Unbilled Revenue

         The majority of the Company’s Unbilled Revenue at September 30, 2002 and June 30, 2002 represents clinical materials that have passed quality testing, that the Company has shipped and title has transferred to the collaborator, but the Company has not yet invoiced.  Also included in Unbilled Revenue are costs the Company has incurred in completing development work on behalf of its collaborators but has not yet invoiced.

Prepaid and Other Current Assets

         Included in Prepaid and Other Current Assets at September 30, 2002 and June 30, 2002 is $1.5 million and $1.3 million, respectively, related to prepayments made to an antibody manufacturer to reserve manufacturing space and partial payment for antibody that had not been delivered to the Company at September 30, 2002 and June 30, 2002.  Under the terms of the Company’s shared product license collaboration with British Biotech, the Company is responsible for certain manufacturing and process development costs.  The Company’s actual cost to manufacture huN901 antibody exceeded its original estimates.  In June 2002, the Company and British Biotech agreed that ImmunoGen and British Biotech would share the costs to manufacture antibody in excess of the original estimates and subsequently executed a letter agreement to this effect.  Based upon this agreement with British Biotech, the Company determined that a valuation allowance of $648,000 and $492,000 was required to reduce the value of the prepaid material to its estimated net realizable value as of September 30, 2002 and June 30, 2002, respectively.  During the three months ended September 30, 2002, the Company received a portion of the antibody to be delivered under this contract, thereby reducing the prepaid asset and related reserve by approximately $696,000 and $209,000, respectively.   Subsequent to June 30, 2002, the Company expenses as incurred (or paid, in the case of prepayments) that portion of the cost of antibody that it expects to pay for under the terms of the letter agreement with British Biotech.  During the quarter ended September 30, 2002, the Company recorded $365,000 as research and development expense and a related prepaid asset valuation allowance related to prepayments made to the antibody manufacturer.  The cost of the huN901 antibody that was received by the Company during the quarter and the related reserve are included in raw materials inventory at September 30, 2002.        

Inventory

         Inventory costs primarily relate to clinical trial materials being manufactured by the Company for its collaborators. Inventory is stated at the lower of cost or market.

         Inventory at September 30, 2002 is summarized below:

        Included in inventory is a valuation allowance of $349,000 as of September 30, 2002.  This valuation allowance represents the cost of on-hand conjugate produced for British Biotech that the Company may not realize and, as discussed in Prepaid and Other Current Assets, that portion of the cost of huN901 antibody that exceeds the original estimates that the Company is required to pay under its agreement with British Biotech.  The Company does not believe that it will be reimbursed for the full amount of the cost of the conjugate and has established a reserve of $140,000 to reduce the value of huN901-DM1/BB-10901 inventory to $881,000, the Company’s estimate of the net realizable value at September 30, 2002.  The entire huN901-DM1/BB-10901 conjugate valuation allowance relates to work in process inventory.  The huN901-DM1/BB-10901 conjugate valuation allowance was charged to research and development expense for the year ended June 30, 2002.

        DM1, the Company’s most advanced small molecule effector drug, is the cytotoxic agent used in all of its current TAP product candidates and the subject of most of its collaborations. One of the primary components required to manufacture DM1 is its precursor, ansamitocin P3. Once manufactured, the ansamitocin P3 is then converted to DM1.

        In fiscal 2002, the Company entered into several agreements with two outside vendors to perform large scale manufacture of DM1 and ansamitocin P3.  Under the terms of these agreements, the manufacturers, together with the Company, will improve the fermentation and conversion processes used to generate ansamitocin P3 and DM1, respectively.  Pursuant to these agreements, the two outside vendors will also manufacture, under current Good Manufacturing Processes, large-scale batches of ansamitocin P3 and DM1 to be used in the manufacture of both the Company’s and its collaborators’ products.  Once manufactured, the ansamitocin P3 is delivered from one vendor to the other vendor for conversion to DM1.  At September 30, 2002, the Company had not yet received any final DM1 product from the DM1 manufacturer, although ansamitocin P3 had been delivered from one of the third party manufacturers to the other manufacturer who was in the process of converting the ansamitocin P3 to DM1. 

        The actual amount of ansamitocin P3 and DM1 that will be produced is highly uncertain.  The Company currently anticipates that a significant amount of ansamitocin P3 and DM1 will be manufactured for the Company over the next three to five years at these manufacturers.  If the Company’s and the manufacturers’ process development efforts are successful, the amount of ansamitocin P3 and/or DM1 produced could be higher than expected.  As a result, the Company anticipates that its working capital investment in ansamitocin P3 and DM1 inventory will be significant. 

         The Company produces preclinical and clinical materials for its collaborators either in anticipation or support of clinical trials, or for process development and analytical purposes.  Under the terms of supply agreements with two of its collaborators, the Company receives rolling six month firm fixed orders for conjugate that the Company is required to manufacture and rolling twelve month manufacturing projections for how much conjugate the collaborator expects to need in any given twelve-month period.  The Company’s other collaboration agreements do not require that the collaborators provide firm fixed manufacturing orders, although the collaborators provide the Company with the collaborators’ projected conjugate requirements.  The amount of clinical materials produced is directly related to the number of on-going clinical trials for which the Company is producing clinical material for its collaborators, the speed of enrollment in those trials and the dosage schedule of each clinical trial.  As a result, the actual amount of conjugate that the Company manufactures can differ significantly from the collaborator projections.  To the extent that a collaborator has provided the Company with a firm fixed order, the collaborator will be required to reimburse the Company the full cost of the conjugate, and any margin thereon, even if the collaborator subsequently cancels the manufacturing run. 

        The Company accounts for the DM1 and ansamitocin P3 inventory as follows:

        At September 30, 2002, the Company’s on-hand supply of DM1, including $1.7 million of DM1 inventory the Company acquired from GlaxoSmithKline and the ansamitocin P3 held at its third party manufacturers, represented less than a twelve-month supply based upon current collaborator firm fixed orders and projections.  Any changes to the Company’s collaborators’ projections could result in significant changes in the Company’s estimate of the net realizable value of DM1 and ansamitocin P3 inventory.  Reductions in collaborators’ projections could indicate that the Company has excess DM1 and/or ansamitocin P3 inventory and the Company would then evaluate the need to record additional valuation allowances, included as charges to research and development, to record the DM1 and/or ansamitocin P3 inventory at its estimated net realizable value.  Increases in collaborators’ projections and/or firm fixed orders could result in a reversal of previously established valuation allowances and an associated reduction in research and development expense.

Computation of Net Loss Per Common Share

         Basic and diluted net loss per common share is calculated based upon the weighted average number of common shares outstanding during the period. Diluted net loss per common share incorporates the dilutive effect of stock options, warrants and other convertible securities. Common stock equivalents, as calculated in accordance with the treasury-stock accounting method, equaled 813,556 and 4,403,677 for the three months ended September 30, 2002 and 2001, respectively. Common stock equivalents have not been included in the net loss per common share calculations for the three months ended September 30, 2002 and 2001 because their effect is anti-dilutive.

Comprehensive Loss

         The Company presents comprehensive loss in accordance with Statement of Financial Accounting Standards (SFAS) No. 130, “Reporting Comprehensive Income.” For the three months ended September 30, 2002 and 2001, total comprehensive loss equaled $3.0 million and $675,000, respectively. Comprehensive loss was comprised entirely of net loss and the change in net unrealized gains recognized on available-for-sale securities.

Reclassifications

         Certain prior year balances have been reclassified to conform to current year presentation.

B.            Agreements

         On October 8, 2002, Boehringer Ingelheim GmbH confirmed with the Company that clinical trials of the novel anti-cancer agent composed of ImmunoGen's DM1 Tumor-Activated Prodrug (TAP) technology and Boehringer Ingelheim's anti-CD44v6 antibody had been initiated on or about September 24, 2002. The achievement of this milestone triggered a milestone payment of $1.0 million from Boehringer Ingelheim to ImmunoGen. This milestone payment is included in collaboration revenue in the accompanying statement of operations for the three months ended September 30, 2002. The Company received cash payment of this milestone from Boehringer Ingelheim on October 4, 2002.

         In June 2002, GlaxoSmithKline informed the Company that it has elected not to advance cantuzumab mertansine into Phase II clinical development under the present terms of the companies’ license agreement.  The Company has conducted, and continues to conduct, negotiations with GlaxoSmithKline.  However, should the Company determine that it is not in the best interests of ImmunoGen to enter into a revised agreement with GlaxoSmithKline, or if the Company cannot reach satisfactory terms on a revised agreement, rights to cantuzumab mertansine will be returned to ImmunoGen and the Company will be free to develop and/or relicense the product as it considers most appropriate.

         The Company continues to recognize a portion of the deferred upfront payment received from GlaxoSmithKline over the Company’s estimated period of involvement during development, assuming that the collaboration with GlaxoSmithKline will continue.  At September 30, 2002, approximately $389,000 of the previously received upfront payment remained as deferred revenue.  In the event that the collaboration agreement with GlaxoSmithKline is terminated, the Company will recognize as revenue that portion of the upfront payment that remains in deferred revenue at the date of any such termination.
 
C.            Capital Stock

       In July 1997, the Company’s majority-owned subsidiary, Apoptosis Technology, Inc. (ATI), entered into a collaboration agreement with BioChem Pharma. As previously disclosed in the Company's annual reports on Form 10-K, as part of the agreement, BioChem Pharma received warrants to purchase shares of common stock of the Company equal to $11.1 million, the amount BioChem Pharma invested in ATI during the three-year research term. On July 29, 2002, Shire Biochem, Inc. (Shire), as successor in interest to BioChem Pharma, delivered to the Company a notice of exercise of warrants to acquire the number of shares of common stock of the Company equal to $11.1 million divided by the average of the closing price per share, as reported by Nasdaq, for the five days preceding the exercise of such warrants. As provided by the terms of the warrants, Shire delivered 11,125 shares of ATI in lieu of cash to exercise the warrants.  The Company issued to Shire 4,096,098 shares of restricted common stock of the Company. Upon the request of Shire and pursuant to the Registration Rights Agreement dated July 31, 1997 between the two parties, on September 26, 2002, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission to register the resale by Shire of the shares of common stock issued upon the exercise of the warrants.

         On August 27, 2002, the Company announced that, effective immediately, its Board of Directors had authorized the repurchase of up to 4.1 million shares of the Company's common stock. The repurchases are to be made at the discretion of management and as market conditions warrant. No time limit was set for the completion of the repurchase program.  As of September 30, 2002, the Company had repurchased 952,800 shares of its common stock at a total cost of $3.1 million.

         Under the Company's 2001 Non-Employee Director Stock Plan, approved in November 2001, the Company issued 2,230 shares of common stock and 1,852 stock units to Non-Employee Directors of the Company during the three months ended September 30, 2002.

D.            Commitments and Contingencies

          In March 2002, the Company settled a claim with a third party and its principals (together, the “Settling Parties”) relating to compensation for the provision of services.  The settlement of the claim included the issuance of restricted shares of the Company’s common stock (the “Settlement Proceeds”) in favor of the Settling Parties.  The Settling Parties have recently alleged that the Company failed to disclose material information during the course of the settlement negotiations that had an effect on the value of the Settlement Proceeds.  Attorneys for the Settling Parties have notified the Company that they intend to file a complaint with respect to this matter in the United States District Court for the District of Massachusetts if the issue is not settled. The Company expressly denies these allegations and believes that a settlement of the claim is probable and, accordingly, has accrued $400,000 as the currently estimated amount of settlement. The reserve was charged to general and administrative expense during the three months ended September 30, 2002.

ITEM 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

         Since the Company’s inception, we have been principally engaged in the development of antibody-based cancer therapeutics. Our proprietary, tumor‑activated prodrug, or TAP, technology combines extremely potent, small‑molecule drugs with monoclonal antibodies that recognize and bind specifically to tumor cells. Our targeted delivery technology increases the potency of these cancer‑specific antibodies, which allow our drugs to kill cancer cells with minimal harm to healthy tissue. The cytotoxic agent we currently use in all of our TAP products is the maytansinoid DM1, a chemical derivative of a naturally occurring substance called maytansine.

          We have entered into collaborative agreements that allow companies to use our TAP technology to develop commercial products containing their antibodies.  We also use our proprietary TAP technology in conjunction with our in-house antibody expertise to develop our own anti-cancer products.  We licensed certain rights to our two most advanced, internally developed TAP product candidates to companies that have product development and commercialization capabilities that we wished to access. The terms of the collaborative agreements vary, reflecting the value we add to the development of any particular product candidate, however, the agreements generally provide that we receive upfront and milestone payments, royalties on sales of any resulting products and reimbursement of our fully burdened cost to manufacture preclinical and clinical materials.  Under certain agreements, we receive our fully burdened cost to manufacture preclinical and clinical materials plus a profit margin.  Currently, our collaborative partners include GlaxoSmithKline plc, Genentech, Inc., Abgenix, Inc., British Biotech plc, Millennium Pharmaceuticals, Inc. and Boehringer Ingelheim International GmbH. We expect that substantially all of our revenue for the foreseeable future will result from payments under our collaborative arrangements.

         In June 2002, GlaxoSmithKline informed us that they have elected not to advance cantuzumab mertansine into Phase II clinical development under the present terms of our license agreement.  We have conducted, and continue to conduct, negotiations with GlaxoSmithKline.  However, should we determine that it is not in the best interests of the Company to enter into a revised agreement with GlaxoSmithKline, or we cannot reach satisfactory terms on a revised agreement, rights to cantuzumab mertansine will be returned to ImmunoGen and we will be free to develop and/or re-license the product as we consider most appropriate.

          To date, we have not generated revenues from commercial product sales and we expect to incur significant operating losses for the foreseeable future.  As of September 30, 2002, we had approximately $127.2 million in cash and marketable securities.  We anticipate that our current capital resources and future collaboration payments, if any, will enable the Company to meet its operational expenses and capital expenditures for at least the next three fiscal years. We do not anticipate that we will have a commercially approved product within the foreseeable future.  Research and development expenses are expected to increase in the near term as we continue our development efforts.  In the next nine months we expect to pay out approximately $0.2 million to further expand our development and pilot manufacturing facility in Norwood, Massachusetts.  On July 23, 2002, we signed a sublease on approximately 15,000 square feet of laboratory and office space in a building located at 148 Sidney Street, Cambridge, Massachusetts.  We expect that we will spend in the range of $1.8 million to $2.0 million over the next six to nine months to renovate this additional space.

         On August 27, 2002, we announced that, effective immediately, our Board of Directors had authorized the open market repurchase of up to 4.1 million shares of ImmunoGen common stock. The repurchases are to be made at the discretion of management and as market conditions warrant. No time limit was set for the completion of the repurchase program.  As of September 30, 2002, the Company had repurchased 952,800 shares of its common stock at a total cost of $3.1 million.  We anticipate that we will purchase additional shares of our common stock and that the total cost of the shares repurchased will be significant.  As our repurchases are at management’s discretion and subject to market conditions, we are unable to estimate the total cost of the repurchase program or the period during which such repurchases may take place.

         We anticipate that the increase in our total cash expenditures will be partially offset by collaboration-derived proceeds.  Accordingly, period-to-period operational results may fluctuate dramatically.  We believe that our established collaborative agreements, while subject to specified milestone achievements, will provide funding to assist us in meeting obligations under our collaborative agreements while also allowing for the development of internal product candidates and technologies.  However, we can give no assurances that such collaborative agreement funding will, in fact, be realized. Should we or our partners not meet some or all of the terms and conditions of our various collaboration agreements, we may be required to pursue additional strategic partners, secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.

Critical Accounting Policies

         In December 2001, the U.S. Securities and Exchange Commission (SEC) requested that all registrants discuss their "critical accounting policies" in management's discussion and analysis of financial condition and results of operations. In addition, under the Sarbanes-Oxley Act of 2002, the Company’s independent auditors will be required to disclose in their reports to, and discuss with, the Audit Committee the critical accounting policies used by ImmunoGen.  The SEC indicated that a "critical accounting policy" is one that is both important to the portrayal of the company's financial condition and results and that requires management's most difficult, subjective or complex judgments. Such judgments are often the result of a need to make estimates about the effect of matters that are inherently uncertain. While our significant accounting policies are more fully described in Note A to our consolidated financial statements included in this report, we currently believe the following accounting policies to be critical:

         Revenue Recognition

         We currently have four types of out-license and development contracts. 

• Shared product license - the Company retains commercial rights worldwide excluding the European Union and Japan (shared product license):

         British Biotech plc
  

• Full product license (product license):

         GlaxoSmithKline plc
  

• License to a single target antigen (single target license):
  

         Genentech, Inc.
  

         Boehringer Ingelheim International GmbH

       Millennium Pharmaceuticals, Inc.


• Broad option agreements to acquire a specific number of licenses over a specified time period (broad license):
  

         Genentech, Inc.
  

         Abgenix, Inc.
  

         Millennium Pharmaceuticals, Inc.
  

          Excluding the shared product license agreement, all of these collaboration agreements provide that we will (i) manufacture preclinical and clinical materials for our collaborators, at their request and cost, (ii) receive payments upon our collaborators’ achievements of certain milestones and (iii) receive royalty payments, generally until the later of the last applicable patent expiration or 12 years after product launch.  We are required to provide technical training and any process improvements and know-how to our collaborators during the term of the collaboration agreements.  Practically, once a collaborator receives U.S. Food and Drug Administration (FDA) approval for any drug and the manufacturing process used to produce the drug, our collaborator will not be able to incorporate any process improvements or know-how into their manufacturing process without additional testing and review by the FDA.  Accordingly, we believe that it is very unlikely that our collaborators will require our services subsequent to FDA approval.

          Generally, upfront payments on product and single target licenses are deferred over the period of our substantial involvement. We are available to assist our collaborators during the development of their products.  We estimate this development phase to begin at the inception of the contract and conclude when the product receives FDA approval.  We believe this time period is, on average, six years.  At each reporting period we look at individual product facts and circumstances and review the estimated period of our substantial involvement.  Significant changes in our estimates could result in changes to the deferral period. In the event that the product or a single target license were terminated, we would recognize as revenue any portion of the upfront fee that had not previously been recorded as revenue, but was classified as deferred revenue at the date of such termination.

         We defer upfront payments we receive from our broad option agreements over the period during which the collaborator may elect to receive a license.  These periods are specific to each collaboration agreement, but are between seven and 12 years.  If a collaborator selects an option to acquire a license under these agreements, any option fee is deferred and recorded over the life of the option, generally 12 to 18 months.  If our collaborator exercises an option and we grant a single target license to the collaborator, we defer the license fee and account for it as we would an upfront payment on a single target collaboration agreement, as discussed above.

         Our shared product license collaboration provides for an upfront payment from our collaborator to us that was paid at the start of the agreement and, upon FDA approval of the product, we will pay the collaborator a milestone payment, which we expect will exceed the upfront payment we have received.  We have deferred the upfront payment and anticipate recognizing such revenue concurrent with the milestone payment that is required from us when and if the product receives such FDA approval.  In the event that the product does not receive such FDA approval, we will record as revenue the non-refundable upfront payment we previously received upon the termination of the license agreement.

         When milestone payments are specifically tied to a separate earnings process, revenue is recognized when the milestone is achieved. In addition, when appropriate, we recognize revenue from certain research payments based upon the level of research services performed during the period of the research contract. Deferred revenue represents amounts received under collaborative agreements and not yet earned pursuant to these policies. Where we have no continuing involvement, we will record non-refundable license fees as revenue upon receipt and will record milestone revenue upon achievement of the milestone by the collaborative partner.

         The Company produces preclinical and clinical materials for its collaborators and, at the collaborators’ request, may perform process development work.  The Company also produces preclinical material for potential collaborators under material transfer agreements.  Generally, the Company is reimbursed for its fully burdened cost of producing these materials or providing these services.  The Company recognizes revenue on preclinical and clinical materials when it has shipped the materials, the materials have passed all quality testing required for collaborator acceptance and title has transferred to the collaborator.  The Company recognizes revenue on process development services as those services are performed.  

Inventory

          Inventory costs primarily relate to clinical trial materials being manufactured for our collaborators. Inventory is stated at the lower of cost or market.  We evaluate the estimated net realizable value of inventory at each reporting period.  If necessary, we establish a valuation allowance to record inventory at its estimated net realizable value.  At September 30, 2002, inventory valuation allowances of $349,000 represent the cost of on-hand conjugate and huN901 antibody produced for British Biotech that we may not realize.

         Under the terms of our shared product license collaboration with British Biotech, we are responsible for certain manufacturing and process development costs.  Our actual cost to manufacture the huN901 antibody and conjugate exceeded our original estimates. In June 2002, we agreed that ImmunoGen and British Biotech would share the costs to manufacture huN901 antibody in excess of our estimates and determined the amount we would be reimbursed for huN901-DM1/BB-10901 conjugate and huN901 antibody.    As of September 30, 2002 the reserve related to huN901-DM1/BB-10901 and huN901 antibody inventory was $349,000, which represents that portion of the cost of the on-hand conjugate and huN901 antibody that British Biotech may not reimburse.  During the three months ended September 30, 2002, we wrote down $121,000 of huN901-DM1/BB-10901-conjugate cost against the $261,000 valuation allowance previously established.  The write down did not result in any additional charge or reversal of any portion of the previously established valuation allowance. At September 30, 2002, approximately $140,000 and $209,000 of the inventory valuation allowance represents the remaining cost of on hand conjugate produced for British Biotech and huN901 antibody that we may not realize, respectively.

         DM1, our most advanced small molecule effector drug, is the cytotoxic agent used in all of our current TAP product candidates and the subject of most of our collaborations. One of the primary components required to manufacture DM1 is its precursor, ansamitocin P3. Once manufactured, the ansamitocin P3 is then converted to DM1.

         In fiscal 2002, we entered into several agreements with two outside vendors to perform large scale manufacture of DM1 and ansamitocin P3.   Under the terms of these agreements, we, together with the manufacturers, will improve the fermentation and conversion processes used to generate ansamitocin P3 and DM1, respectively.  Pursuant to these agreements, the two outside vendors will also manufacture, under current Good Manufacturing Processes, large-scale batches of ansamitocin P3 and DM1 to be used in the manufacture of both our own and our collaborators’ products.  Once manufactured, the ansamitocin P3 is delivered from one vendor to the other vendor for conversion to DM1.  At September 30, 2002, we had not yet received any final DM1 product from the DM1 manufacturer, although ansamitocin P3 had been delivered from one of the third party manufacturers to the other manufacturer who was in the process of converting the ansamitocin P3 to DM1.

         The actual amount of ansamitocin P3 and DM1 that will be produced is highly uncertain.  We anticipate that a significant amount of ansamitocin P3 and DM1 will be manufactured for us over the next three to five years at these manufacturers.  If our and our manufacturers’ process development efforts are successful, the amount of ansamitocin P3 and/or DM1 produced could be higher than expected.  As a result, we anticipate that our working capital investment in ansamitocin P3 and DM1 inventory will be significant. 

          We produce preclinical and clinical materials for our collaborators either in anticipation or support of clinical trials, or for process development and analytical purposes.  Under the terms of supply agreements with two of our collaborators, we receive rolling six month firm fixed orders for conjugate that we are required to manufacture and rolling twelve month manufacturing projections for how much conjugate the collaborator expects to need in any given twelve month period.  Our other collaboration agreements do not require that the collaborators provide firm fixed manufacturing orders, although the collaborators provide us with their projected conjugate requirements.  The amount of clinical materials produced is directly related to the number of on-going clinical trials for which we are producing clinical material for our collaborators, the speed of enrollment in those trials and the dosage schedule of each clinical trial.  As a result, the actual amount of conjugate that we manufacture can differ significantly from the collaborator projections.  To the extent that a collaborator has provided us a firm fixed order, the collaborator will be required to reimburse us the full cost of the conjugate, and any margin thereon, even if the collaborator subsequently cancels the manufacturing run. 

         We account for the DM1 and ansamitocin P3 inventory as follows:

         At September 30, 2002, our on-hand supply of DM1, including $1.7 million of DM1 inventory we acquired from GlaxoSmithKline and the ansamitocin P3 held at its third party manufacturers, represented less than a twelve-month supply, based upon current collaborator firm fixed orders and projections. Any changes to our collaborators’ projections could result in significant changes in our estimate of the net realizable value of our DM1 and ansamitocin P3 inventory.  Reductions in collaborators’ projections could indicate that we have excess DM1 and/or ansamitocin P3 inventory and we would then evaluate the need to record additional valuation allowances, included as charges to research and development, to record the DM1 and/or ansamitocin P3 inventory at its estimated net realizable value.  Increases in collaborators’ projections and/or firm fixed orders could result in a reversal of previously established valuation allowances and an associated reduction in research and development expense.

RESULTS OF OPERATIONS

Comparison of Three Months ended September 30, 2002 and 2001

Revenues

         Our total revenues for the three months ended September 30, 2002 were $2.3 million compared with $1.4 million for the three months ended September 30, 2001.  The 65% increase in revenues in the quarter ended September 30, 2002 compared to the same period in the prior year is primarily attributable to a milestone achieved under our single target license agreement with Boehringer Ingelheim. On October 8, 2002, Boehringer Ingelheim confirmed to us that clinical trials of the novel anti-cancer agent composed of ImmunoGen's DM1 Tumor-Activated Prodrug (TAP) technology and Boehringer Ingelheim's anti-CD44v6 antibody had been initiated on or about September 24, 2002. The achievement of this milestone triggered a milestone payment of $1.0 million from Boehringer Ingelheim to us.  This milestone payment was recognized as revenue during the three months ended September 30, 2002.  We received cash payment of the milestone from Boehringer Ingelheim on October 4, 2002.

         During the three months ended September 30, 2002 we recognized collaboration revenue of $42,000 from GlaxoSmithKline, $161,000 from Genentech, $125,000 from Abgenix, $111,000 from Millennium and the $1.0 million from Boehringer Ingelheim referred to above.  During the same period in 2001, we recognized collaboration revenue of $51,000 from GlaxoSmithKline, $177,000 from Genentech, $100,000 from Abgenix and $69,000 from Millennium. Deferred revenue of $12.9 million as of September 30, 2002 represents accumulated progress payments received from collaborators pursuant to contract revenues not yet earned.

         We continue to recognize a portion of the deferred upfront payment received from GlaxoSmithKline over our estimated period of involvement during the development of cantuzumab mertansine, assuming that the collaboration with GlaxoSmithKline will continue.  At September 30, 2002, approximately $389,000 of the previously received upfront payment remained as deferred revenue.  In the event that the collaboration agreement with GlaxoSmithKline is terminated, we will recognize as revenue that portion of the upfront payment that remains in deferred revenue at the date of any such termination.

          GlaxoSmithKline is currently completing one phase I clinical trial of cantuzumab mertansine.  The length of this trial is dependent upon how well the remaining patient tolerates the cantuzumab mertansine and the period, if any, during which the patient derives clinical benefit from the administration of the TAP.  The actual length of this trial may vary from our estimates.  Additionally, GlaxoSmithKline is the sponsor of this trial and, as such, has control over the clinical trial schedule and progress.  We are funding a portion of the cost of this on-going phase I clinical trial.  In June 2002, GlaxoSmithKline informed us that they have elected not to advance cantuzumab mertansine into Phase II clinical development under the present terms of our license agreement. We have conducted and continue to conduct negotiations with GlaxoSmithKline. However, should we determine that it is not in the best interests of the Company to enter into a revised agreement with GlaxoSmithKline, or we cannot reach satisfactory terms on a revised agreement, the rights to cantuzumab mertansine will be returned to ImmunoGen and we will either develop and/or re-license the product as we consider most appropriate.

         British Biotech is currently conducting two phase I clinical trials of huN901-DM1/ BB-10901. The first Phase I study is being conducted in the United States. British Biotech is also conducting a second Phase I clinical trial of huN901-DM1/BB-10901 in the United Kingdom. We anticipate that both trials of huN901-DM1/ BB-10901 will be completed in calendar year 2003. However, the actual length of these trials may vary from our estimates.  Additionally, British Biotech is the sponsor of this trial and, as such, has control over the clinical trial schedule and progress.

         In addition to retaining commercial rights to huN901-DM1/BB-10901 worldwide excluding the European Union and Japan, we retain worldwide manufacturing rights.  Under the terms of the contract, we are responsible for all clinical and commercial manufacturing process development.  We continue process development efforts to improve clinical huN901 antibody production.  Under an arrangement with Genzyme Transgenics Corporation, we are investigating the viability of commercial production of huN901 antibody using transgenic goats. We also continue to develop various other processes related to the commercial manufacture of the huN901-DM1/ BB-10901 conjugate.   We anticipate that we will continue to devote significant financial and human resources to these efforts over the next five years.

         Our three internally developed product candidates that are most advanced at September 30, 2002 are huMy9-6-DM1, an anti-IGF1-R antibody and a third product.  huMy9-6-DM1 is a humanized monoclonal antibody conjugated to DM1 and is directed against acute myeloid leukemia.  huMy9-6-DM1 is in early preclinical development.  We intend to continue to conduct preclinical safety and efficacy studies on huMy9-6-DM1.  Pending the successful preclinical development of huMy9-6-DM1 and favorable outcome of preclinical safety and efficacy studies and any other studies, we expect to be prepared to file an Investigational New Drug application (IND) for huMy9-6-DM1 in the next 15 to 21 months.  The actual filing of this IND is dependent upon the development of huMy9-6-DM1 and the results of any and all preclinical studies and the financial and human resources that we are able to direct to the development of the product and completion of the IND application.  As a result, the timing of the filing of this IND, if it occurs at all, may vary from our estimates. 

         Anti-IGF1-R antibody is a naked antibody directed against breast, lung and prostate cancers.  We are performing preclinical experiments to evaluate candidate antibodies and, pending the results of these studies, expect to move one antibody into preclinical development in calendar year 2003.  Our third, undisclosed, potential product is directed at a specific cancer and is in the early stages of preclinical development. 

         The cost to develop new products and advance those products to the IND stage can be significant.  Worldwide antibody manufacturing capacity is currently constrained, and, generally, manufacturing capacity must be reserved months in advance of production.  We anticipate that we will incur substantial costs to reserve manufacturing space and manufacture humanized antibody.  We expect to devote substantial financial and human resources to the development of our three most advanced products for the foreseeable future. We review the results of all preclinical studies and tests to evaluate the viability of products under development.  We evaluate the value of each potential product at each stage of development to determine when, if ever, we should consider out-licensing the product. We are unable to reliably estimate the costs to develop our potential products as a result of the uncertainties related to preclinical and clinical testing. Our decision to move a product into the clinical development phase is predicated upon the results of preclinical tests. We cannot accurately predict which, if any, of our product candidates will move into clinical development. The costs to take a product through clinical trials is dependent upon, among other things, the medical indications, the timing, size and dosing schedule of each clinical trial, the number of patients enrolled in each trial, and the speed at which patients are enrolled and treated. In many cases, we are unable to determine what, if any, indication a particular product candidate will treat until we have completed extensive preclinical studies. Given the uncertainties related to new drug development, we are currently unable to estimate when, if ever, our potential product candidates will generate revenues and cash flows.

          DM1 is the cytotoxic agent that we currently use in the manufacture of all of our collaborators’ and our own conjugates.  In order to enhance manufacturing yields, we have devoted substantial resources to improve the strain of the microorganism that produces ansamitocin P3, the precursor to DM1.  We also continue to devote considerable resources to improve the DM1 manufacturing processes.  In connection with these efforts, we anticipate that we will incur research and development expense of $1.7 million to $2.0 million over the next twelve months.

           We generally do not track our historical research and development costs by project; rather, we track such costs by department and expense category.  For this reason, we cannot accurately estimate with any degree of certainty what our historical costs have been for any particular research and development project. We believe that our research and development costs by project would be confidential and the disclosure of such costs could have a material negative effect on our ability to negotiate with our suppliers, collaborators and potential collaborators and, accordingly, would not disclose our individual project research and development expense.

         Research and development expenses for the three months ended September 30, 2002 increased 64% to $4.1 million from $2.5 million for the three months ended September 30, 2001. Under the terms of our shared product license collaboration with British Biotech, we are responsible for certain manufacturing and process development costs. To date, the actual cost to manufacture huN901 antibody has exceeded our original estimates. In June 2002, we agreed with British Biotech that we would share in the costs of huN901 antibody in excess of our estimates.  We recorded an additional reserve of $365,000 as a charge to research and development expense for the three months ended September 30, 2002 related to prepayments we made to produce huN901 antibody.  The reserve is equal to our estimate of that portion of the cost in excess of our original estimates that we will pay under the terms of our June 2002 agreement with British Biotech. The actual realized value of the prepaid asset may differ from our estimate based upon actual manufacturing yields.

         During the three months ended September 30, 2002 and 2001, we produced three and eight batches of conjugates, respectively, on behalf of certain collaborators. Due to lower utilization of the Norwood pilot manufacturing plant during the three months ended September 30, 2002, manufacturing and quality control costs included in research and development expense increased approximately $650,000.  This increase represents costs of operating the Norwood plant that we were unable to allocate to cost of batches manufactured on behalf of our collaborators during the quarter.  The number of research and development personnel increased to 84 at September 30, 2002 compared to 61 at September 30, 2001.  Research and development base salaries and wages increased by $359,000 in the three months ended September 30, 2002 compared to the three months ended September 30, 2001 as a result of the personnel increases.  Included in salaries and wages for the three months ended September 30, 2001 was approximately $211,000 related to estimated and accrued bonuses.  There is no similar expense or accrual in the three-month period ended September 30, 2002. Patent costs increased $101,000 in the quarter ended September 30, 2002 compared to the same period in the prior year.  We expect future research and development expenses to increase as we continue development of our product candidates and technologies.

         In September 2001 we entered into a process development agreement with a third party. Under the original terms of the agreement, the third party and ImmunoGen shared equally certain development costs.  This agreement required the third party to reimburse us for a portion of certain development costs that we had expensed in prior periods, which, due to the nature of the agreement, was accounted for as a reduction of research and development expenses totaling $439,000 in the quarter ended September 30, 2001.

General and Administrative Expenses

          General and administrative expenses for the three months ended September 30, 2002 increased 45% to $1.7 million from $1.2 million for the three months ended September 30, 2001.  Legal and accounting services increased by approximately $270,000.  A legal settlement reserve of $400,000 was recorded during the three months ended September 30, 2002, for the probable settlement related to a claim asserted against the Company in July 2002.  General and administrative expenses for the three months ended September 30, 2002 and 2001 are reported net of $26,000 and $226,000, respectively, of expenses for which we are entitled to reimbursement from our collaborators.  Included in general and administrative salaries and wages for the three months ended September 30, 2001 was approximately $81,000 related to estimated and accrued bonuses.  There is no similar expense or accrual in the three-month period ended September 30, 2002.

Interest Income

          Interest income for the three months ended September 30, 2002 decreased 46% to $892,000 from $1.6 million for the three months ended September 30, 2001. The decrease is primarily a result of lower rates of return on investments and lower average cash and investment balances.

Realized Gains on Investments

         Realized gains on investments were $153,000 and $8,000 for the three months ended September 30, 2002 and 2001, respectively. The increase is attributable to the timing of investment sales. 

LIQUIDITY AND CAPITAL RESOURCES

         As of September 30, 2002, we had approximately $15.2 million in cash and cash equivalents and $111.9 million of marketable securities. In November 2000, we completed a public offering of 4.0 million shares of our common stock.  Net proceeds of the offering were $124.8 million. We have used a portion of the net proceeds from the offering for working capital and general corporate purposes, including research and development.  Since July 1, 2000, we have financed the net cash used to support operating activities primarily from various collaborative and financing sources. These sources include upfront and milestone payments received under our collaboration agreements with GlaxoSmithKline, Genentech, Abgenix, Millennium, and Boehringer Ingelheim, the sale of equity securities to Abgenix, the exercise of a put option by GlaxoSmithKline, the exercise of stock options and warrants to purchase common stock and income earned on invested assets.

         Net cash used in operations during the three-month period ended September 30, 2002 was $5.8 million compared to $4.0 million during the three-month period ended September 30, 2001. This increase in operational cash use is largely due to the increase in operating expenses discussed previously, as well as the cash payout of the 2002 bonus in July 2002.

         Net cash provided by investing activities was $7.3 million for the three months ended September 30, 2002 compared to $619,000 for the three months ended September 30, 2001.  Cash provided by investing activities in the three months ended September 30, 2002 and 2001 reflects the net proceeds of sales and maturities of marketable securities net of capital purchases. In addition, during the quarter ended September 30, 2002, we paid a deposit of $1.9 million relating to the renovation of the laboratory and office space we have leased at 148 Sidney Street. Capital purchases were $798,000 and $552,000 for the three months ended September 30, 2002 and 2001, respectively, and consisted primarily of costs associated with the purchase of new equipment and the build-out of our existing Norwood, Massachusetts development and pilot manufacturing facility.

         Net cash used for financing activities was $2.5 million for the three months ended September 30, 2002 compared to net cash provided by financing activities of $5.3 million for the three months ended September 30, 2001.  For the three months ended September 30, 2002 net cash used for financing activities reflects the repurchase of 756,600 shares of common stock of the Company.  At September 30, 2002, the Company had commitments to purchase an additional 196,200 shares for $576,602.  For the three months ended September 30, 2001, net cash provided by financing activities reflects the proceeds from exercises of warrants and stock options.  

         We anticipate that our capital resources and future collaborator payments, if any, will enable us to meet our operational expenses and capital expenditures for at least the next three fiscal years.  We believe that the proceeds from our November 2000 public stock offering in addition to our established collaborative agreements will provide funding sufficient to allow us to meet our obligations under all collaborative agreements while also allowing us to develop product candidates and technologies not covered by collaborative agreements. However, we cannot assure you that such collaborative agreement funding will, in fact, be realized. Should we not meet some or all of the terms and conditions of our various collaboration agreements, we may be required to pursue additional strategic partners, secure alternative financing arrangements, and/or defer or limit some or all of our research, development and/or clinical projects.

Risk Factors

THE RISKS AND UNCERTAINTIES DESCRIBED BELOW ARE THOSE THAT WE CURRENTLY BELIEVE MAY MATERIALLY AFFECT OUR COMPANY. ADDITIONAL RISKS AND UNCERTAINTIES THAT WE ARE UNAWARE OF OR THAT WE CURRENTLY DEEM IMMATERIAL ALSO MAY BECOME IMPORTANT FACTORS THAT AFFECT OUR COMPANY.

If our TAP technology does not produce safe, effective and commercially viable products, our business will be severely harmed.

          Our TAP technology is a novel approach to the treatment of cancer. None of our TAP product candidates has obtained regulatory approval and all of them are in early stages of development. Our TAP product candidates may not prove to be safe, effective or commercially viable treatments for cancer and our TAP technology may not result in any meaningful benefits to our current or potential collaborative partners. Furthermore, we are aware of only one antibody-drug conjugate that has obtained FDA approval and is based on technology similar to our TAP technology. If our TAP technology fails to generate product candidates that are safe, effective and commercially viable treatments for cancer, and fails to obtain FDA approval, our business will be severely harmed.

Clinical trials for our product candidates will be lengthy and expensive and their outcome is uncertain.

          Before obtaining regulatory approval for the commercial sale of any product candidates, we and our collaborative partners must demonstrate through preclinical testing and clinical trials that our product candidates are safe and effective for use in humans. Conducting clinical trials is a time consuming, expensive and uncertain process and may take years to complete. Our most advanced product candidates, cantuzumab mertansine and huN901-DM1/BB-10901, are only in the Phase I stage of clinical trials. Historically, the results from preclinical testing and early clinical trials have often not been predictive of results obtained in later clinical trials. Frequently, drugs that have shown promising results in preclinical or early clinical trials subsequently fail to establish sufficient safety and effectiveness data necessary to obtain regulatory approval. At any time during the clinical trials, we, our collaborative partners or the FDA might delay or halt any clinical trials for our product candidates for various reasons, including:

• ineffectiveness of the product candidate;

• discovery of unacceptable toxicities or side effects;

• development of disease resistance or other physiological factors;

• delays in patient enrollment; or

• other reasons that are internal to the businesses of our collaborative partners, which reasons they may not share with us.