**As filed with the Securities and Exchange Commission on [•], 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**

**(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

**For the fiscal year ended December 31, 2005**

**OR**

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

**Date of 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 requiringthis Shell Company Report**

**For the transition period from N/A to N/A**

**Commission file number: 0-30962**

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**Crucell N.V.**

(Exact name ofRegistrant as Specified in its Charter)

**Crucell N.V.**

(Translation ofRegistrant’s Name into English)

**The Netherlands**

(Jurisdiction ofIncorporation or Organization)

**Archimedesweg 4,2333 CN Leiden, The Netherlands**

(Address ofPrincipal Executive Offices)

Securitiesregistered or to be 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 forwhich there is a reporting obligation pursuant to Section 12(g) ofthe Act.

**None**

(Title of Class)

 

(Title of Class)

Securities forwhich there is a reporting obligation pursuant to Section 15(d) ofthe Act.

**None**

(Title of Class)

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Indicate the number of outstanding shares of each of the issuer’sclasses of capital or common stock as of the close of the period covered by theannual report.

**OrdinaryShares, par value 41,440,613**

 

Indicate bycheck mark if the registrant is a well-known seasoned issuer, as defined inRule 405 of the Securities Act.   o Yes   x No

If this reportis an annual or transition report, indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934.   o Yes   x No

Note—Checkingthe box above will not relieve any registrant required to file reports pursuantto Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligationsunder those Sections.

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   x Yes   o No

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, or a non-accelerated filer. See definition of "accelerated filerand large accelerated filer" in Rule 12b-2 of the Exchange Act. (Checkone):

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

 

Indicate bycheck mark which financial statement item the registrant has elected to follow.   o Item 17   x Item 18

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

(APPLICABLE ONLYTO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate bycheck mark whether the registrant has filed all documents and reports requiredto be filed by Sections 12, 13 or l5(d) of the Securities Exchange Act of 1934subsequent to the distribution of securities under a plan confirmed by a court.   o Yes   o No

 

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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 OF FINANCIAL AND OTHERINFORMATION**

We publish our financial statements ineuro. In this document, references to (1) “€”, “EUR” and “euro” are to the currency introduced at the start ofthe third stage of the European Economic and Monetary Union pursuant to theTreaty establishing the European Economic Community as amended by the Treaty onEuropean Union, and (2) “$”, “USD” and “dollars” are to the currency ofthe United States.

All amounts set forth in this annualreport, unless otherwise noted, are in thousands of euro, except share andoption data.

On February 22, 2006, we acquired, via ashare exchange, the majority of the outstanding shares of Berna Biotech AG, aSwiss stock corporation. This annual report describes the business now conductedby the 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 moreinformation on Berna Biotech AG, including their historical financial statements,you can visit their website at *http://www.bernabiotech.com*The contents of this website are not incorporated by reference intothis annual report.

**FORWARD-LOOKING STATEMENTS**

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 registeredtrademarks. The most important of these are: Crucell® , Berna®, the Berna and Crucell logos,ChromaGenics®, Aerugen®, Te Anatoxal Berna®, Di Anatoxal Berna®, Di Te Anatoxal Berna®, Epaxal®, Epaxal Berna®, Inflexal®, InflexalBerna®, Vivotif®, Vivotif Berna®, Hepimmune® and Flavimun®, PER.C6®, AdVac®, MAbstract® and STAR®. In addition we holdrights to use certain trademarks owned by our partners, such as Quinvaxem fromChiron. All other trademarks, service marks, trade names and registered marksused in this report are trademarks, trade names or registered marks of theirrespective owners. Crucell N.V. and its subsidiaries own a number of additionaltrademarks, including registered trademarks, that are not referenced in thisreport.

1

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**PART I**

**Item 1.**                        Identity of Directors, Senior Management and Advisors

This item isnot applicable.

**Item 2.**                     Offer Statistics and Expected Timetable

This item isnot applicable.

2

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**Item 3.**                        Key Information

**SelectedFinancial Data**

Theselected financial data presented below as at and for each of the five years inthe period ended December 31, 2005 has been derived from:

·        in respect of the three years ended December 31, 2005, ouraudited financial statements included elsewhere in this annual report, whichhave been audited by Ernst & Young Accountants, Independent RegisteredPublic Accounting Firm; and

·        in respect of the two years ended December 31, 2002, ouraudited financial statements, which have not been included elsewhere in thisannual report, and which have been audited by Ernst & YoungAccountants, Independent Registered Public Accounting Firm.

We have prepared our financial statementsin accordance with accounting principles generally accepted in the UnitedStates (U.S. GAAP). The selected financial data should be read in conjunctionwith Item 5, “Operating and Financial Review and Prospects”, our auditedhistorical financial statements and accompanying notes that are includedelsewhere in this annual 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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**RiskFactors**

*Youshould carefully consider all the information in this annual report, includingthese material risk factors. The risks we face are not limited to the riskslisted here. Some risks are not yet known to us and some of the risks that wecurrently do not believe to be material to our operations could prove to bematerial at a later date. All of these risks can materially affect ourbusiness, financial condition and results of operations.*

***We havea history of net losses and we may not achieve or maintain profitability.***

We haveincurred net losses since our incorporation. At December 31, 2005, we hadan accumulated deficit of €290,049. We expect to have net losses and negative cash flow in theforeseeable future. Achieving profitability will depend, in part, on:

·       the rateof 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

·       the levelof our expenses.

We may never generate sufficient revenuesto achieve profitability. Growth of our revenues is dependent on expandingcurrent product sales, obtaining approval of the products in our pipeline, thesuccess of our technologies—in particular, PER.C6—and on our success and thatof our licensees in developing commercially successful products based on ourtechnologies. Revenue growth related to our existing products may be dependenton factors beyond our control as discussed below under “—Our results fluctuateas a result of seasonality in our business, particularly with respect to ourflu vaccine product” and “—Our products may fail at any stage of development orafter market 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 mayneed additional capital in the future. If we do not raise this additionalcapital, we may have to curtail operations and/or scale back our research anddevelopment activities.***

We expect thatour future capital requirements will be substantial. Changes may occur thatwould consume available capital resources significantlysooner than we currently expect. If our capital resources are insufficient tomeet future capital requirements, we will have to raise additional funds tocontinue the research and development of our technologies and potentialproducts. In this regard, on May 10, 2005, we raised net proceeds of €50.1 million in a private equity offering of our ordinary sharespriced at €14.50 pershare. The capital raised from this private offering of shares supports theacceleration of our product development with new opportunities especially inthe field of antibodies and therapeutic proteins. We also may need to raiseadditional capital if we make any acquisitions involving cash consideration orthe issuance of new shares. In this regard, on February 22, 2006, weissued 16.7 million ordinary shares in connection with our acquisition ofshares of Berna Biotech.

We may seek additional funding throughpublic or private financing, strategic alliances or other arrangements. We maynot have access to additional financing and, if we do, it may not be onfavorable terms. If we fail to raise sufficient funds, we will have to curtailor cease operations, reduce our capital expenditures, scale back ourdevelopment of new potential products, reduce our workforce and licensepotential products or technologies to others that we otherwise would seek tocommercialize ourselves.

6

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***Weexpect that our interim results of operations will fluctuate, and thisfluctuation could cause the price of our ordinary shares and AmericanDepositary Shares (ADSs) to decline, causing investor losses.***

Ourinterim operating results have fluctuated in the past and are likely to do soin the future. These fluctuations could cause the price of our ordinary sharesand ADSs to fluctuate significantly or decline. Some of the factors that couldcause our operating results to fluctuate include:

·       upon our acquisition of BernaBiotech in February 2006, the timing of salesand shipments of our existing products;

·       the timingand recognition of payments related to license agreements and collaborationarrangements; 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 isrelatively fixed, including expenses for personnel, facilities and equipment.If revenues decline or do not grow as anticipated, we may not be able tocorrespondingly reduce our operating expenses and will suffer lossesaccordingly. In addition, we may increase our research costs in 2006, which mayincrease our operating expenses in the foreseeable future. Due to thepossibility of fluctuations in our revenues and expenses, we believe thatperiod-to-period comparisons of our operating results may not always be a goodindication of our future performance. Our operating results in some periods maynot meet the expectations of stock market analysts and investors. In that case,the price of our ordinary shares and ADSs would probably decline.

***Ourresults fluctuate as a result of seasonality in our business, particularly withrespect to our flu vaccine product.***

Upon ouracquisition of Berna Biotech in February 2006, ourinfluenza vaccine, Inflexal V, accounts for a significant proportion of netsales from our vaccines business. The market for flu vaccines is extremelyseasonal. There is a narrow window of time for production, regulatory approvaland marketing of flu vaccines. Possible delays in stock availability ormarketing of the vaccines could have a significant negative effect on us, sincea majority of the distribution and sales occurs during only a few weeks in the thirdand/or fourth quarter of every year. Potential delays in any step of theregulatory approval, production and marketing process could result in asignificant sales reduction for us . In addition, the antigen necessary toproduce influenza vaccine is in limited supply, and we generally rely on asingle source for our supply of this antigen. Any interruption or delay in ourantigen supply could have a materially adverse effect on our sales of InflexalV and negatively impact our earnings and financial position.

***Expectedbenefits from the Crucell-Berna combination may not be realized.***

Weexpect the acquisition of Berna Biotech in February 2006 to result in futuregrowth benefits, cost savings and other benefits. However, our ability tosuccessfully realize these benefits and the timing of their realization may beaffected by a variety 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 thecombination of Crucell and Berna Biotech, there can be no assurance that thebenefits we expect from the combination will be realized. If the expectedbenefits of the combination are not or only partially realized, the marketprice of our ordinary shares and ADSs may decrease.

7

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***Ourproducts may fail at any stage of development or after market introduction dueto factors beyond 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 inlate-stage development are introduced, there can be no assurance that a marketfor such products will develop or be sustained. If a market does develop, therecan be no assurance that our existing facilities and resources will besufficient to meet demand. Accordingly, there can be no assurance that we willrealize any potential benefits that may be associated with our late-stagedevelopment product portfolio.

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

Very little data exists regarding thesafety and effectiveness of the type of potential products that we and ourlicensees are developing. All of our potential products, and those of ourlicensees, including those based on our PER.C6 technology are either inresearch or in pre-clinical or clinical development. We and our licensees maynot succeed in developing commercial products based on PER.C6 technology thatare safe and effective, meet applicable regulatory standards, are capable of beingmanufactured at reasonable cost, or can be marketed successfully.

Development of products requiressignificant investment, including pre-clinical and clinical testing, todemonstrate their effectiveness prior to their commercial distribution. To a certainextent, we are dependent on the research and performance of third parties tobring potential products to market. We expect certain potential products toenter clinical trials during 2006. We and our licensees must conduct asubstantial amount of additional research and development before any regulatoryauthority will 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 notcontinue to use our potential products, PER.C6 technology or our othertechnologies, or if they terminate their agreements with us, we will earn lessor no revenue from our agreements with them.***

License, service and manufacturing revenuesand government grants from our potential products, PER.C6 and othertechnologies have accounted for a substantial portion of our revenues to dateand we 

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expect thatthey will continue to comprise a significant portion of our revenues for theforeseeable future. If our current or prospective partners or licensees do notdevelop and eventually distribute products based on our technologies, or ifthey terminate the relationship with us, we may not be able to realize therevenues and growth we anticipate. We also may not be able to successfullydevelop and derive license or other revenues from new technologies. Our currentor prospective licensees or partners may use or develop alternativetechnologies or develop competing products or potential products independentlyor in collaboration with others, including our competitors. The dollar/euroexchange rate may make our technology less competitive or reduce our revenues.If any of our licensees or partners become involved in a business combinationor other major corporate transaction, this could cause a strategic shift intheir business focus and the technologies they use. Our agreements with ourlicensees do not require them to dedicate resources to developing and distributingcommercial products based on our technologies. Furthermore, our licensees orpartners may generally terminate their agreements with us on short notice. Ifthey do terminate their agreements with us, we may not be able to enter intonew arrangements with other parties to replace those agreements. During 2005,existing licenses with eight licensees were not renewed.

***We facecompetition in 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 andrapidly evolving, and we expect that it will continue to undergo significantand rapid technological change. We operate in highly competitive markets and wemay experience competition from companies that have similar or othertechnologies, or other products or forms of treatment for the diseases we aretargeting. We are aware of a number of commercial initiatives in the fields inwhich we operate that may result in marketable products with which we wouldcompete. We also may experience competition from companies that have acquiredor may acquire technology from companies, universities and other researchinstitutions. As these companies develop their technologies, they may developproprietary positions in the areas of our core technologies or obtainregulatory approval for alternative technologies or commercial products earlierthan we or our licensees do. Other companies are developing products to addressthe same diseases and conditions that we and our licensees target and may haveor develop products or potential products that are more effective than thosebased on 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 maybe unable to obtain regulatory approval to manufacture and market our newproducts and may have regulatory approval of the manufacture and marketing ofour existing products revoked.***

Regulatory bodies such as the U.S. Food andDrug Administration (FDA) in the United States of America and comparableauthorities elsewhere, such as the European Medicines Agency (EMEA) and theEuropean Commission, regulate the market introduction of biopharmaceuticalproducts. In the approval process, a product candidate must undergo extensivetesting, which can take many years and require substantial expenditures. Thecosts of pursuing and securing regulatory approval are increasing,necessitating additional regulatory compliance expenditure on our part. Requiredtesting and trials include a review of the underlying technologies (includingthe cell line on which companies produce biopharmaceuticals) and areparticularly rigorous with respect to vaccines. Product development involvingnew technologies is highly uncertain. In addition, different regulatoryauthorities may impose different conditions upon the marketing of a givenproduct or may refuse to grant, or require additional data before granting, anapproval to market a product even though the product may have been approved byanother 

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regulatoryauthority. There can be no assurance that regulatory approvals will ultimatelybe obtained to manufacture and market any such product candidates in which weare, or may in the future be, interested.

Although the FDA allows PER.C6 cells to beused to produce clinical materials that are being used in clinical trials atthis time, the FDA has in the past raised concerns over the history and some ofthe properties 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 manufactureand marketing 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.

***Anypotential health risks associated with our products may lead to significantadverse regulatory and market consequences.***

The possibility of product failure oradverse side effects poses a variety of risks for manufacturers ofpharmaceutical and medical products. These risks may be more pronounced in thecase of the prophylactic vaccines that constitute our core products than withrespect to other pharmaceutical and medical products generally. Because suchvaccines are administered to healthy subjects, any adverse health consequencesassociated with such administration may be perceived as less tolerable thanside effects associated with the treatment of disease. Accordingly, there canbe no assurance that even relatively minor potential health risks associatedwith our products will not give rise to adverse regulatory action, and/ornegative market perception of us and our products, resulting in a materialadverse effect on our business, financial condition, results of operations andprospects.

***We mayhave significant product liability exposure, and our product liabilityinsurance may be inadequate to cover product liability or other claims againstus.***

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 thepast, we have been dependent on a small number of licensees and partners for amajority of our license revenues and expect to depend on a small number oflicensees for a portion of our revenues in the future.***

We have been dependent on a small number oflicensees and 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 ouragreements with sanofi pasteur (“sanofi”), DSM Biologics (“DSM”) and theNational Institute of Health (“NIH”) to generate licensing. revenues and weexpect that a high level of licensee and partner concentration will continue inthe foreseeable future. In the event that one or more of our major licensees orpartners were to terminate or substantially alter their licenses with us forany reason, we could experience a significant decrease in revenues and anadverse effect on our financial results.

***We mayhave conflicts with our licensees that could make collecting payments due to usmore difficult or that could negatively affect our relationship with ourcurrent and potential licensees.***

We may have disagreements with ourlicensees over royalty payments due to us and may have difficulty in collectingthese payments. Our existing license arrangements generally entitle us toreceive royalty payments for any potential products developed using ourtechnology. We depend on our licensees to inform us when they develop productsusing our technology. If our licensees fail to inform us of their progress inthese developments, we may not know of payments to which we would be entitled.In addition, 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 thelicenses that we have granted them, which could negatively affect ourrelationships with them and other licensees and our ability to grant additionallicenses to other companies. A number of our license agreements provide that ifmore favorable royalty terms are granted to another licensee pursuant to alicense of substantially the same scope, the initial licensee will also beentitled to the more favorable terms. A licensee may claim that other licenseagreements contain more favorable terms and that we should extend these termsto it. This may lead to a licensee disputing the amounts payable to us.

***Ifethical, legal and social issues related to the use of genetic technology,human-based materials and animal testing negatively affect regulatoryapproval, patentability or market acceptance of our core technologies and ofthe products developed using these technologies, we would not be able togenerate revenues from those products or our technologies.***

The use of genetic technology and materialsderived from human fetal tissue, such as PER.C6 technology, raises manyethical, legal and social issues that could hinder regulatory approval,patentability or market acceptance of our technologies and products developedusing them. Further, public expressions of concern and adverse events involvingnew biopharmaceutical technologies or products (such as stem cells orgenetically modified foods or organisms) could result in greater governmentalregulation of our technologies and potential regulatory delays relating to thetesting or approval of our own or our licensees’ potential products. Advocacygroups have taken issue in the past and may take issue in the future with theuse of genetic technology or materials derived from human fetal tissue, whichmay hinder 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 bypatients and the medical community. In addition, we rely on animal testing insome of our research and development and adverse public reaction to our use ofanimal testing could also cause us to encounter negative publicity. Any ofthese factors 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.

***Ourefforts to protect our intellectual property rights or to defend ourselvesagainst any claims of infringement may be costly and, if unsuccessful, we maybe barred from using or licensing our technologies.***

Our commercial success depends in part onour ability to obtain and maintain adequate protection of our intellectualproperty rights, including patents, in our technologies and potential productsin Europe, the United States and elsewhere. However, the patent positions oftechnology-based enterprises like us are subject to complex factual and legalissues that may give rise to uncertainty as to the validity, scope and priorityof a particular patent. There can be no assurance that we will develop productsthat are patentable, that patents will be granted under pending or futureapplications or that patents granted to us or our collaborators will be ofsufficient breadth to provide adequate protection against competitors withsimilar technologies or products or will not be successfully challenged. If wedo not adequately protect our intellectual property, competitors may be able touse our 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 parton not infringing patents and proprietary rights of third parties. Our work isin areas 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 disclosuresof other companies operating in our industry regarding their technologicaldevelopment efforts to ensure that we do not undertake activities that infringetheir intellectual property rights and to monitor whether those companies’activities may 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 involvedin proceedings 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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Oppositions are relatively straightforward proceedings where any thirdparty can seek to have a patent revoked. The proceedings typically have a stagewhere the patent’s opponents and proprietor may each file observations inwriting, followed by oral proceedings. The decision, which may be a dismissal of the opposition, a revocationof the patent or a maintenance of the patent in more limited form, usuallytakes between 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 withGlaxoSmithKline, if decided adversely to us, could cause us to lose asignificant share of our future revenues.***

Berna’s subsidiary Green Cross Vaccine Corporation, currently operatingunder the name Berna Biotech Korea Corporation, and our partner Chiron, lodgedoppositions against a patent of GlaxoSmithKline (GSK) in Korea. The patent isconcerned with multivalent vaccine formulations, such as our pentavalentvaccine registered in Korea, to be marketed under the trademark Quinvaxem. Inresponse to the opposition, the patent has been revoked by the KoreanIntellectual Property Office in December 2004 on the grounds that thesubject-matter claimed in the patent lacks novelty. GSK has appealed thatdecision before the Korean Patent Court. After a hearing which took place on April 272006, the Korean Patent court dismissed the appeal on June 8, 2006. Thedecision could be further appealed by the adversely affected party. If theKorean Supreme Court were to reverse the decision of the Patent Court and ifGSK were to decide to enforce its patent, Berna Biotech Korea Corp. could befound to have infringed or be infringing the patent. If we are found to beinfringing, we may be forced to delay, or even cancel, our commercialactivities with this vaccine. As a consequence we might lose revenues and ourbusiness would be adversely affected.

In addition, production of our pentavalent vaccine requires aparticular vaccine component that may become the subject of a patent disputebetween GSK and us or our supplier of that component. The patent on thatparticular component, held by GSK, is currently under opposition before thepatent office and a definitive outcome on the validity of the patent isexpected to take a number of years. A negative outcome of this oppositionproceeding could lead to infringement proceedings between GSK and us or oursupplier, although we believe that neither we nor our supplier would be held tohave infringed or be infringing that patent. The outcome of legal disputes isinvariably difficult to predict with accuracy, but in the event GSK were toprevail in infringement proceedings against us, this would adversely affect ourbusiness.

***If we or our licensees are unable to obtainany necessary licenses from third parties for use of their intellectualproperty on acceptable terms, we or our licensees may be unable to develop ormarket products based on our technologies.***

Before we can market some of our products or technologies, we may needto obtain licenses from third parties who have patents or other intellectualproperty rights. 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 orare unable to attract and retain qualified personnel, we may be unable todevelop our own technologies and potential products and to execute our businessplan.***

We are dependent on the principal members of our management andscientific personnel. Because of the experience our senior management has withour scientific research and development, our financial 

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position and our business and the industryin which we operate, the loss of the services of any of them might adverselyaffect our results or the ongoing development of our technologies which isnecessary to remain competitive and our ability to execute our business plan.The employment contracts of each of our management board members containnon-compete provisions that would apply for a period of one year after the endof their employment with us. We also may not be able to recruit and retain thequalified personnel necessary to develop our core technologies and potentialproducts and execute our business plan. There is currently a shortage ofskilled executives, scientific personnel and intellectual property andregulatory experts in our industry, particularly in the markets in which weoperate. We believe this shortage is likely to continue. As a result, competitionfor skilled personnel is intense, and the turnover rate can be high.Competition for experienced executives, scientists, developers andmanufacturers of pharmaceutical products, and other experts from numerouscompanies and academic and other research institutions may limit our ability toattract and retain qualified personnel on acceptable terms or may significantlyincrease our labor costs. The loss of any key personnel and/or the inability toattract and retain highly skilled personnel on acceptable terms could have amaterial adverse effect on our business, financial condition, results ofoperations and prospects.

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

We have experienced rapid and substantial growth and may continue toexperience such 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 productdevelopment programs depend on access to biological materials without which wewould be unable to conduct this research and development.***

To continue to develop our core technologies and potential products, wewill need access to biological materials, such as virus and tissue samples,which may be in limited supply. If we lose or do not obtain access toappropriate biological materials, or if tighter restrictions are imposed ontheir use or on information generated from them, we could be restricted orprevented from conducting our research and product development. In addition,government regulations could result in restricted access to, or use of, humanand other biological 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.***

We and some of our licensees rely on third parties for the supply ofthe serum-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.

In addition, we rely on third-party supplies including CSL, Chiron andBio Farma for the supply of crucial materials for the production of some of ourmarketed products or those under development, including starting materials aswell as antigens present in the final product. This includes, but is notlimited to, the supply of A-Singapore flu antigen for the production of thecurrently marketed hepatitis A vaccine 

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Epaxal, flu antigen for the production ofthe currently marketed flu vaccine Inflexal V, DiTePHiB antigen for thepentavalent vaccine currently in Phase III clinical development and DTP antigenfor the tetravalent vaccine currently in Phase III clinical development. Inparticular, a significant shortfall of the supply of A-Singapore fluantigen for the production of our hepatitis A vaccine Epaxal beforeDecember 31, 2007, when our agreement with Chiron for the supply of thisantigen terminates, may have a material adverse effect on our ability toproduce Epaxal. In addition, our agreement with CSL for the supply of fluantigen for the production of our flu vaccine Inflexal will terminate as ofDecember 31, 2009. Due to the shortage of antigen production capacityworldwide, we anticipate that it may be difficult to establish a new contractfor the supply of flu antigen on the terms and conditions we currently have. Ifwe are unable to establish a new supply agreement, or are only able toestablish a new agreement on less favorable terms and conditions, it couldincrease our costs, and there is no guarantee that we would be able to pass onthese increased costs to our customers. Any interruption or termination of thesesupply relationships may have adverse effects on our ability to produce andsupply these products as well as on our ability to launch new products indevelopment and thus on our overall results.

***We cannot be certain that we will besuccessful in public tenders to provide national governments and supranationalorganizations with our vaccine products.***

For the sale of our pediatric vaccines, such as the pentavalent vaccineQuinvaxem, we rely to a considerable extent on the public markets, whichtypically operate via a tender system. In a tender system, national governmentsor supranational organizations request proposals for the terms under which avaccine manufacturer will provide a large quantity of one or more vaccines. Theaward of 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 toimproper handling, 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.***

Our research and development processes involve the controlled use ofhazardous materials, including chemicals and radioactive and biologicalmaterials. Our BioSafety Level III (BSL-III) laboratory facilities allow us towork on-site with hazardous materials like West Nile virus. Our operations alsoproduce hazardous waste products. Given the inherently dangerous nature ofcertain of the materials we may work with in our BSL-III laboratory facilitiesand other hazardous materials incident to our work, we cannot eliminate therisk of accidental contamination or discharge and any resultant injury fromthese materials. Various laws and regulations govern the use, manufacture,storage, handling and disposal of these materials. We could be subject to civildamages and significant adverse publicity in the event of an improper orunauthorized release of, or exposure of individuals to, hazardous materials. Inaddition, claimants may sue us for injury or contamination that results fromour use or the use by third parties of these materials, and our liability mayexceed our total assets. Compliance with environmental laws and regulations maybe expensive, 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 orother agreements are not in breach of applicable competition laws and will notbe considered void.***

We have not notified the European Commission competition authorities ofany of our licensing or other agreements or sought clearance from any othercompetition authority. We take the view that these agreements are unlikely tobe found to infringe European Union or other applicable competitionregulations. It is possible, however, that our current or future similaragreements could be found to 

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infringe applicable competitionregulations. In this event, among other things, we may be subject to fines,claims of damages and our licensing or other agreements may be considered voidand unenforceable. The Technology Transfer Block Exemption Regulation in theEuropean Union may require us to review and possibly amend existing license andtechnology transfer agreements in the future to comply with this regulation.This review process may be costly and time consuming and may requirerenegotiation of certain portions of our licenses and other agreements but wedo not expect this process to have a material adverse effect on our licenseportfolio or results.

***Compliance with the internal controls andevaluations and attestation requirements under the Sarbanes-Oxley Act may beexpensive and time-consuming.***

Pursuant to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, wewill be required, as a foreign private issuer, beginning in fiscal year 2006,to perform 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 ourarticles of association and the laws of The Netherlands may prevent a change incontrol that may be in the best interests of our shareholders.***

Our articles of association and the laws ofThe Netherlands 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 ofan increase 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 protectingtheir rights as a shareholder and in enforcing civil liabilities because we area Dutch limited liability company.***

Dutch law and our articles of association govern issues regarding thelegal organization, internal constitution, corporate authority and theliability of members of our management board and supervisory 

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board. Our offices and all of our assetsare located outside the United States. In addition, a majority of the membersof our supervisory board, all of the members of our management board andmanagement team are residents of, and most of their assets are located in,jurisdictions outside the United States. As a result, it may be difficult toserve process on us or these persons within the United States. It may also bedifficult to enforce a U.S. court judgment against them in a U.S. court or in aDutch court or to enforce a Dutch court’s judgment against them in a U.S.court. This can include actions under the U.S. securities laws. In addition, itmay be difficult to enforce, in original actions brought in courts injurisdictions located outside the United States, liabilities under the U.S.securities laws. For a more complete discussion of potential difficulties inprotecting your rights, see Item 10, “Additional Information—Enforcement ofCivil Liabilities.”

***Our ordinary shares and ADSs may have ahighly volatile trading price. You may not be able to resell your ordinaryshares or ADSs at or above the price you pay for them, the ADSs may vary invalue, and our share price may render us vulnerable to a takeover bid.***

Our ordinary shares are listed on Euronext Amsterdam’s Eurolist byEuronext, also called the Amsterdam Stock Exchange. Our ADSs are quoted on theNasdaq National Market. An active trading market for our ordinary shares orADSs may not continue to develop or be sustained. The ADSs’ low closing priceduring 2003, 2004 and 2005 has been $3.81, $6.38 and $12.30 respectively, andthe closing price as of June 19, 2006 was $18.24. The trading prices ofordinary shares of biotechnology companies in general have experiencedsignificant volatility 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 notpublish research or reports about our business, or if they change theirrecommendations regarding our ordinary shares or ADSs adversely, our share orADS price and trading volume could decline.***

The trading market for our ordinary shares and ADSs will be influencedby the research and reports that industry or securities analysts publish aboutus or our business. If one or more of the analysts who cover us or our industrydowngrade our ordinary shares or our ADSs, the market price of the shares orADSs would likely decline. If one or more of these analysts ceases coverage ofus or fails to regularly publish reports on us, we could lose visibility in thefinancial markets, which could cause the market price of our shares or ADSs ortrading volume to decline.

***We believe that we were or may have been apassive foreign investment company before 2005, causing certain adverse U.S.tax rules to apply to U.S. holders that held our ordinary shares or ADSsbefore 2005.***

Although we 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 notanticipate becoming a PFIC with respect to the year 2006 or thereafter, webelieve that we were or may have been a PFIC with respect to the years before2005. If we were a PFIC in the past, U.S. holders that held our ordinary sharesor ADSs at any time during the years when we were treated as a PFIC and did notmake a mark-to-market election or a qualified electing fund (“QEF”) electionwill generally 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.**                        Information on the Company

**Historyand Development of Crucell**

We are a limited liability companyincorporated in The Netherlands with the legal and commercial name CrucellN.V., registered under number 28087740. We were incorporated  on October 9, 2000, as the holdingcompany for Crucell Holland B.V., formerly called IntroGene B.V., following thecombination of IntroGene B.V. and U-BiSys B.V. Our principal executive officeis located at Archimedesweg 4, 2333 CN Leiden, The Netherlands andour telephone number is +31 (0)71 524 8701. Our agent in the United States isCT Corporation, 111 Eighth Avenue, New York, New York 10011.

On December 31, 2005 we owned threeDutch subsidiaries, Crucell Holland B.V., U-BiSys B.V. and ChromaGenics B.V.,all limited 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 DepositaryShares (ADS). Since February 22, 2006, our shares are also listed on theSWX Swiss 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 subsidiariesof 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 we announced plans to divest biopharmaceutical and vaccine manufacturerRhein Biotech GmbH in a cash transaction. It will be acquired by DynavaxTechnologies Corporation, a U.S. based biotech company. On April 5,2006 we reached 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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**Businessoverview**

***Profile***

We are a fullyintegrated biopharmaceutical company, focusing on the development, productionand marketing of vaccines and antibodies against infectious diseases forprivate and public markets worldwide. With the acquisition of Berna Biotech inFebruary 2006, we have a portfolio of well known vaccines and a broad pipelineof new potential vaccines and antibodies. We combine the use of established andnew technologies such as the PER.C6, MAbstract, AdVacand our virosomal technology as well as our proprietary Hansenulapolymorpha expression system. We believe our proprietary PER.C6 human cell linetechnology is well suited for the development and large-scale manufacturing ofa wide range of biopharmaceuticals including vaccines, antibodies, therapeuticproteins and gene therapy products. Our research and development facilities arelocated in the Netherlands and Switzerland, Korea and Germany. We also havemanufacturing facilities in Switzerland, Korea and Spain, and a sales andmarketing infrastructure in our core markets of Switzerland, Italy, Spain andKorea. Through our portfolio of core marketed vaccines, we have establishedmarkets in hepatitis B, paediatric, respiratory and travel vaccines. We haveapproximately 900 employees. As of March 1, 2006 our research anddevelopment facilities employed approximately 325 employees of which one thirdare outside the Netherlands, primarily in Switzerland.

***Strategy***

We aim toincrease revenue growth by manufacturing and marketing vaccines and antibodiesthat address currently unmet medical needs and to leverage our proprietarytechnologies to develop monoclonal antibodies and therapeutic protein productsto combat infectious and other diseaeses. We do this by discovering,researching and developing technologies, vaccines and antibodies, using our ownfully integrated infrastructure for in-house development, production andmarketing, and, where useful or necessary, by forging partnerships with othercompanies and organizations. We may alter or expand our product pipeline toinclude products 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***

Ourbusiness strategy is based on the following business drivers:

·       *Leveragingpresence of our marketed vaccines in public and private markets*.   The combined company has established products in hepatitisB, paediatric, respiratory and travel vaccines. We intend to enhance ourposition in these markets by highlighting the unique features of these productsand by providing outstanding customer service in terms of delivery, reliabilityand quality and by leveraging our worldwide presence in both public and privatemarkets.

·       *Product pipeline with competitive advantage*.   We believe that each of our selected products either targetsunmet medical needs, improves current medications, or is perceived as amarketable product due to predictive study models and/or due to perceivedfavorable regulatory conditions. We currently have five vaccine programs inclinical trials of which three are in Phase III or registration, and fivevaccine programs and one antibody program in various stages of pre-clinicaldevelopment, which are based on our PER.C6 production technology. In addition,we have various discovery programs to find new vaccine antibody and therapeuticprotein leads.

·       *Ongoing technology licensing program*.   We have a broad base of excellent technologies withapplicability for vaccines, antibodies, other recombinant proteins and genetherapy. In areas where we are not developing our own products, we offer ourtechnologies to the biopharmaceutical 

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industryfor the development and production of diverse biopharmaceutical products. Theongoing and extensive PER.C6 technology licensing program and as of yet morelimited licensing programs for our other technologies support and accelerateour in-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 currentproduct portfolio upon completion of the acquisition of Berna Biotech inFebruary 2006 contains hepatitis B, paediatric, respiratory and travelvaccines. Our core product portfolio currently consists of four marketedvaccines: Hepavax-Gene, Inflexal V, Epaxal, and Vivotif. Recently our portfoliohas been strengthened with the addition of the Quinvaxem vaccine.

*Hepavax-Gene*

Hepavax-Gene isa Hansenula polymorpha-based recombinant hepatitis B vaccine. Since its launchin 1996, 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).

*InflexalV*

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 thefirst virosome-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 ofthese countries is licensed for adults and children over the age of one year.

*Vivotif*

Vivotif is alive attenuated typhoid fever vaccine administered orally. It is the only liveoral vaccine indicated for use against Salmonella typhi, the most prevalent ofthe typhoid fever-causing bacteria. Vivotif consists of a live strain ofSalmonella typhi that has been altered so that it stimulates an immuneresponse, but not the disease. The bacteria are enclosed in coated capsulesthat dissolve in the intestines, releasing 

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thelive organism. 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 the Korea Food and Drug Administration (KFDA) has awarded licence toQuinvaxemTM, a fully liquid pentavalent (five-component) vaccine we will producein Korea. QuinvaxemTM combines antigens for protection against five importantchildhood diseases: diphtheria, tetanus, pertussis (whooping cough), hepatitisB and Haemophilus influenzae type b, one of the leading causes of bacterialmeningitis in children. It is the first internationally available fully liquidvaccine containing all five of the above antigens to reach the market, offeringa clear advantage in terms of convenience of use. QuinvaxemTM was co-developedwith Chiron Corporation, which provides four of the five components as bulk.The production of this combination vaccine has started immediately. First salesare expected in the second half of 2006. Supranational organizations are majorcustomers for combination vaccines, which are used in mass vaccination programsin developing countries.

*Complementaryvaccines*

Our corevaccines business also includes a range of paediatric and booster vaccines andvaccines for special indications which we offer in our key markets and, throughregional sales partners, world-wide. We currently offer, through ourpartnership with Chiron, Di Te AnatoxalTM for diphtheria and tetanus, EncepurTMfor tick-borne encephalitis, Menjugatefor meningitisC, Te AnatoxalTM for tetanus and MoRuviratenformeasles/rubella.

*Seasonality*

Our sales ofrespiratory vaccines are exposed to seasonal variations. The sales are primarilymade in the second half of the business year. In other respects, our businessis not significantly seasonal.

***Product development programs***

Our early-stage product developmentprograms comprise vaccines against influenza, West Nile virus, Ebola, malaria,and tuberculosis as well as antibody products against rabies and preclinicalresearch on the blood clotting Factor V. This coagulation factor is a centralregulator in the early phases of blood clot formation.

In late-stagedevelopment, our pipeline of vaccines consist of four products, two of which arein Phase III clinical trials: Pseudomonas aeruginosa vaccine Aerugenand a paediatric combination vaccine (DTPw-HepB) against diphteria,tetanus, pertussis (whooping cough) and hepatitis B. The Aerugen vaccine isintended to prevent Pseudomonas aeruginosa infections in patients with cysticfibrosis. The two other vaccines which are in the process of finalizing theirregistration are  a yellow fever vaccineand a two-dose hepatitis B vaccine. We also have programs in various stages ofpre-clinical development, including programs focused on improved flu/respiratory syncytial virus (RSV), therapeutichepatitis B vaccines and Recombinant Live Paramyxovirus vaccines intended tocombat 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 forthe discovery 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 beenisolated, they can either be used to subsequently identify the target or aspecific binding place on the target (referred to as epitope), or be used tosubsequently isolate the DNA coding for the binding part of the antibody. Thispart may genetically be combined with other parts of the antibody that have nofunction in binding but have assessory functions in the human immune system.Thus, different formats of antibodies with different modes of action orfunctions can be made, but with the same specificity for the target.

We use ourMAbstract technology to identify antibodies reactive with whole pathogens, orantibodies against protein elements from pathogens, or antibodies directedagainst targets already known to be associated with disease. In additionMAbstract can be used to identify targets or epitopes on disease-causing agentsthat were previously unknown and may make suitable candidates forantibody-based diagnosis, prevention or therapy of the associated disease.

***Key features and advantages***

MAbstract employs a human-basedantibody-display technology. We believe that MAbstract allows for the discoveryof therapeutic antibodies with several potential advantages over currenttechnologies using transgenic mice. These advantages include the following:

*Subtraction method of selection.*   MAbstract technology selects antibodies for possibletherapeutic use and discovers novel drug targets using whole cells, tissues orinfectious agents. The subtraction method of selection is not available whengenerating human antibodies in transgenic mice.

*No inherentlimitation on antibody specificity.*   MAbstracttechnology does not have the inherent limitation on antibody specificity thatis seen in transgenic mice.

*Productionusing PER.C6 technology.*   MAbstracttechnology has been used to isolate antibodies for numerous diseaseapplications. Selected antibody specificities can be directly reformatted intoantibodies for production using PER.C6 technology.

**OtherCore Technologies**

*STAR technology.**  *STAR technology isa production technology that is particularly useful for the production ofrecombinant human antibodies and proteins. It has a potentially broadapplication 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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*Virosomal technology.**  *One of the challenges in vaccine development is the creation ofproducts that contain defined antigens of high purity that efficiently induce aprotective immune response. Many antigen preparations are thereforesupplemented with adjuvants to enhance the body’s immune response to thespecific antigens. The most commonly used and approved adjuvants for human useare aluminum salt derivatives, which are known to cause adverse reactions suchas irritation and inflammation at the injection site. Virosome-based vaccinesappear not to require additional adjuvants to enhance immune response. Thevirosomal technology offers a broadly applicable delivery system for antigens,DNA/RNA or therapeutic drugs. As a result, virosomal based vaccines havesuperior immunogenicity and tolerability.

*Hansenulapolymorpha.**  *Gene technology has invaded the production of industrial proteins,in particular that of pharmaceuticals. The demand for suitable expression systemsis increasing as developing science results in an increasing number of targetsfor the various industrial branches. The production of recombinant proteins hasto follow an economic and qualitative rationale which is dictated by thecharacteristics and the anticipated application of the produced compound.The  yeast Hansenula polymorphaproduction system provides superior characteristics for a wide range ofindustrial applications. Particularly the lack of pyrogens, pathogens or viralinclusions, its ease of genetic manipulation and its robustness in industrialscale fermentations add to its attractiveness for the synthesis ofpharmaceutical compounds. Our  hepatitisB vaccine Hepavax-Gene is based on recombinant production in this yeast.

**OtherTechnology Platforms**

We, througheither our own resources or through our research collaborations, have inaddition to our core proprietary technologies, access to the followingtechnology platforms.

*Polysaccharide-proteinconjugates*

The causative agents of many commonbacterial infections contain surface structures made of polysaccharides,against which protective antibodies are directed. However, vaccines based onpolysaccharide antigens alone do not induce a T-cell response and therefore arenot able to elicit immunological memory (memory immune responses). By linkingthe specific antibody-inducing polysaccharides with T-cell activating carrierproteins it is possible to induce the desired immune response and enhance longterm protection against the corresponding pathogen.

A conjugatevaccine in the final clinical phase is Aerugen, the first and only vaccine forthe prophylaxis of fatal Pseudomonas aeruginosa infections in cystic fibrosispatients. The polyvalent conjugate vaccine combines 8 prevalent P. aeruginosaserotypes and the bacterial exotoxin A. It is the first conjugate vaccine basedon a lipopolysaccharide component.

*Recombinantlive bacteria*

Recombinant live bacteria are harmless buthighly immunogenic bacteria that elicit immunity against specific pathogens.The technology can also be applied for therapeutic vaccines against cancer.

The ideal wayto induce a complete immune response, at the systemic and the mucosal level, isto administer vaccines in a manner that mimics the natural route of infectionas closely 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.

*Recombinantlive paramyxoviruses*

The use of liveattenuated viruses in vaccines is a well established method of conferringimmunity against a number of diseases. But these viruses can also be used tointroduce genes encoding foreign antigens into their genomes, thus creating arecombinant vaccine that would simultaneously confer immunity against more thanone disease, e.g. measles and malaria. Because the attenuated viruses retaintheir high immunogenic properties, they induce a strong cellular responseagainst both their own and the foreign proteins. This last property makesrecombinant viruses (alone or in combination with virosomes) very useful toolsfor a number of different therapeutic vaccines targeting a broad spectrum ofhuman diseases, including cancer.

*Therapeutichuman monoclonal antibodies*

We develop andproduce fully human monoclonal antibodies (MAb). A monoclonal antibody is aspecial class of antibody that originates from a single clone of lymphocyte. Asingle MAb is highly specific for a unique antigen and can be isolated at ahigh level of purity. The purity of the product combined with the uniqueness ofsource and specificity, as well as high consistency makes MAbs attractive bothas research tools and as potential products.

*Particlepresentation technology*

The immunesystem is activated by antigens, or more precisely, by domains on theseantigens called epitopes. For each immune cell, there is only one correspondingantigen/epitope which activates it. Our Particle Presentation Technologycombines the desired antigens or epitopes on a carrier (e.g. 20 nm HbsAgparticles) in a form that elicits an efficient immune response. Our therapeutichepatitis B vaccine, currently in pre-clinical development, uses thistechnology. This technology can potentially be applied to the development ofother therapeutic vaccines.

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**Licensingand Collaborations**

***Licensees and partners***

Our current 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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**ANTIBODIESAND THERAPEUTIC 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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**GENETHERAPY**
| 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       |

 

**ALLIANCESWITH CONTRACT 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                                           |

 

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

 

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***Licenseagreement structure and payments***

Our licensees can elect to take either a license for commercialdevelopment or a license for research only. In addition, we have issuedexclusive licenses to certain licensees. Our research licenses granted in theareas of antibodies and gene therapy typically cover the entire portfolio ofantibodies and genes, respectively, that the customer may wish to use in thefuture.

The general payment structure under the terms of our commerciallicenses is as follows:

·       *one-time issuance fee**:* We usually charge our licensees a one-time issuance fee, the amountof which is determined by the nature of the license, e.g., whether the licenseis for commercial development or research use, whether the license is exclusiveor non-exclusive, and the area of use of the license.

·       *license maintenance:* ourlicensees usually pay annual fixed payments to maintain their licenses. Thelicense maintenance fee is generally offset against any royalty paymentsaccruing from the time of initial commercial sales.

·       *milestone payments:*certain licenses provide for additional fees to be paid if the applicablelicensee achieves certain agreed upon targets, or milestones. Milestonepayments are typically not offset against future royalty payments.

·       *royalty payments**:* with the exception of a limited number of licenses (includingTransgene SA, MedImmune, Millipore and Galapagos N.V.), and the majority of ourcontract manufacturers and service providers, we will receive a percentage ofthe value of any net sales that the licensee may generate related to theeventual product. Royalty payments are typically only payable once they exceedthe license 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 ofvarious collaboration agreements, we receive service fees for work performedunder such agreements. Revenues and costs associated with completed contractservices are recognized when the service is completed and the collectibility ofthe receivable 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 onlylicenses provide for lower issuance and license maintenance fees and do notprovide for royalty payments. Generally our research only licenses permit thelicense to be converted into a commercial development license, but typically donot allow (late) clinical development and commercial distribution of anyproduct using the licensed technology.

Our commercialdevelopment license agreements generally provide that the applicable commerciallicense will expire after the expiration of the last applicable patent or 10 to15 years 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.

*ExclusiveLicenses.*   We have issuedcertain 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, wegranted an exclusive license to the International AIDS Vaccine Initiative(IAVI) for the development of an AIDS vaccine based on our AdVac technology.Other exclusive licenses include our agreements with DSM Biologics for thelicensing of PER.C6 technology for proteins and antibodies, and for contractmanufacturing of recombinant proteins and monoclonal antibodies under PER.C6licenses, Merck & Co. for a PER.C6-cell produced HIV/AIDSvaccine and HCV vaccine, which latter 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 ServiceArrangements***

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**

***Overviewof our late-stage pipeline***

*Yellow fever vaccine*

An infectiousdisease transmitted by mosquitoes, yellow fever is prevalent in tropicalregions of Africa and South and Central America. Approximately 200,000 cases and30,000 fatalities occur each year. Endemic areas have increased over the pasttwenty years, and because the yellow fever virus circulates in natureindependently of humans, it has not been possible to eradicate it. Also thereis a worldwide shortage in the supply of yellow fever vaccines. Since 1963, oneof the most reliable vaccines for yellow fever has been produced by the RobertKoch Institute 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 fibrosisis a genetically induced abnormality of the mucus-producing glands in thelungs, 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 finalclinical phase involved some 470 patients in 46 centers located in fourEuropean countries. Aerugen was also the first vaccine to be acknowledged as an“Orphan Drug” in Europe. “Orphan Drugs” are pharmaceuticals or biologicalsspecially developed to combat rare diseases. The European directive on OrphanDrugs, which has been in force since April 2000, offers special incentivesfor companies developing drugs against rare diseases, including marketexclusivity for up to ten years. For the registration and marketing of thevaccine in Europe, we have formed an alliance with Orphan Europe, apharmaceutical company which specializes in the development and marketing of “OrphanDrugs” in Europe. An exclusive commercialization and license agreement with CSLLimited for the marketing of Aerugen in Australia and New Zealand was signed inJune 2005. A collaboration with Solvay Pharmaceuticals regarding anexclusive commercialization and license agreement for Aerugenin the United States of America, Canada, Latina America and otherinternational markets was signed in 2005.

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

Forty years ago a baby received only oneinjection during its first year of life. Today in the United States of Americababies receive up to 15 shots against different diseases during their firstyear.

Paediatriccombination vaccines, which address several diseases in one injection, clearlysimplify the immunization process, reduce discomfort during vaccination andlower the risk of infection associated with multiple injections. Combinationvaccines also mean considerable cost savings. Supranational organizations suchas United Nation’s Children’s Fund (UNICEF) and the Global Alliance forVaccines and Immunization (GAVI) strongly recommend the development and furtherimprovement of combination vaccines for use in mass vaccination programs indeveloping countries. We currently have one program on paediatric combinationvaccines. Recently we received marketing authorization from the Koreanauthorities for the marketing of a combination vaccine against diphtheria,tetanus, pertussis (whooping cough) hepatitis B and Haemophilus influenzae typeb, which we believe is the first fully liquid pentavalent DTPw-HepB-Hib vaccineavailable anywhere in the world.

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

Our PER.C6 technology, complemented by ourAdVac and Mabstracttechnologies, drives thedevelopment of our early-stage product pipeline. We continue to develop ourtechnologies while selecting product leads for further development based oncareful product selection criteria that support our long-term businessobjectives. We currently have several potential products in various stages ofpre-clinical development. We may enter into collaborative and/or strategicalliance arrangements with third parties to co-develop and market products thatwe may develop.

Our primary focus is the development of arange of novel vaccine and antibody products in the area of infectiousdiseases. We currently have a number of core programs:

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*PER.C6.*   Our influenzavaccine, developed in collaboration with sanofi pasteur, and our West Nilevirus vaccine are both being developed using our PER.C6 technology. Phase 1testing 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.C6 and AdVac.*   OurEbola and malaria vaccines are recombinant vaccines based on PER.C6 that alsouse AdVactechnologies. In addition to these core programs, a collaborationwith the Aeras Global TB Vaccine Foundation is ongoing for the pre-clinical andclinical development of candidate tuberculosis (TB) vaccines based on PER.C6and AdVac. Phase I clinical testing of our TB vaccine is scheduled tobegin in the second quarter of 2006, while malaria  and Ebola vaccine  Phase I testing is scheduled to begin in thethird quarter of 2006.

*PER.C6 and MAbstract.*   In2003 our Antibody Discovery Group also turned its attention towards infectiousdiseases, and in 2004 the discovery of its first two human monoclonal antibodyproducts was announced. The first, for protection against SARS, is currently onhold, while our rabies antibodies announced in November 2004 became anadditional core product program.

To maintain our competitive position wecontinually research improvements to and potential new versions of the abovementioned core technologies. In addition to testing for additional applicationsof our existing PER.C6 technology, we are researching the creation of new celllines from a variety of cell sources.

A shortdescription of each of our main potential products in the early-stage pipeline,and the diseases those products target, follows.

**Influenza**

Each year approximately 10-20% of theworld’s population contracts influenza, and an estimated 250,000 to 500,000people die annually from influenza-associated complications according to theWorld Health Organization. As well as these annual epidemics, a major geneticshift in the influenza virus can occasionally lead to a deadly new virus strainto which the human population does not have immunity, resulting in a globalpandemic. Concerns currently exist that a new avian influenza strain (H5N1)endemic among birds in Asia, and showing high pathogenicity for humans, couldpresent a genuine pandemic threat.

Influenza vaccines are classically producedon embryonated 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,we entered into a strategic agreement with sanofi pasteur to further developand commercialize novel influenza vaccines using our PER.C6 productiontechnology. Sanofi pasteur is the world leader in vaccines, and has been thelargest supplier of influenza vaccines for more than 50 years, providing morethan 100 million doses worldwide during the 2003-04 season. Since theinception of the collaboration, production processes have been underdevelopment, with the production of a GMP master cell bank already completed.sanofi pasteur, with us as 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 clinicaldevelopment of PER.C6-based influenza vaccine and other relatedactivities. Phase I clinical trials for the pandemic flu vaccine arescheduled to begin in September 2006. Phase I clinical trials for theinterpandemic, or seasonal, flu vaccine in healthy adults are scheduled tobegin in the third quarter of 2006 and in the elderly in the fourth quarter of2006, followed by pediatric trials scheduled to begin in 2007.

**WestNile virus**

Named after the West Nile district ofUganda where the disease was discovered in 1937, West Nile virus infection canlead to mortality in humans and animals by causing a fatal form ofencephalitis, or inflammation of the brain, according to U.S. Geological Survey. It is estimated that 20% of the people who become infected withWest Nile virus will develop West Nile fever. Persons over 50 years of age havethe highest risk of developing a severe disease, such as meningitis, aninflammation of the membrane around the brain and the spinal cord, orencephalitis.****Since 1999, WestNile virus has caused disease in more than 16,000 U.S. citizens, leading to 650deaths.

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 ourdecision to develop a vaccine against the West Nile virus based on our PER.C6technology. Our vaccine uses an inactivated whole virus concept, which isdifferent from vaccines currently under development by our competitors.Currently there is no vaccine or antiviral therapy available to protect humansagainst West Nile virus.

In a separate but related program, weentered collaboration 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.

Thesignificance to our human vaccine program is that a PER.C6-based vaccineprotects against the Israel 1998 Goose strain of West Nile virus. The fact thatthis strain is closely related to the New York 1999 strain, which caused theWest Nile outbreaks in the U.S., supported our decision to develop a West Nilevaccine for 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 viraldiseases, with a mortality ranging from 50% to 90% according to the WorldHealth Organization. Ebola outbreaks occur regularly in tropical Africa,affecting both human and great ape populations. To date, approximately 2,000cases have been reported since the virus was first discovered in 1976. TheEbola virus belongs to the group of ‘hemorrhagic fever viruses’, which alsoincludes the highly pathogenic Marburg and Lassa viruses. Ebola virus causes adisease characterized by high fever and massive internal bleeding. Because novaccine or therapy is presently available, Ebola virus is on the Centers forDisease Control (CDC), National Institutes of Allergy and Infectious Diseases(NIAID), and U.S. Department of Defense Category “A” list of bioterror agents.In 2003 the U.S. government announced that once available, an Ebola vaccine maybe stockpiled 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. TheBioShield Act was enacted in July 2004, with a total appropriation ofUS$5.6 billion across all programs.

Numerous attempts to vaccinate againstEbola virus using inactivated virus or protein-based vaccine modalities havefailed, and developing a live attenuated vaccine is considered too dangerous.However, it has been shown in experiments conducted by the Vaccine ResearchCentre (VRC) of the U.S. National Institutes of Health (NIH) in 2005 that asingle-dose immunization with a recombinant adenovirus (expressing Ebola virusproteins) vaccine protects monkeys against an otherwise lethal challenge withwild-type Ebola virus. Based on these results, we decided to develop an Ebolavaccine. The vaccine could provide protection from the lethal virus in theevent of biological warfare.

In May 2002 we entered into aCollaborative Research and Development Agreement (CRADA) with the VRC of the NIHto develop jointly, test and manufacture an adenovirus-based Ebola vaccine.Under the terms 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 withNIH, we are manufacturing adenovirus Ebola vaccine vectors according to currentgood manufacturing practice (cGMP) requirements. In March 2005 we extendedthe CRADA 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 VRCtogether with the U.S. Army Medical Research Institute of Infectious Diseases(USAMRIID) during the first half of 2004, our vaccine candidate confirmedsingle-dose protection of monkeys against Ebola. What set the results of thistrial apart from the earlier successful trial, which established aproof-of-concept, was that the vaccine in this instance was produced on PER.C6cells. All preclinical material was produced at our FDA-compliant productionfacilities in Leiden. For potential safety reasons, VRC switched thedevelopment of the vaccine from the use of the wild-type Ebola glycoproteinsequences to mutant sequences, after a single dose of this new candidatevaccine showed protection of monkeys against Ebola. We expect to initiateclinical trials of this vaccine in the third quarter of 2006.

In 2002 the FDAissued the so-called ‘‘two animal’’ or animal efficacy rule, which states thatefficacy studies in man may not be required to obtain a product license forspecial categories of products as long as efficacy is established in twoindependent animal models and safety in man. We believe our Ebola vaccine maybe a candidate 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 infectiousdisease caused by the plasmodium parasite and transmitted from person-to-personthrough the bite of a female Anopheles mosquito. It is one of today’s top threekillers among communicable diseases. The disease currently represents one ofthe most prevalent infections in tropical and subtropical areas causing severeillness in 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%.The widespread occurrence and elevated incidence of malaria are a consequenceof discontinued malaria control programs and increasing numbers ofdrug-resistant parasites and insecticide-resistant parasite vectors. Otherfactors include environmental and climatic changes, civil disturbances andincreased mobility of populations. Although the overwhelming majority ofmorbidity and mortality associated with malaria occur in the developing world,this disease also affects travelers.

Currently there is no commerciallyavailable vaccine to protect against malaria. Our candidate malaria vaccine isbased on our AdVac technology and produced using our PER.C6 technology. In astudy carried out by the Department of Medical Molecular Parasitology at NewYork University, the efficacy of our malaria vaccine candidate was tested inNYU’s mouse malaria model. The study showed that a single administration of aprototype AdVac vaccine, a recombinant adenovirus 35 (rAd35) vector expressingthe malaria parasite-derived immunogenic circumsporozoite antigen, protectsmice upon challenge with the mouse specific parasite.

In March 2003, we entered intocollaboration with the Walter Reed Army Institute of Research (WRAIR) andGlaxoSmithKline Biologicals (GSK) under a Cooperative Research and DevelopmentAgreement (CRADA). Pursuant to this agreement, we have completed work withWRAIR and GSK to evaluate our AdVac malaria vaccine candidate directed againstthe human malaria parasite Plasmodium falciparum. Our vaccine candidate wastested as a stand-alone vaccine and in combination with GSK’s RTS,S malariavaccine candidate. The GSK malaria vaccine candidate RTS,S has, as astand-alone vaccine, been shown to confer partial protection to humanvolunteers in both a laboratory challenge model conducted at WRAIR and undernatural challenge conditions in a field study conducted in the Gambia.

Phase IIb pediatric trials conducted withRTS,S in Mozambique 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 aspart of the CRADA resulted in excellent immune responses for our AdVac-basedmalaria vaccine. 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 2004we received a grant up to a maximum of €2 million from the Dutch Ministry of Economic Affairs in support ofour malaria research and AdVac technology development. Research carried outunder this grant will aim to expand the number of antigens able to be carriedby an rAd35-vectored vaccine, such as our AdVac-based malaria candidate.

**Tuberculosis**

Mycobacterium tuberculosis (TB) representsone of the most prevalent infectious diseases throughout the world. It isestimated that 2 billion people are infected with TB, representing a third ofthe world’s population. Each year sees 8 million new cases and 2 million deathsas a result of the disease according to the World Health Organization.

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TB is spread when people who have theactive form of the disease cough or sneeze and people nearby breath in thesebacteria and become infected. Only 5-10% of infected but otherwisehealthy people develop an active TB disease. Most people who carry the bacteriasuffer no obvious symptoms and cannot pass on the disease to others during thislatent phase of the infection. But if the immune system is weakened, active TBdisease can occur. This occurs most in people infected with HIV/AIDS, whichseverely weakens the immune system.

The increased incidence of TB is aconsequence of the spread of HIV/AIDS, the emergence of multi-drugresistant strains of TB and variability in protective efficacy of the onlycurrently available vaccine, Bacillus Calmette-Guérin (BCG). Although the BCGvaccine offers protection against the most serious forms of TB in childhood,its efficacy wanes over a period of 10-15 years after the vaccination. Aneed for an alternative vaccination approach has emerged in the last twodecades.

In March 2004 we announced a newcollaboration with the Aeras Global TB Vaccine Foundation on the pre-clinicaland clinical development of candidate TB vaccines. The Crucell-Aeras TB vaccineprogram is focusing on improvement of BCG, using our PER.C6 and AdVactechnologies. Aeras has agreed to pay us up to US$2.9 million, contingent uponmeeting certain development milestones, for process development and productionof clinical material of TB vaccine candidates. We expect that the vaccine willenter Phase 1 clinical trial in Europe in the third quarter of 2006.

**Rabies**

Rabies is a viral disease of mammals mostoften transmitted through the bite of a rabid animal. The virus infects thecentral nervous 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%effective and involves the use of a vaccine plus antibodies. Neither vaccinenor antibodies are effective independent of one another.

Current supply and quality of rabiesvaccine is sufficient, but anti-rabies antibodies (Human Rabies Immune Globulin(HRIG) and Equine 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 monoclonalantibody product in collaboration with two leaders in the rabies antibodyfield, the Thomas Jefferson University (TJU) based in Philadelphia and the U.S.Centers for Disease Control and Prevention (CDC) in Atlanta, using MAbstractand PER.C6 technology.

In experiments conducted during 2004 incollaboration with TJU under a Collaborative Research and Development Agreement(CRADA) with the CDC, the antibody product demonstrated protection in theindustry standard hamster model at least equivalent to HRIG.

We arecurrently producing clinical trial materials and we expect to submit a dossierto the FDA for clinical trials in the third quarter of 2006. Multiple Phase Istudies are planned in the U.S. starting in the fourth quarter of 2006 and inthe Philippines in the first quarter of 2007.

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**Other Collaborations and Agreements**

***GalapagosN.V.***

Galapagos N.V.(“Galapagos”) is a discovery company focused on the rapid identification ofdisease-modifying drug targets through the functional screening of humandisease models, and the subsequent progression of these targets into drugdiscovery. The company is listed on the Euronext Brussels and EuronextAmsterdam stock exchanges (ticker symbol: GLPG).

Founded inBelgium in 1999 as a joint venture between IntroGene (our predecessor) andTibotec-Virco (acquired by Jansen Pharmaceutica, a Johnson &Johnson company), it was established to put PER.C6 technology to use in thefield of functional genomics, a set of biological techniques which are used to identify or confirm thebiochemical role of a newly discovered gene within cells and to understand howthis role might be related to disease pathways.

Researchactivities at Galapagos encompass internal programs in osteoporosis, rheumatoidarthritis, osteoarthritis and Alzheimer’s disease, as well as numerouspartnerships with pharmaceutical, nutraceutical and biotechnology companies. Anewly established services unit, Galadeno, provides reagents and functionalscreens to such companies for the rapid identification and validation of noveldrug targets. Partners of Galapagos include Bayer, Boehringer Ingelheim, Celgene,Johnson & Johnson, Organon, Pfizer, Procter & Gamble, Vertexand Wyeth.

Galapagos holdsan exclusive 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.

***EtnavaxHolding AG***

In June 2005Etnavax Holding AG was founded. Etnavax is active in the field ofimmunoprophylaxis and immunotherapy. Berna Biotech contributed in cash up to anamount which represents 13.4% of the share capital. As we are able to exercisea significant influence through board representation and special shareholderagreements, Etnavax Holding AG is treated as an investment in an associatesubsequent to our acquisition of Berna in February 2006.

***PevionBiotech AG***

In 2002 PevionBiotech was founded by Berna as joint venture with Bachem AG. The company isdedicated to creating novel virosomal formulated vaccines and bringing themfrom research into clinical development. We indirectly own 50% of the sharecapital subsequent to our acquisition of Berna in February 2006.

***Chiron***

In 2001,subsidiaries of Berna entered into a worldwide collaboration agreement withChiron, to develop and commercialize a liquid pentavalent pediatric combinationvaccine to prevent Hepatitis 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.

***CSLPharmaceuticals***

In November2001 Berna entered into an agreement with CSL Pharmaceuticals, pursuant towhich CSL supplies flu antigen to Berna for the manufacture and sale ofvirosome-based flu vaccines, such as Inflexal. Under the agreement, Berna isentitled to a minimum quantity of seasonal flu antigens, which is adjustedupward each year. However, due to external factors, such as slower growth ratesof certain seasonal flu strains, even the minimum quantities may be difficultto obtain in time for a particular year’s flu season, or at all. This mayaffect revenues in any given year in which this occurs. The agreementterminates after 2009. Due to the shortage of antigen production capacityworldwide, it may be difficult to renew the contract against the same terms andconditions, or at all. If this risk materializes it will adversely affectBerna’s results.

***Universitycollaborations***

We collaboratewith a number of universities worldwide in the areas of vaccines, antibodies,cell lines, 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 hire people with high-level experience in our fields of interest toprovide advice and consulting services. We generally pay consultants on a perproject basis and their term generally runs year-to-year. We requireconsultants, among other things, to adhere to confidentiality undertakings, andgenerally we have the right to all intellectual property created during theterm of the consulting agreement.**

**Intellectual property**

Our success andability to compete depends in large part on our ability to protect ourproprietary technology and information, and to operate without infringing theintellectual property rights of others. We rely on a combination of patent,trademark and trade secret laws, as well as confidentiality, assignment andlicensing agreements, to establish and protect our proprietary and intellectualproperty rights. Our policy is to actively seek patent protection of ourintellectual property in the United States and Europe, as well as in otherjurisdictions as appropriate.

In addition toretaining outside patent counsel, we also employ European and Dutch patentattorneys that file, prosecute, defend and enforce patent rights as well asmanage our patent portfolio. Our patent portfolio comprises 780 active cases(i.e. granted patents in force or pending patent applications) as of December 31,2005 ((i.e*.*excluding Berna Biotech patent positions). Weaggressively protect our inventions and employ a proactive filing strategy withrespect to patent applications. Our portfolio management involves activecommercialization and enforcement strategies combined with disposal of casesthat we no longer consider commercially attractive.

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The following table reflects the total number of active cases (pendingor granted) through December 31, 2005, organized according to ourdifferent fields of operation before the acquisition of Berna. All figuresinclude acquired and jointly owned patent cases, but exclude patent positionslicensed-in from third parties. Patent filings classified under vaccines relateto AdVac-based and classical vaccines. Patent filings classified underantibodies relate to antibodies and/or drug targets, excluding the enablingtechnologies. Patent filings classified under technology primarily relate to cell-basedproduction technology, adenoviral vector technology, STAR-technology andrelated technology, functional genomics and target and antibody discoverytechnology.

| ** **    | ** ** | **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 12new inventions, 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 diversifiedfiling strategy, depending on our technological and business needs, as well asits view of long-term economic trends and developments in legal systems invarious parts of the world. As of December 31, 2005, we have 109 pendingapplications in the EU(1), 138 pending applications in the U.S.(2), 24international patent applications (so-called ‘‘PCT(3) applications’’)and 211 applications in 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 underthe European patent convention. The EU figures do not include European patentapplications designated in Patent Cooperation Treaty (PCT) applications whilestill in the international phase.

(2)            U.S. figures do not includeU.S. patent applications designated in PCT applications while still in theinternational phase.

(3)            Figures reflect PCTapplications still in the international phase. Our PCT applications routinelydesignate all territories and contracting states that are party to the PatentCooperation Treaty per the international filing date.

(4)            Rest of world consists ofAustralia, Brazil, Canada, China, India, Israel, Japan, Hong Kong, Mexico, NewZealand, Norway, Russia, Singapore, South Africa and South Korea. Rest of worldfigures do not include PCT applications designating these countries while stillin the international phase.

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**Patents**

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

On February 22, 2006, Berna Biotechowned or co-owned 15 pending patent applications and 133 granted patents,of which 115 in the EU territory, 6 in the United States of America and 12 inthe rest of the world.

Thefollowing is a summary of the intellectual property rights related to our majorproducts and product 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, Aerugenis eligible to benefitfrom a period of marketing exclusivity (7 years in the United States andup to 10 years in Europe) following expiration of its patent protection in2006. This period of exclusivity will apply only if Aerugen becomes licensed.We intend to apply for and expect to receive a license for Aerugen followingcompletion of Phase III testing.

*Epaxal andInflexal V.**  *Epaxal and Inflexal V are the two virosomal products which areprotected by the patent family ‘‘Immunostimulating and immunopotentiatingreconstituted influenza virosomes and vaccines containing them’’, which willexpire in 2012. In addition, the hepatitis A strain used to produce Epaxal isclaimed in a patent family which will expire in 2012.

*Hepavax-Gene .*   Theactive substance of this monovalent recombinant hepatitis B vaccine is HbsAgwhich is no longer protected by patent in Europe and most countries in the restof the world. The Supplementary Protection Certificates with respect toHepavax-Gene are still valid in Sweden, Italy, and France. However, we are notcurrently considering western European countries for product registration andmarketing. The production technology is based on our proprietary Hansenulapolymorpha expression technology.

*Two-dose hepatitis.*   Thetwo-dose hepatitis B is enabled by formulating HbsAg with a specialadjuvant, for which we have obtained a worldwide co-exclusive license fromCorixa Corporation for both prophylactic and therapeutic application. Thepatents of Corixa Corporation will expire in 2017 in the U.S. and in 2018 inEurope.

We seek patent protection, wheneverpossible, commercially feasible and appropriate, in respect of any technologyor product development that is important to our business. Together with ouraffiliates in Germany, Italy and Korea, we have several platform technologiesand consequently our intellectual property activities concentrate on protectingtheir technologies and any improvements thereof in the main worldwide vaccine marketsof Europe, the United States, Canada, Japan and Australia. However, becausesome vaccine markets are outside these countries, we have also soughtprotection in other countries, such as Korea. The IP portfolio is constantlyreviewed to decide on maintenance of individual patents or patent familiesconsidering parameters such as actual product performance, product development,patent term, options for commercialization/outlicensing of non-core IP. Our IP tasksare coordinated, patents are filed on a worldwide basis by specialized patentattorneys.

Ourpatent-related activities do not afford complete protection to our intellectualproperty rights. 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 enforcement and proceedings***

We may need tolitigate or institute administrative proceedings such as oppositions to apatent to enforce or uphold our intellectual property rights or determine thevalidity and scope of the proprietary rights of others. Likewise, from time totime it may be necessary to defend our patents in litigation or administrativepatent proceedings such as opposition proceedings. We believe that litigationcan play a significant role in defining and protecting our intellectual propertyrights. We are aware, however, that legal and administrative proceedings can becostly and time-consuming, and result in a diversion of resources. As analternative to litigation, we may enter into licensing, includingcross-licensing, arrangements as a means of clarifying the status of ourintellectual property rights.

InOctober 2004 we commenced patent infringement proceedings against CEVECPharmaceuticals in the District Court of Düsseldorf, Germany, arguing thatCEVEC’s cell line infringes a recently granted European patent for our PER.C6technology. In December 2004 CEVEC Pharmaceuticals acknowledgedthree out of four of our claims, but chose to defend the remaining claim. InMay 2006 we withdrew the one remaining claim following submission of awritten statement by CEVEC that it abandoned all rights over the cell bank andthat it will not use the cell bank in future in any way that infringes ourPER.C6 patent.

In 2005 Serono,Probiogen and CEVEC Pharmaceuticals have each individually filed oppositionsbefore the European Patent Office against one or more of our PER.C6 patents.

Cell Genesyshas filed opposition against our European patent related to our AdVActechnology.

In 2005 Crucelllodged opposition against a European patent held by Chiron related to certainaspects of the production of influenza viruses in cell culture.

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 theKorean Patent Court. After a hearing which took place on April 27 2006,the Korean 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 enforce its patent, Berna Biotech Korea Corp. could be found to have infringedor be infringing the patent. If we are found to be infringing, we may be forcedto delay, or even cancel, our commercial activities with this vaccine. As aconsequence we might lose revenues and our business would be adverselyaffected.

In addition,production of our pentavalent vaccine requires a particular vaccine componentthat may become the subject of a patent dispute between GSK and us or oursupplier of that component. The patent on that particular component, held byGSK, 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.

In addition toprotecting our intellectual property rights, our commercial success alsodepends on our ability to operate without infringing the intellectual propertyrights of others. We monitor patent applications to the extent available,patents issued and publications of discoveries in scientific or patentliterature to keep abreast of the activities of others in our field and, withthe assistance of our internal and external patent counsel and other externaladvisors, assess whether our activities or products infringe the patents orproprietary rights of third parties. A number of third parties have beengranted 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 hasbeen conducted for many years in the fields of biotechnology andbiopharmaceuticals. This has resulted in a substantial number of issued patentsand an even larger number of patent applications. The U.S. Patent Office maintainspatent applications that are filed only in the United States in secrecy untilpatents issue, and publication of patent applications elsewhere and ofdiscoveries in the scientific or patent literature frequently occurssubstantially later than the date of the underlying discoveries. Moreover,patents that appear not to affect our activities may be construed broadly. Assuch, we or our licensees may be found to infringe the patents or violate otherproprietary rights of third parties and may be enjoined from pursuing research,development or commercialization of our or their products or be required to paydamages. In these circumstances, licensing or other arrangements for addressingthese infringements or violations may not be available, or may not be availableon commercially acceptable terms.

***Technologylicenses from third parties***

We licensetechnology and patents for specific use as part of our technology platformsfrom a number of third parties. We entered into a technology license agreementwith Xoma in the field of bacterial expression technology. This license allowsus to develop diagnostic and therapeutic antibodies in the field of infectiousdisease using phage-display technology. The agreement provides us with optionsto expand the license to cover additional disease fields. Under the terms ofthe agreement, we pay Xoma milestone payments and royalties on products as andwhen developed and marketed using the licensed technology.

We also hold alicense under the phage antibody display patent portfolio owned or controlledby Cambridge 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 and sale of certain types of vectors foruse in gene therapy, and a license to phage antibody-display technology andpart human, or chimeric, binding proteins and molecules from EnzonCorporation’s subsidiary, SCA Ventures, Inc.

We also haveexclusive licenses or an option for an exclusive license to a number of genes,which we may use in the development of products in the area of gene therapy. Insome cases we will be required to make royalty payments in the event of productsales based on these genes.

In the field ofvaccines, 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 licensingour technology to third parties we seek to obtain access to any improvementpatents via so-called grant-back provisions to reduce the risk of beingexempted from using such improvements for our own benefit, or that of ourlicensees.

***Trademarks***

New trademarksfor our products 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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**Legal Proceedings**

In addition tothe matters discussed under “Intellectual Property—Patent Enforcement andProceedings’’ we have been notified of the following matter:

In January2006, Menarini Ricerche S.p.A. notified Berna that it believes it isentitled to compensation for damages allegedly incurred as a consequence ofBerna’s termination of contract negotiations in 2005. These contractnegotiations concern contract manufacturing activities by Berna on behalf ofMenarini. We are not aware of any misconduct on Berna’s part that could lead toa successful claim for compensation of the alleged damages, nor do we believethe damages, if incurred, will be found to be attributable to Berna’s behavior.In February 2006, Menarini requested Berna to waive the statute of limitationsin respect of this claim, which Berna refused.

***Competition Law***

The TechnologyTransfer Block 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 ahighly regulated industry. Our activities involve the use of hazardousmaterials, including chemicals and radioactive and biological materials, andanimal testing, 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 andthat of our licensees to commercially distribute biopharmaceuticals depends inpart on the extent to which governmental health administration authorities,health insurance 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.

Obtainingproduct approval is a costly and time-consuming process. All of our potentialproducts, and those of our licensees, are either in research or development.Any products our licensees or we develop will require regulatory clearancesprior to clinical trials and additional regulatory clearances prior to beingproduced and distributed commercially. These regulatory processes are generallystringent and time-consuming. We expect the European Medicines Agency(EMEA) in the European Union, the Food & Drug Administration (FDA) inthe United States, the College ter Beoordeling van Geneesmiddelen (CBG) in TheNetherlands and comparable agencies in other countries to subject newbiopharmaceutical products to extensive regulation. These regulatoryrequirements with which we and our licensees will have to comply will evolveover time due to the novelty of the biopharmaceutical products and therapiescurrently under development. Fortunately, the harmonization of theserequirements is promoted at an international level (International Conferenceson Harmonization (ICH)) to avoid unnecessary repetition of studies when seekingapproval in various countries. Under the current definitions, we believe that productsdeveloped using our technologies will be regulated either as biologicalproducts or as drugs.

Beforemarketing a (bio)pharmaceutical product, companies require regulatory approvalfrom the relevant authorities. To obtain this approval, pre-clinical animalstudies and human 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.

Clinical trials are normally done in three phases:

·       *Phase I:* Firstclinical trial of a new compound, generally performed in a small number ofhealthy human volunteers, to assess clinical safety, tolerability as well asmetabolic and pharmacologic properties.

·       *Phase II:*Clinical studies that test the safety and efficacy of the compound in patientswith targeted disease with the goal of determining the appropriate doses forfurther testing and evaluating study design as well as identifying common sideeffects and risks.

·       *Phase III:*Large-scale clinical studies with several hundred or several thousand patientsto establish safety and effectiveness for regulatory approval for indicateduses and to evaluate the overall benefit-risk relationship.

Our research and development and production activitiesare undertaken in a number of countries around the world. These activities aresubject to strict regulatory requirements of national and supranationalauthorities in the countries in which they are undertaken such as requirementsgoverning the testing, manufacturing and marketing of pharmaceutical products.In most countries, it is necessary to obtain an approval to market apharmaceutical or medical product. The grant of such an approval is subject toa detailed evaluation of data submitted by the applicant related to thequality, safety and efficacy of the product. Many countries, including memberstates of the EU and the United States, impose extensive testing and datasubmission requirements and conduct rigorous technical appraisals of productcandidates. 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 regulatory authority. Pre-clinicaltesting, clinical research and regulatory approval of a pharmaceutical ormedical product is a very lengthy and costly process.

Once a productis approved, 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 abroad range of legislation in force in member states of the European Uniongoverning testing, manufacturing and marketing biopharmaceutical products, bothat an individual state level as well as on a Union-wide level (European UnionDirectives). These laws impose specific requirements on various topicsincluding pre-clinical and clinical testing and the operation of laboratoriesand manufacturing sites. Furthermore, there are specific directives and otherlegislation on, among other things, pricing, distribution, labeling andadvertising of medicinal products.

At theUnion-wide level, legislation on medicinal products was first enacted inDirective 65/65/EEC: “on the approximation of provisions laid down by law,regulation or administrative action relating to medicinal products”. SubsequentDirectives (75/318/EEC, 75/319/EEC and 93/39/EEC) further amended and expandedthe original provisions, resulting in a system for the regulation of drugs, ormedicinal products as they are called in the EU, based on the principle ofmutual recognition. Under this 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 thereference member state has assessed the medicinal product for quality, safety,and efficacy and has granted a national marketing authorization, other memberstates that have received copies of the application have 90 days for evaluationbefore they must grant authorization as well. In case of refusal, theapplication will be sent to 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 ofthis directive is to harmonize the process for authorization and conduct ofclinical trials as it is implemented in the individual EU member states. As aresult of the 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.

Manufacturersof pharmaceutical 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 tothe requirements 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 FederalFood, Drug and Cosmetic Act regulates both drugs and biological products, andthe Public Health Service Act also regulates biological products. The areasthat these two Acts and related regulations govern include testing,manufacturing, safety, efficacy, labeling, storage, record keeping andadvertising and other promotional practices. The FDA must approve a product orprovide alternative clearances before clinical testing or manufacturing andmarketing of biologics or drugs may begin.

To gain FDAapproval to conduct clinical trials, pre-clinical studies must generally be conductedin the laboratory and in animal model systems to gain preliminary informationon an 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 clinicalstudies are designed to demonstrate the safety and efficacy of the new drug.The FDA receives reports on the progress of each phase of clinical testing, andit may require the modification, suspension, or termination of clinical trialsif an unwarranted risk is presented to patients. In 2002, the FDA issued theso-called ‘‘two animal rule.’’

According tothis rule, extensive clinical trials in humans intended to demonstrate efficacymay not be necessary when it is unpractical or unethical to perform efficacytrials. Instead, the efficacy must be demonstrated in relevant animal models,while safety 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 detailedand potentially time-consuming approval process. The FDA may ultimately decidethat the 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, theNIH has established guidelines for research involving recombinant DNAmolecules. These guidelines apply to all recombinant DNA research that the NIHconducts or supports, including proposals to conduct clinical researchinvolving DNA therapeutics, including our collaboration with the NIH to developEbola and malaria vaccines. The NIH review of clinical trial proposals is apublic process 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.***   The PER.C6 cell substrate Biologics Master File (BMF) is theregulatory dossier filed with the FDA in the United States, which describesvarious aspects of our PER.C6 technology. The companies to which we license ourPER.C6 technology can refer to the BMF and need not compile their own historyof the PER.C6 cell line when they seek regulatory approval of anybiopharmaceutical product that they may produce using it. This may assist ourlicensees in applications they may make to the FDA for products manufacturedusing the PER.C6 technology. We are required to supplement our BMF when newinformation arises.

During 2003, weexpanded our cooperation agreement with Merck & Co., Inc., whichrelates to the PER.C6 cell substrate Biologics Master File in the U.S. andequivalent authorities in other jurisdictions. Under the terms of theagreement, we agreed to work closely with Merck on matters relevant tomaintenance of the PER.C6 cell substrate BMF, including the provision oftechnical assistance and guidance from Merck as appropriate.

***SouthKorea***

The Korean Foodand Drug Administration (“KFDA”) is the regulatory authority for the regulationof the vaccine industry in Korea. KFDA is one of the leading regulatoryauthorities in Asia and employs competent staff for the review of vaccineproduct submissions, the control of manufacturing and the release of vaccinesof Korean production. KFDA regulates vaccines under the Korean PharmaceuticalLaw, which establishes the requirements for the lawful marketing ofpharmaceutical products, i.e. quality, efficacy and safety. Different kinds ofproduct permits are foreseen for the approval of products for the domesticmarket, respectively for the export situation. International standards asestablished by the International Conference on Harmonization for the structureand content of product dossiers are recognized by KFDA while the authorityreserves the right to ask for specific input and data as result of theregulatory review. The timelines for the review of submission dossiers aredefined by the law and, therefore, predictable to a certain extent.

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

Highlyregulated countries such as the United States of America, Australia and Canadaare to be distinguished from those where similar regulation is only justemerging. Harmonization of standards and formats between the EU, the UnitedStates and Japan, which is coordinated by the International Conference onHarmonization, will have a global impact. In some countries, limitations may beplaced on the price at which products may be sold and the amount of royaltiespayable to licensors.

**Competitionin Product and Technology Development**

The field ofbiotechnology is one of rapid change and innovation. We expect that thisindustry will continue to experience significant technological and otherchanges in the years ahead. We operate in highly competitive markets and we mayexperience competition 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 companiesuse alternative 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 thatSolvay has obtained registration in the Netherlands for a vaccine based on MDCKcells. We are aware of other biotechnology and pharmaceutical companies thatcurrently are 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 areaware that Acambis is conducting a Phase I clinical safety study in humans withits West Nile ChimeriVax vaccine. This vaccine uses a genetically engineeredyellow fever 17D live virus containing the genes encoding the antigensresponsible for protection against West Nile virus. We are also aware thatVical is developing a DNA-based West Nile virus vaccine that uses portions ofthe genetic code of a pathogen to cause the host to produce specific featuresof the pathogen that may induce an immune response. This method couldpotentially offer superior safety, ease and reliability of manufacturing, aswell as storage and handling advantages, compared with conventional vaccinesthat use live, weakened or dead pathogens to produce an immune response. Inaddition, other parties are working on human West Nile virus vaccine research.The University of Queensland is working on a vaccine based on the relativelyharmless Kunjin virus, a flavivirus found in Australia, and Hawaii Biotechreceived significant funding from the NIH in December 2004 in support ofthe pre-clinical development of its West Nile vaccine candidate.

In the area of Ebola, we are aware thatVical is conducting Phase I clinical efficacy studies with its DNA-based Ebolavaccine and has initiated GMP manufacturing for the NIH with whom they arejointly developing the vaccine. We are aware that Health Canada, a federalgovernment organization, is conducting pre-clinical studies with its Ebolavaccine that is based on a live replication competent Vesicular StomatitisVirus (VSV) vector. We are also aware that the U.S. Army Medical ResearchInstitute of Infectious Diseases (USAMRIID) is conducting pre-clinical studieswith its recombinant Ebola vaccine, which is based on Ebola virus-like-particle(VLP) technology. USAMRIID is also involved in a CRADA with AVI BioPharma intesting the latter’s antisense drugs against Ebola. AVI BioPharma receivedfunding from the U.S. Senate Committee on Appropriations in June 2004 tosupport this and its work on Marburg virus.

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In the area of malaria, we are aware of twocompanies conducting Phase I/II clinical studies with malaria vaccinecandidates based on virus-like-particle (VLP) technology: GlaxoSmithKlineBiologicals (GSK) and Apovia. GSK has secured significant funding from NGOs forits malaria vaccine RTS,S. We are also aware that Oxford (The Wellcome TrustCentre for Human Genetics) and GSK are jointly developing a malaria vaccineusing live vector technology, and that this vaccine is in Phase I/IIa clinicalstudies. In addition, Oxford is conducting Phase I/II clinical studies withthree additional malaria vaccine candidates based on live vector technology, aswell as pre-clinical studies with one additional vaccine candidate based onlive vector technology. We are aware that the Pasteur Institute is conductingPhase I/IIa clinical studies with its malaria vaccine candidate, which is basedon Long Synthetic peptide technology (LSA-3).

Fortuberculosis, a number of companies, government bodies and academic institutesaround the world are working on the development of new vaccines. The NIAID inthe U.S. is involved in a range of early-stage efforts relating tolive-attenuated, subunit and naked DNA type vaccine candidates. Our partner, theAeras Global TB Vaccine Foundation, is working on various other programsincluding a live recombinant TB vaccine with the David Geffen School ofMedicine at UCLA, which entered its first clinical trial in March 2004. InOctober 2004 Nature Medicine announced an Oxford University subunitvaccine, designed to work in tandem with the existing BCG vaccine, hadsuccessfully completed safety trials with positive T-cell responses.

***Antibodies***

Other biotechnology companies, includingCelltech Group plc and Protein Design Laboratories, Inc., currentlygenerate humanized antibodies, and Medarex, Inc., GenMab AG, and AbgenixCorp. produce fully-human antibodies from transgenic mice. MorphoSys AG andCambridge Antibody Technology Group plc generate fully-human antibodies usingphage antibody-display libraries that are similar to ours. Companies such asDyax Corp., XOMA and SCA Ventures, Inc., a subsidiary of EnzonCorporation, are also working in the field of phage display libraries andrelated technologies.

In the area ofinfectious disease antibodies, potential competitors include serum antibodycompanies such as Chiron and Baxter, and monoclonal antibody companies likeNeutec Pharma, MedImmune, XTL Bio, Inhibitex and Biosynexis. For rabiesspecifically, our antibody product may offer an alternative to the existingRabies Immune Globulin products, both Human (HRIG) and Equine (HRIG), that arecurrently paired with rabies vaccine for effective post-exposure treatment.

***Production of recombinant proteins andmonoclonal antibodies***

Monoclonal antibodies and recombinantproteins are produced by other companies on a variety of platforms. Simpleproteins that do not demand extensive post-translational modifications areproduced in bacterial systems (E. coli). For example, the humanrecombinant insulin is produced entirely on E. coli.

Monoclonal antibodies and complexrecombinant proteins are produced mainly on mammalian cell lines like ChineseHamster Ovary (CHO), murine myeloma cells like NS0 and Sp2/0, and occasionallyon human 293 cells. CHO, NS0 and Sp2/0 are used for commercial production ofmonoclonal antibodies and other recombinant proteins by companies includingGenentech, Biogen, Centocor, Amgen, Lonza and Boehringer Ingelheim. We areaware of a human cell line expression platform used for production ofrecombinant proteins, the 293 human cell line, which shares some of theadvantages of the PER.C6 cell line. The 293 human cell line is utilized by EliLilly & Company to produce a protein for the treatment of adult severesepsis. The FDA and the EMEA have approved this product and it is currentlyavailable for use. We are aware that scientists have published researchdescribing human cell culture systems that appear to have similarities to ourPER.C6 cell line.

In addition tomicrobial and mammalian cell culture systems, transgenic animals and plants arealso exploited for the manufacture of complex recombinant proteins. Transgenicrabbits are, for example, used 

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forthe manufacture of recombinant C1 inhibitor by Pharming. This product iscurrently in 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 otherrecombinant vectors***

With respect tovector development, we are aware of several competing technologies, includingthose of GenVec and Merck & Co., which may pose a threat to thecommercial viability of our AdVac technology. In particular, Merck &Co. research has established methods that may prevent problems relating topre-existing immunity to adenovirus 5 vectors. We jointly own intellectualproperty on other vectors with Harvard.

**Property,Plant and Equipment**

Our corporate offices and researchactivities are located in facilities of approximately 7,800 square meters inLeiden, The Netherlands. We sub-lease 1,000 square meters of this space toPharming Technologies B.V. and 500 square meters to Galapagos N.V. In addition,we lease 770 square meters of space adjacent to these corporate offices, ofwhich 439 square 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.

Upon our acquisition of Berna in February 2006, we also have officespace, laboratories, production facilities, animal facilities and storage spacein Switzerland, Spain, Germany and Korea. The following table sets outinformation regarding 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 Switzerlandare FDA/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 areWorld Health Organization-approved and are used primarily for the production ofHepavax-Gene and for formulating and filling vials. The manufacturing processused at our Korean facilities are based on the patented Hansenula polymorphayeast expression technology.

In Spain, the center of our Europeanfilling and packaging operations, we operate a filling line for syringes.

On August 27, 2005 we signed aturn-key contract with Pharmaplan GmbH, Oberursel, Germany, for the erection ofa new GMP production facility of 4,100 square meters. This new facility inLeiden will be built as a BioSafety Level (BSL) 3 facility, in which twoconcurrent products can be produced, on either BSL 2 and/or BSL 3 safety level.The building will consist of 1,200 square meters of production space; 220 squaremeters of quality control labs; 185 square meters BSL 3 research anddevelopment labs; 80 square meters filling (up to 2,000 ampoules); 40square meters of buffer and medium preparation; 310 square meters ofoffices; 350 square meters of storage and 1,715 square meters for utilities,washing area, waste destruction and sterilization and technical areas. Weexpect the new production facility to be operational during the course of 2007.

We have a newcenter for bacterial 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 inplace general third party public and product liability insurance. Our policywould not cover any of our activities in the United States of America orCanada, has a limit of liability and has certain additional conditions tocoverage and deductibles. We do not insure our phage antibody-display library orPER.C6 master cell bank, though identical copies of the same cell bank arestored in multiple locations in Europe. We carry insurance relating to theft,fire and damage to the moveable assets within our facilities and other customary insurance coverage for most of our activities,including liability insurance coverage for the members of the management board,management committee and the supervisory board.

**Salesand Business Development**

***BusinessDevelopment***

We currentlyemploy eight people in our business development operations in the Netherlands.Our business development strategy has historically involved contactingprospective licensees and partners, assessing their interest in ourtechnologies and products, and, if the prospective licensee or partnerindicates interest, negotiating a license and/or collaboration agreementpursuant to which we deliver the applicable technology to, or collaborate with,the licensee or partner. For some of the contracts we provide services, forwhich we are paid at different rates.

***Marketingand sales***

Upon our acquisition of Berna in February2006, we have our own sales and marketing infrastructure in our core marketsSwitzerland, Italy, Spain and Korea. To ensure broader market access for ourproducts, we have established a strong network of partnerships forcommercialization, such as those with Orphan Europe, Solvay and CSL for Aerugen.Through our dedicated sales force for supranational organizations, our ownsales and marketing infrastructures in Korea and key European markets, and ournetwork of distributors in other countries, we have established a globalposition in both public and private markets. 

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**Item 5.**                        Operating and 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 inthis Item 5 are in thousands of euro, except share and option data.

**Operatingresults**

**Overview**

**General**

We are a fully integrated biopharmaceuticalcompany, focused on developing, producing and marketing  vaccines and antibodies against infectiousdiseases for private and public markets worldwide. We have a portfolio ofwell-known vaccines and a broad pipeline of potential new vaccines andantibodies. We combine proprietary technologies to discover, develop andproduce a variety of biological products for the prevention and treatment ofinfectious diseases. Unlike the technologies generally employed in ourindustry, our technologies enable the development and production of biologicalproducts that may overcome the limitations inherent in many currently availableproducts. We face a variety of challenges and opportunities in bringing ourproducts to market and responding to the dynamics of the biotechnologyindustry, which is characterized by rapid change and intense competition.

Due to our acquisition of Berna in February2006, our product portfolio has expanded significantly and our strategy hasevolved to include a strong emphasis on generating product sales, primarilyvaccines. Our strategy to develop additional products such as novel vaccinesrevolves around continued investment in research and product development,particularly related to infectious diseases, expanding the portfolio oflicensees using our proprietary technology, partnering with global industryleaders, and working to improve our operating results and financial strength.

Our financial strength and ability to adaptto the current market and economic conditions are dependent, in part, on thesuccess of our existing products, the cost of bringing novel vaccines to marketin our chosen field, the success of our licensees in developing commercialproducts using our technology, and effective management of our working capital.

Through fiscal year 2005 we generatedrevenues primarily through licensing our proprietary technology to othercompanies in our industry. In May 2005, we privately placed 3,600,000 ordinaryshares at €14.50 per share, resulting in netproceeds and cash of €50,112. In areas where weare not developing our own products, we offer our PER.C6 technology to thebiopharmaceutical 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 €37,569 from €22,622 in2004 and €7,424 in 2003. During thisperiod, our total headcount increased from 210 to 282 employees on a full-timebasis. At December 31, 

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2005, 240 ofour 282 full time equivalent employees were engaged in, or directly supported,research and development activities.

Our total cost and expenses were €33,916 in 2003, €45,348 in 2004 and €55,295 in 2005. These amounts included non-cash charges of €4,026, €4,532,and €5,748 related to developedtechnology amortization and stock based employee compensation in 2003, 2004 and2005 respectively. Non-cash expenses relating to warrants and non-employeestock options amounted to €616, €4,246 and €3,043 in2003, 2004 and 2005 respectively. We incurred a loss from operations of €17,726 in 2005 compared to losses from operations of €22,726 in 2004. At December 31, 2005, our accumulated deficitwas €290,049 and our totalshareholders’ equity was €137,415.Although we expect to incur operating and net losses for this and next year, weforesee a break-even in the very near future.

With thediscussion of our financial condition and results of operations that follows,we intend to provide information that will assist in understanding ourfinancial statements, the changes in certain key items in those financialstatements from year to year, and the primary factors that accounted for thosechanges, as well as how certain accounting principles, policies and estimatesaffect our financial statements.

**CriticalAccounting Policies**

The methods,estimates and judgments we use in applying our most critical accountingpolicies have a significant impact on the results we report in our financialstatements. The U.S. Securities and Exchange Commission has defined the mostcritical accounting policies as the ones that are most important to theportrayal of our financial condition and results, and requires us to makedifficult and subjective judgments, often as a result of the need to makeestimates of matters that are inherently uncertain. Based on this definition,our most critical policies on our historical operations include revenuerecognition, the assessment of recoverability of our intangible assets, whichimpacts the valuation of intangible assets, and the determination of the fairvalue of stock-based compensation, which impacts compensation expense.Below we discuss these policies further, as well as the estimates and judgmentsinvolved. The development and selection of our critical accounting estimateshave been discussed by management with our audit committee.

***Revenueand Revenue Recognition***

Revenue from sales of products isrecognized upon transfer of the significant risks and rewards of ownership tothe customer. Revenue is reported net of sales taxes, rebates and return ofgoods. We did not recognize any revenues from sales of products in 2005, butexpect to in 2006 due to our acquisition of Berna.

In2005, we generated revenues from licensing our proprietary technology andservices performed together with or on behalf of licensees or partners.Licensing our PER.C6 technology to third parties is a key element of ourstrategy to establish PER.C6 as the cell-line of choice in thebiopharmaceutical industry. Our license agreements generally provide for anon-refundable payment upon signing, a non-refundable fixed annual orsemi-annual payment (which is generally creditable against future royaltypayments) payable in arrears and royalty payments calculated as a percentage ofthe net sales of the licensee using our technology. The payment upon signingunder these license agreements is generally larger than the subsequent annualor semi-annual payments. Certain license agreements provide for additionalnon-refundable license fees to be paid upon the achievement of contractuallydefined milestones.

We recognize initial fees related to thelicensing of our technology as revenues over the period of our significantcontinuing performance obligations, if any, and upon persuasive evidence of anarrangement and delivery of the associated technology. Under certainarrangements, we have no continuing performance obligations after delivery ofthe associated technology under the license agreement or any 

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otherarrangement with the licensee. In such arrangements, the initial license feesrecognized as revenue relate to the complete transfer of our fully developedtechnology to the licensee and represent the culmination of the earningsprocess.

While for the majority of our licenseagreements we have no significant continuing performance obligations subsequentto the delivery 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 providefor additional non-refundable license fees to be paid to us upon theachievement of milestones. We recognize such additional license fees as revenuewhen the amounts become due and payable.

In addition to the initial fee, ourarrangements generally provide that the licensees 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. We recognize annual and semi-annualnon-refundable license maintenance fees as revenues when the amounts becomefixed and payable. The aggregate of annual or semi-annual license maintenancefees paid generally will reduce any royalty payments which may be due based onfuture product sales of the licensee, if any, under the license agreement.Although we have not received royalty payments from our licensees to date, wewill recognize royalties as revenue when they become fixed and payable, to theextent we receive such royalties in the future.

We also earn revenues from governmentgrants received from the Dutch government and the European Union. We expect tocontinue to generate revenues from such government grants in the future. Wehave also filed grant proposals and expect to generate additional revenues fromgrants from non-governmental, semi-governmental and governmental bodies in theUnited States. Grants generally take the form of reimbursements for specificexpenses incurred in connection with approved scientific research activities.We intend to 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 intendto generate revenues in the future from the commercial distribution ofbiopharmaceutical products we are working to develop using our coretechnologies. We intend to market any such products through collaborations orstrategic alliances with third parties, particularly pharmaceutical andbiopharmaceutical companies. The timing and nature of these arrangements willdepend on a number of factors, including the product’s likelihood of clinicalsuccess, its stage of development, its commercial potential and the resourcesand abilities of our prospective partner.

***IntangibleAssets***

We performtests for impairment of intangible assets whenever events or circumstancessuggest the value of such assets may be impaired. At December 31, 2005,our intangible assets consisted entirely of developed technology with a netcarrying value of €2,577. Toevaluate 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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weare using 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-basedcompensation under the fair value method in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 123 “Accounting for Stock-BasedCompensation”. 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 valued based on the grant-date fair value of the award, arerecognized based on the probable outcome 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 expense for optionsgranted to non-employees has been determined in accordance with Emerging IssuesTask Force (“EITF”) No. 96-18, “Accounting for Equity Instrumentsthat are Issued to Other than Employees for Acquiring, or in Conjunction withSelling, Goods or Services” as the fair value of the consideration received orthe fair value of the equity instrument issued, whichever is more readilymeasured.

Estimates havebeen prepared based upon our historical experience and our best estimation ofthe future. 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.

**Resultsof Operations**

**YearsEnded December 31, 2003, 2004 and 2005**

***Revenues***

The following table shows our revenues for each of the years in thethree-year period ended December 31, 2005, and the percentage changesbetween 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,Senior Management and Board Practices**

We have atwo-tier board structure consisting of a management board (*raad van bestuur*), which manages ourbusiness, and a supervisory board (*raad vancommissarissen*), which supervises and advises our management board.

At the annualgeneral meeting of shareholders in 2005, our shareholders approved theamendment of our articles of association. Most of the amendments to thearticles of association are necessary to eliminate the priority shares,references to priority shares and the rights of the holders of priority sharesor have to do with the authority to resolve to issue shares or limit or excludepre-emptive rights. For more information on our articles of association seeItem 10—“Memorandum and Articles of Association.”

***SupervisoryBoard***

Our supervisoryboard must approve certain resolutions of our management board, which arespecified in our articles of association. In addition, our supervisory boardmay give our management board written notice of other corporate actions that itwishes to approve. In fulfilling their duties, all members of our supervisoryboard must serve 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 ofour supervisory 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 supervisoryboard appoints 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 supervisoryboard member can be suspended or dismissed at any time by a resolution of ourgeneral meeting of shareholders passed by an absolute majority of the votescast. This vote must represent more than one third of our issued share capitalif the resolution to suspend or dismiss a supervisory board member is notproposed by our supervisory board. Within three months after a suspension, ourgeneral meeting of shareholders must either dismiss the supervisory director,terminate the suspension or extend it. The total suspension may not exceedthree months.

The generalmeeting of shareholders determines the supervisory board members’ compensation.In contrast to the provisions of the Dutch corporate governance code, until theend of our 2004 fiscal year we  

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paidour supervisory board members in options on our ordinary shares as well ascash, and as of the beginning of our 2005 fiscal year in ordinary shares andcash, or cash only, at the member’s discretion and reimburse them for theirexpenses. See “Remuneration of the Management Board and Supervisory Board.”

**The business address of each supervisory board member is the address ofour principal executive office in Leiden, The Netherlands. As of May 31**, 2006our supervisory board members held an aggregate of 280,610 of our ordinaryshares. See “ShareOwnership.”

The following table sets forth the name, age and position of each ofthe members of our 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 annualmeeting of shareholders 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 ourpresident, chief executive officer and chairman of our management board fromJune, 2000 until January 2004, was appointed a member of our supervisoryboard, effective January 1, 2005, at our annual meeting of shareholders inJune 2004. In January 2005, Mr. Valerio and we agreed that hewould not serve as a member of our supervisory board, but would continue toserve us in an advisory role with an emphasis on investor and public relations.

The following paragraphs contain briefbiographies of each of our supervisory board members:

*Pieter Strijkert* has servedas chairman of our supervisory board since our incorporation. He also served aschairman of the supervisory board of IntroGene from 1994 to October 2000,and as chairman of the supervisory board of U-BiSys from 1998 to October 2000.He currently serves on the boards of Chiron Corporation, a position he has heldsince 1987, and Paratek Pharmaceuticals, Inc., a position he has heldsince 1998. He served as chairman of the supervisory boards of Pharming from1995 to 2001, and for deVGen N.V. and PamGene B.V. from 2000 to 2003. From 1985to 1995 he was a member of the managing board of Gist-Brocades N.V. Mr. Strijkerthas a PhD from the University of Utrecht.

*Jan Oosterveld* retired fromRoyal Philips Electronics N.V. on April 1, 2004, after an internationalcareer of 32 years. He was responsible for Corporate Strategy, CorporateAlliances and the joint ventures 

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with LGE onCathode Ray Tubes (CRT’s) and LiquidCristal Displays (LCD’s). In the latter responsibility he was theChairman of the Board of LG. Philips Ltd, which went public in April 2004and Vice-Chairman of the Board of LG. Philips Displays BV. He was also the CEOof Philips Asia Pacific. He graduated as a Mechanical Engineer from theTechnical University 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.

*Phillip Satow* has served as amember of our supervisory board since our incorporation. He spent 14 years atPfizer, Inc. where his last position was vice president, Pfizer Europe.From 1985 to 1997, he was executive vice president of marketing at ForestLaboratories, Inc. From 1998 to 1999 he was president of ForestPharmaceuticals, executive vice president of Forest Laboratories Inc. and amember of its board of directors. Mr. Satow currently serves on the publicboards of Forest Laboratories Inc. (FRX), and Eyetech Pharmaceuticals Inc.(EYET) and is Chairman and CEO of JDS Pharmaceuticals LLC, a privately heldpharmaceutical company. Mr. Satow received a Masters in Economics fromGeorgetown University.

*Claes Wilhelmsson* has servedas a member of our supervisory board since May 2003. He was previously theExecutive Director of research and development of AstraZeneca PLC from 1999 to July 2002,where he was responsible for AstraZeneca’s global R&D. He joined Astra in1985 and held various positions until the company merged with Zeneca in 1999.Prior to working for Astra, he was a lecturer and researcher at the Universityof Göteborg in Sweden, where he also completed his medical education and PhD.He currently serves on the boards of a number of biotechnology and start-up companies.Dr. Wilhelmsson previously served on the board of AstraZeneca PLC.

*Seán Lance* has served as amember of our supervisory board since January 2004. Mr. Lance is thepast chairman of Chiron Corporation. He joined Chiron as president and chiefexecutive officer in 1998. From 1985 to 1998 he was employed at Glaxo Holdingswhere his last position was group chief operating officer and CEO designate. Heis a past president of the International Federation of PharmaceuticalManufacturers Association. Mr. Lance is a chartered company secretary andadministrator and he also holds a post-graduate qualification in AdvancedFinancial Management.

*Arnold Hoevenaars***has served as a memberof our supervisory board since June 2005 and has been attending oursupervisory 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.

*Dominik Koechlin* has servedas a member of our Supervisory Board since February 2006 upon settlementof Crucell’s exchange offer for Berna Biotech AG, where he was a member of theBoard of Directors. His career began in 1986 as a financial analyst at BankSarasin & Cie in Basel. In 1990 he was a founding partner of EllipsonAG, a consultancy specialized in strategy, corporate finance andsustainability. In 1996 he became a member of the executive board of TelecomPTT, now known as Swisscom AG. In 1999 he took over responsibility for all ofSwisscom’s international participations. He has served on the boards of DebitelAG (Stuttgart), Bluewin AG, Swisscom USA and was chairman of the board of UTA(Vienna) and a member of the supervisory board of Cesky Telecom (Prague). He iscurrently a member of the supervisory boards and audit committees of LGT Bank(Liechtenstein), EGL AG and Swissmetal AG, and a board member at SAM, M2 andCorris AG. Expiry of Term: 2010

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*Jürg Witmer* has served as a member of our Supervisory Board sinceFebruary 2006 upon settlement of Crucell’s exchange offer for BernaBiotech AG, where he was a member of the Board of Directors. Dr Witmerstarted his professional career in 1978 as legal counsel of Hoffmann-La RocheAG in Basel. In 1982 he was appointed as personal assistant to the CEO of theRoche Group and in 1984 became Regional Manager of Roche Far East, based inHong Kong. He was promoted to General Manager in 1988 before returning to Switzerlandas head of Corporate Communications and Public Affairs at Roche. In 1994 hetook over as General Manager of Roche’s operations in Austria and parts ofEastern Europe, before becoming CEO at Givaudan Group in Geneva. In thisfunction he lead the spin-off of Givaudan from the Roche Group and its Swissstock exchange listing. In April 2005 he took over the chair of the Boardof Directors of Givaudan. Dr Witmer is also a member of the Board of Directorsof Bank Sal. Oppenheim Jr. & Cie (Schweiz) AG.

*Claude Thomann* has served as a member of our Supervisory Board sinceFebruary 2006 upon settlement of Crucell’s exchange offer for BernaBiotech AG, where he was a member of the Board of Directors. He began hiscareer as a lawyer in 1979 at the Kellerhals firm in Berne where he became apartner in 1985 and managing partner from 1989 to 2000. He is a member of theBoard of Directors of Securitas AG (Bern), Keymile Holding AG (Freienbach SZ),Keymile AG (Bern) and Bonotec AG (Konolfingen BE) and Chairman of theMedicinal-Cluster Berne and of the Compensation Fund of the BerneseEntrepreneurs. Dr Thomann is also managing director of various employers’associations and legal advisor to the Swiss Cancer League and the SwissInstitute for Applied Cancer Research.

***Remuneration Committee***

Our supervisoryboard has established a remuneration committee. The remuneration committeedetermines our policy on remuneration of all members of our management boardand management committee. See “Remuneration of the Management Board andSupervisory Board—Remuneration Policy”. The members of our remunerationcommittee are Phillip Satow (Chairman), Pieter Strijkert, Claes Wilhelmsson andJan Oosterveld.

***Audit Committee***

Our supervisory board has established anaudit committee. The audit committee consists of three supervisory boardmembers who are independent within the meaning of the Nasdaq listing rules.This committee is responsible for, among other things, reviewing our annual andinterim reports and accounts and monitoring our auditors’ involvement in thatprocess. The ultimate responsibility for reviewing our annual and interimaccounts lies with our supervisory board. The members of our audit committeeare Arnold Hoevenaars (Chairman), Seán Lance and Dominik Koechlin.

***Nomination Committee***

Our supervisoryboard has established a nomination committee. The nomination committee consistsof all supervisory board members. This committee (a) draws up selectioncriteria and appointment procedures for members of the supervisory board andthe management board, (b) periodically assesses the size and compositionof the 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 supervisoryboard has established a scientific committee. The scientific committee consistsof one supervisory board member who is independent within the meaning of theNasdaq listing rules. This committee is responsible for, among other things,reviewing progress in our research and development activities. The chairman andsole member of our scientific committee is Claes Wilhelmsson.

***Management Board***

Ourmanagement board manages our general affairs and business, under thesupervision of our supervisory board. Under our articles of association, themanagement board requires prior approval of the supervisory board forresolutions 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

·       enter intofinancial commitments exceeding price limits set by the supervisory board orfor longer than a year.

Under Dutch law, in certain circumstances,management board actions may require the approval of the general meeting ofshareholders.

Our supervisory board determines the sizeof our management board after consultation with our chief executive officer.Our general meeting of shareholders appoints the members of our managementboard from nominations made by our supervisory board. To be binding, there mustbe at least 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 suspendedor dismissed 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 thecompensation and benefits of the members of our management board, on a proposalby the remuneration committee, within the scope of the remuneration policyadopted by the general meeting of shareholders. The business address of themembers of our management board is the same as the address of our principalexecutive office in Leiden, The Netherlands.

The name, 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                                                 |

 

LeonardKruimer, our chief financial officer, joined the management board as of January 1,2005.

***Management Board Service Contracts***

The contracts for the management boardmembers have been entered into for an indefinite period and provide for anotice period of up to six months upon termination by the Company and a noticeperiod of three months upon termination by the individual. A dismissal arisingfrom an unwanted change of control will result in a severance arrangementlimited to two years’ worth of base salaries for the management board members.

The contractsof the management board members contain non-compete provisions that would applyfor a period of one year after the end of their employment with us.

***Management committee***

We have a management committee that advisesthe management 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 a result of the acquisition of Berna Biotech AG, K. Sommer and S.Rothen joined our management committee in March 2006. The following tablesets forth the name, age and position of each of the members of our newmanagement 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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Thefollowing paragraphs contain brief biographies of the members of our managementboard and the members of our management committee:

*Ronald H.P. Brus* is chairmanof the management board and president and chief executive officer since January 26,2004, and has been a member of our management committee since ourincorporation. He was executive vice president, business development atIntroGene from 1997 to 2000 and chief operating officer at Crucell from March 2003through to his appointment as president and chief executive officer. From 1994to 1996, he was product-planning physician at Forest Laboratories (New York)and from 1990 to 1994 he was medical director for Zambon B.V. He holds amedical degree (M.D.) from the University of Groningen.

*Jaap Goudsmit* is a member ofthe management board since January 26, 2004. He was our Senior VicePresident Vaccine Research from September 2001 until July 2002 andmember of our management committee from July 2002 as Executive VicePresident Vaccine R&D. In September 2002 he was appointed ChiefScientific Officer and head of Research and Development. He chaired theAcademic Medical Center of the University of Amsterdam the Research Institutefor Infectious Diseases and the Institute for Science Education. He was thefounding chair of the Scientific Advisory Committee of the International AIDSVaccine Initiative (IAVI) and the founding co-chair of the European VaccineEffort against HIV/AIDS (EuroVac). Since 1989 he has been a professor at theUniversity of Amsterdam and the Academic Medical Center. He holds a medicaldegree (MD) and a PhD from the University of Amsterdam and is a board certifiedmedical microbiologist.

*Leonard Kruimer* became amember of the management board on January 1, 2005. He has been our chieffinancial officer and a member of our management committee since ourincorporation. He held the same position at IntroGene from 1998 to 2000. From1996 to 1998 he was an independent consultant with companies such as Pepsicoand Royal Boskalis Westminster N.V. From 1988 to 1995, he held senior executivepositions at Continental Can Europe, GE Capital/TIP Europe and Kwik-Fit EuropeB.V. He was a consultant at McKinsey & Co. and has worked with PriceWaterhouse. He holds a Masters in Business Administration from Harvard GraduateSchool of Business Administration, a degree from the University ofMassachusetts, Amherst, and is a CPA in New York State.

*Simon Rothen**,***served as chief operations officer of Berna Biotech since 2004. Hejoined Berna Biotech in 1998 where he fulfilled several positions inproduction, quality, IT/IS, supply chain and operations. He studied at andworked for Novartis biotechnology at ETH Zurich where he earned his Ph.D. inbioprocess engineering in 1997, before joining Berna Biotech PharmaBiotechnology Development & Production (Technical Cell Biology).

*Kuno Sommer* was chiefexecutive officer of Berna Biotech from 2000 until 2006. He studied economicscience at Basel University and earned a doctorate in political science. Before1990, he held various positions with Roche AG Vitamin Marketing. From 1990 to1994, he served as Head of the North American branch of the Roche animal feedand health division. From 1995 he served as manager of Roche global marketingfor the vitamin and speciality chemicals division in Basel. Mr. Sommer wasCEO of Givaudan-Roure in Geneva and member of the executive committee of RocheAG in 1998/99.

*René K. Beukema* has been ourgeneral counsel and corporate secretary since our incorporation. He held thesame position at IntroGene from 1999 to 2000. From 1994 to 1999 Mr. Beukemawas Senior Legal Counsel for GE Capital/TIP Europe. From 1991 to 1994, he waslegal counsel for TNT Express Worldwide N.V. He has a Masters in Law from theUniversity of Amsterdam.

*John Lambert*****holds, through his ownorganization, J G Solutions Ltd, the post of executive vice-president ofCrucell , and is responsible for strategy development. Prior to this he wasVice President and Officer of Chiron and President of Chiron Vaccines between March 2001and February 2005. Before joining Chiron, he provided consulting andcoaching at the chief executive level to organizations both in 

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the United Kingdom andinternationally. From 1998 to 2000, Mr. Lambert was the President of AventisPasteur MSD, based in Lyon, France, where he headed the vaccines venture formedbetween Pasteur Mérieux Connaught (now Sanofi Pasteur) and Merck & Co.following four years as that company’s Vice President of Operations. From 1987to 1994, he held various positions with the Pasteur Mérieux Connaught Group, inincreasing levels of responsibility, starting off as Managing Director, MérieuxUK 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 thatthe establishment 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.

**Remunerationof the Management Board and Supervisory Board**

Netherlandslegislation requires full disclosure of individual management board andsupervisory board remuneration. We have included the required disclosuresbelow.

***Remuneration Policy***

The remuneration committee is charged bythe supervisory 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 onpolicies and reviews and determines objectives relevant to the compensation ofthe members of the management board and members of the management committee.Remuneration consists of a fixed salary portion and a variable bonus portionthat is linked to our overall performance and the achievement of setobjectives. The remuneration committee evaluates the performance of members ofthe management board and management committee in view of those objectives andadvises on the fixed and variable compensation of members of the managementboard and the management committee. In advising on short and long termincentive compensation for members of the management board and managementcommittee, the remuneration committee considers among other factors ourfinancial and commercial performance, scientific performance and progress, andthe accrual of our value. External compensation survey data available for thebiotechnology industry are also used as another factor to benchmark thecompensation levels. It is the aim of the remuneration committee to positionthe remuneration packages for members of the management board and managementcommittee 

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at competitivelevels. The bonus paid to the management board is paid in connection withachievement of certain objectives set by the supervisory board.

The remuneration committee has advised the supervisory board and thesupervisory board has reviewed the remuneration policy and structure for themanagement board during 2004 in light of the Dutch corporate governance codeand market competitiveness. At the annual general meeting of shareholders in2005, our shareholders approved this remuneration policy. The remunerationpolicy for 2005 and consecutive years is based on four key principles:

·       in 2005,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;

·       to enhancethe 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.

*Remunerationstructure 2005.*   The balance infixed and variable pay for at target performance for the CEO amounts to 47%fixed and 53% variable compensation. For the other two management boardmembers, the balance equals 56% fixed and 44% variable compensation.

*Base Salary.*   In 2005, base salary levels of the management board have beenincreased by 2% in order to account for an inflation correction. Eachconsecutive year the supervisory board considers whether base salary levelsshould be adjusted by taking account of our external and internal businessenvironment.

*Short-termincentive.*   At the annualgeneral meeting of shareholders in 2005, our shareholders approved theshort-term share-based incentive plans.

During 2004,our short-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 the short-term incentive award is based on individual milestones,assessed on the basis of predefined measurable milestones set for eachexecutive. These milestones depend on the specific responsibilities of theindividual and are approved by our supervisory board. All milestones linked tothe short-term incentive plan are revised annually and approved by oursupervisory board to ensure that they remain challenging but realistic.

The table below shows the relative weight of the collective andindividual milestones:

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

 

**The target bonus of the CEO amounts to 75% of base salaryand for the chief financial officer and chief scientific officer a target bonusof 50% of base salary is applicable. In the event performance exceedsexpectations to a considerable extent, up to 125% of the target bonus could berewarded as a maximum bonus.**

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**The bonus is payable in restricted shares or cash, optionalto the participant. Our management board members are encouraged to opt forrestricted shares to maximize alignment of shareholders’ interest. Thereforewhen opted for 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 analysis assessed whether the vehicle used (stock options)sufficiently supported our long-term strategic objectives. As a result of thisstudy, the remuneration committee recommended our supervisory board replaceaward of stock options with award of performance shares.

Target long-term incentive levels amount to40% of base salary for the CEO and 30% for the chief scientific officer and thechief financial officer. When achieving maximum performance, a maximum of 200%of the target award can be awarded. Overall, no vesting takes place for belowmedian performance.

The performance shares will beconditionally****granted and vest ifpre-set performance targets have been met at the end of a three-yearperformance period. The performance targets are based on a combination ofabsolute share price growth on the stock markets, and our Total ShareholderReturn (“TSR”). TSR reflects the return received by a shareholder, taking intoaccount both the change in share price and dividends received, while assumingdividends are re-invested in us.

The absolute share price growth serves as ahurdle which****must be overcome to qualify forany possible vesting of the shares. After the share price hurdle is met, theTSR performance measurement is twofold: relative to a peer group consisting of26 constituents 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.*   At thebeginning of our 2005 fiscal year a new pension plan for our management boardwas 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 theannual contribution rates, including the employee contribution. The riskpremium for the survivor’s pension will be financed separately by the employer.

**Totalcontribution rates 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       | %                          |       |

 

*ManagementBoard*

The total remuneration and related costs of the members of themanagement board over the past three years, excluding stock options, is asfollows:

| ** **         | ** ** | **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** | ** ** |

----

(1)          Pension costsinclude disability insurance costs.

(2)          In connectionwith his stepping down as our chief executive officer, president and chairmanof our management board, we agreed to pay Mr. Valerio an amount equal to €454 in severance and up to €19 as partial compensationfor advisory costs. On January 26, 2004, we also entered into an advisoryagreement with Mr. Valerio under which he received an advisory feetotaling €227 through theend of 2004.

The remuneration of the individual members of our management boardduring 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** | ** ** |

----

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

For details regarding share and optionownership by our management board members, see “Share and Option Ownership.”

Pension,retirement and similar arrangements for our management board members consist ofa defined contribution plan, and we do not have further pension obligationsbeyond the annual premium contribution.

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***Supervisory Board***

Beginning in 2005, compensation of allSupervisory Board members consists of a fixed fee in cash and an annual sharegrant. The fixed fee in cash amounts to €25 per Supervisory Board member. The Chairman will receive a fixedfee 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 €4.9 isawarded annually to the Chairman of the Supervisory Board.

In 2004 the remuneration was based on afixed amount of €5 permember, an additional payment of €5 for each chairmanship of a committee, and payments based on theactual number of supervisory board meetings attended, as well as an additionalpayment of €4.9 tocover expenses for the chairman. We reimburse our supervisory board members fortheir travel and associated expenses incurred in connection with supervisoryboard meetings. The remuneration for the members of the supervisory board isdetermined by the general meeting of shareholders.

During 2005 and 2004, the individual members of the supervisory boardreceived the following 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 became a member of the supervisory board on June 2,2005, and has been attending supervisory board meetings as an observer since July 2004.

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

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

For detailsregarding share and option ownership by our supervisory board members, see “Shareand Option 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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**Item 8.**                        Financial Information

See Item 18, “Financial Statements.”

**Legal Proceedings**

In the ordinary course of business, we have been involved in certaindisputes. Neither we, nor any of our subsidiaries, has been party to any legalor arbitration proceedings that may have, or have had during the 12 monthspreceding the date of this document, a significant effect on our financialposition or any of our subsidiaries nor, as far as we are aware, are any suchlegal proceedings pending or threatened, except for those disclosed in Item 4.

**Dividends and Dividend Policy**

Neither we or our principal Dutch subsidiaries, Crucell Holland B.V.,U-Bisys B.V. and Chromagenics B.V. have ever declared or paid dividends. We donot intend to pay dividends on our ordinary shares for the coming years, andthereafter only on the condition that our financial performance is adequate andit is in the shareholders’ interest to pay dividends instead of investing theproceeds into the company. Any payment of future dividends and the amountsthereof will depend upon earnings, statutory and financial requirements andother factors deemed relevant by our management board, and will be subject towithholding tax in The Netherlands. In the event that we pay dividends in thefuture, holders of our ADSs will be entitled to receive payments in U.S.dollars in respect of dividends on the underlying ordinary shares in accordancewith a deposit agreement dated October 26, 2000, between The Bank of NewYork and us.

**Significant Changes**

Other than as disclosed in this annual report, no significant change hasoccurred since December 31, 2005, the date of our most recent auditedfinancial statements.

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**Item 9.**                        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 beenquoted on the Nasdaq National Market since October 27, 2000, both underthe symbol “CRXL”. Since 22 February 2006, our shares have beenlisted on the SWX Swiss Exchange (in Zürich, under the symbol “CRX”) as aresult of our acquisition of Berna 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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Our ordinary shares trade on Eurolist by Euronext AmsterdamN.V. through the book-entry facilities of NEGICEF, Euroclear and ClearstreamLuxembourg. For the ordinary shares the International Securities IdentificationNumber (ISIN) code is NL0000358562, the Amsterdam Security Number is 35856 andthe Common Code is 11907164.

The following table sets forth the range of high andlow closing prices, in euros, for our ordinary shares in The Netherlands forthe periods 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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**Item 10.**                 Additional Information

**Memorandum and Articlesof Association**

Set out below is a summary of material information concerning our shares,which are our ordinary shares together with our preference shares, and relatedmaterial provisions of our articles of association and of Book 2 of the DutchCivil Code (*Boek 2 van het BurgerlijkWetboek*). This summary is not complete and is qualified in itsentirety by reference to our articles of association and to Dutch law.

***General***

We were incorporated as a limited liability company (*naamloze vennootschap*) on October 9,2000 by deed executed before Mr. R.J.J. Lijdsman, civil law notary. Ourcorporate seat is in Leiden, The Netherlands, and we have offices atArchimedesweg 4, 2333 CN Leiden, The Netherlands. We are registered in thetrade register of the Chamber of Commerce and Industry for Leiden under number28087740. The statement of no objection of the Minister of Justice in respectof our deed of incorporation was issued on October 9, 2000 under numberN.V. 1133178. Our agent in the United States is CT Corporation, 111 EighthAvenue, New York, New York 10011.

***Corporate Purpose***

Our objects include acquiring, establishing and managing companies in ourfield, controlling and using intellectual property, and funding our operations.

***Limitation of Liabilityand Indemnification Matters***

Pursuant to Dutch law,each member of our supervisory and management boards is responsible to us forthe proper performance of his or her assigned duties. They are also responsiblefor taking measures to prevent the consequences of any improper performance ofduties by another member of our supervisory board or our management board. Ourarticles of association provide that our managing board members and oursupervisory board members are discharged from liability for their actions asboard members, if our general meeting of shareholders adopts a resolution tothat effect. This discharge extends only to actions or omissions disclosed inor apparent from the adopted annual accounts or otherwise communicated to ourgeneral meeting of shareholders.

This discharge ofliability may be limited by mandatory provisions of Dutch law, such as in thecase of bankruptcy. Under Dutch law, our supervisory board members and membersof our management board generally cannot be held personally liable fordecisions made exercising their reasonable business judgment.

Our articles ofassociation provide that we shall generally indemnify any person who is or wasa member of our supervisory board or our management board or one of ouremployees, officers or agents, and suffers any loss as a result of any actionin connection with their service to us, provided they acted in good faith incarrying out their duties.

This indemnification 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***

Our authorized share capital amounts to €40,800divided into: 85,000,000 ordinary shares and 85,000,000 preference shares, eachwith a par value of €0.24.

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

***Ordinary Shares***

Our ordinary shares may be in registered or bearer form and will be inbearer form unless the shareholder indicates otherwise in writing. Only bearerordinary shares can trade on Euronext Amsterdam.

***Bearer Ordinary Shares***

All of our 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.

The ordinary shares represented by the single global share certificate mayonly be transferred through the book-entry system maintained by NECIGEF. Aparticipant in the collective deposit (verzameldepot) of a securitiesinstitution admitted to NECIGEF may, at his own expense, require conversion ofone or more of his bearer ordinary shares into ordinary shares in registeredform.

***Registered Ordinary Shares***

We enter holders of registered ordinary shares in the register ofshareholders. We do not issue share certificates. However, the shareholder mayrequest an extract from the shareholders’ register regarding the ordinaryshares registered in his name. We are required to provide this free of charge.Dutch law requires that transfers of registered ordinary shares be recorded ina written instrument to which we are a party or which is served on us, or thatthe transaction be acknowledged by us.

***Priority Shares***

In line with the provisions of the Dutch corporategovernance code and our corporate governance, our management and supervisoryboards believe that the use of priority shares should be considered a form ofpermanent protection against possible takeovers, which should be abolished.Instead, our management and supervisory boards believe preference shares, whichprovide temporary anti-take-over protection, are more appropriate.

At the annual general meeting of shareholders in 2005, our shareholdersapproved the amendment of our articles of association to eliminate the priorityshares and the rights of the holders of the priority shares. The right of thepriority shareholdersto make binding nominations for the appointment of our supervisory boardmembers now lies with our supervisory board. The amendment of our articles ofassociation was effected on November 21, 2005.

***Preference Shares***

As of the date of this annual report, we have not issued any preferenceshares. On October 25, 2000, we established a foundation called StichtingPreferente Aandelen Crucell, also referred to as the Preferred Foundation. ThePreferred Foundation’s object is to safeguard our interests and those of ouraffiliates through acquiring and managing our preference shares and byexercising the rights attaching to these shares, in particular, the votingrights.

In connectionwith the abolition of our priority shares and in order to achieve adequatetemporary protection, the agreement between us and the Preferred Foundation wasamended to 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 board of governors of up to five persons directs the PreferredFoundation. Pieter Strijkert, in his capacity as chairman of our supervisoryboard, and Pieter Bouw, Mick W. den Boogert, Sweder van Wijnbergen and GerardP. Krans, have been appointed to the board of governors. A majority of thesemembers may not be members or former members of our management or supervisoryboard, or an employee of any of our advisers, any of our banks or us. Theseindependent members 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:

·       voluntaryretirement, reaching the age of 72, death or bankruptcy;

·       forour non-independent members, resignation, or dismissal by the members ofour supervisory board;

·       forour independent members, if they cease to be independent;

·       dismissalby the complete board of the Preferred Foundation; or

·       periodic retirement in accordance with a rotationplan to be drawn up by the Preferred Foundation’s board of governors, however,these members may be reappointed.

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

Our general meeting of shareholders, or our management board if the generalmeeting of shareholders has delegated the power to it, has the authority todecide on any further issuance of shares or rights to subscribe for shares andon the terms and conditions of such issuance. Our management board is theauthorized corporate body (*orgaan*)for this purpose until June 1, 2010 and this authorization may at any timebe extended for periods of up to five years. Our management board’s authorityto issue shares is limited to our authorized share capital.

Our management board can issue shares of any class if it has the approvalof our supervisory board. Without specific authorization from our generalmeeting of shareholders our management board may not issue preference shares orgrant options for such shares if, as a result, more preference shares than othershares will or could become outstanding.

Each holder of ordinary shares has pre-emptive rights to subscribe for anyordinary shares that we issue and has pre-emptive rights to subscribe if wegrant rights to subscribe for ordinary shares. Pre-emptive rights are inproportion to the percentage of our outstanding ordinary shares that the holderowns. Pre-emptive rights do not apply to ordinary shares issued for a non-cashcontribution, to ordinary shares issued to our employees or ordinary shares issued to a person whoexercises a previously-acquired right to subscribe for ordinary shares.Holders of preference shares do not have pre-emptive rights if we issueordinary shares, and holders of ordinary shares have no pre-emptive rights topurchase preference shares if we issue preference shares.

If our management board has been delegated the authority to issue shares,it can limit or exclude any pre-emptive rights as long as the general meetingof shareholders has granted it that power and our supervisory board approves.At present, 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.

Our shares cannot be issued below par. The ordinary shares must be fullypaid up upon issue. Preference shares may be issued without being fully paidup, but at least one-quarter of the nominal amount must be paid up uponsubscription, and each issue of preference shares must have the same amountpaid up. Our management board may determine the day and the amount of a furthercall for payment on preference shares.

***Acquisition by Us of Shares in Our Own Capital***

We may acquire our own shares if the followingconditions are met:

·       ourgeneral meeting of shareholders has authorized our management board to acquirethe shares;

·       theauthorization specifies the number of shares which we may acquire, the mannerin which they may be acquired and the limits within which the price must beset;

·       ourshareholders’ equity, after deduction of the price of acquisition, is not lessthan the sum of the paid and called up portion of the share capital and thereserves that provisions of Dutch law or our articles of association require usto maintain; and

·       theaggregate par value of the shares to be acquired, together with the shares inour share capital that we already hold directly, indirectly or as pledgee, doesnot equal more than one-tenth the aggregate par value of our total issued sharecapital.

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

***Capital Reduction***

If our management board proposes, our supervisory board approves and Dutchlaw permits, 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 ofour Articles of Association**

***Voting Rights and Shareholders’ Meetings***

We must hold annual general meetings of shareholderswithin six months of the end of our fiscal year. The annual meeting is held,among other things, to adopt our annual accounts. We must hold extraordinarygeneral meetings of shareholders whenever:

·       shareholdersand holders of depositary receipts for shares together representing at leastone-tenth of our outstanding share capital request it in writing, listing thetopics to be discussed; and

·       ourmanagement board or our supervisory board deems appropriate.

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

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Each shareholder canattend general meetings in person or by proxy, address the meeting and vote.Each share, whether ordinary or preference, confers one vote on theshareholder. The management board must be notified in writing of a registeredshareholder’s intention to attend the general meeting of shareholders. Theholders of bearer ordinary shares can vote if a NECIGEF participant sends awritten statement as to their shareholdings to our offices. Resolutions arepassed by absolute majority of votes cast unless stated otherwise in Dutch lawand our articles of association.

The general meeting ofshareholders can amend our articles of association, dissolve us, merge us ordemerge us only if proposed by the supervisory board.

Dutch law and our articles of association do not impose any limitations onnon-Dutch ownership or voting of our ordinary shares.

***Annual Accounts***

We have a calendar fiscal year. Dutch law requires that within five monthsafter the end of our fiscal year, unless the general meeting of shareholdershas extended this period for a maximum of six months, our management board mustmake available to the shareholders a report with respect to that fiscal year.This report must include the financial statements and a report of anindependent accountant. The annual report is submitted to the annual generalmeeting of shareholders for adoption. See “Management—Limitation of Liabilityand Indemnification Matters”.

***Dividends***

Annual dividends may onlybe paid out of profits as shown in the adopted annual financial statements. Wemay not make distributions if the distribution would reduce our shareholders’equity below certain reserves required by Dutch law or our articles ofassociation. The profits must first be used to set up and maintain reservesrequired by Dutch law and must then be set off against certain financiallosses. The preference shares will be paid their dividends, which will be acertain percentage of their nominal value, first. With supervisory boardapproval, our management board then decides whether and how much of theremaining profit they will reserve. Any profits remaining can be paid as adividend on the ordinary shares. With the approval of our supervisory board andsubject to Dutch law, our management board can pay an interim dividend. Thepayment of an interim dividend in our or another entity’s shares requires theadditional approval of our general meeting of shareholders.

We can make distributions to shareholders at the charge of one or more ofour reserves. Holders of shares are entitled to the full dividend for thefiscal year 2000 and subsequent fiscal years. Any dividends that are notclaimed within five years of their declaration revert to us.

***Amendment of Our Articlesof Association and Liquidation Rights***

The general meeting of shareholders may only resolve to amend our articlesof association 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.

**Enforcement of Civil Liabilities**

We are incorporated underthe laws of The Netherlands, and the majority of the members of our supervisoryboard, all of the members of our management board and management team and allof the experts named in this document are residents of, and most of our andtheir assets are in, jurisdictions 

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outside the United States. As a result, it may not be possible for you toeffect service of process within the United States upon us or these persons, orto enforce against us or these persons in courts in the United States,judgments of these courts predicated upon the civil liability provisions ofUnited States securities laws. In addition, it is not clear whether a Dutchcourt would impose civil liability on us, members of our management board orsupervisory board or management team or any of the experts named in thisdocument in an original action based solely upon the federal securities laws ofthe United States brought in a court of competent jurisdiction in TheNetherlands. Dutch law, furthermore, does not recognize a shareholder’s rightto bring a derivative action on behalf of a corporation.

Our legal counsel in The Netherlands, Allen &Overy, has advised us that because there is no treaty on the reciprocalrecognition and enforcement of judgments in civil and commercial mattersbetween the United States and The Netherlands, courts in The Netherlands willnot automatically enforce a final judgment rendered by a United States court.In order to obtain a judgment enforceable in The Netherlands, claimants mustlitigate the relevant claim again before a Dutch court of competentjurisdiction. Under current practice, however, a Dutchcourt will recognize a final and conclusive judgment rendered by a UnitedStates court if the Dutch court finds that:

·       the UnitedStates court assumed jurisdiction on grounds which are acceptable from aninternational law perspective;

·       the finaljudgment results from proceedings compatible with Dutch concepts of dueprocess; and

·       the finaljudgment does not contravene public policy of The Netherlands.

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

**Material Contracts**

On December 18, 2002we entered into a collaboration agreement with DSM Biologics Holding, Inc.,DSM Biologics Company, Inc. and DSM Biologics Company, B.V. Under theterms of the agreement, we granted DSM an exclusive license to our PER.C6 technology forthe contract manufacturing of recombinant proteins and monoclonal antibodies.We will receive licensing fees over a four year period, depending on theachievement of certain cumulative milestones, and are obligated to commit tocertain expenditures in connection with the development of the PER.C6production platform. DSM is entitled to a percentage of all non-service feesunder the contract, in addition to an exclusive license to the technology thatincludes the right to sublicense.

In December 2005 theCompany and DSM announced that they will strengthen and expand the developmentof the PER.C6 protein and monoclonal antibody licensing business. The twocompanies will create an integrated solution for the production of recombinantproteins and monoclonal antibodies on PER.C6 in order to increase licensing androyalty income and accelerate the development and roll-out of the PER.C6technology platform in the market. The existing collaboration agreement was amendedand terminated, resulting in release of deferred revenues and recognition ofcertain milestones and agreed to by DSM.

On December 31,2003, we entered into a collaboration and license agreement with AventisPasteur S.A. (now sanofi pasteur) to develop and commercialize influenzavaccine products based on our PER.C6 technology. Under the terms of theagreement, we granted sanofi pasteur an exclusive license to research, develop,manufacture and commercialize influenza vaccine products based on our PER.C6technology. We received an up-front payment and will receive milestonepayments, annual payments, research and development funding totaling €30million, and high single- up to double-digit royalties on futurePER.C6-based influenza vaccine sales. We retain commercialization rightsfor Japan, where sanofi pasteur will supply finished vaccine products to us andwe will pay a royalty on sales to sanofi pasteur.

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On April 13, 2005 we entered into a manufacturing contract with theVaccine Research Center (VRC), part of the National Institute of Allergy andInfectious Diseases (NIAID) of the National Institutes of Health (NIH), tomanufacture up to ten batches of clinical material of the PER.C6-based Ebolavaccine in its own manufacturing facility. These materials will be used forPhase I and early Phase II clinical studies in humans. We will receive up to €21.4million (US$27.6 million) from the VRC for the manufacturing of these clinicallots, over a period of 5 years, commencing April 15, 2005.

**Exchange Controls**

There are currently no Dutch laws, decrees or regulations that restrict theexport or import of capital, including, but not limited to, foreign exchangecontrols, or that affect the remittance of dividends or other payments tonon-Dutch residents or to U.S. holders of our securities except as otherwiseset forth in Item 10, “Taxation”.

**Taxation**

The following is a summary of the material Dutch and U.S. tax consequencesof an investment in ordinary shares or ADSs. This summary does not discussevery aspect of taxation that may be relevant to a particular investor who issubject to special treatment under any applicable law, and is not intended tobe applicable 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.

**Certain Dutch Tax Consequences for Holders of OrdinaryShares or ADSs**

This summary describes the principal tax consequences that will generallyapply in the case of an investment in the ordinary shares or ADSs under Dutchtax laws in force and in effect as of the date hereof, and is subject tochanges in Dutch law, including changes that could have retroactive effect. Notevery potential tax consequence of such investment under the laws of TheNetherlands will be addressed.

***Dutch Taxation ofResident Shareholders***

Thesummary of certain Dutch taxes set out in this section “Dutch Taxation ofResident Shareholders” is only intended for the following investors:

(1)         individuals who are resident or deemed to be residentor who have opted to be resident in The Netherlands for purposes of Dutchtaxation and who invest in the ordinary shares orADSs, excluding individuals who invest in the ordinary shares or ADSs that formpart of a substantial interest in us and excluding individuals who are ouremployees or who are deemed to be our employees or employees of any entityrelated to us (the “Dutch Individuals”); and

(2)         corporateentities (including associations which are taxable as corporate entities) thatare resident or deemed to be resident in The Netherlands for purposes of Dutchtaxation and who invest in the shares or ADSs, excluding:

(a)           corporateentities that are not subject to Dutch corporate income tax;

(b)          pensionfunds (*pensioenfondsen*) and otherentities that are wholly or partly exempt from Dutch corporate income tax;

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(c)           corporate entitiesthat hold ordinary shares or ADSs that qualify for application of theparticipation exemption (as laid down in the Dutch Corporate Income Tax Act1969); and

(d)          investmentinstitutions (*beleggingsinstellingen*)as defined in the Dutch Corporate Income Tax Act 1969;

(the “Dutch Corporate Entities”).

Generally, a holder ofordinary shares or ADSs will not have a substantial interest if he, his spouse,certain other relatives (including foster children) or certain persons sharinghis household, do not hold, alone or together, whether directly or indirectly,the ownership of, or certain other rights over, ordinary shares representing 5%or more of our total issued and outstanding capital (or the issued andoutstanding capital of any class of shares), or rights to acquire ordinaryshares, whether or not already issued, that represent at any time 5% or more ofour total issued and outstanding capital (or the issued and outstanding capitalof any class of shares) or the ownership of certain profit participatingcertificates that relate to 5% or more of our annual profit and/or to 5% ormore of our liquidation proceeds. A deemed substantial interest is present if(part of) a substantial interest has been disposed of, or is deemed to havebeen disposed of, on a non-recognition basis, unless, in the case of an actualdisposal, the consideration 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.

*Dutch Individuals engaged or deemed to be engaged in an enterprise,Dutch Individuals for whom the benefits derived from the ordinary shares orADSs are treated as results from other activities, and Dutch CorporateEntities.*   Any benefits derived or deemed to be derived from the ordinary shares orADSs (including any capital gains realised on the disposal thereof) that areattributable to an enterprise carried on by a Dutch Individual or to anenterprise in which he has an interest, are generally subject to income taxcharged at progressive rates in his hands. The same applies to a DutchIndividual for whom the benefits derived from the ordinary shares or ADSs aretreated as results from other activities. Any benefits derived or deemed to bederived from the ordinary shares or ADSs (including any capital gains realisedon the disposal thereof) that are held by a Dutch Corporate Entity aregenerally subject to corporate income tax in its hands.

***Withholding Tax.******  ***Dividends we distribute generally aresubject to a withholding tax imposed by The Netherlands at a rate of 25%. Theconcept “dividends we distribute” used in this section includes, but is notlimited to:

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

(2)         liquidationproceeds, proceeds of redemption of the ordinary shares or ADSs or, as a rule,consideration for the repurchase of the ordinary shares or ADSs by us in excessof the average paid-in capital recognised for Dutch dividend withholding taxpurposes;

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(3)         the parvalue of the ordinary shares or ADSs issued to a holder of the ordinary sharesor ADSs or an increase of the par value of the ordinary shares or ADSs, as thecase may be, to the extent that it does not appear that a contribution,recognised for Dutch dividend withholding tax purposes, has been made or willbe made; and

(4)         partialrepayment of paid-in capital, recognised for Dutch dividend withholding taxpurposes, if and to the extent that there are net profits (*zuivere winst*), unless:

(a)           thegeneral meeting of our shareholders has resolved in advance to make suchrepayment; and

(b)          the parvalue of the ordinary shares or ADSs concerned has been reduced by an equalamount by way of an amendment of the articles of association.

Dutch Individuals andDutch Corporate Entities generally can credit the dividend withholding taxagainst their income tax or corporate income tax liability and will be entitledto a refund of dividend withholding tax insofar as such tax, together with anyother creditable domestic and/or foreign taxes, exceeds their aggregate incometax or corporate income tax liability. A condition to avoid “dividend stripping”is that the recipient of proceeds from the ordinary shares or ADSs qualify asthe beneficial owner thereof. A recipient of proceeds from the ordinary sharesor ADSs 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 TheNetherlands with respect to an acquisition of the ordinary shares or ADSs byway of a gift made by a Dutch Individual or a Dutch Corporate Entity. Aninheritance tax liability will arise in The Netherlands with respect to anacquisition or deemed acquisition of the ordinary shares or ADSs on the deathof a Dutch Individual.

For purposes of Dutch gift and inheritance taxes, an individual who holdsDutch nationality will be deemed to be resident in The Netherlands if he hasbeen resident in The Netherlands at any time during the ten years preceding thedate of the gift or his death. For purposes of the Dutch gift tax, anindividual not holding Dutch nationality will be deemed to be resident in TheNetherlands if he has been resident in The Netherlands at any time during thetwelve months preceding the date of the gift.

***Dutch Taxation ofNon-Resident Shareholders***

This section “Dutch Taxation of Non-resident Shareholders” describes certainDutch tax consequences for a holder of the ordinary shares or ADSs who isneither resident, nor deemed to be resident, and who has not opted to betreated as a resident in The Netherlands for purposes of Dutch taxation (a “Non-ResidentShareholder”).

Withholding Tax. Dividends we distributegenerally are subject to a withholding tax imposed by The Netherlands at a rateof 25%. Reference is made to the section “Dutch Taxation of ResidentShareholders—Withholding Tax” for a description of the concept “dividendsdistributed by us.”

If a double taxation convention is ineffect between The Netherlands and the country of residence of a Non-ResidentShareholder, such Non-Resident Shareholder may, depending on the terms of thatdouble taxation convention, be eligible for a full or partial exemption from,or refund 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 “dividendstripping” is that the Non-Resident Shareholder qualifies as the beneficialowner of the dividend. A Non-Resident Shareholder is not considered to be the beneficial owner of the dividend, if theamount of this dividend, following a set of transactions, is ultimately whollyor partly received by another person and this other person also maintains,directly or indirectly, an interest in the ordinary shares or ADSs.

***Taxes on Income and Capital Gains.******  ***A Non-Resident Shareholder will not besubject to any Dutch taxes on income or capital gains in respect of dividendswe distribute (other than the withholding tax described above) or in respect ofany gain realised on the disposal of the ordinary shares or ADSs, providedthat:

(1)         such Non-Resident Shareholder does not have anenterprise or an interest in an enterprise that is, in whole or inpart, 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 attributable;and

(2)         suchNon-Resident Shareholder does not have a substantial interest or a deemedsubstantial interest in us.

Reference is made to the section “Dutch Taxation of Resident Shareholders” fora description of the concepts “substantial interest” and “deemed substantialinterest.”

***Gift and Inheritance Taxes.******  ***No liability for gift or inheritance taxeswill arise in The Netherlands with respect to an acquisition of the ordinaryshares or ADSs by way of a gift made by, or on the death of, a Non-ResidentShareholder, unless:

(1)         such Non-Resident Shareholder at the time of the gifthas or at the time of his death had an enterprise or an interest in anenterprise that is or was, in whole or in part, carried on through a permanent 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 or were attributable; or

(2)         in thecase of a gift of the ordinary shares or ADSs by an individual who at the timeof the gift was a Non-Resident Shareholder, such individual dies within 180days after the date of the gift, while (at the time of his death) beingresident or deemed to be resident in The Netherlands.

For purposes of Dutchgift and inheritance tax, an individual who holds Dutch nationality will bedeemed to be resident in The Netherlands if he has been resident in TheNetherlands at any time during the ten years preceding the date of the gift orhis death. For purposes of the Dutch gift tax, an individual not holding Dutchnationality will be deemed to be resident in The Netherlands if he has beenresident in The Netherlands at any time during the twelve months preceding thedate of the gift.

***Other Taxes and Duties.******  ***No Dutch registration tax, transfer tax,stamp duty or any other similar documentary tax or duty will be payable in TheNetherlands in 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.federal income tax considerations regarding the purchase, ownership anddisposition of ordinary shares or ADSs to an eligible U.S. holder. You are aneligible U.S. holder if you are a resident of the United States for purposes ofthe tax treaty between The Netherlands and the United States (the “tax treaty”)and are fully eligible for benefits under the tax treaty. You generally will beentitled to the benefits of the tax treaty if you are:

·       thebeneficial owner of ordinary shares or ADSs (and of the dividends paid withrespect to such ordinary shares or ADSs);

·       anindividual resident of the United States, a U.S. corporation, or a partnership,estate or trust to the extent your income is subject to taxation in the UnitedStates as the income of a resident, in your hands or in the hands of yourpartners or beneficiaries;

·       notresident in The Netherlands for Dutch tax purposes; and

·       notsubject to an anti-treaty shopping rule.

You generally 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.

The summary does not purport to be a comprehensive description of all ofthe tax considerations that may be relevant to your decision to purchaseordinary shares or ADSs. In particular, the summary does not addressconsiderations that may be applicable to you if you will not hold ordinaryshares or ADSs as capital assets, or if you are a taxpayer subject to specialtax rules, such as a bank, tax-exempt entity, insurance company, a regulatedinvestment company, a pension fund, a real estate investment trust, a dealer insecurities or currencies, a person that holds ordinary shares or ADSs as partof an integrated investment (including a “straddle”) comprised of ordinaryshares or ADSs and one or more other positions, and a person who owns or isdeemed to own 10% or more of any class of our stock. The summary is based onlaws, treaties and regulatory interpretations in effect on the date of this document,all of which are subject to change. You should consult your own advisersregarding the tax consequences of an investment in the ordinary shares or ADSsin light of your particular circumstances, including the U.S. taxconsiderations discussed below and the effect of any state, local or othernational laws.

**Based on our auditedfinancial statements and relevant market data, we believe that we were nottreated as a “passive foreign investment company” or “PFIC” for U.S. federalincome tax purposes with respect to the year 2005. In addition, based on ourcurrent expectations regarding the value and nature of our assets, the sourcesand nature of our income, and relevant market data, we do not anticipatebecoming a PFIC in the year 2006 or thereafter. We believe, however, that wewere or may have been a PFIC for U.S. federal income tax purposes with respectto the years before 2005. In order to avoid being subject to unfavorable U.S.federal income tax rules applicable to PFICs (the “PFIC rules”) with respect toour ordinary shares or ADSs in the future, U.S. holders that held our ordinaryshares or ADSs at any time before 2005 may wish to make a deemed sale electionwith respect to their ordinary shares or ADSs. See “Passive Foreign InvestmentCompany Rules.”**

For U.S. federal income tax purposes and for purposes of the tax treatybetween The Netherlands and the United States, beneficial owners of ADSs willbe treated as the owners of the underlying ordinary shares represented by thoseADSs.

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***Taxation of Dividends***

Subject to the discussion below under “Passive Foreign Investment CompanyRules,” the gross amount of dividends distributed by us (including amountswithheld in respect of Dutch withholding tax) generally will be subject to U.S.federal income taxation as foreign source dividend income, and will not beeligible for the dividends received deduction. Subject to certain exceptionsfor positions that are hedged or held for less than 60 days, an individual U.S.holder generally will be subject to U.S. taxation at a maximum rate of 15% inrespect of dividends received after 2002 and before 2009, unless we were in theyear prior to the year in which the dividend was paid, and are, in the year inwhich the dividend is paid, a PFIC. As described above, we believe that we werenot a PFIC 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 may claim the benefit of the reduced withholding rate of 15 percentthat is available under the tax treaty between The Netherlands and the UnitedStates by submitting a duly completed Form IB 92 USA that has beencertified by a financial institution (typically the entity that holds theordinary shares or ADSs as custodian for the holder). If we receive therequired documentation prior to the relevant dividend payment date, we mayapply the reduced withholding rate at source. If you fail to satisfy theserequirements prior to the payment of a dividend, you may claim a refund of theexcess of the amount withheld over the tax treaty rate by filing Form IB92 USA together with a supplemental statement with the Dutch tax authorities.Pension funds and tax-exempt organizations qualifying for a complete exemptionfrom tax are not entitled to claim tax treaty benefits at source, and insteadmust file claims for refund by filing Form IB 95 USA.

Subject to applicable limitations and to the special considerationsdiscussed below, Dutch withholding tax at the 15% tax treaty rate will betreated as a foreign income tax that is eligible for credit against your U.S.federal income tax liability or, at your election, may be deducted in computingtaxable income. Foreign tax credits will not be allowed for withholding taxesimposed in respect of certain short-term or hedged positions and may not beallowed in respect of arrangements in which your expected economic profit,after non-U.S. taxes, is insubstantial. You should consult your own advisers concerningthe implications of these rules in light of your particular circumstances.

***Taxation of Capital Gains***

Subject to the discussion below under “Passive Foreign Investment CompanyRules,” gain or loss realized by you on the sale or other disposition ofordinary shares or ADSs will be capital gain or loss in an amount equal to thedifference between your basis in the ordinary shares or ADSs and the amountrealized on the disposition (or its dollar equivalent, determined at the spotrate on the date of disposition, if the amount realized is denominated in aforeign currency). The gain or loss will be long-term gain or loss if theordinary shares or ADSs were held for more than one year. The net amount oflong-term capital gain recognized by an individual U.S. holder generally issubject to taxation at a maximum rate of 20%; however, net long-term capitalgain recognized by an individual U.S. holder after May 5, 2003 and before January 1,2009 generally is subject to taxation at a maximum rate of 15%.

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***Passive Foreign Investment Company Rules***

Unfavorable U.S. tax rules (the “PFIC rules”)apply to companies 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 passive income for purposes of thePFIC rules; or

·       theaverage percentage of the value of our assets that produce or are held for theproduction of passive income is at least 50%.

Based on our audited financial statements and relevant market data, webelieve that we were not treated as a PFIC for U.S. federal income tax purposeswith respect 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 before2005.

If we are classified as a PFIC in any year, then a U.S. holder who holdsshares during that year and does not make a mark-to-market election or aqualified electing fund (“QEF”) election will be subject to a special tax atordinary income tax rates on certain dividends that we pay and on gainsrealized on the sale of ordinary shares or ADSs (“excess distributions”) in allsubsequent years, without regard to whether we were a PFIC in the year theexcess distribution was received. The amount of this tax will be increased byan interest 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 we were a PFIC in the past, U.S. holders that held our ordinary sharesor ADSs at any time during the years when we were a PFIC and did not make amark-to-market election or a QEF election will generally continue to be subjectto the PFIC rules described above, even though we later ceased to qualifyas a PFIC. You can generally avoid the future application of the PFIC rules bymaking a deemed sale election with respect to your ordinary shares or ADSs foryour taxable year that includes the last day of our last taxable year duringwhich we qualified as a PFIC (the “termination date”). If you make the deemedsale election with respect to our ordinary shares or ADSs, you generally willbe treated as having sold all your ordinary shares or ADSs for their fairmarket value on the termination date. The deemed sale generally will be taxedto you as an excess distribution. Any loss realized on the deemed sale will notbe recognized. If you made a mark-to-market election or a QEF election withrespect to your ordinary shares or ADSs in the past, you will not be requiredto include any mark-to-market gain or loss with respect to our ordinary sharesor ADSs (in the case of the mark-to-market election) or to include your prorata share of our ordinary earnings and net capital gain (in the case of theQEF election) for the years during which we do not qualify as a PFIC.

**The PFIC rules areextremely complex, and you should consult your own tax advisers regarding theU.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 ADSsthat are made in the United States or by a U.S.-related financialintermediary will be subject to information reporting and may be subject tobackup withholding unless you:

·       are acorporation or other exempt recipient; or

102

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·       provide an IRS Form W-9 or anacceptable substitute form, certifying your taxpayer identification number andthat no loss of exemption from backup withholding has occurred.

If you are not a U.S. person, you generally are not subject to these rules,but may be required to provide certification of non-U.S. status in order toestablish that you are exempt.

**Dividends and Paying Agents**

Not applicable.

**Statement by Experts**

Not applicable.

**Documents on Display**

We are subject to theinformational requirements of the Securities Exchange Act of 1934, as amended,and in accordance therewith file information with the U.S. Securities andExchange Commission (“SEC”). You may read and copy this information at thefollowing location:

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.*

**Item 11.**                 Quantitative and Qualitative Disclosuresabout Market Risk

We are exposed to market risk related to changes in interest rates andforeign currency exchange rates between the U.S. dollar, Swiss Franc, KoreanWon, and the Euro.

*Interest Rate Sensitivity*

We are exposed to interest rate fluctuations in connection with our cashand cash equivalents that have maturities of less than three months, and inconnection with a portion of our short term loans. Substantially all of ourcash and cash equivalents consist of bank deposits. We also hold a limitedamount of commercial paper issued by European institutions that are at leastAA-rated and that have a maturity of less than three months. The securities inour investment portfolio are not leveraged, are classified asavailable-for-sale and are, due to their very short-term nature, subject tominimal interest rate risk. We currently do not hedge interest rate exposure.Because of the short-term maturities of our investments, we do not believe thatan increase in market rates would have any negative impact on the realizedvalue of our investment portfolio.

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*Fair Value Interest Rate Risk*

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

*Foreign Currency Exchange Risk*

The majority 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 of Securities Other than EquitySecurities

This item is notapplicable.

104

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**PART II**

**Item 13.**                 Defaults, Dividend Arrearages andDelinquencies

None.

**Item 14.**                 Material Modifications to the Rights ofSecurity Holders

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

**Item 16A.**         AuditCommittee Financial Expert

The members of our audit committee are all independent, non-executivemembers of the supervisory board. Our audit committee is in compliance with allof the relevant rules and regulations of The Netherlands. We believe thatthe members of our audit committee have sufficient financial and otherexperience to perform their responsibilities on the committee. Notwithstandingthe committee members’ financial and other experience, the audit committee doesnot include a “financial expert” as that term is strictly defined in the rules promulgatedunder the Sarbanes-Oxley Act of 2002.

**Item 16B.**        Codeof Ethics

During 2003, we adopted a code of business conduct and ethics that appliesto all employees 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.

**Item 16C.**        PrincipalAccountant Fees and Services

The Sarbanes-OxleyAct of 2002 requires that audit committees pre-approve all services provided bythe Company’s independent auditor. This process is critical to the auditormaintaining independence. Our process requires that all services provided bythe independent auditor be pre-approved by the audit committee.

105

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During 2004 and 2005 we paid the following amounts toour auditors 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 |   |

 

**Audit fees**

Audit fees include fees associated with the annual audit, interim reviews,required statutory audits and services that only the independent auditor canreasonably provide, such as services associated with documents issued inconnection with securities offerings.

**Audit-related fees**

Audit-related fees include accounting consultations on financial andaccounting reporting standards.

**Tax fees**

Tax fees primarily represent services provided related tomiscellaneous consultations on tax matters.

**Item 16D. Exemptions from the Listing Standards for AuditCommittees**

Not applicable.

**Item 16E. Purchases of Equity Securities by the Issuer andAffiliated Purchasers**

Neither we nor anyaffiliated purchaser have purchased any of our equity securities during theyear ended December 31, 2005.

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**PART III**

**Item 17.**                 Financial Statements

The registrant has responded to Item 18 in lieu of responding to this item.

**Item 18.**                 Financial Statements

See pages F-1 through F-27 of 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 |
|            | 13.1       |            |   | Certification of CEO and CFO pursuant to Section 906  of the Sarbanes-Oxley Act of 2002 |
|            | 99.1       |            |   | Crucell Code of Ethics **** |

 

107

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Confidentialtreatment has been granted with respect to portions of the exhibit indicated bya dagger (†). The omitted portions have been filed separately with theSecurities and Exchange Commission.

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*                                 As previously filed with the Securities and Exchange Commission on October 24,2000 by Crucell N.V. in an Exhibit to the Form F-1.

**                          As previously filed with the Securities and Exchange Commission on June 28,2001 by Crucell N.V. in an exhibit to the Form 20-F.

***                   As previously filed with the Securities and Exchange Commission on April 18,2003 by Crucell N.V. in an exhibit to the Form 20-F.

****            As previously filed with the Securities and Exchange Commission on February 27,2004 in an exhibit to the Form 20-F.

*****     As previously filed with the Securities and Exchange Commission on April14, 2005 in an exhibit to the Form 20-F.

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**SIGNATURE**

The registrant hereby certifies that itmeets all of the requirements for filing on Form 20-F and that ithas duly caused and authorized the undersigned to sign this annual report onits behalf.
| Crucell N.V. |
|--------------|
| By:          |   | RONALD H. P. BRUS |   | By: |   | LEONARD KRUIMER |
|         |   | Ronald  H. P. Brus |   |   |   | Leonard  Kruimer |
|         |   | *Chief  Executive Officer* | * * | * * | * * | *Chief  Financial Officer* |

 

Date:June 29, 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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**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

The Board of Supervisory Directors andShareholders of Crucell N.V.

We have audited the accompanyingconsolidated balance sheets of Crucell N.V. as of December 31, 2005 and2004, and the related consolidated statements of operations, shareholders’equity and cash flows for each of the three years in the period ended December 31,2005. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance withthe standards 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,the consolidated 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 an arrangementand delivery of the associated technology, the Company recognizes initial feesfrom such arrangements as revenues over the period of its continuingperformance obligations. Incremental fees from research and developmentactivities are recognized as revenues earned over the period of the developmentcollaboration or the manufacturing obligation. All fees received under theCompany’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 future productsales of the licensee, if any, under the license agreement. Royalties arerecognized 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 taxableincome in the years in which those temporary differences are expected to berecovered or settled. The effect on deferred tax assets and liabilities of achange in tax rates is recognized in the results of operations in the periodthat includes 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; furniture andlaboratory equipment, five years; and leasehold improvements, the shorter ofthe lease term or ten years. Land is not depreciated. Intangible assets consistof developed technology acquired in connection with business combinations in2000 and the purchase of certain technology in 2004. Developed technology isamortized 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 impairment wheneverevents or changes in circumstances indicate the carrying amount of the assetsmight not be recoverable. Conditions that would necessitate an impairmentassessment include an impairment of goodwill of the associated assets, asignificant decline in the observable market value of an asset, a significantchange in the extent or manner in which an asset is used, or a significantadverse change  that would indicate thatthe carrying amount of an asset or group of assets is not recoverable. Forlong-lived assets to be held and used, the Company recognizes an impairmentloss only if its carrying amount is not recoverable through its undiscountedcash flows and measures the impairment loss based on the difference between thecarrying amount and fair value. There was no impairment of long-lived assets,including intangible assets, during the three year period ended 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’sfinancial instruments include primarily cash and cash equivalents, accountsreceivable and other current assets, securities available for sale, accountspayable, accrued and other liabilities, capital lease obligations and long-termdebt. 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**

Equity securities available for sale that have readily determinablefair values are stated at market value determined by quoted market prices,based on the Company’s designation of such securities at the time of purchaseor when an event occurs causing the Company to re-evaluate itsinvestments. Unrealized holding gains and losses for securities availablefor sale are excluded from earnings and reported in other comprehensive incomeuntil realized.

**ComprehensiveIncome (Loss)**

For the yearsended December 31, 2005, 2004 and 2003 respectively, comprehensive lossamounted to €4,226, €21,331 and €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).

**Concentrationof Credit Risk**

The Companyextends credit based on an evaluation of the customer’s financial condition,without requiring collateral. The Company monitors its exposure related tocredit losses and maintains 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.**   Summaryof Significant Accounting Policies (Continued)

**TradeAccounts Receivables and Allowance for Doubtful Accounts**

Trade accounts receivables do not carry any interest and are stated attheir nominal value as reduced by appropriate allowances for uncollectibleamounts. The collectibility of accounts receivable is assessed based on acombination of factors. In cases where the Company is aware of circumstancesthat may impair a specific customer’s ability to meet its financialobligations, the Company records a specific allowance against amounts due, andthereby reduces the net recognized receivable to the amount the Companyreasonably believes will be collected. For all other customers, the Companyrecognizes allowances for doubtful accounts based on the length of time thereceivables are past due, the current economic conditions and the Company’shistorical 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.

**NewAccounting Pronouncements**

In December 2004,the Financial 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 2005the Emerging Issue Task Force of the FASB issued EITF 05-6 “Determiningthe Amortization 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.**   Summaryof 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 assetsincludes debt acquisition costs amounting to €700 incurred in December 2005. These costs will be amortizedover the term of the mortgage loan of 15 years. Amortization is charged to thestatements of operations as interest expense. Debt acquisition costs will beginto be amortized in fiscal year 2006 and no amortization expense has beenrecognized in the year ended December 31, 2005.

In connectionwith the public offer for Berna Biotech AG, Crucell incurred costs amounting toapproximately €3,500that are capitalized as prepaid acquisition costs as of December 31, 2005.Upon acceptance of the offer, these expenses will be part of the purchaseprice, and subject to purchase price allocation.

**Note 4.   EquityInvestment in Galapagos N.V.**

In June 1999, the Company togetherwith Tibotec Group N.V., an unrelated party, established a 50/50 joint venture,Galapagos N.V. (“Galapagos”), registered in Mechelen, Belgium to carry outcertain functional 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 ofintangible assets 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 is net of accumulated amortization of €8,093, €6,623,and €4,657 at December 31,2005, 2004 and 2003, respectively.

The purchase ofdeveloped technology in 2004 relates to the acquisition of ChromaGenics B.V.(see Note 1.). The estimated aggregate amortization expense for each of thenext respective five years is €803, €803, €803, €168, and €0 respectively.

**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, theCompany held laboratory equipment under capital leases with a cost of €4,021 and €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, €212 and €221 during 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 31,2005 the Company has contractual commitments for the construction of aproduction facility with the remaining commitment amounting to approximately €10,500.

**Note 7.   LongTerm Debt**

In December 2005, the Company enteredinto a mortgage 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 an additional €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 loan has a 15-year term and bears interest at 4.55percent for the first five years, after which time the rates will berenegotiated. The loan is secured by the land and building and a compensatingbalance arrangement with a bank in the amount of €10,000. For the first year, interest is accrued to the loan and nopayments of principal or interest are required. The loan will be repaid throughmonthly payments over 15 years, starting January 1, 2007, with a balloonrepayment of €10,000after 15 years.

Principal payments on the mortgage loan, when fully drawn, are due asfollows 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 differencebetween the total 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**

**ShareCapital**

The Company’s authorized share capitalamounts to €40,800divided into: 85,000,000 ordinary shares, and 85,000,000 preference shares,each with a par value of €0.24. Asof December 31, 2005, there were 41,440,613 ordinary shares issued andoutstanding. No preference shares are 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,the Company privately placed 3,600,000 ordinary shares at €14.50 per share, resulting in net proceeds for the Company of €50,112.

Asof December 31, 2004 the Company had 10 issued and outstanding priorityshares, all of which were held by Stichting Prioriteit Crucell (PriorityFoundation). The Priority Foundation, which was able to make bindingnominations for the supervisory board members, transferred the priority sharesto the Company in exchange for €0.24 per priority share. The nomination right has been transferredto the Nomination Committee of the supervisory board. The outstanding priorityshares have been revoked and swapped for ten ordinary shares per November 21,2005.

All of thepreference shares are held by a foundation called Stichting Preferente AandelenCrucell (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 aresolution of the shareholders, the Company may repurchase up to10 percent of its outstanding share capital through December 2, 2006.No repurchases have occurred through December 31, 2005.

**Stock–Based Compensation**

*Stock Option Plans*

The Companymaintains stock option plans whereby the remuneration committee of thesupervisory board may grant options to employees, directors and members of thesupervisory board, which are described further below. The compensation costthat has been included in operating expenses for those plans was €2,700, €2,566and  €2,696 in 2005, 2004 and 2003 respectively.

In December 2004,the supervisory board approved a new option plan for 2005 providing for thegrant of stock options to non-management committee members for a maximum of 1%of issued 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)

thedifference between the total proceeds from the sale of shares and the aggregateexercise price. The portion of the profits payable to the Company decreasesratably over three to four years. The relevant portion of any profits derivedby the employee 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 connectionwith the award of certain options in the past, a cash bonus plan is applicable.In accordance 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,the supervisory board approved an option plan (the “2003 Plan”) wherebypreviously awarded options to employees and members of the supervisory board withan exercise price of €21.00 per share could be exchanged for an equal number of newoptions (the “replacement options”). The replacement options have an exerciseprice of €3.49, which was 161% of theaverage 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 were replaced under the new option plan, resultingin incremental deferred compensation of €1,516 or €1.17 peroption. 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 alloutstanding stock options to the supervisory board were modified such thatoptions vest immediately and are no longer subject to profit retributionprovisions. The Company recognized compensation expense of €495 representing the total amount of deferred compensationassociated with options held by members of the supervisory board.

In April 2004, the supervisory boardapproved a new option plan (the “2004 Plan”) whereby employees and members ofthe supervisory board are granted options with an exercise price 126% greaterthan the average closing stock price of the Company on the three days precedingthe option grant date and have a five year life. The options are subject toprofit retribution 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 Companyaccounts for its employee stock options under the fair value method. The fairvalue of options was estimated at the date of grant using the Black-Scholesoption pricing 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 onU.S. Treasury securities in effect at the time of grant. Expected volatility isbased on the historical volatility of the Company’s stock. The expected life ofthe options granted is an estimate based on the contractual term of the optionsand historical behavior. The weighted average fair value of options grantedduring the years ended December 31, 2005, 2004 and 2003 was €10.80, €3.28 and €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 ofthe stock option 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 followingtable summarizes 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“STI Plan”), which allows for the issuance for up to 75,015 shares of commonstock, the Company granted select executives share awards whose vesting iscontingent upon meeting various Company-wide, departmental and individualperformance goals 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, includinga requirement not to exceed budgeted cash outflows as a significant item whichif met 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 than the fair value of the shares on the dateof grant of €21.10. InDecember 2005, 68,108 STI Plan shares were granted to select executives,of which the Company expects to issue 34,054 shares of common stock relatedthereto in fiscal 2006 as the remaining amounts due under the STI Plan to theemployees 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 Planwas estimated on the date of grant assuming the performance goals will beachieved by multiplying the number of shares available to be granted by thegrant date fair value of the Company’s shares of €21.10. As of December 31, 2005, there was €1,534 of total recognized compensation costrelated to these share-based compensation arrangements granted under the STIPlan included in accrued compensation and related benefits in the accompanyingconsolidated balance sheets.

The Company also has a 2005 Long-termIncentive Plan (the “LTI Plan”), which allows for the issuance for up to 36,842shares of common stock to be granted to select executives with vestingcontingent upon meeting various market-based goals, including a requirement ofa certain share price increase over a three year period and then total sharesto be granted after achieving the increase would be based on the Company’sranking in various European and U.S. sector indexes at the end of themeasurement period. Depending on the level of achievement of these marketmeasures, at the end of three years the number of shares vesting could be 0%-200%.Shares granted in 2005 under the LTI Plan were at the share price at thebeginning of the year at €10.10, which is lower than the fair value of the shares on the dateof 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 Planwas estimated 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 impliedyield currently 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.

Theweighted-average grant-date fair value of LTI Plan shares granted was €30.04. As of December 31, 2005, there was €1,063 of total unrecognized compensation costrelated to nonvested share-based compensation arrangements granted under theLTI Plan; that cost is expected to be recognized over a period of 2.0 years.Compensation cost recognized during the year ended December 31, 2005related to the LTI Plan amounted to €44.

*StockOption Grants to Non-Employees*

The Company has issued stock options tovarious non-employee consultants in connection with consulting agreements overthe years. These non-employee stock options included exercise prices greaterthan or equal to the fair market value of the underlying common stock on thedate of grant and the exercise prices range from  €3.49 to €21.38 pershare with expiration dates ranging from May 2010 through December 2011.During 2005, the Company issued stock options to purchase 58,000 shares ofcommon stock to a few consultants with exercise prices ranging from €15.40 to €21.38 andexpiration dates ranging from May 2010 through November 2010.

The consulting agreements can be terminatedby the Company at any time and only those stock options vested as of the dateof termination 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 €4.77 expiration dates ranging from May 2010 through December 2011.

In connection with these stock optiongrants to non-employees, the Company is required to record compensation expensebased on a Black-Scholes valuation model and amortized over the consulting orvesting period of the grant. The assumptions used in the Black-Scholesvaluation model for these non-employee grants are based on the same criteria asused for employee grants except that the expected term is equal to thecontractual life of the grant as required by EITF No. 96-18. TheCompany re-values the unvested portion of these stock options at each reportingperiod as a result of the requirement for variable accounting for non-employeegrants. As of December 31, 2005, assuming the valuation at December 31,2005 would remain consistent over the future service periods, the Company wouldrecognize compensation expense related to these non-employee grants amountingto €592 overthe next 46 months. The Company recorded compensation expense associated withthese stock options of €3,043, €3,542 and €182, forthe years ended December 31, 2005, 2004 and 2003, respectively.

Stock optiongrants to non-employees are made pursuant to approved stock option plans andactivity related thereto is included in the tables above with the employeegrants of the approved plans.

*Warrants*

In 2003, theCompany granted warrants to acquire 250,000 ordinary shares with an exerciseprice of €3.00 pershare to a consultant in exchange for services. The warrants were earned by theconsultant 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**

Total minimum payments under non-cancelable operating leases andcapital leases are as 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 €1,165 for the years ended December 31, 2005, 2004 and 2003,respectively.

The Company has future minimum paymentsunder non-cancelable research, licensing and other agreements whereby it isobligated to make payments of €2,115 and €1,618 in2006 and 2007 respectively, with no required minimum payments thereafter.

At December 31, 2005 the Company hasentered into contractual commitments for the completion of the construction ofa production facility amounting to approximately €10,500.

The Company has compensating cash balancearrangements that amount to €14,148 at December 31, 2005, mainly related to operating leasecontracts and the mortgage loan.

The Company isparty to claims and litigation incidental to the business. The Company believesthe ultimate resolution of these matters will not have a material adverseeffect on its financial position, results of operations, or cash flows.

**Note 10.   CollaborationAgreements**

In December 2002, the Company enteredinto a collaboration 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.**   CollaborationAgreements

the Companyreceived an up-front non-refundable licensee fee and in June 2004 theCompany received a non-refundable milestone payment. Additional payments fromDSM may be triggered upon certain dates and the attainment of certainmilestones. Due to the Company’s continuing performance obligations related tothe novel use of its technology during the development period, the up-frontlicense fee was initially recognized as deferred revenue and is beingrecognized as revenue ratably over four years, the estimated period of development.Milestones, related to scientific and technical achievements are recognized asrevenue when the milestone is obtained.

In December 2005 the Company and DSMannounced that they will strengthen and expand the development of the PER.C6protein and monoclonal antibody licensing business. The two companies willcreate an integrated solution for the production of recombinant proteins andmonoclonal 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.

In December 2003,the Company entered into a collaboration and license agreement with AventisPasteur S.A. (as of 2004 sanofi pasteur S.A. (“Sanofi”)) pursuant to whichSanofi received an exclusive license to research, develop and manufactureinfluenza vaccines based on the Company’s PER.C6 technology. Under the terms ofthe agreement 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 Companymaintains a defined contribution plan in The Netherlands whereby participantsmay contribute 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, €1,032 and€761 for 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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