and chief scientific officer, whereby, following a change of controlresulting in termination of employment, members of the management board mayexercise options over the shorter of a three year period or the remaining termof the options.

F-17

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 8.   Shareholders’Equity (Continued)**

In December 2003, the terms of all outstandingstock options to the supervisory board were modified such that options vestimmediately and are no longer subject to profit retribution provisions. TheCompany recognized compensation expense of €495representing the total amount of deferred compensation associated with optionsheld by members of the supervisory board.

In April 2004, the supervisory board approved anew option plan (the “2004 Plan”) whereby employees and members of thesupervisory board are granted options with an exercise price 126% greater thanthe average closing stock price of the Company on the three days preceding theoption grant date and have a five year life. The options are subject to profitretribution provisions. Such provisions entitle the Company to receive aportion of the profits upon the sale of the shares, calculated as thedifference  between the total proceedsfrom the sale of shares, and the aggregate selling price. The portion of the profitspayable to the Company decreases ratably over three years. The relevant portionof any profits derived by the employee from the sale of shares received onexercise of options must be remitted to the Company if the employee terminatesemployment prior to the end of the three-year period. Compensation expense isrecognized ratably over a period of three years. No further grants areavailable to be made from the 2004 Plan.

The Company accounts forits employee stock options under the fair value method. The fair value ofoptions was estimated at the date of grant using the Black-Scholes optionpricing model, with the following weighted average assumptions:

| ** **               | ** ** | **Year ended December 31,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Risk-free  interest rate |       | 4.42                                       | %          | 2.9 | % | 2.5 | % |
| Expected dividend  yield |       | —                                     |       | — |   | — |   |
| Expected  volatility     |       | 52.4                                       | %          | 62.3 | % | 87.0 | % |
| Expected life (years)    |       | 4.25                                       |       | 4.0 |   | 4.0 |   |

 

The risk free interest rate is based on U.S. Treasurysecurities in effect at the time of grant. Expected volatility is based on thehistorical volatility of the Company’s stock. The expected life of the optionsgranted is an estimate based on the contractual term of the options andhistorical behavior. The weighted average fair value of options granted duringthe years ended December 31, 2005, 2004 and 2003 was €10.80,€3.28and €1.41,respectively.

F-18

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 8.**   Shareholders’ Equity (Continued)

A summary of the stockoption activity for the plan is as follows:

| ** **                         | ** ** | **Number of  options** | ** ** | **Weighted average  exercise price** | ** ** |
|------------------------------------|------------|-----------------------------|------------|------------------------------------------------|------------|
| Balance at  January 1, 2003   |       | 4,529,164                   |       |                                           | 9.27       |   |   |
| Granted                            |       | 2,512,554                   |       |                                           | 4.19       |   |   |
| Exercised                          |       | (356,386                    | )          |                                           | 0.87       |   |   |
| Forfeited                          |       | (2,326,574                  | )          |                                           | 13.63      |   |   |
| Balance at  December 31, 2003 |       | 4,358,758                   |       |                                           | 4.70       |   |   |
| Granted                            |       | 1,333,500                   |       |                                           | 9.59       |   |   |
| Exercised.                         |       | (867,097                    | )          |                                           | 1.62       |   |   |
| Forfeited                          |       | (6,150                      | )          |                                           | 8.48       |   |   |
| Balance at  December 31, 2004 |       | 4,819,011                   |       |                                           | 6.42       |   |   |
| Granted                            |       | 123,000                     |       |                                           | 19.45      |   |   |
| Exercised.                         |       | (887,182                    | )          |                                           | 8.09       |   |   |
| Forfeited                          |       | (25,325                     | )          |                                           | 9.07       |   |   |
| Balance at  December 31, 2005 |       | 4,029,504                   |       |                                           | 6.43       |   |   |

 

Included in the options outstanding as of December 31,2005 are options to acquire 600,604 ordinary shares that are held by formeremployees and consultants. These individuals have been permitted to continuevesting in these options for services rendered.

The following tablesummarizes information about the Company’s stock options outstanding at December 31,2005:

| **Exercise price** | ** ** | ** ** | ** ** | **Outstanding  Options  at December 31,  2005** | ** ** | **Weigthed average  exercise price** | ** ** | **Weighted average  remaining contractual  life (years)** | ** ** | **Exercisable options** | ** ** | **Weigthed average  exercise price—  exercisable options** | ** ** |
|-------------------------|------------|------------|------------|-----------------------------------------------------------|------------|------------------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------------|------------|
| €2.35-€3.00   |       |       | 163,000    |                                                      |       |                                           | 2.64       |                                                                     |       |                         | 5.04       |                                                                           |       |   | 163,000 |   |   |   | 2.64 |   |   |
| €3.01-€5.00   |       |       | 1,647,400  |                                                      |       |                                           | 3.50       |                                                                     |       |                         | 4.80       |                                                                           |       |   | 1,647,400 |   |   |   | 3.50 |   |   |
| €5.01-€7.00   |       |       | 802,604    |                                                      |       |                                           | 6.09       |                                                                     |       |                         | 0.92       |                                                                           |       |   | 802,604 |   |   |   | 6.09 |   |   |
| €7.01-€11.66  |       |       | 1,293,500  |                                                      |       |                                           | 9.60       |                                                                     |       |                         | 3.50       |                                                                           |       |   | 1,293,500 |   |   |   | 9.60 |   |   |
| €11.67-€22.22 |       |       | 123,000    |                                                      |       |                                           | 19.45      |                                                                     |       |                         | 4.65       |                                                                           |       |   | — |   |   |   | — |   |   |
| Total                   |       |       | 4,029,504  |                                                      |       |                                           |       |                                                                     |       |                         |       |                                                                           |       |   | 3,906,504 |   |   |   |   |   |   |

 

As of December 31,2005, a total of 6,216,092 ordinary shares, representing 15% of the issuedshare capital, have been reserved for issuance under the option plan, of which4,029,504 are subject to outstanding options (including non-employee stockoptions).

*Share-BasedIncentive Plans*

Under its 2005 Short-term Incentive Plan (the “STIPlan”), which allows for the issuance for up to 75,015 shares of common stock,the Company granted select executives share awards whose vesting is contingentupon meeting various Company-wide, departmental and individual performancegoals in fiscal 

F-19

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 8.**   Shareholders’ Equity (Continued)

2005, including arequirement not to exceed budgeted cash outflows as a significant item which ifmet allows a determination of the amounts earned under the plan based onachievement of the departmental and individual performance goals. The employeesgranted shares under the STI Plan can elect to receive either cash (at a 25%discount from the total award) or shares if the performance criteria are met.As such, grants under the STI Plan are accounted for as liabilities andincluded in accrued compensation and related benefits in the accompanyingbalance sheets. Shares granted in 2005 under the STI Plan were at the shareprice at the beginning of the year at €10.10, which is lower thanthe fair value of the shares on the date of grant of €21.10.In December 2005, 68,108 STI Plan shares were granted to selectexecutives, of which the Company expects to issue 34,054 shares of common stockrelated thereto in fiscal 2006 as the remaining amounts due under the STI Planto the employees will be received in the form of payments made on behalf of theemployees to tax authorities for the minimum statutory wage taxes due on suchshare grants. There were no forfeitures of the STI Plan grants through December 31,2005 and all shares granted were vested at year end as all performance relatedmeasures were achieved.

The fair value of grants under the STI Plan wasestimated on the date of grant assuming the performance goals will be achievedby multiplying the number of shares available to be granted by the grant datefair value of the Company’s shares of €21.10. As of December 31,2005, there was €1,534 oftotal recognized compensation cost related to these share-based compensationarrangements granted under the STI Plan included in accrued compensation andrelated benefits in the accompanying consolidated balance sheets.

The Company also has a 2005 Long-term Incentive Plan(the “LTI Plan”), which allows for the issuance for up to 36,842 shares ofcommon stock to be granted to select executives with vesting contingent uponmeeting various market-based goals, including a requirement of a certain shareprice increase over a three year period and then total shares to be grantedafter achieving the increase would be based on the Company’s ranking in variousEuropean and U.S. sector indexes at the end of the measurement period.Depending on the level of achievement of these market measures, at the end of threeyears the number of shares vesting could be 0%-200%. Shares granted in2005 under the LTI Plan were at the share price at the beginning of the year at€10.10,which is lower than the fair value of the shares on the date of grant of €21.10,which is the measurement date for the awards. In December 2005, 36,842 LTIPlan shares were granted to select executives. There were no forfeitures of theLTI Plan grants through December 31, 2005 and all shares granted wereunvested as of year end.

The fair value of grants under the LTI Plan wasestimated on the date of grant using a lattice-based option valuation modelthat uses assumptions for the Company in addition to similar assumptions forcompanies (Peer Group) included in the sector indexes in order to model outrankings in various scenarios. The model calculates the likelihood ofachievement of the market-based measures at various levels and once a value isdetermined for the shares, compensation cost is recognized over the measurementperiod of three years regardless of whether such market-based targets areachieved. Key input assumptions for the lattice-based option valuation modelinclude expected volatilities, expected term, dividend yield and risk freeinterest rates. Expected volatilities are based in historical volatilities ofthe Company’s stock and Peer Group’s stock measured over a period commensuratewith the expected term of the grants. The expected term used is the three-yearmeasurement period. Dividend yields used were based on historical informationas to dividends for the Company and its Peer Group. Risk free interest ratesused were equal 

F-20

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 8.**   Shareholders’ Equity (Continued)

to the implied yieldcurrently available on zero-coupon government issues in countries whosecurrency the share price is expressed for Crucell and the Peer Group with aremaining term equal to the expected term of the share-based instrument beingvalued.

The weighted-averagegrant-date fair value of LTI Plan shares granted was €30.04. As of December 31,2005, there was €1,063 oftotal unrecognized compensation cost related to nonvested share-basedcompensation arrangements granted under the LTI Plan; that cost is expected tobe recognized over a period of 2.0 years. Compensation cost recognized duringthe year ended December 31, 2005 related to the LTI Plan amounted to €44.

*Stock Option Grantsto Non-Employees*

The Company has issued stock options to variousnon-employee consultants in connection with consulting agreements over theyears. These non-employee stock options included exercise prices greater thanor equal to the fair market value of the underlying common stock on the date ofgrant and the exercise prices range from €3.49 to €21.38 per share withexpiration dates ranging from May 2010 through December 2011. During2005, the Company issued stock options to purchase 58,000 shares of commonstock to a few consultants with exercise prices ranging from €15.40to €21.38and expiration dates ranging from May 2010 through November 2010.

The consulting agreements can be terminated by theCompany at any time and only those stock options vested as of the date oftermination are exercisable. As of December 31, 2005, total options topurchase 600,604 shares of common stock related to consulting agreements wereoutstanding with an average exercise price of €4.77expiration dates ranging from May 2010 through December 2011.

In connection with these stock option grants tonon-employees, the Company is required to record compensation expense based ona Black-Scholes valuation model and amortized over the consulting or vestingperiod of the grant. The assumptions used in the Black-Scholes valuation modelfor these non-employee grants are based on the same criteria as used foremployee grants except that the expected term is equal to the contractual lifeof the grant as required by EITF No. 96-18. The Company re-valuesthe unvested portion of these stock options at each reporting period as aresult of the requirement for variable accounting for non-employee grants. Asof December 31, 2005, assuming the valuation at December 31, 2005would remain consistent over the future service periods, the Company wouldrecognize compensation expense related to these non-employee grants amountingto €592over the next 46 months. The Company recorded compensation expense associatedwith these stock options of €3,043, €3,542and €182,for the years ended December 31, 2005, 2004 and 2003, respectively.

Stock option grants tonon-employees are made pursuant to approved stock option plans and activityrelated thereto is included in the tables above with the employee grants of theapproved plans.

*Warrants*

In 2003, the Companygranted warrants to acquire 250,000 ordinary shares with an exercise price of €3.00per share to a consultant in exchange for services. The warrants were earned bythe consultant over the service period which ended in 2004, and expire in July 2008.Per December 31, 2005 169,991 warrants are outstanding.

F-21

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 9.   Commitmentsand Contingencies**

Totalminimum payments under non-cancelable operating leases and capital leases areas follows at December 31, 2005:

| ** **                                                   | ** ** | **Capital Leases** | ** ** | **Operating Leases** | ** ** |
|--------------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| 2006                                                         |       |                    | €     | 949                       |       |   |   | € | 1,847 |   |   |
| 2007                                                         |       |                    | 407        |                      |       |   | 1,742 |   |   |
| 2008                                                         |       |                    | —     |                      |       |   | 1,296 |   |   |
| 2009                                                         |       |                    | —     |                      |       |   | 1,218 |   |   |
| 2010                                                         |       |                    | —     |                      |       |   | 1,218 |   |   |
| Thereafter                                                   |       |                    | —     |                      |       |   | 1,319 |   |   |
| Total minimum lease payments                                 |       |                    | €     | 1,356                     |       |   |   | € | 8,640 |   |   |
| Less interest                                                |       |                    | (60        | )                         |       |   |   |   |   |
| Present value of  minimum lease payments                     |       |                    | 1,296      |                      |       |   |   |   |   |
| Less short term  portion of obligations under capital leases |       |                    | (898       | )                         |       |   |   |   |   |
| Long term obligations  under capital leases                  |       |                    | €     | 398                       |       |   |   |   |   |   |

 

Rental expense was €1,711,€1,174and€1,165for the years ended December 31, 2005, 2004 and 2003, respectively.

The Company has future minimum payments undernon-cancelable research, licensing and other agreements whereby it is obligatedto make payments of €2,115 and €1,618in 2006 and 2007 respectively, with no required minimum payments thereafter.

At December 31, 2005 the Company has entered intocontractual commitments for the completion of the construction of a productionfacility amounting to approximately €10,500.

The Company has compensating cash balance arrangementsthat amount to €14,148 at December 31,2005, mainly related to operating lease contracts and the mortgage loan.

The Company is party toclaims and litigation incidental to the business. The Company believes theultimate resolution of these matters will not have a material adverse effect onits financial position, results of operations, or cash flows.

**Note 10.   CollaborationAgreements**

In December 2002, the Company entered into acollaboration agreement with DSM Biologics (“DSM”) pursuant to which theCompany granted DSM an exclusive license to use Crucell’s PER.C6 platform forthe contract manufacturing of recombinant proteins and monoclonal antibodies.Under the terms of this agreement, the Company receives licensing fees over afour year development period and is obligated to commit certain expenditures inconnection with the development of the PER.C6 production platform. Under theterms of the arrangement, DSM is entitled to a percentage of all non-servicefees received by the Company from third parties licensing the Company’s PER.C6technology in certain fields, in addition to an exclusive license to thetechnology that includes a right to sub-license. In December 2002, 

F-22

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 10.**   Collaboration Agreements

the Company received anup-front non-refundable licensee fee and in June 2004 the Company receiveda non-refundable milestone payment. Additional payments from DSM may betriggered upon certain dates and the attainment of certain milestones. Due tothe Company’s continuing performance obligations related to the novel use ofits technology during the development period, the up-front license fee wasinitially recognized as deferred revenue and is being recognized as revenueratably over four years, the estimated period of development. Milestones,related to scientific and technical achievements are recognized as revenue whenthe milestone is obtained.

In December 2005 the Company and DSM announcedthat they will strengthen and expand the development of the PER.C6 protein andmonoclonal antibody licensing business. The two companies will create anintegrated solution for the production of recombinant proteins and monoclonalantibodies on PER.C6 in order to increase licensing and royalty income andaccelerate the development and roll-out of the PER.C6 technology platform inthe market. The existing collaboration agreement was amended and terminated,resulting in release of deferred revenues and recognition of certain milestonesand agreed to by DSM.

In December 2003, theCompany entered into a collaboration and license agreement with Aventis PasteurS.A. (as of 2004 sanofi pasteur S.A. (“Sanofi”)) pursuant to which Sanofireceived an exclusive license to research, develop and manufacture influenzavaccines based on the Company’s PER.C6 technology. Under the terms of theagreement the Company is obliged to provide research and development. Inaddition, the Company is entitled to milestone payments, annual minimum royaltypayments, research and development funding, and royalties upon the developmentof a PER.C6-based influenza vaccine. The Company retains thecommercialization rights in Japan, whereby the Company can request Sanofi tosupply finished vaccine products to the Company, where royalties will be due toSanofi. Due to the Company’s continuing performance obligations related to thenovel use of its technology during the development period, the up-front licensefee has been deferred and will be recognized as revenue ratably over theestimated development period of three years. Minimum annual royalties duringthe development period, which are creditable against future royalties, arerecognized as revenue when earned. Milestones, related to scientific andtechnical achievements are recognized as revenue when the milestone is obtained.Service fees for work performed under the collaboration agreement arerecognized when earned.

**Note 11.   DefinedContribution Plan**

The Company maintains adefined contribution plan in The Netherlands whereby participants maycontribute up to 12% of their pre-tax base salaries, subject to certainlimitations. The Company makes a matching contribution equal to 100% of anemployee’s pre-tax contributions. The contributions to the plan were €866,€1,032and €761for the years ended December 31, 2005, 2004 and 2003, respectively.

F-23

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 12.   Revenues**

Thetable below reflects the geographical composition of revenues for the yearsending December 31, 2005, 2004 and 2003.

| ** **            | ** ** | **Year ended December 31,** | ** ** |
|-----------------------|------------|--------------------------------------------|------------|
| ** **            | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Europe                |       | €                                     | 13,519     |   | € | 10,042 |   | € | 2,310 |   |
| North America         |       | 23,574                                     |       | 12,535 |   | 5,051 |   |
| Asia and Middle  East |       | 476                                        |       | 45 |   | 63 |   |
|                  |       | €                                     | 37,569     |   | € | 22,622 |   | € | 7,424 |   |

 

The Company had 3 individual customers whoserespective accounts receivable balances represented 45% and 67% of theCompany’s total accounts receivable balance as of December 31, 2005 and2004 respectively.

**Note 13.   IncomeTaxes**

The Netherlands domestic statutory tax rate is 31.5%for 2005, and 34.5% for 2004 and 2003. At the end of 2005, The Netherlandsgovernment enacted a tax rate reduction. As a result of this change in law, TheNetherlands statutory tax rate will be reduced to 29.6% in 2006 and 29.1% in2007. Furthermore the Netherlands government intends to reduce the statutoryrate to 26.9% as of 2007. No certainty exists whether the intentions from thegovernment will be executed.

Thereconciliation between the provision for income taxes shown in the consolidatedstatement of operations, based on the effective tax rate, and benefit based onthe domestic tax rate, is as follows:

| ** **                                 | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                 | ** ** | **2005**                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| Income tax  benefit based on domestic rate |       | €                                     | (4,891     | ) | € | (7,360 | ) | € | (8,069 | ) |
| Reconciling  items:                        |       |                                       |       |   |   |   |   |
| Stock option compensation expense          |       | 1,535                                      |       | 2,295 |   | 325 |   |
| Timing difference revenue recognition      |       | (1,716                                     | )          | (1,466 | ) | 2,674 |   |
| Difference amortization expense            |       | 463                                        |       | 678 |   | 459 |   |
| Other                                      |       | —                                     |       | — |   | (51 | ) |
| Income tax  benefit                        |       | (4,609                                     | )          | (5,853 | ) | (4,662 | ) |
| Valuation  allowance                       |       | 4,609                                      |       | 5,853 |   | 4,662 |   |
| Provision for income  taxes                |       | €                                     | —     |   | € | — |   | € | — |   |

 

F-24

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 13.**   Income Taxes (Continued)

Deferred tax assets andliabilities reflect the impact of temporary differences between amounts ofassets and liabilities for tax and financial reporting purposes. Temporarydifferences and tax loss carry forwards, which give rise to deferred tax assetsand liabilities, are as follows:

| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2005**              | ** ** | **2004** | ** ** |
| Deferred tax  assets/(liabilities):        |       |                  |       |   |   |
| Tax loss carry  forwards                   |       | €                | 30,181     |   | € | 29,589 |   |
| Accrued  compensation and related benefits |       | 52                    |       | 362 |   |
| Deferred revenue                           |       | 873                   |       | 2,915 |   |
|                                       |       | 31,106                |       | 32,866 |   |
| Valuation  allowance                       |       | (31,106               | )          | (32,866 | ) |
| Net deferred tax assets                    |       | €                | —     |   | € | — |   |

 

The temporary differences in the table above arecalculated by taking the temporary differences between amounts of assets andliabilities for tax and financial reporting differences and tax effecting suchamounts using the enacted tax rates when the temporary differences are expectedto turn around and the tax loss carryforwards are expected to be realized. Theenacted tax rates used are 29.1% and 31.5% at December 31, 2005 and 2004,respectively.

The Company has tax loss carry forwards of €103,714,€85,766and €68,802at December 31, 2005, 2004 and 2003 respectively. The Company hasevaluated evidence impacting the realizability of its deferred tax assets,which consist principally of tax loss carry forwards. Management has consideredthe Company’s history of net losses and concluded that it is more likely thannot that the full benefits of these tax loss carry forwards will not berealized in the near term. Accordingly, the Company recorded a valuationallowance equal to 100% of the net deferred tax asset balance at December 31,2005, 2004 and 2003.

Tax losses may be carriedforward indefinitely and offset against future taxable profits. On January 1,2001, a bill was enacted that may limit the ability to offset losses againstfuture profits when the beneficial ownership of a company changes. This new lawcould limit the Company’s ability to realize the benefits of its tax loss carryforward in the future.

**Note 14.   SignificantCustomers**

Asummary of significant customers based on a percentage of total revenues is afollows:

| ** ** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
| Customer A |       |     | 25         | %        |       |     | 23         | % |   |   | 17 | % |   |
| Customer B |       |     | 23         | %        |       |     | 26         | % |   |   | (* | ) |   |
| Customer C |       |     | 12         | %        |       |     | (*         | ) |   |   | (* | ) |   |
| Customer D |       |     | 12         | %        |       |     | (*         | ) |   |   | (* | ) |   |
| Customer E |       |     | (*         | )        |       |     | (*         | ) |   |   | 15 | % |   |
|       |       |     | 72         | %        |       |     | 49         | % |   |   | 32 | % |   |

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(*)          Revenueless than 10% of total revenues.

F-25

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 15.   QuarterlyFinancial Data (unaudited)**

Thefollowing is a summary of the condensed quarterly results of operations for thefiscal years ended December 31, 2005 and 2004. 

| ** **                                  | ** ** | **Fiscal year 2005 (unaudited)** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **Q1**                                          | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenues                                    |       | €                                          | 5,960      |   | € | 10,098 |   | € | 9,450 |   | € | 12,061 |   |
| Loss from  operations                       |       | (5,700                                          | )          | (3,906 | ) | (4,338 | ) | (3,782 | ) |
| Net loss before  provision for income taxes |       | (5,288                                          | )          | (3,403 | ) | (3,649 | ) | (3,185 | ) |
| Net loss                                    |       | (5,288                                          | )          | (3,403 | ) | (3,649 | ) | (3,185 | ) |
| Net loss per share basic  and diluted       |       | (0.14                                           | )          | (0.09 | ) | (0.09 | ) | (0.08 | ) |
|                                             |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

| ** **                                  | ** ** | **Fiscal year 2004 (unaudited)** | ** ** |
|---------------------------------------------|------------|-------------------------------------------------|------------|
| ** **                                  | ** ** | **Q1**                                          | ** ** | **Q2** | ** ** | **Q3** | ** ** | **Q4** | ** ** |
| Revenues                                    |       | €                                          | 4,005      |   | € | 8,015 |   | € | 4,098 |   | € | 6,504 |   |
| Loss from  operations                       |       | (7,396                                          | )          | (2,476 | ) | (5,857 | ) | (6,997 | ) |
| Net loss before  provision for income taxes |       | (7,047                                          | )          | (2,043 | ) | (5,475 | ) | (6,766 | ) |
| Net loss                                    |       | (7,047                                          | )          | (2,043 | ) | (5,475 | ) | (6,766 | ) |
| Net loss per share basic  and diluted       |       | (0.19                                           | )          | (0.06 | ) | (0.15 | ) | (0.18 | ) |
|                                             |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

**Note 16.**   Subsequentevents (unaudited)

On December 1, 2005 the Company entered into theTransaction Agreement with Berna Biotech AG (“Berna”), an established Swisscompany with more than 100 years experience in the field of vaccines, pursuantto which the Company offered to exchange each Berna share into 0.447 newlyissued Crucell shares, with a par value of €0.24each. The exchange offer was pre-announced on December 1, 2005 and thepublic offer prospectus in accordance with Swiss take-over law was published onDecember 15, 2005. The exchange offer remained open for 25 SWX Swissexchange trading days, until January 20, 2006 16.00 hours. On January 23,2006 the Company declared the exchange offer successful, as 73.9% of theoutstanding shares were offered for exchange. The Company announced anadditional acceptance period of 10 SWX Swiss exchange trading days, starting January 262006 until February 8, 2006. During this period an additional 22.66% ofoutstanding shares were tendered, resulting in 96.56% shares offered forexchange.

On February 22, 2006, Crucell acquiredapproximately 97 percent of the outstanding common shares of Berna. The resultsof Berna’s operations will be included in the consolidated financial statementsas of that date.  Crucell and Berna bringcomplementary resources and strengths which the Company believes will result inthe creation of one of the leading independent vaccines companies in the world,with a fully integrated infrastructure for in-house development, production andmarketing.

The aggregate purchase price was approximately €363,500,including approximately €9,000 acquisition related expenses. Theacquisition of the shares is fully paid in common stock valued at €20.94.The value of the 16,930,762 common shares issued was determined based on theaverage market price of Crucell’s common shares over the period including twodays before and after the terms of the acquisition were agreed to andannounced. The Company is in the process of 

F-26

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**CRUCELL N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) (amounts in thousands of euro, except share data)**

**Note 16.**   Subsequent events (unaudited) (Continued)

obtaining third-partyvaluations of all assets acquired, and liabilities assumed, therefore noinformation on purchase price allocation and opening balance sheet information canbe provided. The purchase price allocation is expected to be completed in thebeginning of the third quarter of fiscal 2006.

The Company plans to divest Rhein Biotech GmbH in acash transaction. Rhein Biotech GmbH is part of Rhein Biotech N.V. a company93% owned by Berna Biotech AG. Under the terms of the planned acquisition,Dynavax will pay approximately €10 million (US$12 million)in cash in exchange for 100% of Rhein Biotech GmbH’s shares. The transactionwill need to be approved by Rhein Biotech N.V. shareholders. On the basis ofthe currently available information Crucell has undertaken to procure thatBerna Biotech AG votes in favour of the divestiture of Rhein Biotech GmbH. Thetransaction is anticipated to close in the second quarter of 2006.

On April 5, 2005 the Company announced that ithas reached agreement on the sale of all its shares in the veterinarypharmaceuticals production company Dr. E. Gräub AG. Dr. E. Gräub AGwill become a subsidiary of VETINVEST GmbH, a German company investing in thefield of veterinary medicines. Dr. E. Gräub was fully owned by BernaBiotech AG. The Company decided to sell this holding, which employs 40 people,as production and sales of veterinary medicines are not among its coreactivities. The transaction will be formally concluded immediately uponapproval by the competent competition authorities.

On April 12, 2006 the Company announced that itobtained more than 98% of all issued shares of Berna Biotech, and that theCompany has filed for the cancellation of the remaining minority held shares inexchange for the consideration offered in the public exchange offer. This stepis in line with previous announcements and the goal of fully integrating thetwo companies. The procedure, which is governed by the Swiss Act on StockExchanges and Securities Trading, is expected to last several months. BernaBiotech shares will be delisted from the SWX Swiss Exchange upon completion ofthe cancellation procedure.

F-27

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