IMCLONE SYSTEMS INC/DE - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 0-19612

IMCLONE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)

DELAWARE 04-2834797
(State or other jurisdiction of (IRS employer
incorporation or organization) identification no.)

180 VARICK STREET, NEW YORK, NY 10014
(Address of principal executive offices) (Zip code)

(212) 645-1405
Registrant's telephone number, including area code

NOT APPLICABLE
Former name, former address and former fiscal year, if changed since last report

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

Indicate by check mark whether registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No [ ]

Applicable only to corporate issuers:

Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS

See accompanying notes to consolidated financial statements.

1

IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to consolidated financial statements.

2

IMCLONE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to consolidated financial statements.

3

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The numbers are shown in the text to these Notes to the Unaudited
Consolidated Financial Statements as actual amounts. Tables and charts note
where numbers are shown in thousands.

(1) BASIS OF PRESENTATION AND LIQUIDITY

The consolidated financial statements of ImClone Systems Incorporated
("ImClone Systems" or the "Company") as of June 30, 2003 and for the three and
six months ended June 30, 2003 and 2002 are unaudited. In the opinion of
management, these unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. These financial statements should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with the
Securities and Exchange Commission ("SEC").

Results for the interim periods are not necessarily indicative of results
for the full years.

The Company believes that its existing cash on hand, marketable securities
and amounts to which it is entitled should enable the Company to maintain its
current and planned operations at least through June 2004. The Company is also
entitled to reimbursement for certain marketing and research and development
expenditures and certain other payments, some of which are payable upon the
achievement of research and development milestones. Such contingent amounts
include $500,000,000 in cash-based payments under the development, promotion,
distribution and supply agreement (the "Commercial Agreement") dated September
19, 2001 with Bristol-Myers Squibb Company ("BMS") and E.R. Squibb & Sons L.L.C.
("E.R. Squibb"), as well as up to $16,000,000 in equity-based milestone payments
under the development and license agreement with Merck KGaA for the Company's
lead product candidate, the investigational IgG1 monoclonal antibody ERBITUX(TM)
(cetuximab), of which, $6,000,000 was received during July 2003, and up to
$18,500,000 in cash-based milestone payments under the development agreement
with Merck KGaA, for the Company's investigational monoclonal antibody vaccine,
BEC2. There can be no assurance that the Company will achieve these milestones.
In order to fund its future capital needs, the Company may require significant
levels of additional capital and the Company intends to raise the capital
through additional arrangements with corporate partners, equity or debt
financings, or from other sources, including the proceeds of product sales, if
any, or combinations of the foregoing. There is no assurance that the Company
will be successful in consummating any such arrangements. If adequate funds are
not available, the Company may be required to significantly curtail its planned
operations.

The Company was late in filing its 2002 annual report on Form 10-K as well
as its first quarter 2003 report on Form 10-Q. Timely filing of securities
filings under the Securities Exchange Act of 1934 (the "Exchange Act") is
required by Nasdaq Marketplace Rule 4310(c)(14). The Company regained compliance
with the rules for a public company to remain listed with Nasdaq on July 3,
2003, when it filed its first quarter report on Form 10-Q. If the Company were
to be delisted, such a delisting may have a material adverse effect on the
Company's ability to raise capital in the public markets or otherwise.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

In December 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard ("SFAS") No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure", effective for fiscal years ending
after December 15, 2002. This standard amends SFAS No. 123 "Accounting for
Stock-Based Compensation" to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. The Company has elected to continue to follow the
intrinsic value method of accounting for employee stock options in accordance
with the provisions of Accounting Principles Board Opinion ("APB") Opinion No.
25 "Accounting for Stock Issued to Employees." APB No. 25 does not require the
recognition of compensation expense unless the exercise price

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of employee stock options is less than the market price of the Company's stock
on the date of grant. During 2002 and 2003, the Company's stock option grants
were based on the closing market price of its stock on the date of grant. SFAS
No. 148 also amends certain disclosure requirements related to stock-based
employee compensation, which the Company has adopted and which are reflected
under "Stock-Based Compensation Plans" below.

In August 2001, Statement of Financial Accounting Standards ("SFAS") No.
143, "Accounting for Asset Retirement Obligations" was issued by the Financial
Accounting Standards Board ("FASB") and was effective for the Company in the
first quarter of the year ending December 31, 2003. The new rule requires the
fair value of a liability for an asset retirement obligation to be recognized in
the period in which it is incurred. When the liability is initially recorded, a
cost is capitalized by increasing the carrying amount of the related long-lived
asset. Over time, the liability is accreted to its present value each period,
and the capitalized cost is depreciated over the useful life of the related
asset. To settle the liability, the obligation for its recorded amount is paid
and a gain or loss upon settlement is incurred. The adoption of this statement
did not have a material effect on the Company's financial statements.

STOCK BASED COMPENSATION PLANS

The Company has two types of stock-based compensation plans: a stock option
plan and a stock purchase plan. The Company accounts for its stock-based
compensation plans in accordance with the provisions of APB No. 25, and related
interpretations including the Statement of Financial Accounting Standards Board
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- An Interpretation of APB Opinion No. 25" ("Interpretation No.
44"). Accordingly, compensation expense would be recorded on the date of grant
of an option to an employee or member of the Board of Directors (the "Board")
only if the market price of the underlying stock on the date of grant exceeds
the exercise price. During 2002 and 2003 the Company's stock option grants were
based on the closing market price of its stock on the date of grant.

The fair value of stock options was estimated using the Black-Scholes
option-pricing model. The Black-Scholes model considers a number of variables,
including the exercise price and the expected life of the option, the current
price of the common stock, the expected volatility and the dividend yield of the
underlying common stock, and the risk-free interest rate during the expected
term of the option. The following summarizes the weighted average assumptions
used:

Changes in assumptions used could have a material effect on the pro forma
results.

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Had compensation cost for the Company's stock option grants been determined
based on the fair value at the grant dates for awards consistent with the fair
value method of SFAS No. 123, the Company's net loss and net loss per common
share would have been increased to the pro forma amounts indicated below: (in
thousands, except per share amounts)

The pro forma effect on the net loss for the three and six months ended
June 30, 2003 and 2002 is not necessarily indicative of the pro forma effect on
future periods' operating results.

(2) PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are recorded at cost and consist of the
following: (in thousands)

The Company is building a multiple product manufacturing facility (the
"Multiple Product Facility") adjacent to its single product manufacturing
facility (the "Single Product Facility") in Somerville (Branchburg Township),
New Jersey. This new facility will be a multi-use facility with capacity of up
to 110,000 liters (production volume). The 250,000 square foot facility will
cost approximately $260,000,000, and is being built on land purchased in July
2000. The actual cost of the new facility may change depending upon various
factors. The Company has incurred approximately $109,314,000 in conceptual
design, engineering, pre-construction and construction costs (which are included
in construction in progress in the preceding table), excluding capitalized
interest of approximately $5,513,000, through June 30, 2003. Through June 30,
2003, committed purchase orders totaling approximately $107,561,000 have been
placed with subcontractors and for equipment related to this project. In
addition, $65,689,000 in engineering, procurement, construction management and
validation costs were committed. As of June 30, 2003, $103,451,000 has been paid
relating to these committed purchase orders. During August 2002, the Company
executed an escrow agreement with Branchburg Township (the "Township"). The
agreement required the Company to deposit $5,040,000 in an

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

escrow account until the Company supplies the Township with certain New Jersey
Department of Environmental Protection permits and also certain water and sewer
permits related to the construction of this facility. Interest that accrues on
the escrow deposit is allocated two-thirds to the Company and one-third to the
Township. The escrow deposit was requested by the Township to insure that funds
would be available to restore the site to its original condition should the
Company fail to obtain such permits required for construction at the site. The
Company has satisfied the permit requirements of the Township and received the
escrow principal and accrued interest totaling $5,101,000 in April 2003.

In January 2002, the Company purchased real estate consisting of a 7.5-acre
parcel of land located adjacent to the Company's Single Product Facility and
pilot facility in Somerville, New Jersey. The real estate includes an existing
50,000 square foot building, 40,000 square feet of which is warehouse space and
10,000 square feet of which is office space. The purchase price for the property
and building was approximately $7,020,000, of which approximately $1,125,000
related to the purchase of the land and approximately $5,895,000 related to the
purchase of the building. The Company is using this property for warehousing and
material logistics for its Somerville campus. As of June 30, 2003, the Company
has incurred approximately $1,262,000 for the retrofit of this facility. The
logistics facility was ready for its intended use and put into operation during
January 2003 and depreciation commenced at that time.

The process of preparing consolidated financial statements in accordance
with accounting principles generally accepted in the United States of America
requires the Company to evaluate the carrying values of its long-lived assets.
The recoverability of the carrying values of the Company's Single Product
Facility and its Multiple Product Facility currently being built will depend on
(1) receiving United States Food and Drug Administration ("FDA") approval of
ERBITUX, (2) receiving FDA approval of the manufacturing facilities and (3) the
Company's ability to earn sufficient returns on ERBITUX. Based on management's
current estimates, the Company expects to recover the carrying value of such
assets.

(3) CONTRACT MANUFACTURING SERVICES

In September 2000, the Company entered into a three-year commercial
manufacturing services agreement with Lonza Biologics plc ("Lonza") relating to
ERBITUX. This agreement was amended in June 2001 and again in September 2001 to
include additional services. The total cost for services to be provided under
the three-year commercial manufacturing services agreement is approximately
$86,913,000. The Company has incurred approximately $7,944,000 and $7,410,000 in
the three months ended June 30, 2003 and 2002, respectively, and $23,189,0000
and $14,528,000 for the six months ended June 30, 2003 and 2002, respectively,
and $85,022,000 from inception through June 30, 2003, for services provided
under the commercial manufacturing services agreement.

Under the September 2000 agreement, Lonza manufactures ERBITUX at the
5,000-liter scale under current Good Manufacturing Practices ("cGMP") and
delivers it to the Company. The costs associated with this agreement are
included in research and development expenses when incurred and will continue to
be so classified until such time as ERBITUX may be approved for sale or until
the Company obtains binding obligations from its corporate partners to purchase
such product. In the event of such approval or obligations from its corporate
partners, the subsequent costs associated with manufacturing ERBITUX for
commercial sale will be included in inventory and expensed when sold. During the
term of the agreement, certain batches were cancelled at negotiated rates agreed
to by the parties. All existing commitments under this agreement were completed
during the three months ended June 30, 2003, but the agreement has been
subsequently amended to allow for potential manufacture of a limited number of
additional batches.

In December 2001, the Company entered into an agreement with Lonza to
manufacture ERBITUX at the 2,000-liter scale for use in clinical trials by Merck
KGaA. The costs associated with the agreement are reimbursable by Merck KGaA and
accordingly are accounted for as collaborative agreement revenue and such costs
are also included in research and development expenses in the Consolidated
Statements of Operations.

7

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company did not incur any costs associated with this agreement during the
three or six months ended June 30, 2003, and $1,175,000 was incurred during the
three months ended June 30, 2002 and $3,525,000 in the six months ended June 30,
2002. From inception to June 30, 2003, the Company incurred approximately
$7,183,000 for services provided under this agreement. As of June 30, 2003,
Merck KGaA has reimbursed the Company in full for all the services provided
under this agreement and Lonza has completed its responsibilities under such
agreement.

On January 2, 2002, the Company executed a letter of intent with Lonza to
enter into a long-term supply agreement. The long-term supply agreement would
have applied to a large scale manufacturing facility that Lonza is constructing,
which would have been able to produce ERBITUX in 20,000-liter batches. The
Company paid Lonza $3,250,000 upon execution of the letter of intent for the
exclusive right to negotiate a long-term supply agreement for a portion of the
facility's manufacturing capacity. In September 2002, the Company wrote-off the
deposit because the exclusive negotiation period ended on September 30, 2002. In
light of the assistance the Company provided to BMS with respect to preserving
and then relinquishing the manufacturing capacity described above, BMS paid the
Company $3,250,000 in April 2003 and this amount is recognized as a reduction to
marketing, general and administrative expenses in the three and six months ended
June 30, 2003.

(4) WITHHOLDING TAX ASSETS AND LIABILITY

Federal and applicable state tax law requires an employer to withhold
income taxes at the time of an employee's exercise of non-qualified stock
options or warrants issued in connection with the performance of services by the
employee. An employer that does not do so is liable for the taxes not withheld
if the employee fails to pay his or her taxes for the year in which the
non-qualified stock options or warrants are exercised. In 2000 and prior years,
the Company generally did not require the withholding of federal, state or local
income taxes and, in certain years, employment payroll taxes at the time of the
exercise of non-qualified stock options or warrants. Prior to 1996, the Company
did not comply with tax reporting requirements with respect to the exercise of
non-qualified stock options or warrants.

In January 2003, the New York State Department of Taxation and Finance
("New York State") notified the Company that it was liable for the New York
State and City income taxes that were not withheld because one or more of the
Company's employees who exercised certain non-qualified stock options in 1999
and 2000 failed to pay New York State and City income taxes for those years. As
of December 31, 2002, the Company recorded a gross New York State and City
withholding tax liability of approximately $6,800,000 related to this matter. On
March 13, 2003, the Company entered into a closing agreement with New York
State, paying $4,500,000 by March 31, 2003, to settle the matter. The Company
believes that substantially all of the underpayment of New York State and City
income tax identified by New York State is attributable to the exercise of
non-qualified stock options by its former President and Chief Executive Officer,
Dr. Samuel D. Waksal. On June 17, 2003, New York State notified the Company
that, based on the warrant issue identified below, it is continuing a previously
conducted audit of the Company and is evaluating the terms of the closing
agreement to determine whether or not it should be re-opened. The liability of
approximately $2,300,000, representing the difference between the gross
liability of $6,800,000 and the settlement amount per the closing agreement paid
in March 2003, will remain on the Company's Consolidated Balance Sheets, until
New York State concludes its previously conducted audit.

On March 13, 2003, the Company initiated discussions with the Internal
Revenue Service (the "IRS") relating to federal income taxes on the exercise of
non-qualified stock options on which income tax was not properly withheld.
Although the IRS has not yet asserted that the Company is required to make a
payment with respect to such failure to withhold, the IRS may assert that such a
liability exists, and may further assert that the Company is liable for interest
and penalties. The Company has requested and received confirmation from all of
its current and substantially all of its former employees who exercised
non-qualified stock options in 1999 and 2000, on which no income tax was
withheld, that they have reported the appropriate amount of income on their tax
returns and paid the taxes shown as due on those returns. Based on this
information, the

8

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company has determined that all but an insignificant amount of the potential
liability for withholding taxes with respect to exercises of non-qualified stock
options in 1999 and 2000 is attributable to those amounts related to Dr. Samuel
D. Waksal.

In addition, in the course of the Company's investigation into its
potential liability in respect of the non-qualified stock options described
above, the Company has identified certain warrants that were granted in 1991 and
prior years to then-current and former officers, directors and advisors
(including the three individuals discussed herein and the one individual
discussed in Note 9) that the Company previously treated as non-compensatory
warrants and thus not subject to tax withholding and information reporting
requirements upon exercise. Accordingly, when exercised in 2001 and prior years,
the Company did not deduct income and payroll taxes upon exercise or report
applicable information to the taxing authorities. Based on the information
discovered in the course of the Company's recent investigation, the Company now
believes that such treatment was incorrect, and that the exercise of such
warrants by current and former officers of the Company should have been treated
in the same manner for withholding and reporting purposes as the exercise of
non-qualified stock options. The Company has informed the relevant authorities,
including the IRS and New York State, of this matter and intends to resolve its
liability in respect of these warrants with these taxing authorities in
conjunction with its resolution of the matter described above.

On April 2, 2003, the Company received a request from the SEC for the
voluntary production of documents and information relating to the above matters.
The Company is cooperating fully with the SEC, and intends to continue to do so,
while also updating the United States Attorney's Office on an ongoing basis.

The IRS has commenced audits of the Company's income tax and employment tax
returns, and New York State has commenced audits of the Company's employment tax
returns, for tax years 1999 through 2001. On July 31, 2003, the Company received
an Information Document Request in connection with the IRS employment tax audit.
The Company is cooperating fully with the IRS and New York State with respect to
these audits, and intends to continue to do so.

One of the officers and directors to whom warrants were issued and
previously treated as non-compensatory warrants is Dr. Harlan W. Waksal, the
Company's former Chief Scientific Officer, and previously its President and
Chief Executive Officer. In June 2003, Dr. Harlan W. Waksal represented to the
Company that he has paid the taxes associated with the exercise of these
warrants and further agreed to indemnify the Company for any withholding taxes
that may be assessed and are attributable to the Company's failure to deduct
income and payroll taxes on all warrants and options that he or his transferee
has previously exercised, subject to the consent of Dr. Harlan W. Waksal, which
cannot be unreasonably withheld. Therefore, the Company has removed the
respective asset and liability of $9,759,000 from its June 30, 2003 Consolidated
Balance Sheet.

Two of the other officers, directors and advisors to whom warrants were
issued and previously treated as non-compensatory warrants are Dr. Samuel D.
Waksal and the Company's former General Counsel, John B. Landes. The Company has
made demands on both of these individuals to pay the taxes associated with the
exercise of these warrants and certain non-qualified stock options and to
indemnify the Company against any liability that it may incur to taxing
authorities in respect of the warrants or non-qualified stock options that were
previously exercised.

The Company has recognized assets at the time of exercise relating to the
above individuals. These assets are based on the fact that individuals are
required by law to pay their personal income taxes, as well as the Company's
determination that these individuals had the means and intention to satisfy
their tax liabilities, and legal claims the Company has against these
individuals both during and after their employment with the Company. The Company
decided to write-down certain of these assets during the periods noted in the
paragraph below.

Regarding Dr. Samuel D. Waksal, the Company determined that subsequent to
the Company's receipt of a "refusal to file" letter from the FDA on December 28,
2001, with respect to its rolling Biologics License Application for ERBITUX, his
financial condition deteriorated and therefore the recoverability of the asset

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

became doubtful. Regarding Mr. Landes, based on the limited information
available to it, due to the decrease in the Company's stock price during 2002
and corresponding decrease in the value of Mr. Landes' ownership of the
Company's securities, the Company determined that recoverability of the asset
became doubtful. Based upon these determinations, the asset write-downs of
$25,269,000 and $3,384,000 were recorded during the fourth quarter of 2001 for
Dr. Samuel D. Waksal and the second quarter of 2002 for Mr. Landes,
respectively. The withholding tax liabilities relating to Dr. Samuel D. Waksal
and Mr. Landes will remain on the Company's Consolidated Balance Sheets, until
such time as these liabilities are satisfied. Should the Company negotiate
settlements with the IRS and New York State tax authorities for amounts less
than those noted above or should such individuals pay the taxes, the Company
would reduce operating expenses for the difference between the withholding tax
liabilities and settlement amounts in the period of settlement.

Amount related to the following items are included in withholding tax
liability: (in thousands)

(5) LONG-TERM DEBT

Long-term debt consists of the following:

In February 2000, the Company completed a private placement of $240,000,000
in convertible subordinated notes due March 1, 2005. The Company received net
proceeds from this offering of approximately $231,500,000, after deducting costs
associated with the offering.

The holders may convert all or a portion of the notes into common stock at
any time on or before March 1, 2005 at a conversion price of $55.09 per share,
subject to adjustment under certain circumstances. The notes are subordinated to
all existing and future senior indebtedness. As of March 6, 2003, the Company
has the option to redeem any or all of the notes at specified redemption prices,
plus accrued and unpaid interest to the day preceding the redemption date. The
Company was required to file with the SEC and obtain the effectiveness of a
shelf registration statement covering resales of the notes and the common stock.
Such registration statement was declared effective in July 2000. Upon the
occurrence of a "fundamental change" as defined in the indenture, holders of the
notes may require the Company to redeem the notes at a price equal to 100% of
the principal amount to be redeemed.

On May 2, 2003, the Company informed the trustee for the Convertible
Subordinated Notes of its withholding tax issues and the delay in filing its
Form 10-K for the year ended December 31, 2002, and of the Company's intention
to satisfy its tax liabilities upon completion of its discussions with the
relevant taxing authorities and to file its Form 10-K as soon as possible. The
indenture for the Convertible Subordinated Notes includes covenants requiring
the Company to timely pay taxes and timely make Exchange Act filings. Under the
indenture, there can be no acceleration of payment of the notes until the
Company receives a notice of default from the trustee or a specified percentage
of the note holders and a 60-day grace period lapses

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

without the default being cured. The Company has not received any such notice.
If, at some point in the future, the Company were to receive such a notice and
if it were determined at that time that the Company was not in compliance with
applicable covenants, the Company intends to and believes it would be able to
cure such non-compliance within the 60-day grace period.

In August 1990, the NYIDA issued $2,200,000 principal amount of its 11 1/4%
Industrial Development Revenue Bonds due May 2004 (the "1990 IDA Bonds"). The
proceeds from the sale of the 1990 IDA Bonds were used by the Company at its
research and development facility in New York City. The Company granted a
security interest in certain equipment located in this New York City facility
purchased with the proceeds from the 1990 IDA Bonds to secure the obligations of
the Company relating to the 1990 IDA Bonds. In April 2003, the Company
discovered that it was in breach of certain covenants in its 1990 IDA Bonds.
These bonds were tax-exempt and the Company was required to continue to use the
proceeds for a qualified tax-exempt purpose (in this case, manufacturing), until
maturity. While the bond proceeds were originally used for manufacturing
purposes, a recent internal investigation concluded that in August 1995, this
qualified purpose was abandoned and the proceeds had been used for a
non-qualified purpose in later periods. As a result, the bond proceeds likely
became taxable to the bondholders in August 1995. The Company is required to
indemnify the bondholders from any taxes imposed upon them. The Company intends
to attempt to settle any tax liability directly with the relevant taxing
authorities using procedures established for that purpose. The Company has
recognized a tax liability of $1,019,000 and $953,000 in its Consolidated
Balance Sheets as of June 30, 2003 and December 31, 2002, respectively. This tax
liability is estimated based upon the rates specified for use in IRS closing
agreements for tax-exempt bonds, as applied to interest payments made on the
1990 IDA Bonds during the relevant period. The 1990 IDA Bonds were redeemed in
full, pursuant to the bond indenture, on June 30, 2003.

(6) NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share are computed based on the net
loss for the relevant period, divided by the weighted average number of common
shares outstanding during the period. For purposes of the diluted loss per share
calculation, the exercise or conversion of all potential common shares is not
included since their effect would be anti-dilutive for all periods presented.
Potential common shares outstanding which represent new shares that could be
issued under convertible debt, stock options and stock warrants by the Company
totaled approximately 18,226,000 and 16,876,000 for the periods ended June 30,
2003 and 2002, respectively.

(7) COMPREHENSIVE INCOME (LOSS)

The following table reconciles net loss to comprehensive loss:

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IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(8) COLLABORATIVE AGREEMENTS

(A) MERCK KGAA

In April 1990, the Company entered into a development and commercialization
agreement with Merck KGaA with respect to BEC2 and the recombinant gp75 antigen
product candidate. The agreement has been amended a number of times, most
recently in December 1997. The agreement grants Merck KGaA a license, with the
right to sublicense, to make, have made, use, sell, or have sold BEC2 and gp75
antigen outside North America. The agreement also grants Merck KGaA a license,
without the right to sublicense, to use, sell, or have sold, but not to make
BEC2 within North America in conjunction with the Company. Pursuant to the terms
of the agreement the Company has retained the rights, (1) without the right to
sublicense, to make, have made, use, sell, or have sold BEC2 in North America in
conjunction with Merck KGaA and (2) with the right to sublicense, to make, have
made, use, sell, or have sold gp75 antigen in North America. In return, the
Company has recognized research support payments totaling $4,700,000 and is not
entitled to any further research support payments under the agreement. Merck
KGaA is also required to make payments of up to $22,500,000, of which $4,000,000
has been recognized through June 30, 2003, based on milestones achieved in the
licensed products' development. Merck KGaA is also responsible for worldwide
costs of up to DM17,000,000 associated with a multi-site, multinational Phase
III clinical trial for BEC2 in limited disease small-cell lung carcinoma. This
expense level was reached during the fourth quarter of 2000 and all expenses
incurred from that point forward are being shared 60% by Merck KGaA and 40% by
the Company. The Company incurred approximately $161,000 and $33,000 in the
three months ended June 30, 2003 and 2002, respectively, and approximately
$325,000 and $154,000 for the six months ended June 30, 2003 and 2002,
respectively, associated with this agreement. Such cost sharing applies to all
expenses beyond the DM17,000,000 threshold. Merck KGaA is also required to pay
royalties on the eventual sales of BEC2 outside of North America, if any.
Revenues from sales, if any, of BEC2 in North America will be distributed in
accordance with the terms of a co-promotion agreement to be negotiated by the
parties.

In December 1998, the Company entered into a development and license
agreement with Merck KGaA with respect to ERBITUX. In exchange for granting
Merck KGaA exclusive rights to market ERBITUX outside of the United States and
Canada and co-exclusive development rights in Japan, the Company has received
$30,000,000 through June 30, 2003, in up-front cash fees and early cash payments
based on the achievement of defined milestones. An additional $14,000,000 has
been received through June 30, 2003, based upon the achievement of further
milestones for which Merck KGaA received equity in the Company and $16,000,000
more equity payments are possible depending upon the achievement of further
defined milestones.

The chart below details the equity milestone payments received from Merck
KGaA through June 30, 2003:

- ---------------

* Entire amount of proceeds was recorded as a capital transaction during the
second quarter of 2003.

On June 27, 2003 and June 30, 2003 respectively, Merck KGaA submitted
applications for regulatory authorization to market ERBITUX for the treatment of
metastatic colorectal cancer in Switzerland and the European Union. On July 25,
2003 and July 30, 2003 respectively, Merck KGaA paid the Company $3,000,000 for
achieving each of two milestones associated with these two submissions, and the
Company

12

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

issued Merck KGaA 92,276 shares and 90,944 shares of the Company's common stock
as of those respective payment dates. These sales, at prices of $32.51 per share
and $32.99 per share respectively, represented sales of the Company's common
stock at a ten percent premium to market value at the time each milestone was
achieved, as defined and as provided in the development and license agreement.
These transactions will be recognized in the quarter ended September 30, 2003.

The equity interests underlying the milestone payments are priced at
varying premiums to the then-market price of the common stock depending upon the
timing of the achievement of the respective milestones. Merck KGaA will pay the
Company a royalty on future sales of ERBITUX outside of the United States and
Canada, if any. This agreement may be terminated by Merck KGaA in various
instances, including (1) at its discretion on any date on which a milestone is
achieved (in which case no milestone payment will be made), or (2) for a
one-year period after first commercial sale of ERBITUX in Merck KGaA's
territory, upon Merck KGaA's reasonable determination that the product is
economically unfeasible (in which case Merck KGaA is entitled to receive back
50% of the cash-based up front fees and milestone payments then paid to date,
but only out of revenues received, if any, based upon a royalty rate applied to
the gross profit from ERBITUX sales or a percentage of ERBITUX fees and
royalties received from a sublicensee on account of the sale of ERBITUX in the
United States and Canada). In August 2001, the Company and Merck KGaA amended
this agreement to provide, among other things, that Merck KGaA may manufacture
ERBITUX for supply in its territory and may utilize a third party to do so upon
the Company's reasonable acceptance. The amendment further released Merck KGaA
from its obligations under the agreement relating to providing a guaranty under
a $30,000,000 credit facility relating to the build-out of the Company's Single
Product Facility. In addition, the amendment provides that the companies have
co-exclusive rights to ERBITUX in Japan, including the right to sublicense and
Merck KGaA waived its right of first offer in the case of a proposed sublicense
by the Company of ERBITUX in the Company's territory. In consideration for the
amendment, the Company agreed to a reduction in royalties payable by Merck KGaA
on sales of ERBITUX in Merck KGaA's territory.

In conjunction with Merck KGaA, the Company has expanded the trial of
ERBITUX plus radiotherapy in squamous cell carcinoma of the head and neck. In
order to support clinical trials, Merck KGaA has agreed to purchase ERBITUX
manufactured by Lonza and the Company for use in these trials and has further
agreed to reimburse the Company for one-half of the outside contract service
costs incurred with respect to the Phase III clinical trial of ERBITUX for the
treatment of head and neck cancer in combination with radiation. In September
2002, the Company entered into a binding term sheet, effective as of April 15,
2002, for the supply of ERBITUX to Merck KGaA, which replaces previous supply
arrangements. The term sheet provides for Merck KGaA to purchase bulk and
finished ERBITUX ordered from the Company during the term of the December 1998
development and license agreement at a price equal to the Company's fully loaded
cost of goods. The term sheet also provides for Merck KGaA to use reasonable
efforts to enter into its own contract manufacturing agreements for supply of
ERBITUX by 2004 and obligates Merck KGaA to reimburse the Company for costs
associated with transferring technology and any other services requested by
Merck KGaA relating to establishing its own manufacturing or contract
manufacturing capacity. Amounts due from Merck KGaA related to these
arrangements totaled approximately $7,809,000 and $2,462,000 at June 30, 2003
and December 31, 2002, respectively, and are included in amounts due from
corporate partners in the Consolidated Balance Sheets. The Company recorded
collaborative agreement revenue related to these arrangements in the
Consolidated Statements of Operations totaling approximately $804,000 and
$7,473,000 for the three months ended June 30, 2003 and 2002, respectively, and
$4,620,000 and $12,495,000 for the six months ended June 30, 2003 and 2002,
respectively. Of these amounts, $289,000 and $6,544,000 for the three months
ended June 30, 2003 and 2002, respectively, and $3,410,000 and $10,853,000 for
the six months ended June 30, 2003 and 2002, respectively, related to
reimbursable costs associated with supplying ERBITUX to Merck KGaA for use in
clinical trials. All of the ERBITUX sold to Merck KGaA was produced in prior
periods and the related manufacturing costs have been expensed in prior periods
when the related raw materials were purchased and the associated direct labor
and overhead was consumed or, in the case of

13

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

contract manufacturing, when such services were performed. Reimbursable research
and development expenses were incurred and totaled approximately $442,000 and
$656,000 for the three months ended June 30, 2003 and 2002, respectively, and
$1,038,000 and $1,369,000 for the six months ended June 30, 2003 and 2002,
respectively. These amounts have been recorded as research and development
expenses and also as collaborative agreement revenue in the Consolidated
Statements of Operations. Reimbursable administrative expenses were incurred and
totaled approximately $73,000 and $273,000 for the three months ended June 30,
2003 and 2002, respectively, and $172,000 and $273,000 for the six months ended
June 30, 2003 and 2002, respectively. These amounts have been recorded as
marketing, general and administrative expenses and also as collaborative
agreement revenue in the Consolidated Statements of Operations.

In June 2003, the Company agreed to supply a fixed quantity of ERBITUX in
bulk form for use in Merck KGaA's medical affairs program on different ordering
and pricing terms than those provided in the binding term sheet, including
prepayment by Merck KGaA for a portion of such supply. The Company has recorded
this prepayment as deferred revenue on the Consolidated Balance Sheet until such
time as the product is shipped to Merck KGaA.

(B) BRISTOL-MYERS SQUIBB COMPANY

On September 19, 2001, the Company entered into an acquisition agreement
(the "Acquisition Agreement") with BMS and Bristol-Myers Squibb Biologics
Company, a Delaware corporation ("BMS Biologics"), which is a wholly-owned
subsidiary of BMS, providing for the tender offer by BMS Biologics to purchase
up to 14,392,003 shares of the Company's common stock for $70.00 per share, net
to the seller in cash. In connection with the Acquisition Agreement, the Company
entered into a stockholder agreement with BMS and BMS Biologics, dated as of
September 19, 2001 (the "Stockholder Agreement"), pursuant to which all parties
agreed to various arrangements regarding the respective rights and obligations
of each party with respect to, among other things, the ownership of shares of
the Company's common stock by BMS and BMS Biologics. Concurrent with the
execution of the Acquisition Agreement and the Stockholder Agreement, the
Company entered into the Commercial Agreement with BMS and E.R. Squibb, relating
to ERBITUX, pursuant to which, among other things, BMS and E.R. Squibb are
co-developing and co-promoting ERBITUX in the United States and Canada with the
Company, and are co-developing and co-promoting ERBITUX with the Company and
either together or co-exclusively with Merck KGaA.

On March 5, 2002, the Company amended the Commercial Agreement with E.R.
Squibb and BMS. The amendment changed certain economics of the Commercial
Agreement and has expanded the clinical and strategic roles of BMS in the
ERBITUX development program. One of the principal economic changes to the
Commercial Agreement is that the Company received payments of $140,000,000 on
March 7, 2002 and $60,000,000 on March 5, 2003. Such payments are in lieu of the
$300,000,000 milestone payment the Company would have received upon acceptance
by the FDA of the ERBITUX BLA under the original terms of the Commercial
Agreement. In addition, the Company agreed to resume and has resumed
construction of its Multiple Product Facility. The terms of the Commercial
Agreement, as amended on March 5, 2002, are set forth in more detail below.

ACQUISITION AGREEMENT

On October 29, 2001, pursuant to the Acquisition Agreement, BMS Biologics
accepted for payment pursuant to the tender offer 14,392,003 shares of the
Company's common stock on a pro rata basis from all tendering shareholders and
those conditionally exercising stock options.

STOCKHOLDER AGREEMENT

Pursuant to the Stockholder Agreement, the Company's Board was increased
from ten to twelve members. BMS received the right to nominate two directors to
the Company's Board (each a "BMS

14

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

director") so long as its ownership interest in ImClone Systems is 12.5% or
greater. If BMS' ownership interest is 5% or greater but less than 12.5%, BMS
will have the right to nominate one BMS director, and if BMS' ownership interest
is less than 5%, BMS will have no right to nominate a BMS director. If the size
of the Board is increased to a number greater than twelve, the number of BMS
directors would be increased, subject to rounding, such that the number of BMS
directors is proportionate to the lesser of BMS' then-current ownership interest
and 19.9%. Notwithstanding the foregoing, BMS will have no right to nominate any
BMS directors if (i) the Company has terminated the Commercial Agreement due to
a material breach by BMS or (ii) BMS' ownership interest were to remain below 5%
for 45 consecutive days.

Based on the number of shares of common stock acquired pursuant to the
tender offer, BMS has the right to nominate two directors. BMS designated Andrew
G. Bodnar, M.D., J.D., BMS' Senior Vice President, Strategy and Medical &
External Affairs, as one of the initial BMS directors. The nomination of Dr.
Bodnar was approved by the Board on November 15, 2001. The other BMS director
position was initially filled by Peter S. Ringrose, M.A, Ph.D. Dr. Ringrose
retired in 2002 from his position of Chief Scientific Officer and President,
Pharmaceutical Research Institute at BMS, and also resigned from his director
position with the Company. BMS has not yet designated a replacement to fill Dr.
Ringrose's vacated Board seat.

Voting of Shares -- During the period in which BMS has the right to
nominate at least one BMS director, BMS and its affiliates are required to vote
all of their shares in the same proportion as the votes cast by all of the
Company's other stockholders with respect to the election or removal of non-BMS
directors.

Committees of the Board of Directors -- During the period in which BMS has
the right to nominate at least one BMS director, BMS also has the right, subject
to certain exceptions and limitations, to have one member of each committee of
the Board be a BMS director.

Approval Required for Certain Actions -- The Company may not take any
action that constitutes a prohibited action under the Stockholder Agreement
without the consent of the BMS directors, until September 19, 2006 or earlier,
if any of the following occurs: (i) a reduction in BMS's ownership interest to
below 5% for 45 consecutive days, (ii) a transfer or other disposition of shares
of the Company's common stock by BMS or any of its affiliates such that BMS and
its affiliates own or have control over less than 75% of the maximum number of
shares of the Company's common stock owned by BMS and its affiliates at any time
after September 19, 2001, (iii) an acquisition by a third party of more than 35%
of the outstanding shares of the Company's common stock, (iv) a termination of
the Commercial Agreement by BMS due to significant regulatory or safety concerns
regarding ERBITUX, or (v) a termination of the Commercial Agreement due to a
material breach by BMS. Such prohibited actions include (i) issuing additional
shares or securities convertible into shares in excess of 21,473,002 shares of
the Company's common stock in the aggregate, subject to certain exceptions; (ii)
incurring additional indebtedness if the total of (A) the principal amount of
indebtedness incurred since September 19, 2001 and then-outstanding, and (B) the
net proceeds from the issuance of any redeemable preferred stock
then-outstanding, would exceed the Company's amount of indebtedness for borrowed
money outstanding as of September 19, 2001 by more than $500 million; (iii)
acquiring any business if the aggregate consideration for such acquisition, when
taken together with the aggregate consideration for all other acquisitions
consummated during the previous twelve months, is in excess of 25% of our
aggregate value at the time the binding agreement relating to such acquisition
was entered into; (iv) disposing of all or any substantial portion of the
Company's non-cash assets; (v) entering into non-competition agreements that
would be binding on BMS, its affiliates or any BMS director; (vi) taking certain
actions that would have a discriminatory effect on BMS or any of its affiliates
as a stockholder; and (vii) issuing capital stock with more than one vote per
share.

Limitation on Additional Purchases of Shares and Other Actions -- Subject
to the exceptions set forth below, until September 19, 2006 or, if earlier, the
occurrence of any of (i) an acquisition by a third party of more than 35% of the
Company's outstanding shares, (ii) the first anniversary of a reduction in BMS's
ownership interest in the Company to below 5% for 45 consecutive days, or (iii)
the Company's taking a

15

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prohibited action under the Stockholder Agreement without the consent of the BMS
directors, neither BMS nor any of its affiliates will acquire beneficial
ownership of any shares of the Company's common stock or take any of the
following actions: (i) encourage any proposal for a business combination with
the Company's or an acquisition of our shares; (ii) participate in the
solicitation of proxies from holders of shares of the Company's common stock;
(iii) form or participate in any "group" (within the meaning of Section 13(d)(3)
of the Securities Exchange Act of 1934) with respect to shares of the Company's
common stock; (iv) enter into any voting arrangement with respect to shares of
the Company's common stock; or (v) seek any amendment to or waiver of these
restrictions.

The following are exceptions to the standstill restrictions described
above: (i) BMS Biologics may acquire beneficial ownership of shares of the
Company's common stock either in the open market or from the Company pursuant to
the option described below, so long as, after giving effect to any such
acquisition of shares, BMS' ownership interest would not exceed 19.9%; (ii) BMS
may make, subject to certain conditions, a proposal to the Board to acquire
shares of the Company's common stock if the Company provides material non-public
information to a third party in connection with, or begin active negotiation of,
an acquisition by a third party of more than 35% of the outstanding shares;
(iii) BMS may acquire shares of the Company's common stock if such acquisition
has been approved by a majority of the non-BMS directors; and (iv) BMS may make,
subject to certain conditions, including that an acquisition of shares be at a
premium of at least 25% to the prevailing market price, non-public requests to
the Board to amend or waive any of the standstill restrictions described above.
Certain of the exceptions to the standstill provisions described above will
terminate upon the occurrence of: (i) a reduction in BMS's ownership interest in
the Company to below 5% for 45 consecutive days, (ii) a transfer or other
disposition of shares of the Company's common stock by BMS or any of its
affiliates such that BMS and its affiliates own or have control over less than
75% of the maximum number of shares owned by BMS and its affiliates at any time
after September 19, 2001, (iii) a termination of the Commercial Agreement by BMS
due to significant regulatory or safety concerns regarding ERBITUX, or (iv) a
termination of the Commercial Agreement by the Company due to a material breach
by BMS.

Option to Purchase Shares in the Event of Dilution -- BMS Biologics has the
right under certain circumstances to purchase additional shares of common stock
from the Company at market prices, pursuant to an option granted to BMS by the
Company, in the event that BMS's ownership interest is diluted (other than by
any transfer or other disposition by BMS or any of its affiliates). BMS can
exercise this right (i) once per year, (ii) if the Company issues shares of
common stock in excess of 10% of the then-outstanding shares in one day, and
(iii) if BMS's ownership interest is reduced to below 5% or 12.5%. BMS
Biologics' right to purchase additional shares of common stock from the Company
pursuant to this option will terminate on September 19, 2006 or, if earlier,
upon the occurrence of (i) an acquisition by a third party of more than 35% of
the outstanding shares, or (ii) the first anniversary of a reduction in BMS's
ownership interest in the Company to below 5% for 45 consecutive days.

Transfers of Shares -- Until September 19, 2004, neither BMS nor any of its
affiliates may transfer any shares of the Company's common stock or enter into
any arrangement that transfers any of the economic consequences associated with
the ownership of shares. After September 19, 2004, neither BMS nor any of its
affiliates may transfer any shares or enter into any arrangement that transfers
any of the economic consequences associated with the ownership of shares, except
(i) pursuant to registration rights granted to BMS with respect to the shares,
(ii) pursuant to Rule 144 under the Securities Act of 1933, as amended or (iii)
for certain hedging transactions. Any such transfer is subject to the following
limitations: (i) the transferee may not acquire beneficial ownership of more
than 5% of the then-outstanding shares of common stock; (ii) no more than 10% of
the total outstanding shares of common stock may be sold in any one registered
underwritten public offering; and (iii) neither BMS nor any of its affiliates
may transfer shares of common stock (except for registered firm commitment
underwritten public offerings pursuant to the registration rights described
below) or enter into hedging transactions in any twelve-month period that would,
individually or in the aggregate, have the effect of reducing the economic
exposure of BMS and its affiliates by

16

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

the equivalent of more than 10% of the maximum number of shares of common stock
owned by BMS and its affiliates at any time after September 19, 2001.
Notwithstanding the foregoing, BMS Biologics may transfer all, but not less than
all, of the shares of common stock owned by it to BMS or to E.R. Squibb or
another wholly-owned subsidiary of BMS.

Registration Rights -- The Company granted BMS customary registration
rights with respect to shares of common stock owned by BMS or any of its
affiliates.

COMMERCIAL AGREEMENT

Rights Granted to E.R. Squibb -- Pursuant to the Commercial Agreement, as
amended on March 5, 2002, the Company granted to E.R. Squibb (i) the exclusive
right to distribute, and the co-exclusive right to develop and promote (together
with the Company) any prescription pharmaceutical product using the compound
ERBITUX (the "product") in the United States and Canada, (ii) the co-exclusive
right to develop, distribute and promote (together with the Company and together
or co-exclusively with Merck KGaA and its affiliates) the product in Japan, and
(iii) the non-exclusive right to use the Company's registered trademarks for the
product in the United States, Canada and Japan (collectively, the "territory")
in connection with the foregoing. In addition, the Company agreed not to grant
any right or license to any third party, or otherwise permit any third party, to
develop ERBITUX for animal health or any other application outside the human
health field without the prior consent of E.R. Squibb (which consent may not be
unreasonably withheld).

Rights Granted to the Company -- Pursuant to the Commercial Agreement, E.R.
Squibb has granted to the Company and the Company's affiliates a license,
without the right to grant sublicenses (other than to Merck KGaA and its
affiliates for use in Japan and to any third party for use outside the
territory), to use solely for the purpose of developing, using, manufacturing,
promoting, distributing and selling ERBITUX or the product, any process,
know-how or other invention developed solely by E.R. Squibb or BMS that has
general utility in connection with other products or compounds in addition to
ERBITUX or the product ("E.R. Squibb Inventions").

Up-Front and Milestone Payments -- The Commercial Agreement provides for
up-front and milestone payments by E.R. Squibb to the Company of $900,000,000 in
the aggregate, of which $200,000,000 was paid on September 19, 2001,
$140,000,000 was paid on March 7, 2002, $60,000,000 was paid on March 5, 2003,
$250,000,000 is payable upon receipt of marketing approval from the FDA with
respect to an initial indication for ERBITUX and $250,000,000 is payable upon
receipt of marketing approval from the FDA with respect to a second indication
for ERBITUX. All such payments are non-refundable and non-creditable.

Distribution Fees -- The Commercial Agreement provides that E.R. Squibb
shall pay the Company distribution fees based on a percentage of "annual net
sales" of the product (as defined in the Commercial Agreement) by E.R. Squibb in
the United States and Canada. The distribution fee is 39% of net sales in the
United States and Canada.

The Commercial Agreement also provides that the distribution fees for the
sale of the product in Japan by E.R. Squibb or ImClone Systems shall be equal to
50% of operating profit or loss with respect to such sales for any calendar
month. In the event of an operating profit, E.R. Squibb shall pay the Company
the amount of such distribution fee, and in the event of an operating loss, the
Company shall credit E.R. Squibb the amount of such distribution fee.

Development of the Product -- Responsibilities associated with clinical and
other ongoing studies are apportioned between the parties as determined by the
product development committee described below. The Commercial Agreement provides
for the establishment of clinical development plans setting forth the activities
to be undertaken by the parties for the purpose of obtaining marketing
approvals, providing market support and developing new indications and
formulations of the product. After transition of responsibilities for

17

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

certain clinical and other studies, each party is primarily responsible for
performing the studies designated to it in the clinical development plans. In
the United States and Canada, the Commercial Agreement provides that E.R. Squibb
is responsible for 100% of the cost of all clinical studies other than those
studies undertaken post-launch which are not pursuant to an IND (e.g. Phase IV
studies), the cost of which is shared equally between E.R. Squibb and ImClone
Systems. As between E.R. Squibb and ImClone Systems, each is responsible for 50%
of the costs of all studies in Japan. The Company has also agreed, and may agree
in the future, to share with E.R. Squibb, on terms other than the foregoing,
costs of clinical trials that the Company believes are not potentially
registrational but should be undertaken prior to launch in the United States,
Canada or Japan. Except as otherwise agreed upon by the parties, the Company
will own all registrations for the product and is primarily responsible for the
regulatory activities leading to registration in each country. E.R. Squibb will
be primarily responsible for the regulatory activities in each country after the
product has been registered in that country. Pursuant to the terms of the
Commercial Agreement, as amended, Andrew G. Bodnar, M.D., J.D., Senior Vice
President, Strategy and Medical & External Affairs of BMS, and a member of the
Company's Board of Directors, will oversee the implementation of the clinical
and regulatory plan for ERBITUX.

Distribution and Promotion of the Product -- Pursuant to the Commercial
Agreement, E.R. Squibb has agreed to use all commercially reasonable efforts to
launch, promote and sell the product in the territory with the objective of
maximizing the sales potential of the product and promoting the therapeutic
profile and benefits of the product in the most commercially beneficial manner.
In connection with its responsibilities for distribution, marketing and sales of
the product in the territory, E.R. Squibb is performing all relevant functions,
including but not limited to the provision of all sales force personnel,
marketing (including all advertising and promotional expenditures), warehousing
and physical distribution of the product.

However, the Company has the right, at its election and sole expense, to
co-promote with E.R. Squibb the product in the territory. Pursuant to this
co-promotion option, which the Company has exercised, the Company is entitled on
and after April 11, 2002 (at the Company's sole expense) to have the Company's
sales force participate in the promotion of the product consistent with the
marketing plan agreed upon by the parties, provided that E.R. Squibb will retain
the exclusive rights to sell and distribute the product. Except for the
Company's expenses incurred pursuant to the co-promotion option, E.R. Squibb is
responsible for 100% of the distribution, sales and marketing costs in the
United States and Canada, and as between E.R. Squibb and ImClone Systems, each
is responsible for 50% of the distribution, sales, marketing costs and other
related costs and expenses in Japan.

Manufacture and Supply -- The Commercial Agreement provides that the
Company is responsible for the manufacture and supply of all requirements of
ERBITUX in bulk form ("API") for clinical and commercial use in the territory,
and that E.R. Squibb will purchase all of its requirements of API for commercial
use from the Company. The Company will supply API for clinical use at the
Company's fully burdened manufacturing cost, and will supply API for commercial
use at the Company's fully burdened manufacturing cost plus a mark-up of 10%.
Upon the expiration, termination or assignment of any existing agreements
between ImClone Systems and third party manufacturers, E.R. Squibb will be
responsible for processing API into the finished form of the product.

Management -- The parties have formed the following committees for purposes
of managing their relationship and their respective rights and obligations under
the Commercial Agreement:

- a Joint Executive Committee (the "JEC"), which consists of certain senior
officers of each party. The JEC is co-chaired by a representative of each
of BMS and the Company. The JEC is responsible for, among other things,
managing and overseeing the development and commercialization of ERBITUX
pursuant to the terms of the Commercial Agreement, approving the annual
budgets and multi-year expense forecasts, and resolving disputes,
disagreements and deadlocks arising in the other committees;

18

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

- a Product Development Committee (the "PDC"), which consists of members of
senior management of each party with expertise in pharmaceutical drug
development and/or marketing. The PDC is chaired by the Company's
representative. The PDC is responsible for, among other things, managing
and overseeing the development and implementation of the clinical
development plans, comparing actual versus budgeted clinical development
and regulatory expenses, and reviewing the progress of the registrational
studies;

- a Joint Commercialization Committee (the "JCC"), which consists of
members of senior management of each party with clinical experience and
expertise in marketing and sales. The JCC is chaired by a representative
of BMS. The JCC is responsible for, among other things, overseeing the
preparation and implementation of the marketing plans, coordinating the
sales efforts of E.R. Squibb and the Company, and reviewing and approving
the marketing and promotional plans for the product in the territory; and

- a Joint Manufacturing Committee (the "JMC"), which consists of members of
senior management of each party with expertise in manufacturing. The JMC
is chaired by the Company's representative (unless a determination is
made that a long-term inability to supply API exists, in which case the
JMC will be co-chaired by representatives of E.R. Squibb and the
Company). The JMC is responsible for, among other things, overseeing and
coordinating the manufacturing and supply of API and the product, and
formulating and directing the manufacturing strategy for the product.

Any matter, which is the subject of a deadlock (i.e., no consensus
decision) in the PDC, the JCC or the JMC, will be referred to the JEC for
resolution. Subject to certain exceptions, deadlocks in the JEC will be resolved
as follows: (i) if the matter was also the subject of a deadlock in the PDC, by
the co-chairperson of the JEC designated by the Company, (ii) if the matter was
also the subject of a deadlock in the JCC, by the co-chairperson of the JEC
designated by BMS, or (iii) if the matter was also the subject of a deadlock in
the JMC, by the co-chairperson of the JEC designated by the Company. All other
deadlocks in the JEC will be resolved by arbitration.

Right of First Offer -- E.R. Squibb has a right of first offer with respect
to the Company's investigational IMC-KDR monoclonal antibodies should the
Company decide to enter into a partnering arrangement with a third party with
respect to IMC-KDR antibodies at any time prior to the earlier to occur of
September 19, 2006 and the first anniversary of the date which is 45 days after
any date on which BMS's ownership interest in ImClone Systems is less than 5%.
If the Company decides to enter into a partnering arrangement during such
period, the Company must notify E.R. Squibb. If E.R. Squibb notifies the Company
that it is interested in such an arrangement, the Company will provide its
proposed terms to E.R. Squibb and the parties will negotiate in good faith for
90 days to attempt to agree on the terms and conditions of such an arrangement.
If the parties do not reach agreement during this period, E.R. Squibb must
propose the terms of an arrangement which it is willing to enter into, and if
the Company rejects such terms the Company may enter into an agreement with a
third party with respect to such a partnering arrangement (provided that the
terms of any such agreement may not be more favorable to the third party than
the terms proposed by E.R. Squibb).

Right of First Negotiation -- If at any time during the restricted period
(as defined below), the Company is interested in establishing a partnering
relationship with a third party involving certain compounds or products not
related to ERBITUX, the product or IMC-KDR antibodies, the Company must notify
E.R. Squibb and E.R. Squibb will have 90 days to enter into a non-binding heads
of agreement with the Company with respect to such a partnering relationship. In
the event that E.R. Squibb and ImClone Systems do not enter into a non-binding
heads of agreement, the Company is free to negotiate with third parties without
further obligation to E.R. Squibb. The "restricted period" means the period from
September 19, 2001 until the earliest to occur of (i) September 19, 2006, (ii) a
reduction in BMS's ownership interest in ImClone Systems to below 5% for 45
consecutive days, (iii) a transfer or other disposition of shares of the
Company's common stock by BMS or any of its affiliates such that BMS and its
affiliates own or have control over less

19

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

than 75% of the maximum number of shares of the Company's common stock owned by
BMS and its affiliates at any time after September 19, 2001, (iv) an acquisition
by a third party of more than 35% of the outstanding Shares, (v) a termination
of the Commercial Agreement by BMS due to significant regulatory or safety
concerns regarding ERBITUX, or (vi) the Company's termination of the Commercial
Agreement due to a material breach by BMS.

Restriction on Competing Products -- During the period from the date of the
Commercial Agreement until September 19, 2008, the parties have agreed not to,
directly or indirectly, develop or commercialize a competing product (defined as
a product that has as its only mechanism of action an antagonism of the EGF
receptor) in any country in the territory. In the event that any party proposes
to commercialize a competing product or purchases or otherwise takes control of
a third party which has developed or commercialized a competing product, then
such party must either divest the competing product within 12 months or offer
the other party the right to participate in the commercialization and
development of the competing product on a 50/50 basis (provided that if the
parties cannot reach agreement with respect to such an agreement, the competing
product must be divested within 12 months).

Ownership -- The Commercial Agreement provides that the Company own all
data and information concerning ERBITUX and the product and (except for the E.R.
Squibb Inventions) all processes, know-how and other inventions relating to the
product and developed by either party or jointly by the parties. E.R. Squibb,
however, has the right to use all such data and information, and all such
processes, know-how or other inventions, in order to fulfill its obligations
under the Commercial Agreement.

Product Recalls -- If E.R. Squibb is required by any regulatory authority
to recall the product in any country in the territory (or if the JCC determines
such a recall to be appropriate), then E.R. Squibb and ImClone Systems shall
bear the costs and expenses associated with such a recall (i) in the United
States and Canada, in the proportion of 39% for ImClone Systems and 61% for E.R.
Squibb and (ii) in Japan, in the proportion for which each party is entitled to
receive operating profit or loss (unless, in the territory, the predominant
cause for such a recall is the fault of either party, in which case all such
costs and expenses shall be borne by such party).

Mandatory Transfer -- Each of BMS and E.R. Squibb has agreed under the
Commercial Agreement that in the event it sells or otherwise transfers all or
substantially all of its pharmaceutical business or pharmaceutical oncology
business, it must also transfer to the transferee its rights and obligations
under the Commercial Agreement.

Indemnification -- Pursuant to the Commercial Agreement, each party has
agreed to indemnify the other for (i) its negligence, recklessness or wrongful
intentional acts or omissions, (ii) its failure to perform certain of its
obligations under the agreement, and (iii) any breach of its representations and
warranties under the agreement.

Termination -- Unless earlier terminated pursuant to the termination rights
discussed below, the Commercial Agreement expires with regard to the product in
each country in the territory on the later of September 19, 2018 and the date on
which the sale of the product ceases to be covered by a validly issued or
pending patent in such country. The Commercial agreement may also be terminated
prior to such expiration as follows:

- by either party, in the event that the other party materially breaches
any of its material obligations under the Commercial Agreement and has
not cured such breach within 60 days after notice;

- by E.R. Squibb, if the JEC determines that there exists a significant
concern regarding a regulatory or patient safety issue that would
seriously impact the long-term viability of all products; or

- by either party, in the event that the JEC does not approve additional
clinical studies that are required by the FDA in connection with the
submission of the initial regulatory filing with the FDA within

20

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

90 days of receiving the formal recommendation of the PDC concerning such
additional clinical studies.

The Company has also agreed, and may agree in the future, to share with
E.R. Squibb, on terms other than the foregoing, costs of clinical trials that
the Company believes are not potentially registrational but should be undertaken
prior to launch in the United States, Canada or Japan. The Company has incurred
$2,199,000 pursuant to such cost sharing for the three months ended June 30,
2003 and $3,346,000 for the six months ended June 30, 2003. The Company has also
incurred $20,000 related to the agreement with respect to development in Japan
for the three months ended June 30, 2003 and $60,000 for the six months ended
June 30, 2003.

The Company incurred approximately $2,250,000 during the three months ended
March 31, 2002 in legal and other advisor fees associated with the amendment to
the Commercial Agreement with BMS and affiliates, which has been expensed and
included as a separate line item in operating expenses in the Consolidated
Statements of Operations.

Amounts due from BMS related to this agreement totaled approximately
$9,829,000 and $9,739,000 at June 30, 2003 and December 31, 2002, respectively,
and are included in amounts due from corporate partners in the Consolidated
Balance Sheets. The Company recorded collaborative agreement revenue related to
this agreement in the Consolidated Statements of Operations totaling
approximately $5,606,000 and $2,426,000 for the three months ended June 30, 2003
and 2002, respectively and $10,432,000 and $8,521,000 for the six months ended
June 30, 2003 and 2002, respectively. Of these amounts, $2,011,000 and
$1,960,000 for the three months ended June 30, 2003 and 2002, respectively and
$3,211,000 and $3,807,000 for the six months ended June 30, 2003 and 2002,
respectively, related to reimbursable costs associated with supplying ERBITUX
for use in clinical trials associated with this agreement. The related
manufacturing costs have been expensed in prior periods when the related raw
materials were purchased and the associated direct labor and overhead was
consumed or, in the case of contract manufacturing, when such services were
performed. Reimbursable research and development and marketing expenses were
incurred and totaled approximately $3,595,000 and $466,000 for the three months
ended June 30, 2003 and 2002, respectively, and $7,221,000 and $4,714,000 for
the six months ended June 30, 2003 and 2002, respectively. These amounts have
been recorded as research and development and marketing, general and
administrative expenses and also as collaborative agreement revenue in the
Consolidated Statements of Operations.

In June 2002, the Company and BMS agreed that certain ERBITUX clinical
trial costs incurred by the Company but billed to BMS under the Commercial
Agreement would in fact be borne by the Company due to such trials'
non-registrational nature. This resulted in the issuance of credit memos to BMS
during the six months ended June 30, 2002 totaling approximately $2,949,000,
which ultimately reduced collaborative agreement revenue and license fee revenue
in the six months ended June 30, 2002.

License fees and milestone revenue consists of the following: (in
thousands)

21

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Collaborative agreement revenue from corporate partners consists of the
following: (in thousands)

Amounts due from corporate partners consist of the following: (in
thousands)

Deferred revenue consists of the following: (in thousands)

The Company receives royalty revenue from a strategic corporate alliance
with Abbott Laboratories in diagnostics. Royalty revenue for the three months
ended June 30, 2002 primarily includes amounts associated with the Abbott
Laboratories alliance totaling $38,000. Royalty revenue for the six months ended
June 30, 2003 and 2002 primarily includes amounts associated with the Abbott
Laboratories alliance totaling $302,000 and $688,000, respectively.

22

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) COMMITMENTS AND CONTINGENCIES

Beginning in January 2002, a number of complaints asserting claims under
the federal securities laws against the Company and certain of its directors and
officers were filed in the U.S. District Court for the Southern District of New
York. Those actions were consolidated under the caption Irvine v. ImClone
Systems Incorporated et al., No. 02 Civ. 0109 (RO), and on September 16, 2002, a
consolidated amended complaint was filed in that consolidated action, which
plaintiffs corrected in limited respects on October 22, 2002. The corrected
consolidated amended complaint named the Company, as well as its former
President and Chief Executive Officer, Dr. Samuel D. Waksal, its former Chief
Scientific Officer and then-President and Chief Executive Officer, Dr. Harlan W.
Waksal, its former director and then-Chairman of the Board of Directors, Robert
F. Goldhammer, current or former directors Richard Barth, David Kies, Paul
Kopperl, John Mendelsohn and William Miller, its former General Counsel, John
Landes, and its Vice President for Marketing and Sales, Ronald Martell, as
defendants. The complaint asserted claims for securities fraud under sections
10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act of 1934, on behalf of
a purported class of persons who purchased our publicly traded securities
between March 27, 2001 and January 25, 2002. The complaint also asserted claims
against Dr. Samuel D. Waksal under section 20A of the Exchange Act on behalf of
a separate purported sub-class of purchasers of the Company's securities between
December 27, 2001 and December 28, 2001. The complaint generally alleged that
various public statements made by or on behalf of the Company or the other
defendants during 2001 and early 2002 regarding the prospects for FDA approval
of ERBITUX were false or misleading when made, that the individual defendants
were allegedly aware of material non-public information regarding the actual
prospects for ERBITUX at the time that they engaged in transactions in the
Company's common stock and that members of the purported stockholder class
suffered damages when the market price of the Company's common stock declined
following disclosure of the information that allegedly had not been previously
disclosed. The complaint sought to proceed on behalf of the alleged class
described above, sought monetary damages in an unspecified amount and seeks
recovery of plaintiffs' costs and attorneys' fees. On November 25, 2002, all
defendants other than Dr. Samuel D. Waksal filed a motion to dismiss the
complaint for failure to state a claim. On June 3, 2003, the court granted that
motion in part, dismissing the complaint as to defendants Messrs. Goldhammer,
Barth, Kies, Kopperl, Landes, Martell, Mendlesohn and Miller, but not dismissing
it as to the Company, Dr. Harlan W. Waksal and Dr. Samuel D. Waksal.

Separately, on September 17, 2002, an individual purchaser of the Company's
common stock filed an action on his own behalf asserting claims against the
Company, Dr. Samuel D. Waksal and Dr. Harlan W. Waksal under sections 10(b) and
20(a) of the Exchange Act and SEC Rule 10b-5. That action is styled Flynn v.
ImClone Systems Incorporated, et al., No. 02 Civ. 7499 and, in contrast to the
Irvine case discussed above, this case was not filed against any of our outside
directors. In this case, plaintiff alleges that he purchased shares on various
dates in late 2001, that various public statements made by the Company or the
other defendants during 2001 regarding the prospects for FDA approval of ERBITUX
were false or misleading when made and that plaintiff relied on such allegedly
false and misleading information in making his purchases. Plaintiff seeks
compensatory damages of not less than $180,000 and punitive damages of
$5,000,000, together with interest, costs and attorneys' fees. On November 25,
2002, both defendants other than Dr. Samuel D. Waksal filed a motion to dismiss
the complaint for failure to state a claim. On June 3, 2003, the court denied
that motion.

Beginning on January 13, 2002, and continuing thereafter, nine separate
purported shareholder derivative actions have been filed against members of the
Company's board of directors, certain of its present and former officers, and
the Company, as nominal defendant, among others, advancing claims based on
allegations similar to the allegations in the federal securities class action
complaints. Four of these derivative cases were filed in the Delaware Court of
Chancery and have been consolidated in that court under the caption In re
ImClone Systems Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC.
Three of these derivative actions were filed in New York State Supreme Court in
Manhattan, (styled Boghosian v. Barth, et al., Index

23

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

No. 100759/02, Johnson v. Barth, et al. Index No. 601304/02, and Henshall v.
Bodnar, et al., Index No. 603121/02) and have been consolidated under the
caption In re ImClone Systems, Inc. Shareholder Derivative Litigation, Index No.
02-100759. All of these state court actions have been stayed in deference to
proceeding in the U.S. District Court for the Southern District of New York. Two
purported derivative actions, Lefanto v. Waksal, et al., No. 02 Civ. 0163 (RO)
and Forbes v. Barth, et al., No. 02 Civ. 1400 (RO), have been filed in the U.S.
District Court for the Southern District of New York and have been consolidated
under the caption In re ImClone Systems, Inc. Shareholder Derivative Litigation,
Master File No. 02-CV-163 (RO). A supplemental verified consolidated amended
derivative complaint in these federal actions was filed on August 8, 2003. It
asserts, purportedly on behalf the Company, claims including breach of fiduciary
duty by certain members of the Company's board of directors and current and
former officers, among others, based on allegations including that they engaged
in transactions in the Company's common stock while in possession of material,
non-public information concerning the regulatory and marketing prospects for
ERBITUX, or improperly disclosed such information to others, and that they
failed to maintain adequate controls and to exercise due care with regard to the
Company's ERBITUX application to the FDA and certain public statements by or on
behalf of the Company. No response to the complaints in those actions has been
required to date.

The Company intends to vigorously defend itself against the claims asserted
in these actions, which are in their earliest stages. The Company is unable to
predict the outcome of these actions at this time. Because the Company does not
believe that a loss is probable, no legal reserve has been established.

The Company has received subpoenas and requests for information in
connection with investigations by the SEC, the Subcommittee on Oversight and
Investigations of the U.S. House of Representatives Committee on Energy and
Commerce and the U.S. Department of Justice relating to the circumstances
surrounding the disclosure of the FDA "refusal to file" letter dated December
28, 2001, and trading in the Company's securities by certain Company insiders in
2001. The Company has also received subpoenas and requests for information
pertaining to document retention issues in 2001 and 2002, and to certain
communications regarding ERBITUX in 2000. The Company is cooperating with all of
these inquiries and intends to continue to do so.

On June 19, 2002, the Company received a written "Wells Notice" from the
staff of the SEC, indicating that the staff of the SEC is considering
recommending that the SEC bring an action against the Company relating to the
Company's disclosures immediately following the receipt of a "refusal to file"
letter from the FDA on December 28, 2001 for the Company's BLA for ERBITUX. The
Company filed a Wells submission on July 12, 2002 in response to the staff's
Wells Notice.

The Company incurred legal fees associated with these matters of
approximately $495,000 and $2,445,000 for the three months ended June 30, 2003
and 2002, respectively, and $1,193,000 and $5,724,000 during the six months
ended June 30, 2003 and 2002, respectively. The Company has estimated and
recorded a receivable totaling $1,005,000 and $5,340,000 as of June 30, 2003 and
December 31, 2002, respectively, for a portion of the above mentioned legal fees
that the Company believes are recoverable from its insurance carriers. This
receivable is included in other current assets in the Consolidated Balance
Sheets.

On August 7, 2002, a federal grand jury in the Southern District of New
York returned an indictment charging Dr. Samuel D. Waksal with, inter alia,
securities fraud and conspiracy to commit securities fraud. On October 15, 2002,
Dr. Samuel D. Waksal entered a plea of guilty to several counts in that
indictment, including that on December 27, 2001 he directed a family member to
sell shares of the Company's common stock and attempted to sell shares that he
owned in advance of an expected announcement that the FDA had issued a "refusal
to file" letter with respect to the Company's application for approval of
ERBITUX. The Company received such a "refusal to file" letter from the FDA on
December 28, 2001, and announced the receipt of that letter following the close
of trading that day. On June 10, 2003, Dr. Samuel D. Waksal was sentenced to an
eighty-seven month prison term and ordered to pay $4,200,000 in fines and
restitution.

24

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

On August 14, 2002, after the federal grand jury indictment of Dr. Samuel
D. Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to
certain counts of that indictment, the Company filed an action in New York State
Supreme Court seeking recovery of certain compensation, including advancement of
certain defense costs, that the Company had paid to or on behalf of Dr. Samuel
D. Waksal. That action, styled ImClone Systems Incorporated v. Samuel D. Waksal,
Index No. 02/602996, is in its earliest stages. On July 25, 2003, Dr. Samuel D.
Waksal filed a demand for arbitration seeking to have all claims in connection
with the Company's action against Dr. Samuel D. Waksal resolved in arbitration.

In October 2001, the Company entered into a sublease for a four-story
building at 325 Spring Street, New York, New York, which includes between 75,000
and 100,000 square feet of usable space. The Company is currently analyzing its
options with respect to relocating the Company's headquarters and research
laboratory to this subleased space. This subleased space may or may not be
designed, improved and used by the Company in the future, depending on the
Company's business needs. The sublease has a term of 22 years, followed by two
five-year renewal option periods. The future minimum lease payments remaining at
June 30, 2003, are approximately $49,778,000 over the term of the sublease. In
order to induce the sublandlord to enter into the sublease, the Company made a
loan to the sublandlord in the principal amount of a $10,000,000 note
receivable. The loan is secured by a leasehold mortgage on the prime lease as
well as a collateral assignment of rents by the sublandlord. The loan is payable
by the sublandlord over 20 years and bears interest at 5 1/2% in years one
through five, 6 1/2% in years six through ten, 7 1/2% in years eleven through
fifteen and 8 1/2% in years sixteen through twenty. In addition, the Company
paid the owner a consent fee in the amount of $500,000.

In January 2003, New York State notified the Company that it was liable for
the New York State and City income taxes that were not withheld because one or
more of the Company's employees who exercised certain non-qualified stock
options in 1999 and 2000 failed to pay New York State and City income taxes for
those years. On March 13, 2003, the Company entered into a closing agreement
with New York State, paying $4,500,000 to settle the matter. The Company
promptly informed the IRS, the SEC and the United States Attorney's Office,
responsible for the prosecution of Dr. Samuel D. Waksal, of this issue. In order
to confirm whether its liability in this regard was limited to Dr. Samuel D.
Waksal's failure to pay income taxes, the Company contacted current and former
officers, directors and employees who had exercised non-qualified stock options
in 1999 and 2000 to confirm that those individuals had satisfied their personal
income tax liabilities, which payments would reduce or eliminate the Company's
potential liability for failure to withhold income taxes on the exercise of
non-qualified stock options. In the course of doing so, the Company became aware
of another potential income and employment tax withholding liability associated
with the exercise of certain warrants granted in the early years of the
Company's existence that were held by certain officers, directors and employees,
including Dr. Samuel D. Waksal, John B. Landes, Dr. Harlan W. Waksal and Robert
F. Goldhammer. Again, the Company promptly informed the IRS, the SEC and the
United States Attorney's Office of this issue. On June 17, 2003, New York State
notified the Company that, based on the issue identified above, it is continuing
a previously conducted audit of the Company and is evaluating the terms of the
closing agreement to determine whether or not it should be re-opened. On March
31, 2003, the Company received notification from the SEC that it was conducting
an informal inquiry into both of these matters and, on April 2, 2003, the
Company received a request from the SEC for the voluntary production of related
documents and information. The Company is cooperating fully with this SEC
inquiry and is updating the SEC, United States Attorney's Office and the
applicable taxing authorities on an ongoing basis and intends to continue to do
so.

The IRS has commenced audits of the Company's income tax and employment tax
returns, and New York State has commenced audits of the Company's employment tax
returns, for tax years 1999 through 2001. On July 31, 2003, the Company received
an Information Document Request in connection with the IRS employment tax audit.
The Company is cooperating fully with the IRS and New York State with respect to
these audits, and intends to continue to do so.

25

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company has not recognized withholding tax liabilities in respect of
exercises of certain warrants by Robert F. Goldhammer, one of the four former
officers or directors to whom warrants were issued and previously treated as
non-compensatory warrants. Based on the Company's investigation, it believes
that, although such warrants were compensatory, such warrants were received by
Mr. Goldhammer in connection with the performance of services by him in his
capacity as a director, rather than as an employee, and, as such, are not
subject to tax withholding requirements. In addition, in 1999, Mr. Goldhammer
erroneously received a portion of a stock option grant in the form of incentive
stock options, which under federal law may only be granted to employees. There
can be no assurance, however, that the taxing authorities will agree with the
Company's position and will not assert that the Company is liable for the
failure to withhold income and employment taxes with respect to the exercise of
such warrants and any stock options by Mr. Goldhammer. If the Company became
liable for the failure to withhold taxes on the exercise of such warrants and
any stock options by Mr. Goldhammer, the aggregate potential liability,
exclusive of any interest or penalties, would be approximately $12,600,000.

The Company has not recognized accruals for penalties and interest that may
be imposed with respect to the withholding tax issues described in Note 4 and
other related contingencies, including the period covered by the statute of
limitations and the Company's determination of certain exercise dates, because
it does not believe that losses from such contingencies are probable. With
respect to the statute of limitations and the Company's determination of certain
exercise dates, while the Company does not believe a loss is probable, there is
a potential additional liability with respect to these issues that may be
asserted by a taxing authority. If taxing authorities assert such issues and
prevail related to these withholding tax issues and other related contingencies,
including penalties, the liability that could be imposed by taxing authorities
would be substantial. The potential interest on the withholding tax liabilities
recorded on the Consolidated Balance Sheets could be up to a maximum amount of
approximately $8,700,000 at June 30, 2003. Potential additional withholding tax
liability on other related contingencies amounts to approximately $11,000,000,
exclusive of any interest or penalties, and excluding the amount potentially
attributable to Mr. Goldhammer noted above.

(10) CERTAIN RELATED PARTY TRANSACTIONS

In September 2001 and February 2002, the Company entered into employment
agreements with six senior executive officers, including, in September 2001,
then-President and Chief Executive Officer, Dr. Samuel D. Waksal, and then-Chief
Operating Officer, Dr. Harlan W. Waksal. The September 2001 agreements each have
three-year terms and the February 2002 agreement had a one-year term. The
February 2002 agreement was amended in April 2002 and is now expired. The
employment agreements provided for stated base salaries, minimum bonuses and
benefits aggregating $3,765,000 annually. Dr. Samuel D. Waksal resigned and
entered into a separation agreement with the Company in May 2002 and Dr. Harlan
W. Waksal was appointed President and Chief Executive Officer. Dr. Harlan W.
Waksal resigned from the position of President and Chief Executive Officer and
was named the Company's Chief Scientific Officer in April 2003. On July 18,
2003, Dr. Harlan W. Waksal provided the Company with notice of his termination
effective July 22, 2003 in connection with his employment agreement. Pursuant to
his employment agreement with the Company, Dr. Harlan W. Waksal received a lump
sum payment totaling approximately $4,424,000 which includes approximately
$273,000 related to his 2003 guaranteed bonus which has been included in accrued
expenses on our Consolidated Balance Sheet as of June 30, 2003, and is entitled
to receive for defined periods of time the continuation of certain benefits
including health care and life insurance coverage through July 2006, with an
estimated cost of $38,000. The related expense of $4,189,000 will be included in
marketing, general and administrative expenses in the Consolidated Statements of
Operations for the three months ending September 30, 2003. In addition, all
outstanding stock options held by Dr. Harlan W. Waksal, comprising options to
purchase 1,000,000 shares of common stock of the Company at a per share exercise
price of $50.01 that were granted on September 19, 2001, were deemed amended
such that the 666,666 options that remained unvested as of the date of his
resignation vested immediately on that date. The amended

26

IMCLONE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock option awards can be exercised at any time until the end of the term of
such awards. No compensation expense attributable to the stock options will be
recorded because the change in terms is in accordance with the terms of the
original award and also because the fair market value of the Company's common
stock was below the $50.01 exercise price on the date the option award was
amended. In October 2002, the Company accepted the resignation and entered into
a separation agreement with the Company's former General Counsel, John B.
Landes, who held one of the aforementioned employment agreements. See Note 11
for discussion of the separation agreements.

In August 2002 and September 2002, the Company entered into one-year
agreements with two executive officers. The employment agreements provide for
aggregate stated base salaries of $390,000.

Certain transactions engaged in by the Company's former President and Chief
Executive Officer, Dr. Samuel D. Waksal, in securities of the Company were
deemed to have resulted in "short-swing profits" under Section 16 of the
Exchange Act. In accordance with Section 16(b) of the Exchange Act, Dr. Samuel
D. Waksal paid the Company an aggregate amount of approximately $486,000 in
March 2002, and an additional amount of approximately $79,000 in July 2002, as
disgorgement of "short-swing profits" he was deemed to have realized. The
amounts received were recorded as an increase to Additional paid-in capital.

(11) SEPARATION AGREEMENTS

On May 22, 2002, the Company accepted the resignation of its then-President
and Chief Executive Officer, Dr. Samuel D. Waksal. In connection with the
resignation, on May 24, 2002 the Company and Dr. Samuel D. Waksal executed a
separation agreement whereby Dr. Samuel D. Waksal received a lump sum payment
totaling $7,000,000 and was entitled to receive for defined periods of time the
continuation of certain benefits including health care and life insurance
coverage with an estimated cost of $283,000. The related expense of $7,283,000
was included in Marketing, general and administrative expenses in the
Consolidated Statements of Operations for the three and six months ended June
30, 2002. In addition, 1,250,000 stock option awards granted to Dr. Samuel D.
Waksal on September 19, 2001 which were exercisable at a per share exercise
price of $50.01 and constituted all outstanding stock option awards held by Dr.
Samuel D. Waksal, were deemed amended such that the unvested portion vested
immediately as of the date of termination. The amended stock option awards can
be exercised at any time until the end of the term of such awards. No
compensation expense was recorded because the fair market value of the Company's
common stock was below the $50.01 exercise price on the date the option award
was amended. On August 7, 2002, a federal grand jury indicted Dr. Samuel D.
Waksal. The Company has learned that Dr. Samuel D. Waksal, in contravention of
Company policy, directed the destruction of certain of his personal records that
were, or could be perceived to be relevant to the pending government
investigations. Accordingly, on August 14, 2002, the Company filed an action
against Dr. Samuel D. Waksal in New York State Supreme Court seeking repayment
of amounts paid to him by the Company pursuant to the separation agreement,
cancellation or recovery of other benefits provided under that agreement
(including cancellation of all stock options that vested as a result of the
agreement), disgorgement of amounts previously advanced by the Company on behalf
of Dr. Samuel D. Waksal for his legal fees and expenses, and repayment of
certain amounts paid under Dr. Samuel D. Waksal's previous employment agreement.
The action, styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No.
02/602996, is in its earliest stages.

In October 2002, the Company accepted the resignation of its then-General
Counsel, John B. Landes. The Company and Mr. Landes executed a separation
agreement whereby Mr. Landes was to receive his stated base salary from the date
of termination through October 2003 and certain benefits including healthcare
and life insurance coverage through December 2002. In May 2003, the Company
suspended payments under this separation agreement in response to the
withholding tax liabilities discussed in Note 4.

27

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis by our management is provided to
identify certain significant factors that affected our financial position and
operating results during the periods included in the accompanying financial
statements.

CRITICAL ACCOUNTING POLICIES

During January 2002, the Securities and Exchange Commission ("SEC")
published a Commission Statement in the form of Financial Reporting Release No.
61, which requested that all registrants discuss their most "critical accounting
policies" in management's discussion and analysis of financial condition and
results of operations. The SEC has defined critical accounting policies as those
that are both important to the portrayal of a company's financial condition and
results, and that require management's most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. While our significant accounting policies
are summarized in Note 2 to our Consolidated Financial Statements included in
Form 10-K for the fiscal year ended December 31, 2002, we believe the following
accounting policies to be critical:

Revenue Recognition -- We adopted Staff Accounting Bulletin No. 101 ("SAB
101") in the fourth quarter of 2000 with an effective date of January 1, 2000,
implementing a change in accounting policy with respect to revenue recognition.
Beginning January 1, 2000, non-refundable fees received upon entering into
collaborative agreements in which the Company has continuing involvement are
recorded as deferred revenue and recognized over the estimated service period.
See Note 8 to our Unaudited Consolidated Financial Statements.

Payments received under the development, promotion, distribution and supply
agreement (the "Commercial Agreement") dated September 19, 2001 and as amended
on March 5, 2002 with Bristol-Myers Squibb Company ("BMS") and E.R. Squibb &
Sons, L.L.C., a Delaware limited liability company and a wholly-owned subsidiary
of BMS ("E.R. Squibb"), relating to ERBITUX, are being deferred and recognized
as revenue based upon the actual product research and development costs incurred
since September 19, 2001 to date by BMS, E.R. Squibb and ImClone Systems as a
percentage of the estimated total of such costs to be incurred over the term of
the agreement. Of the $400,000,000 in upfront payments we received from BMS
through June 30, 2003, approximately $21,829,000 was recognized as revenue
during the six months ended June 30, 2003 and $44,989,000 from the commencement
of the Commercial Agreement through June 30, 2003.

The methodology used to recognize deferred revenue involves a number of
estimates and judgments, such as the estimate of total product research and
development costs to be incurred under the Commercial Agreement. Changes in
these estimates and judgments can have a significant effect on the size and
timing of revenue recognition.

Non-refundable milestone payments, which represent the achievement of a
significant step in the research and development process, pursuant to
collaborative agreements other than the Commercial Agreement, are recognized as
revenue upon the achievement of the specified milestone.

Withholding Taxes -- The estimated amounts recorded in the accompanying
Unaudited Consolidated Financial Statements do not include penalties and
interest that may be imposed with respect to the withholding tax issues and
other related contingencies described in Notes 4 and 9 to our Unaudited
Consolidated Financial Statements, including the period covered by the statute
of limitations and our determination of certain stock option and warrant
exercise dates, because we do not believe that losses from such contingencies
are probable. With respect to the statute of limitations and our determination
of certain exercise dates, while we do not believe a loss is probable, there is
a potential additional liability with respect to these issues that may be
asserted by a taxing authority. If taxing authorities assert such issues and
prevail related to these withholding tax issues and other related contingencies,
including penalties, the liability which could be imposed by taxing authorities
would be substantial. The potential interest on the withholding tax liabilities
recorded on our Consolidated Balance Sheet could be up to a maximum amount of
$8,700,000 at

28

June 30, 2003. Potential additional withholding tax liability on other related
contingencies amount to approximately $11,000,000, exclusive of any interest or
penalties, and excluding the amount potentially attributable to Mr. Goldhammer
as discussed in Note 9 to the Unaudited Consolidated Financial Statements.

Production Costs -- The costs associated with the manufacture of ERBITUX
are included in research and development expenses when incurred and will
continue to be so classified until such time as ERBITUX may be approved for sale
or until we obtain binding obligations from our corporate partners for
commercial supply of such product. In the event of such approval or obligations
from our corporate partners, the subsequent costs associated with manufacturing
ERBITUX for commercial sale will be included in inventory and expensed as cost
of goods sold at the time of sale. If ERBITUX is approved by the United States
Food and Drug Administration ("FDA"), any subsequent sale of this inventory that
was previously expensed will result in revenue from product sales with no
corresponding cost of goods sold.

Litigation -- We are currently involved in certain legal proceedings as
discussed in "Commitments and Contingencies," Note 9 to our Unaudited
Consolidated Financial Statements. In accordance with Statement of Financial
Accounting Standards No. 5, no reserve has been established in our financial
statements for these legal proceedings because the Company does not believe that
a loss is probable. However, if in a future period events in any such legal
proceedings render it probable that a loss will be incurred, and if such loss is
reasonably estimable at that time, we will establish such a reserve. Thus, it is
possible that legal proceedings discussed in Note 9 may have a material adverse
impact on the operating results for that period, on our balance sheet or both.

Long-Lived Assets -- We review long-lived assets for impairment when events
or changes in business conditions indicate that their full carrying value may
not be recovered. Assets are considered to be impaired and written down to fair
value if expected associated undiscounted cash flows are less than carrying
amounts. Fair value is generally determined as the present value of the expected
associated cash flows. We recently built a Single Product Facility, are building
a Multiple Product Facility, and purchased a material logistics and warehousing
facility as summarized in "Property, Plant and Equipment," Note 2 to the
Unaudited Consolidated Financial Statements. The Single Product Facility is
dedicated to the clinical and commercial production of ERBITUX and the Multiple
Product Facility will be a multi-use production facility. ERBITUX is currently
being produced for clinical trials and potential commercialization. The material
logistics and warehousing facility includes office space, a storage location and
sampling laboratory for ERBITUX. The newly renovated administrative facility
houses the clinical, regulatory, sales, marketing, finance, human resources,
project management and MIS departments, as well as certain executive and legal
offices and other necessities. Based on management's current estimates, the
Company expects to recover the carrying value of such assets. Changes in
regulatory or other business conditions in the future could change our judgments
about the carrying value of these facilities, which could result in the
recognition of material impairment losses.

Manufacturing Contracts -- As summarized under "Contract Manufacturing
Services," Note 3 to the Unaudited Consolidated Financial Statements, we have
entered into certain development and manufacturing services agreements with
Lonza Biologics plc ("Lonza") for the clinical and commercial production of
ERBITUX. All commitments under these agreements were completed during the three
months ended June 30, 2003.

Valuation of Stock Options and Warrants -- We apply Accounting Principles
Board Opinion No. 25 and related interpretations in accounting for our stock
options and warrants. Accordingly, compensation expense is recorded on the date
of grant of an option to an employee or member of the Board of Directors only if
the fair market value of the underlying stock at the time of grant exceeds the
exercise price. During 2002 and 2003, our stock option grants were based on the
closing market price of the Company's stock on the date of grant. In addition,
we have granted options to certain Scientific Advisory Board members and outside
consultants, which are required to be measured at fair value and recognized as
compensation expense in our Consolidated Statements of Operations. Estimating
the fair value of stock options and warrants involves a number of judgments and
variables that are subject to significant change. A change in the fair value
estimate could have a significant effect on the amount of compensation expense
recognized.

29

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 2003 AND 2002

Revenues

Revenues for the six months ended June 30, 2003 and 2002 were $37,446,000
and $30,116,000, respectively, an increase of $7,330,000, or 24% in 2003.
Revenues for the six months ended June 30, 2003 primarily included $21,829,000
in license fee revenue and $10,432,000 in collaborative agreement revenue from
our amended ERBITUX Commercial Agreement with BMS and its wholly-owned
subsidiary, E.R. Squibb. The collaborative agreement revenue represents the
fully burdened manufacturing cost of ERBITUX supplied for or used in clinical
trials and certain research and development and marketing expenses that have
been incurred by us and are reimbursable by BMS as provided for in the amended
Commercial Agreement. License fee revenue from payments under this agreement (of
which $60,000,000 was received on March 5, 2003, $140,000,000 was received in
March 2002 and $200,000,000 was received in September 2001) is being recognized
over the product research and development life of ERBITUX. An additional
$250,000,000 is payable by BMS upon receipt of marketing approval from the FDA
with respect to an initial indication for ERBITUX and $250,000,000 is payable
upon receipt of marketing approval from the FDA with respect to a second
indication for ERBITUX. All such payments are non-refundable and non-creditable.
In addition, revenues for the six months ended June 30, 2003 included $4,620,000
in collaborative agreement revenue from our ERBITUX development and license
agreement with Merck KGaA and $111,000 of the $4,000,000 up-front payment
received upon entering into this agreement with Merck KGaA. This revenue is
being recognized ratably over the anticipated life of the agreement. Revenues
for the six months ended June 30, 2003 also included $302,000 in royalty revenue
from our strategic corporate alliance with Abbott Laboratories ("Abbott") in
diagnostics. Finally, revenues for the six months ended June 30, 2003 included
$81,000 in license fee revenue and $12,000 in collaborative agreement revenue
from our strategic corporate alliance with Merck KGaA for our principal cancer
vaccine product candidate, BEC2.

Revenues for the six months ended June 30, 2002 primarily included
$8,066,000 in license fee revenue and $8,521,000 in collaborative agreement
revenue from our amended ERBITUX Commercial Agreement with BMS and E.R. Squibb.
During the six months ended June 30, 2002 the Company and BMS agreed that
certain ERBITUX clinical trial costs incurred by the Company but billed to BMS
under the Commercial Agreement would in fact be borne by the Company due to such
trials' non-registrational nature. This resulted in the issuance of credit memos
to BMS during the six months ended June 30, 2002 totaling approximately
$2,949,000, which ultimately reduced collaborative agreement revenue and license
fee revenue. Revenues for the six months ended June 30, 2002 also included
$12,495,000 in collaborative agreement revenue from our ERBITUX development and
license agreement with Merck KGaA and $111,000 of the $4,000,000 up-front
payment received upon entering into this agreement with Merck KGaA. In addition,
revenues for the six months ended June 30, 2002 included $688,000 in royalty
revenue from our strategic corporate alliance with Abbott in diagnostics.
Finally, revenues for the six months ended June 30, 2002 included $81,000 in
license fee revenue and $154,000 in collaborative agreement revenue from our
strategic corporate alliance with Merck KGaA for our principal cancer vaccine
product candidate, BEC2.

Operating Expenses

Total operating expenses for the six months ended June 30, 2003 and 2002
were $105,599,000 and $106,231,000, respectively, a decrease of $632,000, in
2003. Operating expenses for the six months ended June 30, 2002 included
$2,250,000 in legal and other advisor fees associated with completing the
amended Commercial Agreement with BMS and E.R. Squibb and $3,384,000 to reflect
the write-down of the withholding tax asset attributable to our former General
Counsel, John B. Landes.

Operating Expenses: Research and Development

Research and development expenses for the six months ended June 30, 2003
and 2002 were $88,432,000 and $75,945,000, respectively, an increase of
$12,487,000 or 16% in 2003. Research and development expenses for the six months
ended June 30, 2003 and 2002, as a percentage of total operating expenses,
excluding the

30

legal and other advisor fee associated with the amended Commercial Agreement,
the write-down of withholding tax assets and the Industrial Development Revenue
Bonds tax expense, were 84% and 76%, respectively. Research and development
expenses include costs associated with our in-house and collaborative research
programs, product and process development expenses, costs to manufacture ERBITUX
and other product candidates (prior to any approval that we may obtain of a
product candidate for commercial sale or committed purchase obligations of our
corporate partners), quality assurance and quality control costs, and costs to
conduct our clinical trials and associated regulatory activities. Research and
development expenses include costs that are reimbursable by our corporate
partners. The increase in research and development expenses for the six months
ended June 30, 2003 was primarily attributable to (1) the costs associated with
full scale production at our Single Product Facility, (2) expenditures in the
functional areas of clinical, regulatory, and pilot plant manufacturing
associated with ERBITUX and (3) increased expenditures associated with discovery
research. We expect research and development costs to increase in future periods
as we continue to manufacture ERBITUX prior to any approval of the product that
we may obtain for commercial use or until we receive committed purchase
obligations of our corporate partners. In the event of such approval or
committed purchase obligations from our corporate partners, the subsequent costs
associated with manufacturing ERBITUX for supply to our corporate partners for
commercial use will be included in inventory and expensed as cost of goods sold
at the time of sale. We expect research and development costs associated with
discovery research and product development also to continue to increase in
future periods.

The largest component of our total operating expenses is our ongoing
investments in research and development and, in particular, the clinical
development of our product pipeline. The process of conducting the clinical
research necessary to obtain FDA approval is costly and time consuming. Current
FDA requirements for a new human drug or biological product to be marketed in
the United States include: (1) the successful conclusion of pre-clinical
laboratory and animal tests, if appropriate, to gain preliminary information on
the product's safety; (2) filing with the FDA of an IND, to conduct human
clinical trials for drugs or biologics; (3) the successful completion of
adequate and well-controlled human clinical investigations to establish the
safety and efficacy of the product for its recommended use; and (4) filing by a
company and acceptance and approval by the FDA of a New Drug Application ("NDA")
for a drug product or a Biological License Application ("BLA") for a biological
product to allow commercial distribution of the drug or biologic.

In light of the factors mentioned above, we consider the active management
and development of our clinical pipeline to be crucial to the long-term success
of the Company. As described in Part I of our December 31, 2002 annual report on
Form 10-K we currently have three candidates in clinical development, including
our most advanced candidate, ERBITUX. Due to the inherent risks associated with
candidate discovery and development, as well as the regulatory approval process,
we, by necessity, manage our overall research, development and in-licensing
efforts in a manner designed to generate new clinical candidates into
development.

The actual probability of success for each candidate and clinical program
may be impacted by a variety of factors, including, among others, the quality of
the candidate, the validity of the target and disease indication, early clinical
data, investment in the program, competition, manufacturing capability and
commercial viability. Due to these factors, it is difficult to give accurate
guidance on the anticipated proportion of our research and development
investments assigned to any one program prior to the Phase III stage of
development or the future cash inflows from these programs.

Operating Expenses: Marketing, General and Administrative

Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related facility costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. Marketing, general and administrative expenses also include amounts
reimbursable from our corporate partners. Marketing, general and administrative
expenses for the six months ended June 30, 2003 and 2002 were $17,102,000 and
$24,602,000, respectively, a decrease of $7,500,000, or 30% in 2003. The
decrease in marketing, general and administrative

31

expenses primarily resulted from the second quarter 2002 separation compensation
and other post-employment benefits, of $7,283,000, associated with the
resignation of our former President and Chief Executive Officer, Dr. Samuel D.
Waksal. In addition, during April 2003, BMS paid us $3,250,000, which
represented the refund of a previously written-off deposit related to the
exclusive right to negotiate a long-term supply agreement with Lonza. This
amount was recognized as a reduction to marketing, general and administrative
expenses in the six months ended June 30, 2003. This decrease was partially
offset by increased legal and accounting expenses relating to the withholding
tax matters discussed in Note 4 to the Unaudited Consolidated Financial
Statements. Other than the legal and accounting expenses discussed above, we
expect marketing, general and administrative expenses to increase in future
periods to support our continued commercialization efforts for ERBITUX.

Operating Expenses: Write-down of Withholding Tax Assets

The write-down of withholding tax assets for the six months ended June 30,
2002 was $3,384,000 to reflect the write-down of the asset attributable to our
former General Counsel, John B. Landes. Based on the limited information
available to us, due to the decrease in our stock price during 2002 and
corresponding decrease in the value of Mr. Landes' ownership of the Company's
securities, we determined that recoverability of the asset became doubtful and
therefore the asset write-down was recorded during the second quarter of 2002.

Operating Expenses: Industrial Development Revenue Bonds Tax Expense

In April 2003, we discovered that we were in breach of tax covenants in our
1990 IDA Bonds. We therefore recorded additional tax expense of $65,000 and
$50,000 for the six months ended June 30, 2003 and 2002, respectively, relating
to the 1990 IDA Bonds.

Interest Income, Interest Expense and Other (Income) Expense

Interest income was $2,683,000 for the six months ended June 30, 2003
compared with $5,168,000 for the six months ended June 30, 2002, a decrease of
$2,485,000, or 48% in 2003. The decrease was primarily attributable to a
decrease in the average monthly balance and a decrease in interest rates
associated with our portfolio of debt securities.

Interest expense was $4,760,000 and $6,841,000 for the six months ended
June 30, 2003 and 2002, respectively, a decrease of $2,081,000 or 30% in 2003.
The overall decrease in interest expense from the six months ended June 30, 2002
to 2003 was primarily attributable to an increase in the amount of interest
capitalized during the construction of our Multiple Product Facility from
$780,000 to $2,899,000. Interest expense for both periods included (1) interest
on the 5 1/2% convertible subordinated notes due March 1, 2005 (the "Convertible
Subordinated Notes") issued in February 2000, (2) interest on the 1990 IDA Bonds
and (3) interest recorded on various capital lease obligations under a 1998
financing agreement with Finova Technology Finance, Inc. ("Finova") and with GE
Capital Leasing.

We recorded gains on securities and investments of $805,000 and $1,236,000
for the six months ended June 30, 2003 and 2002, respectively.

Provision for Income Taxes

Income taxes of $214,000 for the six months ended June 30, 2003 are the
result of various tax law changes in the State of New Jersey, one of which is
the establishment of the Alternative Minimum Assessment tax ("AMA") to which we
are subject.

Net Losses

We had a net loss of $69,639,000 or $0.94 per share for the six months
ended June 30, 2003, compared with a net loss of $76,552,000 or $1.04 per share
for the six months ended June 30, 2002. The decrease in the net loss and net
loss per share to common stockholders was due to the factors noted above.

32

THREE MONTHS ENDED JUNE 30, 2003 AND 2002

Revenues

Revenues for the three months ended June 30, 2003 and 2002 were $17,875,000
and $11,565,000, respectively, an increase of $6,310,000, or 55% in 2003.
Revenues for the three months ended June 30, 2003 primarily included $11,303,000
in license fee revenue and $5,606,000 in collaborative agreement revenue from
our amended ERBITUX Commercial Agreement with BMS and its wholly-owned
subsidiary, E.R. Squibb. The collaborative agreement revenue represents the
fully burdened manufacturing cost of ERBITUX supplied for or used in clinical
trials and certain research and development and marketing expenses that have
been incurred by us and are reimbursable by BMS as provided for in the amended
Commercial Agreement. License fee revenue from payments under this agreement (of
which $60,000,000 was received on March 5, 2003, $140,000,000 was received in
March 2002 and $200,000,000 was received in September 2001) is being recognized
over the product research and development life of ERBITUX. All such payments are
non-refundable and non-creditable. In addition, revenues for the three months
ended June 30, 2003 included $804,000 in collaborative agreement revenue from
our ERBITUX development and license agreement with Merck KGaA and $55,000 of the
$4,000,000 up-front payment received upon entering into this agreement with
Merck KGaA. This revenue is being recognized ratably over the anticipated life
of the agreement. Finally, revenues for the quarter ended June 30, 2003 included
$41,000 in license fee revenue and $8,000 in collaborative agreement revenue
from our strategic corporate alliance with Merck KGaA for our principal cancer
vaccine product candidate, BEC2.

Revenues for the three months ended June 30, 2002 primarily included
$1,499,000 in license fee revenue and $2,426,000 in collaborative agreement
revenue from our amended ERBITUX Commercial Agreement with BMS and E.R. Squibb.
During the three months ended June 30, 2002 the Company and BMS agreed that
certain ERBITUX clinical trial costs incurred by the Company but billed to BMS
under the Commercial Agreement would in fact be borne by the Company due to such
trials' non-registrational nature. This resulted in the issuance of credit memos
to BMS during the three months ended June 30, 2002 totaling approximately
$2,949,000, which ultimately reduced collaborative agreement revenue and license
fee revenue. Revenues for the three months ended June 30, 2002 also included
$7,473,000 in collaborative agreement revenue from our ERBITUX development and
license agreement with Merck KGaA and $55,000 of the $4,000,000 up-front payment
received upon entering into this agreement with Merck KGaA. In addition,
revenues for the three months ended June 30, 2002 included $38,000 in royalty
revenue from our strategic corporate alliance with Abbott in diagnostics.
Finally, revenues for the quarter ended June 30, 2002 included $41,000 in
license fee revenue and $33,000 in collaborative agreement revenue from our
strategic corporate alliance with Merck KGaA for our principal cancer vaccine
product candidate, BEC2.

Operating Expenses

Total operating expenses for the three months ended June 30, 2003 and 2002
were $51,725,000 and $58,055,000, respectively, a decrease of $6,330,000, or 11%
in 2003. Operating expenses for the three months ended June 30, 2002 included
$3,384,000 to reflect the write-down of the withholding tax asset attributable
to our former General Counsel, John B. Landes.

Operating Expenses: Research and Development

Research and development expenses for the three months ended June 30, 2003
and 2002 were $41,745,000 and $38,167,000, respectively, an increase of
$3,578,000 or 9% in 2003. Research and development expenses for the three months
ended June 30, 2003 and 2002, as a percentage of total operating expenses,
excluding the write-down of the withholding tax assets and the Industrial
Development Revenue Bonds tax expense, were 81% and 70%, respectively. Research
and development expenses include costs associated with our in-house and
collaborative research programs, product and process development expenses, costs
to manufacture ERBITUX and other product candidates (prior to any approval that
we may obtain of a product candidate for commercial sale or committed purchase
obligations of our corporate partners), quality assurance and quality control
costs, and costs to conduct our clinical trials and associated regulatory
activities.

33

Research and development expenses include costs that are reimbursable by our
corporate partners. The increase in research and development expenses for the
three months ended June 30, 2003 was primarily attributable to (1) expenditures
in the functional areas of clinical, and regulatory associated with ERBITUX and
(2) increased expenditures associated with discovery research. We expect
research and development costs to increase in future periods as we continue to
manufacture ERBITUX prior to any approval of the product that we may obtain for
commercial use or until we receive committed purchase obligations of our
corporate partners. In the event of such approval or committed purchase
obligations from our corporate partners, the subsequent costs associated with
manufacturing ERBITUX for supply to our corporate partners for commercial use
will be included in inventory and expensed as cost of goods sold at the time of
sale. We expect research and development costs associated with discovery
research and product development also to continue to increase in future periods.

Operating Expenses: Marketing, General and Administrative

Marketing, general and administrative expenses include marketing and
administrative personnel costs, including related facility costs, additional
costs to develop internal marketing and sales capabilities, costs to pursue
arrangements with strategic corporate partners and technology licensors, and
expenses associated with applying for patent protection for our technology and
products. Marketing, general and administrative expenses also include amounts
reimbursable from our corporate partners. Marketing, general and administrative
expenses for the three months ended June 30, 2003 and 2002 were $9,948,000 and
$16,479,000, respectively, a decrease of $6,531,000, or 40% in 2003. The
decrease in marketing, general and administrative expenses primarily resulted
from the second quarter 2002 separation compensation and other post-employment
benefits, of $7,283,000, associated with the resignation of our former President
and Chief Executive Officer, Dr. Samuel D. Waksal. In addition, during April
2003, BMS paid us $3,250,000 which represented the refund of a previously
written-off deposit related to the exclusive right to negotiate a long-term
supply agreement with Lonza. This amount was recognized as a reduction to
Marketing, general and administrative expenses in the three months ended June
30, 2003. This decrease was partially offset by increased legal and accounting
expenses relating to the withholding tax matters discussed in Note 4 to the
Unaudited Consolidated Financial Statements. Other than the legal and accounting
expenses discussed above, we expect Marketing, general and administrative
expenses to increase in future periods to support our continued
commercialization efforts for ERBITUX.

Operating Expenses: Write-down of Withholding Tax Assets

The write-down of withholding tax assets for the three months ended June
30, 2002 was $3,384,000 to reflect the write-down of the asset attributable to
our former General Counsel, John B. Landes. Based on the limited information
available to us, due to the decrease in our stock price during 2002 and
corresponding decrease in the value of Mr. Landes' ownership of the Company's
securities, we determined that recoverability of the asset became doubtful and
therefore the asset write-down was recorded during the second quarter of 2002.

Operating Expenses: Industrial Development Revenue Bonds Tax Expense

In April 2003, we discovered that we were in breach of tax covenants in our
1990 IDA Bonds. We therefore recorded additional tax expense of $32,000 and
$25,000 for the three months ended June 30, 2003 and 2002, respectively,
relating to the 1990 IDA Bonds.

Interest Income, Interest Expense and Other (Income) Expense

Interest income was $1,245,000 for the three months ended June 30, 2003
compared with $2,904,000 for the three months ended June 30, 2002, a decrease of
$1,659,000, or 57% in 2003. The decrease was primarily attributable to a
decrease in the average monthly balance and a decrease in interest rates
associated with our portfolio of debt securities.

34

Interest expense was $2,537,000 and $3,348,000 for the three months ended
June 30, 2003 and 2002, respectively, a decrease of $811,000 or 24% in 2003. The
overall decrease in interest expense from the three months ended June 30, 2002
to 2003 was primarily attributable to an increase in the amount of interest
capitalized during the construction of our Multiple Product Facility from
$481,000 to $1,335,000. Interest expense for both periods included (1) interest
on the 5 1/2% convertible subordinated notes due March 1, 2005 (the "Convertible
Subordinated Notes") issued in February 2000, (2) interest on the 1990 IDA Bonds
and (3) interest recorded on various capital lease obligations under a 1998
financing agreement with Finova and with GE Capital Leasing.

We recorded gains on securities and investments of $426,000 and $435,000
for the three months ended June 30, 2003 and 2002, respectively.

Provision for Income Taxes

Income taxes of $112,000 for the three months ended June 30, 2003 are the
result of various tax law changes in the State of New Jersey, one of which is
the establishment of the Alternative Minimum Assessment tax ("AMA") to which we
are subject.

Net Losses

We had a net loss of $34,828,000 or $0.47 per share for the three months
ended June 30, 2003, compared with a net loss of $46,499,000 or $0.63 per share
for the three months ended June 30, 2002. The increase in the net loss and net
loss per share to common stockholders was due to the factors noted above.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2003, our principal sources of liquidity consisted of cash and
cash equivalents and securities available for sale of approximately
$189,000,000. From our inception on April 26, 1984 through June 30, 2003, we
have financed our operations primarily through the following means:

- Public and private sales of equity securities and convertible notes in
financing transactions have raised approximately $492,652,000 in net
proceeds.

- We have earned approximately $191,897,000 from license fees, contract
research and development fees, reimbursements from our corporate partners
and royalties from collaborative partners. Additionally, we have
approximately $363,123,000 in deferred revenue related primarily to
up-front payments received from our amended Commercial Agreement for
ERBITUX with BMS, our ERBITUX development and license agreement with
Merck KGaA and our BEC2 development and commercialization agreement with
Merck KGaA. These amounts are being recognized as revenue during the
terms of the respective agreements.

- We have earned approximately $59,098,000 in interest income.

- The sale of the IDA Bonds in each of 1985, 1986 and 1990 raised an
aggregate of $6,300,000, the proceeds of which were used primarily for
the acquisition, construction and installation of our research and
development facility in New York City, and all of which have now been
redeemed.

We may, from time to time, consider a number of strategic alternatives
designed to increase shareholder value, which could include joint ventures,
acquisitions and other forms of alliances, product divestitures, sale-leaseback
transactions, outlicensing opportunities, as well as the sale of all or part of
the Company.

Until September 19, 2006, or earlier upon the occurrence of certain
specified events, we may not take any action that constitutes a prohibited
action under our stockholder agreement with BMS and BMS Biologics, without the
consent of the BMS directors. Such prohibited actions include (i) issuing
additional shares or securities convertible into shares in excess of 21,473,002
shares of our common stock in the aggregate, subject to certain exceptions; (ii)
incurring additional indebtedness if the total of the principal amount of such
indebtedness incurred since September 19, 2001 and then-outstanding, and the net
proceeds from the issuance of any redeemable preferred stock then-outstanding,
would exceed the amount of indebtedness outstanding as

35

of September 19, 2001 by more than $500 million; (iii) acquiring any business if
the aggregate consideration for such acquisition, when taken together with the
aggregate consideration for all other acquisitions consummated during the
previous twelve months, is in excess of 25% of the aggregate value of the
Company at the time we enter into the binding agreement relating to such
acquisition; (iv) disposing of all or any substantial portion of our non-cash
assets; and (v) issuing capital stock with more than one vote per share.

In September 2001, we entered into the ERBITUX Commercial Agreement with
BMS and E.R. Squibb, pursuant to which, among other things, together with E.R.
Squibb we are (a) co-developing and co-promoting ERBITUX in the United States
and Canada, and (b) co-developing ERBITUX (either together or co-exclusively
with Merck KGaA) in Japan. The Commercial Agreement was amended on March 5, 2002
to change certain economics of the agreement and has expanded the clinical and
strategic roles of BMS in the ERBITUX development program. Pursuant to the
amended Commercial Agreement, we can receive up-front and milestone payments
totaling $900,000,000 in the aggregate, of which $200,000,000 was received upon
the signing of the agreement. The remaining $700,000,000 in payments comprises
$140,000,000 paid on March 7, 2002, $60,000,000 paid on March 5, 2003,
$250,000,000 payable upon receipt of marketing approval from the FDA with
respect to an initial indication for ERBITUX and $250,000,000 payable upon
receipt of marketing approval from the FDA with respect to a second indication
for ERBITUX. All such payments are non-refundable and non-creditable. Except for
our expenses incurred pursuant to the co-promotion option that we have
exercised, E.R. Squibb is responsible for 100% of the distribution, sales and
marketing costs in the United States and Canada, and E.R. Squibb and the
Company, each will be responsible for 50% of the distribution, sales, marketing
costs and other related costs and expenses in Japan. The Commercial Agreement
provides that E.R. Squibb shall pay us distribution fees based on a percentage
of annual sales of ERBITUX by E.R. Squibb in the United States and Canada. The
distribution fee is 39% of net sales in the United States and Canada. The
Commercial Agreement also provides that the distribution fees for the sale of
ERBITUX in Japan by E.R. Squibb or us shall be equal to 50% of operating profit
or loss with respect to such sales for any calendar month. In the event of an
operating profit, E.R. Squibb will pay us the amount of such distribution fee,
and in the event of an operating loss, we will credit E.R. Squibb the amount of
such distribution fee. The Commercial Agreement provides that we will be
responsible for the manufacture and supply of all requirements of ERBITUX in
bulk form for clinical and commercial use in the United States, Canada and Japan
and that E.R. Squibb will purchase all of its requirements of ERBITUX in bulk
form for commercial use from us. We will supply ERBITUX for clinical use at our
fully burdened manufacturing cost, and will supply ERBITUX for commercial use at
our fully burdened manufacturing cost plus a mark-up of 10%. In addition to the
up-front and milestone payments, distribution fees for the United States, Canada
and Japan and the 10% mark-up on the commercial supply of ERBITUX, E.R. Squibb
is also responsible for 100% of the cost of all clinical studies other than
those studies undertaken post-launch, which are not pursuant to an IND (e.g.,
Phase IV studies), the cost of which will be shared equally between E.R. Squibb
and ImClone Systems. As between E.R. Squibb and the Company, each will be
responsible for 50% of the cost of all clinical studies in Japan. We have also
agreed, and may agree in the future, to share with E.R. Squibb, on terms other
than the foregoing, costs of clinical trials that we believe are not potentially
registrational but should be undertaken prior to launch in the United States,
Canada or Japan. We have incurred $3,346,000 during the six months ended June
30, 2003, pursuant to such cost sharing. We have also incurred $60,000 during
the six months ended June 30, 2003, related to the agreement with respect to
development in Japan.

In February 2000, we completed a private placement of $240,000,000 in
5 1/2% convertible subordinated notes due March 1, 2005. We received net
proceeds of approximately $231,500,000, after deducting expenses associated with
the offering. Accrued interest on the notes was approximately $4,400,000 at June
30, 2003 and December 31, 2002, respectively. A holder may convert all or a
portion of a note into common stock at any time on or before March 1, 2005 at a
conversion price of $55.09 per share, subject to adjustment under certain
circumstances. On or after March 6, 2003, we may redeem some or all of the notes
at specified redemption prices.

On May 2, 2003, we informed the trustee for the Convertible Subordinated
Notes of our withholding tax issues and the delay in filing our Form 10-K for
the year ended December 31, 2002, and of our intention to satisfy our tax
liabilities upon completion of discussions with the relevant taxing authorities.
The indenture for

36

the Convertible Subordinated Notes includes covenants requiring us to timely pay
taxes and timely make Exchange Act filings. Under the indenture, there can be no
acceleration of payment of the notes until we receive a notice of default from
the trustee or a specified percentage of the note holders and a 60-day grace
period lapses without the default being cured. We have not received any such
notice. If, at some point in the future, we were to receive such a notice and if
it was determined at that time that we were not in compliance with applicable
covenants, we intend to and believe we would be able to cure such non-compliance
within the 60-day grace period.

In September 2000, we entered into a three-year commercial manufacturing
services agreement with Lonza relating to ERBITUX. This agreement was amended in
June 2001 and again in September 2001 and August 2003 to include additional
services and to potentially extend the term. As of June 30, 2003, we incurred
approximately $85,022,000 for services provided under the commercial
manufacturing services agreement. Lonza is currently manufacturing ERBITUX at
the 5,000-liter scale under cGMP. The costs associated with this agreement are
included in research and development expenses when incurred and will continue to
be so classified until such time as ERBITUX may be approved for sale or until we
obtain obligations from our corporate partners for commercial supply of such
product. In the event of such approval or obligations from our corporate
partners, the subsequent costs associated with manufacturing ERBITUX for
commercial sale will be included in inventory and expensed as cost of goods sold
at the time of sale. At June 30, 2003, there are no remaining future commitments
under this agreement, but the agreement has been subsequently amended to allow
for potential manufacture of a limited number of additional batches.

In December 2001, we entered into an agreement with Lonza to manufacture
ERBITUX at the 2,000-liter scale for use in clinical trials by Merck KGaA. We
had incurred approximately $7,183,000 for services provided under this
agreement. During 2002, Merck KGaA reimbursed the Company this entire
obligation. At June 30, 2003, there are no remaining future commitments under
this agreement.

On January 2, 2002, we executed a letter of intent with Lonza to enter into
a long-term supply agreement. The long-term supply agreement would apply to a
large scale manufacturing facility that Lonza is constructing, which would be
able to produce ERBITUX in 20,000-liter batches. We paid Lonza $3,250,000 upon
execution of the letter of intent for the exclusive right to negotiate a
long-term supply agreement for a portion of the facility's manufacturing
capacity. In September 2002, we wrote-off the deposit because the exclusive
negotiation period ended on September 30, 2002. The $3,250,000 is included in
marketing, general and administrative expenses in the Consolidated Statement of
Operations for the year ended December 31, 2002. In light of the assistance we
provided to BMS with respect to preserving and then relinquishing the
manufacturing capacity described above, BMS paid us $3,250,000 in April 2003 and
this amount is recognized as a reduction to marketing, general and
administrative expenses in the three months ended June 30, 2003.

Effective April 1990, we entered into a development and commercialization
agreement with Merck KGaA with respect to BEC2 and the recombinant gp75 antigen.
The agreement has been amended a number of times, most recently in December
1997. The agreement grants Merck KGaA a license, with the right to sublicense,
to make, have made, use, sell, or have sold BEC2 and gp75 antigen outside North
America. The agreement also grants Merck KGaA a license, without the right to
sublicense, to use, sell, or have sold, but not to make, BEC2 within North
America in conjunction with ImClone Systems. Pursuant to the terms of the
agreement, we have retained the rights, (1) without the right to sublicense, to
make, have made, use, sell, or have sold BEC2 in North America in conjunction
with Merck KGaA and (2) with the right to sublicense, to make, have made, use,
sell, or have sold gp75 antigen in North America. In return, we have received
research support payments totaling $4,700,000 and are entitled to no further
research support payments under the agreement. Merck KGaA is also required to
make payments of up to $22,500,000, of which $4,000,000 has been received, based
on milestones achieved in the licensed products' development. Merck KGaA is also
responsible for worldwide costs of up to DM17,000,000 associated with a
multi-site, multinational Phase III clinical trial for BEC2 in limited disease
small-cell lung carcinoma. This expense level was reached during the fourth
quarter of 2000 and all expenses incurred from that point forward are being
shared 60% by Merck KGaA and 40% by ImClone Systems. Such cost sharing applies
to all expenses beyond the DM 17,000,000 threshold. Merck KGaA is also required
to pay royalties on the eventual sales of BEC2 outside of North

37

America, if any. Revenues from sales, if any, of BEC2 in North America will be
distributed in accordance with the terms of a co-promotion agreement to be
negotiated by the parties.

In December 1998, we entered into a development and license agreement with
Merck KGaA with respect to ERBITUX. In exchange for granting Merck KGaA
exclusive rights to market ERBITUX outside of the United States and Canada and
co-development rights in Japan, we received $30,000,000 through June 30, 2003,
in up-front cash fees and early cash payments based on the achievement of
defined milestones. An additional $14,000,000 has been received through June 30,
2003, based upon the achievement of further milestones for which Merck KGaA
received equity in ImClone Systems and $16,000,000 more equity payments are
possible depending upon the achievement of further defined milestones.

The chart below details the equity milestone payments received from Merck
KGaA through June 30, 2003:

- ---------------

(1) Amounts in the above table do not include milestone-type payments under
collaborative agreements.

At December 31, 2002, our estimated net operating loss carryforwards for
United States Federal income tax purposes aggregated approximately $369,000,000,
expiring at various dates from 2003 through 2022. Of this total, we have
approximately $327,000,000 available to use in 2003, approximately $5,159,000
available to use in each year from 2004 through 2011 and approximately $672,000
available to use in 2012. Any of these net operating loss carryforwards that are
not utilized are available for utilization in future years, subject to
applicable statutory expiration dates.

NEW JERSEY STATE TAX LAW CHANGES

In July 2002, the State of New Jersey ("NJ") enacted various income tax law
changes, which are retroactive to January 1, 2002. One of the provisions of the
new law is the suspension of the utilization of net operating losses for 2002
and 2003. This provision would negatively affect the Company if it generates NJ
taxable income in 2003 because the Company would not be able to utilize its NJ
net operating loss carryover to offset such taxable income. A second provision
establishes the Alternative Minimum Assessment ("AMA"), which applies to
companies like ours that currently pay no corporate business tax. This provision
requires that we assess an alternate tax liability with a formula that uses
either reported gross receipts or gross profits as a determining factor. We are
then required to pay the greater of the regular NJ Corporation Business Tax or
the AMA. The AMA tax paid is creditable and can be carried forward to reduce the
income tax in future periods. We have recorded a tax provision of approximately
$112,000 and $214,000 for the three and six months ended June 30, 2003
associated with the NJ AMA.

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 -- SAFE HARBOR CAUTIONARY
STATEMENT

This Form 10-Q contains "forward-looking" statements, as defined in the
Private Securities Litigation Reform Act of 1995 that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about our and our subsidiary's beliefs and
expectations, are forward-

43

looking statements. These statements involve potential risks and uncertainties;
therefore, actual results may differ materially. You are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date on which they were made. We do not undertake any obligation to update any
forward-looking statements, whether as a result of new information, future
events or otherwise.

Important factors that may affect these expectations include, but are not
limited to: the risks and uncertainties associated with completing pre-clinical
and clinical trials of our compounds that demonstrate such compounds' safety and
effectiveness; manufacturing losses and risks associated therewith; obtaining
additional financing to support our operations; obtaining and maintaining
regulatory approval for such compounds and complying with other governmental
regulations applicable to our business; obtaining the raw materials necessary in
the development of such compounds; consummating and maintaining collaborative
arrangements with corporate partners for product development; achieving
milestones under collaborative arrangements with corporate partners; developing
the capacity to manufacture, market and sell our products, either directly or
with collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; obtaining adequate reimbursement from third party payers; attracting
and retaining key personnel; legal costs and the duration and outcome of legal
proceedings and investigations, including, but not limited to, our
investigations pertaining to tax withholding issues; complying with covenants in
the indenture for our Convertible Subordinated Notes; and with the terms of
other contractual obligations; obtaining patent protection for discoveries and
risks associated with commercial limitations imposed by patents owned or
controlled by third parties; and those other factors set forth in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
those other factors set forth in "Risk Factors" in the Company's most recent
Registration Statement.

We do not undertake to discuss matters relating to certain completed
clinical trials or our regulatory strategies beyond those which have already
been made public or discussed herein or in our annual report on Form 10-K for
2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our holdings of financial instruments comprise a mix of U.S. dollar
denominated securities that may include U.S. corporate debt, foreign corporate
debt, U.S. government debt, foreign government/agency guaranteed debt and
commercial paper. All such instruments are classified as securities available
for sale. Generally, we do not invest in portfolio equity securities,
commodities, foreign exchange contacts or use financial derivatives for trading
purposes. Our debt security portfolio represents funds held temporarily pending
use in our business and operations. We manage these funds accordingly. We seek
reasonable assuredness of the safety of principal and market liquidity by
investing in investment grade fixed income securities while at the same time
seeking to achieve a favorable rate of return. Our market risk exposure consists
principally of exposure to changes in interest rates. Our holdings are also
exposed to the risks of changes in the credit quality of issuers. We invest in
securities that have a range of maturity dates. Typically, those with a
short-term maturity are fixed-rate, highly liquid, debt instruments and those
with longer-term maturities are highly liquid debt instruments with fixed
interest rates or with periodic interest rate adjustments. The table below
presents the principal amounts and related weighted average interest rates by
year of maturity for our investment portfolio as of June 30, 2003: (in
thousands, except interest rates)

44

- ---------------

(1) These holdings consist of U.S. corporate and foreign corporate floating rate
notes. Interest on the securities is adjusted monthly, quarterly or
semi-annually, depending on the instrument, using prevailing interest rates.
These holdings are highly liquid and we consider the potential for loss of
principal to be minimal.

Our outstanding 5 1/2% fixed rate convertible subordinated notes in the
principal amount of $240,000,000 due March 1, 2005 are convertible into our
common stock at a conversion price of $55.09 per share. The fair value of fixed
interest rate instruments are affected by changes in interest rates and in the
case of the convertible notes by changes in the price of our common stock as
well. The fair value of the 5 1/2% convertible subordinated notes (which have a
carrying value of $240,000,000) was approximately $240,890,000 at June 30, 2003.

ITEM 4. CONTROLS AND PROCEDURES

We have strengthened and will continue to strengthen our controls and
procedures and improve our corporate governance in order to ensure the accuracy
and timeliness of our financial reporting, as well as our compliance with tax
and other regulatory requirements. As part of this commitment, we have initiated
a number of steps, including those in response to the Sarbanes-Oxley Act of 2002
and corresponding SEC and Nasdaq requirements or proposals. Specific actions
taken or planned by us include the following:

- We have adopted Corporate Governance Guidelines, a Code of Business
Conduct and Ethics, and formal charters for all of our Board committees.
In addition, all employees, officers, directors, consultants and
Scientific Advisory Board members will be required to sign an
acknowledgement on an annual basis that they have read the Code of
Business Conduct and Ethics policy, understand its contents, and agree to
abide by its terms as a condition of employment or association with the
Company.

- We strengthened our Audit Committee Charter and in February 2003,
appointed a new member to our Board of Directors and Audit Committee,
John A. Fazio. Mr. Fazio is a former Senior General Practice Partner of
PricewaterhouseCoopers, qualifies as a "financial expert" under the
Sarbanes-Oxley Act, and brings considerable financial expertise in the
pharmaceutical industry. We expect to add one or more qualified
"financial experts" to the committee in due course.

- In October 2002, we established a Disclosure Committee to formally
organize and oversee the disclosure process. The Committee consists of
senior finance, investor relations, operations and legal management
personnel, with a mandate to design and establish controls and other
procedures to assist our senior officers in overseeing the accuracy and
timeliness of our disclosures.

- In September 2002 we created an Internal Audit function with a formal
charter, which mandates that the department provide independent,
objective and timely analyses and assurances to senior management and the
Board of Directors as to the adequacy and effectiveness of our risk
management, control and governance processes.

- We have conducted a comprehensive review of the adequacy of our policies
and procedures with respect to the administration of our equity
compensation plans (including stock option and warrant plans) and
purchases and sales of our securities. We revised our Insider Trading
Policy and require that all employees, officers, directors, consultants
and Scientific Advisory Board members sign an acknowledgement that they
have read the policy, understand its contents and agree to abide by its
terms as a condition of employment or association with the Company. In
addition, we significantly increased the number of senior managers
designated as executive officers obligated to file reports under Section
16(a) of the Exchange Act. In addition, we have conducted an internal
review of our withholding and reporting policies and established
procedures to ensure that we are in compliance with federal, state and
local tax codes and regulations.

- We are taking steps to ensure that we are in compliance with the
requirements of Section 404 of the Sarbanes-Oxley Act. The Company
intends to modify and enhance its internal control structure based

45

on the recommendations of the Committee of Sponsoring Organizations of
the Treadway Commission ("COSO"). The COSO Integrated
Framework -- Internal Controls report provides a sound basis for
establishing internal control systems and determining their
effectiveness. It is generally regarded as providing the most
recognizable and suitable set of control criteria against which internal
controls and procedures for financial reporting may be judged, and it
meets the test of an authoritative framework that is widely accepted. The
SEC's rules for Section 404 refer to the COSO framework and U.S.
professional auditing literature embraces COSO. For this purpose, we will
engage the assistance of a professional services firm that, in addition
to providing expert advice and guidance, will ensure that an objective
assessment is performed.

- We have established the position of and appointed a Chief Tax Officer, a
new position charged with the responsibility of supervising our policies
and procedures with respect to federal, state, local and foreign tax
administration and compliance, including, but not limited to, compliance
with tax withholding requirements.

- We have enhanced and updated our Travel and Other Business Expense
Policies and Procedures to strengthen internal controls and to ensure
compliance with all appropriate regulatory agencies.

Our Acting Chief Executive Officer and Acting Chief Financial Officer have
evaluated the effectiveness of our "disclosure controls and procedures" (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of a date (the
"Evaluation Date") within 90 days of the filing date of this quarterly report.
Based on the steps outlined in the preceding paragraph, our Acting Chief
Executive Officer and Acting Chief Financial Officer have concluded that, as of
the end of the period covered by this report, our disclosure controls and
procedures were effective and designed to ensure that material information
relating to us and our consolidated subsidiary would be made known to them by
others within those entities. We are committed to performing ongoing periodic
reviews of the effectiveness of our disclosure controls and procedures and we
will continue to make improvements to our control structure as needed.

As required by Rule 13a-15(d), our Acting Chief Executive Officer and
Acting Chief Financial Officer also conducted an evaluation of our internal
control over financial reporting to determine whether any changes occurred
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. Based on this evaluation, there has been no such change during the
quarter covered by this report, other than the enhancement and updating of our
Travel and Other Business Expense Policies and Procedures as described above. A
description of previous such changes is set forth above in this Item 4.

PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A. LITIGATION

1. FEDERAL SECURITIES ACTIONS

Beginning in January 2002, a number of complaints asserting claims under
the federal securities laws against us and certain of our directors and officers
were filed in the U.S. District Court for the Southern District of New York.
Those actions were consolidated under the caption Irvine v. ImClone Systems
Incorporated et al., No. 02 Civ. 0109 (RO), and on September 16, 2002, a
consolidated amended complaint was filed in that consolidated action, which
plaintiffs corrected in limited respects on October 22, 2002. The corrected
consolidated amended complaint named us, as well as our former President and
Chief Executive Officer, Dr. Samuel D. Waksal, our former Chief Scientific
Officer and then-President and Chief Executive Officer, Dr. Harlan W. Waksal,
our former director and then-Chairman of our Board of Directors, Robert
Goldhammer, current or former directors Richard Barth, David Kies, Paul Kopperl,
John Mendelsohn and William Miller, our former General Counsel, John Landes, and
our Vice President for Marketing and Sales,

46

Ronald Martell, as defendants. The complaint asserted claims for securities
fraud under sections 10(b), 20(a) and Rule 10b-5 of the Securities Exchange Act
of 1934, on behalf of a purported class of persons who purchased our publicly
traded securities between March 27, 2001 and January 25, 2002. The complaint
also asserted claims against Dr. Samuel D. Waksal under section 20A of the
Exchange Act on behalf of a separate purported sub-class of purchasers of our
securities between December 27, 2001 and December 28, 2001. The complaint
generally alleged that various public statements made by or on behalf of us or
the other defendants during 2001 and early 2002 regarding the prospects for
United States Food and Drug Administration ("FDA") approval of ERBITUX were
false or misleading when made, that the individual defendants were allegedly
aware of material non-public information regarding the actual prospects for
ERBITUX at the time that they engaged in transactions in our common stock and
that members of the purported stockholder class suffered damages when the market
price of our common stock declined following disclosure of the information that
allegedly had not been previously disclosed. The complaint sought to proceed on
behalf of the alleged class described above, sought monetary damages in an
unspecified amount and seeks recovery of plaintiffs' costs and attorneys' fees.
On November 25, 2002, all defendants other than Dr. Samuel D. Waksal filed a
motion to dismiss the complaint for failure to state a claim. On June 3, 2003,
the court granted that motion in part, dismissing the complaint as to defendants
Messrs. Goldhammer, Barth, Kies, Kopperl, Landes, Martell, Mendlesohn and
Miller, but not dismissing it as to the Company, Dr. Harlan W. Waksal and Dr.
Samuel D. Waksal.

Separately, on September 17, 2002, an individual purchaser of our common
stock filed an action on his own behalf asserting claims against the Company,
Dr. Samuel D. Waksal and Dr. Harlan W. Waksal under sections 10(b) and 20(a) of
the Exchange Act and SEC Rule 10b-5. That action is styled Flynn v. ImClone
Systems Incorporated, et al., No. 02 Civ. 7499 and, in contrast to the Irvine
case discussed above, this case was not filed against any of our outside
directors. In this case, the plaintiff alleges that he purchased shares on
various dates in late 2001, that various public statements made by us or the
other defendants during 2001 regarding the prospects for FDA approval of ERBITUX
were false or misleading when made and that plaintiff relied on such allegedly
false and misleading information in making his purchases. Plaintiff seeks
compensatory damages of not less than $180,000 and punitive damages of $5
million, together with interest, costs and attorneys' fees. On November 25,
2002, both defendants other than Dr. Samuel D. Waksal filed a motion to dismiss
the complaint for failure to state a claim. On June 3, 2003, the court denied
that motion.

We intend to vigorously defend against the claims asserted in these
actions, which are in their earliest stages. We are unable to predict the
outcome of these actions at this time. Because we do not believe that a loss is
probable, no legal reserve has been established.

2. DERIVATIVE ACTIONS

Beginning on January 13, 2002, and continuing thereafter, nine separate
purported shareholder derivative actions have been filed against members of our
board of directors, certain of our present and former officers, and us, as
nominal defendant, among others, advancing claims based on allegations similar
to the allegations in the federal securities class action complaints. Four of
these derivative cases were filed in the Delaware Court of Chancery and have
been consolidated in that court under the caption In re ImClone Systems
Incorporated Derivative Litigation, Cons. C.A. No. 19341-NC. Three of these
derivative actions were filed in New York State Supreme Court in Manhattan,
(styled Boghosian v. Barth, et al., Index No. 100759/02, Johnson v. Barth, et
al., Index No. 601304/02, and Henshall v. Bodnar, et al., Index No. 603121/02)
and have been consolidated under the caption In re ImClone Systems, Inc.
Shareholder Derivative Litigation, Index No. 02-100759. All of these state court
actions have been stayed in deference to proceeding in the U.S. District Court
for the Southern District of New York. Two purported derivative actions, Lefanto
v. Waksal, et al., No. 02 Civ. 163 (RO) and Forbes v. Barth, et al., No. 02 Civ.
1400 (RO), have been filed in the U.S. District Court for the Southern District
of New York and have been consolidated under the caption In re ImClone Systems,
Inc. Shareholder Derivative Litigation, Master File No. 02 CV 163 (RO). A
supplemental verified consolidated amended derivative complaint in these
consolidated federal actions was filed on August 8, 2003. It asserts purportedly
on behalf of the Company, claims including breach of fiduciary duty by certain
members of our board of directors and current and former officers, among others,
based on allegations

47

including that they engaged in transactions in our common stock while in
possession of material, non-public information concerning the regulatory and
marketing prospects for ERBITUX, or improperly disclosed such information to
others, and that they failed to maintain adequate controls and to exercise due
care with regard to the Company's ERBITUX application to the FDA and certain
public statements by or on behalf of the Company. No response to the complaints
in those actions has been required to date.

We intend to vigorously defend against the claims asserted in these
actions, which are in their earliest stages. We are unable to predict the
outcome of these actions at this time. Because we do not believe that a loss is
probable, no legal reserve has been established.

B. GOVERNMENT INQUIRIES AND INVESTIGATIONS

As previously reported, we have received subpoenas and requests for
information in connection with investigations by the Securities and Exchange
Commission (the "SEC"), the Subcommittee on Oversight and Investigations of the
U.S. House of Representatives Committee on Energy and Commerce and the U.S.
Department of Justice relating to the circumstances surrounding the disclosure
of the FDA "refusal to file" letter dated December 28, 2001 and trading in our
securities by certain ImClone Systems insiders in 2001. We have also received
subpoenas and requests for information pertaining to document retention issues
in 2001 and 2002, and to certain communications regarding ERBITUX in 2000. We
are cooperating with all of these inquiries and intend to continue to do so.

On June 19, 2002, we received a written "Wells Notice" from the staff of
the SEC, indicating that the staff of the SEC is considering recommending that
the SEC bring an action against us relating to our disclosures immediately
following the receipt of a "refusal to file" letter from the FDA on December 28,
2001 for our BLA for ERBITUX. We filed a Wells submission on July 12, 2002 in
response to the staff's Wells Notice.

In January 2003, the New York State Department of Taxation and Finance
("New York State") notified us that we were liable for the New York State and
City income taxes that were not withheld because one or more of our employees
who exercised certain non-qualified stock options in 1999 and 2000 failed to pay
New York State and City income taxes for those years. On March 13, 2003, we
entered into a closing agreement with New York Sate, paying $4,500,000 to settle
the matter. We believe that substantially all of the underpayment of New York
State and City income tax identified by New York State is attributable to the
exercise of non-qualified stock options by our former President and Chief
Executive Officer, Dr. Samuel D. Waksal. At the same time, we informed the
Internal Revenue Service, the SEC and the United States Attorney's Office,
responsible for the prosecution of Dr. Samuel D. Waksal, of this issue. In order
to confirm whether our liability in this regard was limited to Dr. Samuel D.
Waksal's failure to pay income taxes, we contacted current and former officers
and employees who had exercised non-qualified stock options to confirm that
those individuals had properly reported and paid their personal income tax
liabilities for the years 1999 and 2000 in which they exercised options, which
would reduce or eliminate our potential liability for failure to withhold income
taxes on the exercise of those options. In the course of doing so, we became
aware of another potential income and employment tax withholding liability
associated with the exercise of certain warrants granted in the early years of
our existence that were held by certain officers, directors and employees,
including our former President and Chief Executive Officer, Samuel D. Waksal,
our former General Counsel, John B. Landes, our former Chief Scientific Officer,
Harlan W. Waksal, and our former director and Chairman of the Board, Robert F.
Goldhammer. Again, we promptly informed the Internal Revenue Service, the SEC
and the United States Attorney's Office of this issue. We also informed New York
State of this issue. On June 17, 2003, New York State notified us that, based on
this issue, they are continuing a previously conducted audit of the Company and
are evaluating the terms of the closing agreement to determine whether or not it
should be re-opened.

On March 31, 2003, we received notification from the SEC that it was
conducting an informal inquiry into both of these matters and on April 2, 2003,
we received a request from the SEC for the voluntary production of related
documents and information. We are cooperating fully with this SEC inquiry and
are

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updating the SEC, United States Attorney's Office and the applicable taxing
authorities on an ongoing basis and intend to continue to do so.

C. INDICTMENT AND PLEA OF DR. SAMUEL D. WAKSAL; ACTION AGAINST DR. SAMUEL D.
WAKSAL

On August 7, 2002, a federal grand jury in the Southern District of New
York returned an indictment charging Dr. Samuel D. Waksal with, inter alia,
securities fraud and conspiracy to commit securities fraud. On October 15, 2002,
Dr. Samuel D. Waksal entered a plea of guilty to several counts in that
indictment, including that on December 27, 2001 he directed a family member to
sell shares of our common stock and attempted to sell shares that he owned in
advance of an expected announcement that the FDA had issued a "refusal to file"
letter with respect to our application for approval of ERBITUX. We received such
a "refusal to file" letter from the FDA on December 28, 2001 and announced our
receipt of that letter following the close of trading that day. On June 10,
2003, Dr. Samuel D. Waksal was sentenced to an eighty-seven month prison term
and ordered to pay $4,200,000 in fines and restitution.

On August 14, 2002, after the federal grand jury indictment of Dr. Samuel
D. Waksal had been issued but before Dr. Samuel D. Waksal's guilty plea to
certain counts of that indictment, we filed an action in New York State Supreme
Court seeking recovery of certain compensation, including advancement of certain
defense costs, that we had paid to or on behalf of Dr. Samuel D. Waksal. That
action, styled ImClone Systems Incorporated v. Samuel D. Waksal, Index No.
02/602996, is in its earliest stages.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits (numbered in accordance with Item 601 of Regulation S-K)

(b) Reports on Form 8-K

On April 9, 2003, April 30, 2003, May 16, 2003, May 22, 2003, May 28, 2003,
June 3, 2003, on June 6, 2003, and June 24, 2003, the Company filed Current
Reports on Form 8-K with the Securities and Exchange Commission reporting events
under Items 5, 7 and 12.

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SIGNATURES

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

IMCLONE SYSTEMS INCORPORATED
(Registrant)

By /s/ DANIEL S. LYNCH
--------------------------------------
Daniel S. Lynch
Senior Vice President and Chief
Administrative Officer; Acting Chief
Executive Officer

Date: August 13, 2003

By /s/ MICHAEL J. HOWERTON
--------------------------------------
Michael J. Howerton
Vice President, Finance and Business
Development; Acting Chief Financial
Officer and Secretary

Date: August 13, 2003

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