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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS

PURSUANT TO SECTIONS 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2004

OR

For the transition period from                      to                     .

Commission file number             

IMMUNICON CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Registrant’s telephone number, including area code: (215) 830-0777

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.001 per share

(Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨

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

The aggregate market value of the voting Common Stock held by nonaffiliates of the registrant, as of January 31, 2005, was approximately $120.9 million. Such aggregate market value was computed by reference to the closing price of the Common Stock as reported on the Nasdaq National Market on January 31, 2005. For purposes of making this calculation only, the registrant has defined affiliates as including all directors and executive officers.

The number of shares of the registrant’s Common Stock outstanding as of January 31, 2005 was 23,204,300.

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the definitive proxy statement for the registrant’s 2005 annual meeting of stockholders to be filed within 120 days after the end of the period covered by this Annual Report on Form 10-K are incorporated by reference into Part III of this Annual Report on Form 10-K.

Part I

The information contained in this Annual Report on Form 10-K includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often preceded by words such as “hope,” “may,” “believe,” “anticipate,” “plan,” “expect,” “intend,” “assume,” “will” and similar expressions. We caution investors not to place undue reliance on the forward-looking statements contained in this report. Forward-looking statements included in this report relate to financing and capital needs and resources, product development, our relationship with Twente University, our relationship with Veridex, research, development and sales based milestones and related payments from Veridex, expansion of research and development activities and increases in research and development costs, instrument system and platform improvement activities and costs, expansion of clinical trials and related costs, use of initial public offering net proceeds and other funds, and other statements regarding matters that are not historical facts. Forward-looking statements speak only as of the date of this report, reflect management’s current expectations and involve certain factors, such as risks and uncertainties, that may cause actual results to be far different from those suggested by our forward-looking statements. These factors include, but are not limited to, risks associated with our dependence on Veridex; our capital and financing needs; research and development and clinical trial expenditures; commercialization of the our product candidates; our ability to use licensed products and to obtain new licenses from third parties; our ability to manage growth; obtaining necessary regulatory approvals; reliance on third party manufacturers and suppliers; reimbursement by third party payors to our customers for our products; compliance with applicable manufacturing standards; the ability to earn license and milestone payments under our agreement with Veridex; retaining key management or scientific personnel; delays in the development of new products or to planned improvements to our products; effectiveness of our products compared to competitors’ products; protection of our intellectual property and other proprietary rights; conflicts with the intellectual property of third parties; product liability lawsuits that may be brought against us; labor, contract or technical difficulties; competitive pressures in our industry; other risks and uncertainties discussed under the caption “Risk Factors” and elsewhere in this report; and other risks and uncertainties, as may be detailed from time to time in our public announcements and SEC filings.

We do not intend to update any of these factors or to publicly announce the results of any revisions to any of these forward-looking statements other than as required under the federal securities laws.

Immunicon is a registered trademark of Immunicon Corporation. The Immunicon logo is a registered stylized trademark of Immunicon Corporation. CellSpotter, CellTracks, MagNest and CellSave are registered trademarks of Immunivest Corporation, a wholly owned subsidiary of Immunicon Corporation, and CellTracks EasyCount, EasyCount, CellTracks MagNest, CellPrep, AutoPrep and CellTracks Analyzer II are trademarks of Immunivest Corporation. The CellTracks Analyzer logo, CellTracks AutoPrep logo and CellSpotter Analyzer logo are registered stylized trademarks of Immunivest Corporation, and the CellTracks MagNest logo and CellSave Preservative Tube logo are stylized trademarks of Immunivest Corporation. CellSearch is a registered trademark of Johnson & Johnson. All other trademarks appearing in this Annual Report are the property of their respective holders.

Item 1.    Business

Overview

Our business principally involves the development, manufacture, marketing and sale of proprietary cell-based diagnostic and research products with a primary focus on cancer. We believe that our products can provide significant clinical benefits by giving physicians better information to understand, treat, monitor and diagnose cancer. Our technologies can identify, count and characterize a small number of circulating

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tumor cells, or CTC, and other rare cells present in a blood sample from a patient. Our collaborator, Veridex, LLC, or Veridex, a Johnson & Johnson company, received 510(k) clearance from the Food and Drug Administration, or FDA, in January 2004 for use of the Veridex CellSearch^™ Circulating Tumor Cell Kit, which incorporates our technologies, in the management of metastatic breast cancer (breast cancer that has spread beyond the primary breast tumor). In August 2000, we entered into a development, license and supply agreement with Ortho-Clinical Diagnostics, or OCD, a Johnson & Johnson company, which subsequently assigned all rights and obligations under the agreement to Veridex, also a Johnson & Johnson company. Under the terms of this agreement, we granted to Veridex a worldwide exclusive license within the field of cancer to commercialize cell analysis products incorporating our technologies.

In August 2004 we announced that the CellSearch Circulating Tumor Cell Kit, Immunicon CellTracks AutoPrep System, and Immunicon CellSpotter Analyzer were released for sale for in vitro diagnostic, or IVD, use in metastatic breast cancer. Our products are currently being sold to hospital, reference laboratory, and pharmaceutical and biotechnology company customers under the terms of our agreement with Veridex, and have been shipped to sites in the US, Europe and Japan. As of December 31, 2004, we had shipped 18 complete instrument systems, each consisting of a CellTracks AutoPrep System and CellSpotter Analyzer and recorded ten instrument system sales. Ten of these systems were shipped to laboratory customers and eight systems were shipped to affiliates of Johnson & Johnson. For the year ended December 31, 2004 we sold ten instrument systems and recognized revenue of $965,000 from these sales. Seven of these sales were to affiliates of Johnson & Johnson/Veridex and three were to third-party customers, including a major reference laboratory, a comprehensive cancer center and a pharmaceutical company, who intends to use the instrument system in the development of pharmaceutical products. Our recognition of revenue related to instrument shipments is typically delayed for a period of several months due to final evaluation of these systems at customer locations.

In September 2004, we entered into an agreement with Quest Diagnostics to purchase our CellTracks AutoPrep System and CellSpotter Analyzer to enable Quest Diagnostics to run the CellSearch Circulating Tumor Cell Kit, and we announced shipment of two CellTracks AutoPrep Systems and two CellSpotter Analyzers to Ortho-Clinical Diagnostics K.K., a Johnson & Johnson company, in Japan, which was the first shipment of our products to this important market. One of these systems has been placed in SRL, the largest reference laboratory in Japan.

Our products are primarily intended for use as an integrated system, consisting of kits containing reagents for use with our instruments and other system components that enable scientists, physicians and laboratories to collect, isolate, label, count and analyze CTCs and other rare cells. CTCs can appear in extremely low number, sometimes as few as one or two CTCs in a test tube of blood that contains billions of cells of various types. Our clinical trials suggest that the presence of even a few CTCs in a blood sample is biologically and clinically important, as it predicts whether a therapy is likely to offer benefit to the patient.

Using first-generation components of our integrated system, we conducted a controlled, multi-center pivotal clinical trial (a large trial designed to support a regulatory submission), of 177 metastatic breast cancer patients. In this trial, we found that the number of CTCs in blood samples drawn from patients at various time points predicted disease progression and survival. The key data and findings were presented at the American Society of Clinical Oncology 2004 Annual Meeting and these and related data were published in August 2004 in the New England Journal of Medicine. Based on the data from this pivotal trial, Veridex received 510(k) clearance for the CellSearch Circulating Tumor Cell Kit for use in metastatic breast cancer. Specifically, the indication for use states that “the presence of CTC[s] in the peripheral blood, as detected by the CellSearch Circulating Tumor Cell Kit, is associated with decreased progression free survival and decreased overall survival in patients treated for metastatic breast cancer.”

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Although our current product labeling is limited to metastatic breast cancer, we believe that our products and underlying technology platforms also have other applications in cancer diagnostics, such as for monitoring patients with colorectal and prostate cancers, in the clinical development of cancer drugs, and in cancer research.

Additionally, we believe that our proprietary technologies may have applications in fields of medicine other than cancer, such as cardiovascular and infectious diseases, which fields we may pursue on our own or with a commercial partner. In December 2004 we announced the release for sale of the CellTracks Endothelial Cell Kit for research use only, or RUO. The CellTracks Endothelial Cell Kit is used in conjunction with our CellTracks AutoPrep System for blood sample preparation and our CellSpotter Analyzer to count and characterize circulating endothelial cells, or CECs from whole blood. Endothelial cells form the lining of blood vessels and play a key role in the development of many diseases including cancer and cardiovascular diseases. Enumeration and characterization of CECs may provide insights into the nature of specific disease processes and response to treatment.

To support commercialization of our products and technology in cancer, we entered into a development, license and supply agreement with Veridex in August 2000. Under this agreement Veridex has exclusive worldwide rights within the field of cancer to make and commercialize any cellular analysis products based on our technologies. However, with respect to cellular analysis products outside of the field of cancer, we retain the exclusive right to develop and commercialize these products, either by ourselves or with a commercial partner. Under our agreement with Veridex, Veridex is obligated to pay us a portion of its net sales from reagents, test kits and certain other consumable products and disposable items incorporating our technologies. For the CellSearch Circulating Tumor Cell Kit, which is manufactured by Veridex using our bulk reagents, Veridex is obligated to pay us approximately 30% of its net sales. For certain other consumable products, such as specialty marker reagents used in conjunction with the basic kit and manufactured to finished products by us, Veridex pays us a higher percentage of net sales, currently 55%, although that amount may change if Veridex assumes certain manufacturing activities associated with these products in the future. Veridex also is our exclusive sales agent for our instruments in the field of cancer and receives commissions on all sales of these instruments.

Cancer presents the physician with complex challenges for effective disease management. Cancer markers, currently used for testing the blood of cancer patients, provide only limited information and often correlate poorly with disease progression, response to therapy and patient survival. Other diagnostic tools, including techniques such as x-ray, CT and magnetic resonance imaging, or MRI, scans, suffer from similar problems and are expensive and potentially harmful to patients. Similar problems exist in clinical trials for new cancer drugs because the same diagnostic tools with their inherent limitations are often used to assess a drug’s potential effectiveness, particularly in early stage clinical trials.

Based on findings from our pivotal clinical trial and research studies, we believe that our products will enable physicians to predict the likely time to disease progression and survival in breast cancer more accurately and earlier than existing methods such as imaging. In our pivotal trial, the presence or absence of CTCs was highly predictive, both immediately before initiation of therapy as well as three to four weeks after initiation of therapy and beyond. By contrast, to evaluate response to therapy, imaging techniques typically can only provide useful information two to three months or longer after the initiation of therapy. As a result, using the CellSearch Circulating Tumor Cell Kit, physicians may be able to:

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We believe that our initial products can be widely applicable in the field of cancer, and that the underlying technologies also have applications in other fields of medicine. Our research studies in cancer suggest that our technologies can detect CTCs in certain solid tumor cancers in addition to breast cancer, specifically prostate, colorectal, lung and ovarian cancers, at various stages of disease and potentially provide clinically useful information. At the 2004 Annual Meeting of the American Association for Cancer Research, or AACR, we presented data from a research study that assessed the possible relationship between CTCs and survival in prostate cancer patients. The data showed that patients with five or more CTCs in 7.5 mL of blood had a statistically significant decreased median survival versus men with fewer than five CTCs. Additionally, CTCs were a better predictor of such outcome versus prostate specific antigen, or PSA. Accordingly, we initiated a pivotal study in metastatic prostate cancer in the fourth quarter of 2004. In January 2005, we announced, in conjunction with changes to certain milestones in our agreement with Veridex, that a planned interim analysis of patient data from our pivotal trial in colorectal cancer showed promising results including good correlation with physician assessment and imaging. As a result we are continuing and expanding this trial to approximately 400 patients with a view to future regulatory submissions.

We believe that our products can also be used to analyze CTCs for the presence of specific genes and proteins. This information may be useful in the selection of specific therapies. We have also developed a product based largely on our existing platforms and reagent technologies to detect and analyze endothelial cells in blood. Endothelial cells play a key role in the formation of blood vessels, or angiogenesis, and consequently are intimately involved in tumor growth and spread. In addition, endothelial cells are believed to play a role and to have diagnostic utility in autoimmune disorders and cardiovascular diseases. On a research basis, we continue to explore the potential of our technologies to develop products in other fields of life science research and medicine.

We were incorporated in August 1983 in the Commonwealth of Pennsylvania as Immunicon Corporation. In December 2000, we merged with and into Immunicon Corporation, a Delaware corporation. Since our inception, we have focused our activities on life science research and product development. In March 1999, we obtained $10.6 million in financing from the sale of our convertible preferred stock. As a result, we substantially increased investment in our cancer related products and technologies, hired additional key management team members and redirected our business strategy. Since 1999, we have devoted substantially all of our efforts to the development of our cell analysis platforms and diagnostic and research tools for applications in cancer. In April 2004 we completed an underwritten initial public offering, or IPO, of our common stock. Including the exercise of the underwriters’ option, we raised approximately $49.4 million net of expenses. We have three wholly owned subsidiaries, Immunivest Corporation, IMMC Holdings, Inc. and Immunicon Europe, Inc., all of which are Delaware corporations. Immunivest Corporation holds substantially all of the intellectual property, such as patents and trademarks that we have developed in connection with our technologies. IMMC Holdings, Inc. provides cash management and financing services to Immunicon Corporation and its subsidiaries. Immunicon Europe, Inc., through a branch office in The Netherlands, provides research and development support to Immunicon Corporation for development for our technologies. Our principal offices are

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located at 3401 Masons Mill Road, Suite 100, Huntingdon Valley, Pennsylvania 19006 and our telephone number is (215) 830-0777.

Additional information about us can be found on our Internet website. Our website address is www.immunicon.com. We make available through a link provided in the Investor Information section of our web site our filings with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, is electronically filed with or furnished to the Securities and Exchange Commission. We include the web site address in this Annual Report on Form 10-K only as an inactive textual reference and do not intend it to be an active link to our web site. The material on our web site is not part of our Annual Report on Form 10-K.

CANCER DIAGNOSTICS MARKET OVERVIEW

Diagnostic testing

Diagnostic tests are used to inform physicians about the presence of a disease or a disease-causing agent and to provide information that is critical for appropriate treatment. Diseases today are diagnosed based on patient history, physical signs and symptoms and information obtained from diagnostic methods. However, such information often tells the physician little about the underlying mechanism or cause of the disease.

In many cases, conventional diagnostic tests lack the clinical sensitivity and specificity to provide definitive diagnoses and timely information on response to therapy during the various stages of disease. Sensitivity is typically the measure of a test’s ability to accurately detect the presence of disease. A false negative test result occurs when a patient who has a disease is given a negative, or normal, diagnosis. Specificity is typically the measure of a test’s ability to exclude the possibility of disease when it is truly not present. A false positive test result occurs when a patient who does not have a disease is incorrectly diagnosed as having the disease. We believe sensitivity and specificity can be greatly enhanced by using cell based assays.

We expect that diagnostic tests that probe for expression of genes and proteins in cells will create a fundamental shift in both the practice of medicine and the economics of the diagnostics industry. Such diagnostic tests could result in an increased emphasis on preventative medicine and may redefine approaches to risk assessment of a particular disease or condition. We believe that physicians will be able to use these tests for the early detection of disease, for evaluating a patient’s propensity for disease and to follow and treat patients on a more personalized basis, allowing them to select the most effective therapy with the fewest side effects.

Cancer diagnostics

According to statistics from the National Cancer Institute and the American Cancer Society, carcinomas are the most common types of cancer, accounting for approximately 86% of all cases. Carcinomas are malignant tumors that generally grow rapidly and destroy adjacent normal tissue and impair bodily functions. Carcinomas include breast, prostate, colorectal, lung and many other organ-specific cancers. The American Cancer Society report “Cancer Facts and Figures 2004” estimates that approximately 8.9 million Americans with a history of cancer were alive in January 1999. This report also estimated that in 2003 over 1.37 million people in the US would be diagnosed with cancer and over 550,000 people would die from the disease.

We selected breast cancer as the first application of our technologies because it is the most frequently diagnosed cancer among women and there are multiple treatments available for this disease. We believe

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these treatments need accurate and reliable monitoring tools. The American Cancer Society estimates that approximately 2 million women alive today in the US have been diagnosed with breast cancer and that, in 2004, approximately 216,000 women will be newly diagnosed and approximately 40,000 women will die from the disease.

Metastasis of carcinomas occurs when malignant cells detach from the primary tumor mass and travel through the circulatory system and by other mechanisms to invade other tissues in the body. Although the immune system may act to control the spread of tumor cells, some tumor cells may still disseminate to and multiply in various organs and other parts of the body, resulting in metastases. In most cases, death is caused by such metastases rather than by the primary tumor.

The primary objective in the diagnosis of cancer is early detection of the disease. In general, cancer treatments are most effective if the disease is diagnosed at a less advanced stage. The standard of care for newly diagnosed carcinomas is surgical removal of the primary tumor. If the tumor has metastasized, more aggressive follow-up and post-surgical treatment is warranted. Consequently, early diagnosis, accurate staging and effective monitoring of the disease are critical to achieving the best outcome. Due to inherent inadequacies of currently used cancer diagnostics, this objective is often not achieved.

Inadequate tools for diagnosis, staging and selection of primary therapy

Diagnosis of cancer differs from screening in that diagnosis refers to cancer detection in patients with symptoms of cancer, such as a lump or chronic unexplained pain. Diagnostic tools for cancer detection are limited in their ability to detect cancer at early and potentially curable stages, and in some cases are very expensive, such as colonoscopy and spiral CAT scans. Staging is used by physicians to determine the prognosis (the likelihood primary therapy will cure this cancer and how long the patient is likely to live) of cancer in a newly diagnosed patient. Current staging methods are based on the size of the tumor, involvement of local lymph nodes, and the degree to which the cancer has spread to distant organs. Although this is a helpful procedure, better ability to predict patient outcome is needed. In addition, many drugs are now available that help improve survival when administered after surgery, and hundreds of new drugs are in various stages of development in pharmaceutical companies. Thus, better tests are needed to:

Inadequate tools to monitor effectiveness of post-surgical therapy and recurrence

Once a patient is diagnosed with cancer, he or she is classified based on the original diagnosis and staging of the disease. This medical profile dictates whether a patient will receive drug or radiation therapy following surgery, or both. There are presently only a limited number of tools that are typically used to monitor cancer patients after their surgery, because the visible cancer has been removed. Most physicians select therapies based on published results from clinical trials, the labeling of approved drugs and the physician’s assessment of the patient’s tolerance to side effects. Sometimes, these treatment decisions are based on the assumption that more potent drugs have a higher chance of eliminating the tumor cells that cause metastasis.

Even when a cancer patient survives the initial treatment and is deemed to be in remission, the disease can recur at any time, even years later. Current tools available to the physician for the detection of disease recurrence are physical examination, imaging techniques and serum tumor markers (biological

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substances that may be found in the blood of cancer patients). These tools are often limited in their diagnostic application because they lack sensitivity and specificity. According to the National Cancer Institute, levels of tumor markers alone are not sufficient to diagnose disease because:

However, they are currently used because they can sometimes detect recurrence early. Nevertheless, we are aware of no practice guidelines today recommend initiating therapy based on a rising tumor marker alone.

Inadequate tools to select and monitor therapy in metastatic disease

Treatment options are increasing for patients with most cancers that have metastasized due to the introduction of new anti-cancer drugs that provide several lines of therapy. With more effective diagnostic tools, physicians would be able to more rapidly replace ineffective therapies with potentially more effective therapies. The selection of the appropriate therapy remains a difficult decision for physicians. First, cancer cells are known to mutate, or change, which means that information from the original, or primary, tumor has limited use for therapy selection. In addition, because most chemotherapy agents are toxic drugs with significant side effects; hence the physician must balance the benefits of the chemotherapy with its undesirable effects. Therefore, any tool that can assist the physician in choice of therapy may benefit the patient. Imaging and serum tumor marker tests are used to monitor certain patients, but these tests are limited in their ability to assess the patient’s status with confidence. Imaging techniques also are used to monitor patients with metastatic cancers. However, imaging is subject to variable interpretation by different radiologists, and the interval between imaging studies is typically several months because these methods do not reliably detect small changes in tumor burden over short periods of time. Serum tumor markers are present even in healthy individuals in addition to patients with cancer. Conversely, many late-stage cancer patients do not exhibit increased levels of serum tumor markers. Accordingly, serum tumor markers may fail to identify the need to change from an ineffective therapy or may result in indicating that an effective therapy should be changed when it is providing benefit to the patient.

Our solution

We believe the ability to accurately predict survival in metastatic breast cancer patients with our integrated system represents a potential breakthrough in cancer disease management. We are developing an integrated portfolio of technologies designed to detect, count and characterize the CTCs that are shed into the blood and ultimately cause the cancer to metastasize, or spread. Our clinical trials in metastatic breast cancer indicate that our products provide quantitative and reproducible results that give physicians predictive information to improve patient management. In contrast, certain existing methods such as imaging need at least two separate measurements, typically months apart, to provide predictive results. Future clinical trials in other cancers and earlier in the disease may yield similar data to support the use of CTCs to monitor patients with other types of carcinomas. Additionally, our products are designed to address many of the limitations of existing diagnostic tools.

Early diagnosis of cancer

Cancers that are not detectable by current tests may still shed tumor cells into the blood that can be detected by our assays. The earlier the patient is diagnosed, the earlier treatment can be commenced,

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which may result in improved patient survival. Because our products can detect a small number of CTC and small amounts of CTC components, such as nucleic acids, we believe that our products may enable the physician to diagnose or assess the risk of invasive cancer earlier than existing tools.

Effective tools for more complete diagnosis, staging and selection of primary therapy

A physician’s determination that the cancer has metastasized is extremely important in staging the patient to complete the diagnosis and to select the most appropriate treatment. The presence of CTCs and CTC components detected by our approach may indicate a more aggressive form of cancer, thereby providing physicians with critical information to guide clinical decisions.

Effective monitoring of post-surgical therapy or for recurrence

The number, trends and characteristics of CTCs and or CTC components in blood during post-surgical treatment may indicate that the disease has not been eliminated and can enable physicians to determine the effectiveness of treatment. Physicians need real-time information to enable them to change from an ineffective therapy earlier and to potentially improve patient survival prospects. The FDA classification of our product includes detection of recurrent disease. We will need to conduct pivotal clinical studies and submit a 510(k) for the detection of recurrence. However, we believe the periodic monitoring of CTCs and their components using our products following post-surgical therapy may allow for earlier detection of recurrence than current methods, such as the observation of clinical signs and symptoms. This may enable the physician to intervene sooner, which may improve the patient survival prospects.

Predictive ability to help select and monitor therapy in metastatic disease

Our pivotal clinical trial demonstrated that quantifying CTCs can be an effective tool in predicting the time to disease progression and survival in patients with metastatic breast cancer. Physicians may select a more appropriate cancer therapy based on the presence or absence of CTCs. Our products can also be used to analyze CTCs for the presence of specific genes and proteins. This “real-time biopsy” information may be used to select therapies, such as Genentech’s breast cancer drug, Herceptin, targeted to a specific gene or protein. Today, only a few of these treatments exist, but many drug and biotechnology companies are developing these therapies.

Other benefits

We believe that the first product marketed by Veridex, the CellSearch Circulating Tumor Cell Kit, offers benefits that other laboratory tests and imaging tools lack. First, CTCs have high clinical specificity, which means that healthy individuals generally have zero, or a very small number, of detectable CTCs. Also, our products are blood tests and are easier to administer than imaging techniques such as CT scans or MRI scans. We believe our products may result in lower overall cost of monitoring and treating patients compared to MRI, PET, or positron emission tomography, and CT scans, where one set of scans typically costs approximately $1,000 or more, and additionally more than one set of scans may often be required.

We believe that our products can also be applied effectively in the clinical development of new cancer drugs, particularly in early stage clinical trials where it is essential for the pharmaceutical company to evaluate efficacy prior to undertaking on long and expensive pivotal trials. Inaccurate information may result in discontinuing the development of a promising drug candidate or wasting millions of dollars on a drug that will fail in late-stage clinical trials. The FDA evaluates efficacy of new drugs or drug combinations based on patient survival and/or certain accepted surrogate endpoints, such as a significant decrease in tumor burden as assessed by imaging studies. Although we believe additional clinical data

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will be required to validate CTCs as a surrogate endpoint to the satisfaction of the FDA, we believe that CTCs may serve as an alternative to survival or costly imaging studies as a drug trial endpoint. Such a surrogate endpoint may permit shorter and less costly late-stage drug trials as well.

Our strategy

Our goal is to be a leader in the development and commercialization of proprietary cell analysis products that deliver high impact clinical and scientific information for use in human diagnostic, life science research and pharmaceutical development applications. The key elements of our strategy include the following:

Develop and commercialize cancer research and diagnostic products

We are focused primarily on the development and commercialization of products for understanding cancer and diagnosing, staging and monitoring cancer patients. Additionally, we intend to develop diagnostic products to be used alone or in conjunction with current screening methods and for establishing the risk of healthy individuals developing cancer. We have a development, license and supply agreement with Veridex. We and Veridex released the CellSearch Circulating Tumor Cell Kit and related instrumentation for sale for RUO in December 2003, and our collaborator, Veridex, received 510(k) clearance from the FDA in January 2004 for use of the CellSearch Circulating Tumor Cell Kit in the management of metastatic breast cancer.

In August 2004 we announced that the CellSearch Circulating Tumor Cell Kit, Immunicon CellSpotter Analyzer and Immunicon CellTracks AutoPrep System were released for sale for IVD use in metastatic breast cancer. In addition, the CellSearch Profile Kit, consisting of reagents and supplies for isolating epithelial cells for molecular analysis, was made available for RUO in April 2004. We also expect that the CellTracks Analyzer II, our next-generation cell analysis platform, will be available for sale in the second quarter of 2005.

Develop multiple indications for our cancer diagnostic products

We are conducting additional clinical trials for label expansion using the CellSearch Circulating Tumor Kit in other major cancers, namely colorectal and prostate cancer, with the aim of gaining FDA clearance or approval, as appropriate. An additional objective of our research trials is to study cancer in earlier, non-metastatic stages of the disease to determine whether CTCs or a combination of CTCs and molecular assays offer valuable information to aid in the management of these patients. We believe that expanded product labeling would help to increase the adoption of our products by physicians and laboratories.

Also, published clinical data suggest that the presence of tumor cells in bone marrow has considerable prognostic significance, but there is currently no automated, highly reproducible method for reliable analysis of bone marrow aspirates from patients. We believe our technology can provide such a method to advance scientific research in this application area, which may lead to products for staging patients with various solid tumor cancers, such as breast, prostate, and colorectal cancer.

Expand the applications of our technologies beyond cancer

We are developing products outside the field of cancer where current diagnostic and research tools are limited and where significant market opportunities exist. For example, we have developed an endothelial cell assay that may have application in the field of cardiovascular and autoimmune diseases and in cancer as well. In December 2004, we announced the release of our CellTracks Endothelial Cell Kit for sale for

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RUO. The CellTracks Endothelial Cell Kit is used in conjunction with our CellTracks AutoPrep System for blood sample preparation and our analysis platforms to capture, count and characterize circulating endothelial cells from whole blood. Endothelial cells form the lining of blood vessels and play a key role in the development of many diseases including cardiovascular disease and cancer. Enumeration and characterization of such CECs may provide insights into the nature of specific disease processes and effects of treatment.

Seek commercialization partners for our non-cancer product candidates

In order to maximize the value of our non-cancer product candidates, we may seek strategic alliances with capable, well-capitalized companies for marketing and distribution. However, we may also consider a direct sales, marketing and service approach, especially when the number of prospective customers is limited or concentrated.

Optimize the value of our proprietary technologies and maximize long-term profitability

Our product portfolio includes instrument systems that are designed to use our reagent kits and disposables exclusively, thus providing recurring revenues from sales of these products. Because our underlying platform technologies are largely developed, we expect that the incremental investment to bring new reagent kits to market will be relatively modest.

Continue product improvement to maintain competitiveness

Because our products are an integrated system, which includes a number of components, there are multiple opportunities to improve various aspects of the system. We intend to continue to make efforts to improve instrument throughput, assay performance and clinical utility of these products. We also plan to reduce costs through investment in manufacturing processes and product design to improve production efficiency, reduce material and component cost, and increase product reliability and robustness.

OUR CURRENT PRODUCT RESEARCH AND DEVELOPMENT PROGRAMS

Overview

We have developed and integrated our technologies into proprietary cell analysis products, which we brand as CellTracks. Our technologies are used principally as an integrated system. In addition, we believe that the components of the system can be used in various combinations to address a variety of unmet needs in the fields of human diagnostics, pharmaceutical development and life science research.

This system is used generally as follows:

Alternatively, the CellSearch Profile Kit may be used to isolate CTCs for further analysis using molecular diagnostic tools, such as PCR (polymerase chain reaction, a method of amplifying genetic material for analysis), or for cell analysis on non-Immunicon instruments, such as flow cytometers (instruments that

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quantify cells and assess certain cellular characteristics). The combination of the CellTracks AutoPrep System and the CellSearch Profile Kit permits reproducible recovery of CTCs along with the flexibility of using well-established commercial or development stage research tools for molecular or cell analysis.

The basic components of our integrated cell analysis system

Product portfolio and status

The following table summarizes our principal products and products incorporating our technology, as well as the design, development, regulatory and marketing status for each of these products. A more detailed description follows immediately after this table.

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Sample collection

Our CellSave Preservative Tube is a specialty blood collection device that enables medical professionals to draw blood into an evacuated test tube and preserves the blood samples during shipment to a laboratory and during the sample preparation process. CTCs are fragile and extraction of these cells from a large sample can cause cell loss or damage. Our collection device permits blood to be drawn from patients in satellite locations, such as the physician’s office, group practice or clinic, and transported to a qualified hospital or reference laboratory for analysis. We believe this tool will help adoption of our products in the market by making them more convenient to use. We have FDA clearance for the CellSave Preservative Tube for IVD use.

Sample preparation

CellTracks AutoPrep System

The CellTracks AutoPrep System is a proprietary, fully automated clinical laboratory instrument that captures, labels and concentrates cells of interest from a 7.5 ml sample of blood. The processed sample is dispensed into our proprietary sample cartridge, which is used with the CellTracks MagNest Cell Presentation Device, or CellTracks MagNest. We received 510(k) clearance for the CellTracks AutoPrep System for IVD use in March 2004 and the product has been commercialized.

CellTracks Large Volume Sample Preparation (LVSP)

We had initiated development of the CellTracks LVSP System, which consists of an instrument, reagents and proprietary disposables to extract a 7.5 ml blood fraction containing cells of interest from a 30 ml blood sample. We have discontinued full development of this system due to scientific and technical data that suggest that other methods of increasing the specificity and sensitivity of our rare cell analysis technology may be more promising and cost effective. For example, we are exploring the use of molecular diagnostic approaches in conjunction with our CellTracks AutoPrep System for enrichment and analysis of cellular material. However, there can be no assurance that such approaches will result in safe, clinically effective and cost-effective products. Furthermore, development of such products may require us to license technologies from third parties and/or form strategic alliances with companies possessing technologies in this field.

Sample presentation

The CellTracks MagNest Cell Presentation Device is a proprietary product for presenting magnetically labeled cells for analysis on our CellSpotter and CellTracks Analyzer II. A proprietary sample cartridge is inserted into the MagNest, exposing the sample to a magnetic field that moves magnetically tagged cells to the upper inside surface of the sample chamber, which is transparent. All cells that are magnetically labeled are available for analysis. Untagged cells tend to move under the influence of gravity to the bottom of the chamber. We believe that this process is a more convenient and elegant approach for cell presentation for analysis than traditional microscope slide preparation. The 510(k) clearance received in March 2004 for the CellTracks AutoPrep System includes the CellTracks MagNest as an accessory.

Sample analysis

CellSpotter Analyzer

The CellSpotter Analyzer is a semi-automated fluorescence microscope with:

The CellSpotter Analyzer is cleared for IVD use under Veridex’s 510(k) for the CellSearch Circulating Tumor Cell Kit. The analyzer scans the sample cartridge inside the CellTracks MagNest and captures

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images across the entire sample area. The images of candidate CTCs are compiled and presented to the reviewer for analysis and final selection.

CellTracks Analyzer II

Our next generation analysis system, the CellTracks Analyzer II, uses similar optical and mechanical technology to that developed for the CellTracks Analyzer and CellSpotter Analyzer. For example the light source, light filtering and cell imaging technology in the CellTracks Analyzer II are similar to that of the CellSpotter Analyzer. CellTracks Analyzer II represents a significant advance in analysis automation, and is capable of better sensitivity for detection of CTCs and other cell types versus the CellSpotter Analyzer. We filed a 510(k) for this platform in January 2005 and we received clearance on March 16, 2005. Additionally, we expect the CellTracks Analyzer II to be released for commercial sale in the second quarter of 2005 and that it will be the instrument platform for analyzing cell images for the foreseeable future.

CellTracks Analyzer

The CellTracks Analyzer is a proprietary scanning cell analyzer, or cytometer, which uses a variation of the cartridge employed in the two analyzers described above. This cartridge is made of precision-molded plastic and has a glass cover with nickel lines lithographed on the inside surface of the glass cover. These lines become magnetic when inside the CellTracks MagNest and cause magnetically tagged CTCs to align within the magnetic field between the nickel lines. The CellTracks Analyzer focuses and tracks along these lines. Lasers are used to excite fluorescent labels on the cells, creating a fluorescent signature. Cells with the correct fluorescent signature are imaged and available for review by the user. The CellTracks Analyzer has 510(k) clearance from the FDA as an automated differential cell counter for CD3/CD4 cells. These are immune system cells, a subset of white blood cells that are important in warding off infection and are often compromised in patients who are diagnosed with acquired immunodeficiency syndrome, or AIDS. These cells are used to assess the health of patients with human immunodeficiency virus (HIV)/AIDS. This product has not been commercialized and given the planned availability of CellTracks Analyzer II described immediately above, we do not plan to commercialize this platform in the foreseeable future.

CellTracks EasyCount System

We are developing the CellTracks EasyCount System as a simple, point-of-care analyzer that, together with associated reagents, is designed to count specific types of cells in whole blood. The first application under development is to CD4 cells, which are used to monitor HIV and AIDS patients. Target cells are immunomagnetically selected using ferrofluid reagents and counted based on fluorescent labeling of the cells. Additionally, in June 2004 we entered into an addendum to our agreement with the University of Twente, or Twente, and with STW, a research funding agency of the Dutch government. Under the modified agreement, STW will provide Twente with up to approximately $1 million toward developing an affordable and portable instrument to monitor patients with HIV. Under the agreement addendum, we will contribute “in kind” research effort toward the project including personnel, equipment and supplies, and we have rights to commercialize products that result from the agreement.

Reagent kits

We have developed and expect to continue to develop a variety of reagent kits for use with our cell analysis systems in various research and diagnostic applications. Our principal cell-capture reagents are based on proprietary, magnetic nano-particles we call ferrofluids. These ferrofluid particles are conjugated to antibodies and are used to capture, or tag, various types of cells. Fluorescently labeled antibodies are then used to identify and differentiate the selected cells. Antibodies are inherently highly specific, and we utilize or use capture antibodies that will bind to specific types of cells, such as CTCs, but not to other cells in the sample. We believe that we will be able to introduce new kits for additional

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cell types that are implicated in diseases in addition to cancer. We believe that the reagent development programs for new kits will require relatively modest incremental investment because the instrument platforms and basic reagent formulations are largely completed and well characterized.

CellSearch Circulating Tumor Cell Kit

The CellSearch Circulating Tumor Cell Kit is a Veridex product that incorporates Immunicon proprietary technology and has been cleared for IVD use and is intended for the enumeration of CTCs in whole blood. We provide certain reagents in bulk to Veridex for manufacture of this kit. The presence of five or more CTCs is predictive of shorter progression free survival and overall survival in patients treated for metastatic breast cancer, thereby providing the treating oncologist with timely, predictive information regarding their patient’s disease progression and overall survival. The kit contains a ferrofluid conjugated with an antibody to epithelial cell adhesion molecule, or EpCAM, to capture and permit isolation of CTCs in a blood sample, together with labeling reagents for achieving a high level of specificity. Data from our research studies suggest that this kit can be used to capture CTCs in a variety of other cancers, and we have started clinical trials in prostate and colorectal cancer to expand our indications.

CellSearch Profile Kit

The CellSearch Profile Kit is a Veridex product that incorporates Immunicon proprietary technology and is used to isolate CTCs for subsequent molecular or cellular analysis and does not contain all of the labeling reagents of the CellSearch Circulating Tumor Cell Kit. We provide certain reagents in bulk to Veridex for manufacture of this kit. We believe that the CellSearch Profile Kit, used in conjunction with our CellTracks AutoPrep System, enables automated and reproducible isolation of rare cells while offering the flexibility to conduct off-line molecular analysis with current or future technologies. This kit is for RUO at this time.

CellTracks Endothelial Cell Kit

The CellTracks Endothelial Cell Kit is an Immunicon reagent kit that has been developed and commercialized for use in isolating and counting endothelial cells. Endothelial cells are involved in angiogenesis. This process is important for the growth of tumors and as a transport mechanism for CTCs involved in metastasis. Several anti-angiogenesis drugs are currently in clinical development. The CellTracks Endothelial Cell Kit may have application in the future in clinical trials as a tool to assess efficacy of anti-angiogenesis drugs as well as for monitoring cancer patients receiving such drugs, subject to regulatory approvals.

In addition to cancer applications, we intend to investigate the role of endothelial cells in cardiovascular and autoimmune diseases. Several independent clinical research studies suggest that endothelial cells are implicated in several aspects of cardiovascular disease. The CellTracks Endothelial Cell Kit may be used to develop and monitor therapies as well as aid in identifying risk of certain cardiac events, such as a heart attack.

Marker Reagents for Cell Characterization

Marker reagents for cell characterization, or cell profile reagents, are fluorescently labeled antibodies that are used to characterize target cells, and may be classified by the FDA as analyte specific reagents, or ASRs. These reagents can be used in research to evaluate new therapies in clinical trials. For example, approximately 30% of breast cancer patients over-express the protein called HER2/neu, which indicates that treatment with Herceptin, or a similarly acting drug, may be appropriate. Our analyzer platforms can report the presence or absence of such markers, which may aid in the selection of patients for clinical trials involving these drugs and for advanced research applications. Ultimately, trials may be conducted to obtain clearance or approval from the FDA for direct use of these reagents in conjunction with specific drugs or classes of drugs. We have developed an initial family of cell profile reagents, termed Tumor

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Profile Reagents, for markers that are implicated in cancer such as MUC-1, HER2neu and EGFR. We expect to launch these for RUO in the second quarter of 2005. We believe that there are opportunities to develop other Tumor Profile Reagents in cancer and cell profile reagents for other types of rare cells, such as endothelial cells. We believe there is a commercial opportunity for marker reagents as a natural line extension of our technology.

CLINICAL DEVELOPMENT AND RESEARCH PROGRAMS

We conduct pre-clinical and clinical research trials to explore whether our technologies can deliver diagnostic value in different diseases. If a research trial is positive and there is a significant market opportunity for a product based on these technologies, we then design trials that enroll larger patient populations. These advanced trials, which we call pivotal trials, are designed to support regulatory submissions for new or expanded product applications or indications for existing products, or potentially a new product offering. To minimize the risk of these development trials failing, we often conduct smaller pilot studies using the same or similar protocol as the larger trial. We expect that pivotal clinical trials will be required to support FDA submissions for the majority of our product candidates.

In 2003, we completed a 177-patient, controlled, multi-center pivotal trial that was statistically powered to determine if CTCs in the blood of women with metastatic breast cancer could provide information to physicians for monitoring therapy. The results of the 177-patient trial were published in the August 19, 2004 edition of the New England Journal of Medicine and the results of 83 of the 177 patients that were newly diagnosed with metastatic breast cancer were published in the March 1, 2005 edition of the Journal of Clinical Oncology. Analytical performance of the CellSearch system and the frequency of CTC in patients with various carcinomas was published in Clinical Cancer Research on October 15, 2004. In December 2004, we completed the collection of 18 month survival data from follow-up of the 177 patients, this information will be presented during the May 2005 meeting of the American Society of Clinical Oncology, or ASCO.

A statistical analysis was used to calculate the probability of survival of metastatic breast cancer patients with less than five (<5) or five-or-more CTCs in 7.5 ml of blood drawn before initiation of a new line of therapy and at the first follow-up patient examination after initiation of therapy. These statistical analyses are included in the product labeling of the CellSearch Circulating Tumor Cell Kit.

The two graphs below show the significance of the number of CTCs to predict survival of patients undergoing treatment for metastatic breast cancer. Blood samples were drawn just prior to initiation of a new line of therapy, or baseline, and following initiation of the therapy, or first follow-up, which was typically three to five weeks into the study.

Probability of survival of metastatic breast cancer patients

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The patients shown in the graphs above were separated into two groups based on the level of their CTCs. The graph on the left plots the probability of patient survival over time based on whether they had fewer than five CTCs at baseline or five or more CTCs at baseline. This graph illustrates that these two groups have very different survival prospects. Patients with fewer than five CTCs had a greater than 70% probability of survival for more than 18 months beyond baseline whereas patients with five or more CTCs had only a 50% probability of survival for longer than approximately 10.1 months beyond baseline.

The graph on the right plots the probability of patient survival over time based on whether they had fewer than five CTCs or five or more CTCs at the first follow-up. This graph illustrates that patients so classified again have very different survival prospects. Patients with fewer than five CTCs had a greater than 70% probability of survival for more than 18 months from the day blood was drawn whereas patients with five or more CTCs had a 50% probability of survival for longer than approximately 7.0 months from the day blood was drawn.

Depending on the success of treatment, patients can move between groups. For example, there were only 90 patients in the low CTCs group at baseline, but there were 114 patients in the low CTCs group at the first follow-up, suggesting that therapy was successful in a number of the patients that started with high levels of CTCs. Similarly, patients with low levels of CTCs may not benefit from therapy and move to the group having an elevated number of CTCs.

The data, which we assessed as being statistically significant, suggest that CTCs may be of clinical value in determining initially not only the severity or aggressiveness of metastatic breast cancer, but also whether an individual patient is benefiting from a particular therapy. While survival is clearly the most important endpoint of this trial, similar patterns were also observed when patients were evaluated in terms of time to progression of disease as clinically determined.

We completed the non-measurable disease portion of the metastatic breast cancer trial in 2004. Forty-Six patients were enrolled and followed for six months. The initial evaluation of this data will be presented at the ASCO meeting in May 2005. Final progression and survival follow-up data for all 223 patients is to be collected by the end of the third quarter of 2005.

Two new multi-center pivotal clinical trials were initiated in 2004 involving patients with metastatic colorectal cancer and androgen independent prostate cancer.

Metastatic colorectal cancer.    We started this trial in February 2004 and in 2004 we enrolled 175 patients with measurable metastatic colorectal carcinoma who are about to start a new line of therapy in 2004. The primary endpoint of this trial is the association between levels of CTCs after the initiation of therapy and the patient’s response to systemic therapy at the first follow-up imaging visit. Secondary endpoints include the use of levels of CTCs after the initiation of therapy to predict progression-free and overall survival. The trial is being conducted at centers in the US and Europe. Interim analysis on the first 100 patients established the CTC threshold of five CTCs (identical to the breast cancer trial) and estimated that approximately 400 patients will be needed to complete the trial.

Metastatic prostate cancer.    We initiated a multi-center trial in December 2004 to expand the monitoring indications for the CellSearch Circulating Tumor Cell Kit to androgen independent prostate cancer. The primary endpoint of this trial is evaluation of the ability of levels of CTCs to predict overall survival after the initiation of chemotherapy. Secondary endpoints include the use of levels of CTCs after the initiation of therapy to predict progression-free survival. This trial is being conducted at academic centers and community oncology centers in US and Europe. A total of eight patients were been enrolled into this trial in 2004. We estimate that this trial, based on our current assumptions regarding trial size and design, will take two to three years to complete; one year for enrollment and two years of follow-up time. The results of the pilot study that lead to this trial were presented at the 2004 Annual Meeting of the AACR, and are published in the April 2005 issue of Urology. The study showed that patients with

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five or more CTCs in 7.5 mL of blood had a statistically significant decreased median survival versus those with fewer than five CTCs. Additionally, CTCs appear to be a better predictor of such outcome versus prostate specific antigen, or PSA.

Summary of completed clinical research and development trials

The following table summarizes the breast cancer trials described above as well as additional clinical research studies we conducted that evaluated the clinical utility of CTCs.

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Ongoing and planned clinical trials

To further assess the value of measuring CTCs and endothelial cells in the blood of patients, we are currently conducting several ongoing clinical research trials and are also planning additional trials. These clinical trials will be conducted in conjunction with medical institutions in the US and Europe. The actual start dates for these trials are subject to change based on a variety of factors, including agreement with investigators on protocols, clearance by institutional review boards and product development status. Certain of these ongoing and planned clinical trials are described below:

Non-small cell lung cancer.    We initiated a multi-center pilot trial in 2004 to determine if CTCs could be found in patients with stage I, II, or IIIA non-small cell lung cancer who were about to undergo surgery, and if so, whether the levels of CTCs that appear before or after surgery could predict recurrence, time to recurrence and/or survival. Enrollment was completed with 54 patients, and these patients will be followed until the earlier of two years or until disease recurrence, whichever occurs first.

Breast and colorectal cancer.    We have an ongoing pilot study to determine if CTCs that appear before or after breast or colorectal cancer surgery can predict disease recurrence, time to disease recurrence and survival. We also initiated the development of an assay that detects tumor cells in bone marrow of such

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patients. If these pilot studies are successful, we plan to extend them to a multi-center pivotal trial in 2005. Any future trial to determine the risk profile for patients before and after primary therapy and for the detection of recurrence would be designed based on the results from these studies.

Herceptin/Navelbine.    We are working with the Southwestern Oncology Group, or SWOG, a large cancer cooperative group comprising over 300 oncologists, to collect samples and count CTCs during a planned drug trial involving the use of either Herceptin or Navelbine therapy in breast cancer. This trial, which will be managed by SWOG, is planned to begin enrolling subjects in early 2005.

Breast Cancer.    We plan to participate in a study initiated by the SWOG network in which metastatic breast cancer patients are randomized to alternative therapy as a result of the number of CTCs detected. This trial is planned to begin enrolling subjects in 2005.

Breast Cancer.    We plan to initiate a single center trial in the neoadjuvant breast cancer patient population. This will be a pilot trial to determine the feasibility of using CTCs and CECs to assess response to neoadjuvant chemotherapy in patients with primary breast cancer.

Breast Cancer.    We plan to initiate a pilot trial at three institutions to determine the feasibility of quantifying apoptosis and Bcl-2 expression of CTCs in metastatic breast cancer patients.

Prostate Cancer.    We plan to initiate a pilot study at a single center location to study the ability of mRNA related to CTCs to predict the presence of cancer in men undergoing a prostate biopsy for detection of prostate cancer.

Endothelial cells.    We have developed and commercialized an assay to enumerate CECs in blood. We have initiated pilot studies to determine the prevalence of CECs in healthy donors and patients with a variety of diseases. First results of this survey were presented at the 2005 Annual Meeting of the AACR. CECs were found to be elevated in a significant proportion of patients with metastatic carcinomas. To determine potential clinical utility of CECs the assay was incorporated in the ongoing trials in metastatic colorectal and prostate cancer. We also plan to initiate a pilot study in cardiovascular disease to confirm previous reported data on its clinical significance.

To date, we have not initiated any clinical trials in the field of cancer for a general population screening product. As compared to the clinical trials described above that we have conducted, clinical trials for general population screening are more costly and last significantly longer because the FDA requires extensive testing on a broad spectrum of the population. We do not plan to start a general population screening trial for at least the next 12 months. Therefore, our obligation under our agreement with Veridex that requires us to pay certain clinical trial costs associated with the first cell analysis product for general population screening for a major cancer has not yet occurred.

Development, license and supply agreement with Veridex

In August 2000, we entered into a development, license and supply agreement with OCD, which subsequently assigned all rights and obligations under the agreement to Veridex. Under the terms of this agreement, we granted to Veridex a worldwide exclusive license in the field of cancer to commercialize cell analysis products incorporating our technologies.

In November 2003, as a result of data from various clinical research and development trials and the overall status of our product development program, we and Veridex amended the agreement to redefine some of the development and regulatory milestones that had not been completed as of the amendment date.

In February 2005, we and Veridex further amended the agreement to modify two previous milestones entitled “Colorectal or Breast Cancer Adjuvant Prognosis and Recurrence Monitoring” and “Metastatic Colorectal or Prostate Cancer Therapy Monitoring.” We believe that the modifications to these

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milestones are beneficial to both us and Veridex and were arrived at through mutual assessment of scientific and market data available at the time. The first milestone cited above for the adjuvant/recurrence setting previously had prospective payments to us totaling approximately $1.1 million. While the total of the milestone payments remains the same, this amendment changes the basis of the milestone and achievement requirements to the development of an assay using our proprietary technology for analysis of tumor cells in the bone marrow of cancer patients. The second milestone cited above previously had prospective payments to us totaling $1 million. The total of the milestone payments as well as the overall achievement requirements for this milestone remain the same, but the amendment provides for progress payments triggered by certain events in the development program. A payment of $250,000 is payable to us upon accrual of an adequate number of metastatic colorectal cancer patients to support a regulatory submission to the FDA, and an additional $250,000 is payable to us upon completion of a draft regulatory submission that is acceptable to the joint Steering Committee. The superseded milestone had provided for payment of $500,000 only on Steering Committee approval of the final regulatory submission. We have to date received $500,000 under this milestone, as a result of the enrollment of the first patient in this trial.

With respect to the reagents for the products developed under the license to Veridex, we manufacture and provide bulk reagents to Veridex, and Veridex is responsible for the packaging and distribution of these products. Veridex is obligated to reimburse us at our cost for the bulk reagents, consumable products and disposable items we deliver to them. Upon the sale by Veridex of the products, Veridex is obligated to pay us approximately 30% of its net sales less the cost previously reimbursed for these products. We are obligated under the agreement to manufacture the CellSave Preservative Tube and certain other ancillary products and to sell these finished products to Veridex for resale in connection with the cancer-related cell analysis products.

We have also established a sales agency arrangement with Veridex with respect to our sample preparation and cell analysis systems, such as the CellTracks AutorPrep System, CellSpotter Analyzer and CellTracks Analyzer II. Under this arrangement, Veridex is our exclusive sales, invoicing and collecting agent and exclusive instrument and technical service provider for these systems in the field of cancer. Veridex is responsible for all expenses for marketing, sales and training, and we are responsible for all software development and validation as well as quality control and quality assurance. We are responsible for shipping systems pursuant to purchase orders received by Veridex. We are obligated to pay Veridex a commission on each sale or lease of these sample preparation and cell analysis systems of up to 15% of the invoice price, subject to a minimum gross profit margin received by us on each system of 27.5%. Some customers may enter into a reagent rental agreement with Veridex, whereby the reagent price also carries an amortized cost of the instrument, based on an agreed test volume. In these cases, Veridex will pay us a percentage of the fully loaded cost of the instrument when it is placed in the account. We are responsible for the costs associated with the one-year warranty period. Veridex has the option under the agreement to convert the sales agency relationship to a sole distributorship arrangement upon 12 months’ notice.

Under this distributor arrangement, we would be required to supply Veridex based on the forecasts provided to us by Veridex and the actual orders for these systems placed with us by Veridex. The allocation of costs and expenses between us and Veridex would remain substantially the same and we would remain responsible for the costs associated with the one-year warranty period. In addition, instead of Veridex receiving up to a 15% commission after deducting the 27.5% gross profit margin on each sale or lease, these systems would be sold to Veridex at a transfer price that provides a 27.5% gross profit margin to us, and Veridex would retain the proceeds from their sales of these systems, but would be required to remit to us any proceeds from their sales to the extent that the proceeds of such sales, after deducting 15%, exceed the transfer price for these systems.

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We are responsible for developing these cell analysis products and our cell analysis systems under a development plan. We are also responsible for managing and administering all clinical trials under the development plan. This plan is subject to the approval of a joint steering committee comprised of members designated by us and Veridex. Veridex has the majority of votes on this committee, although the entire agreement is subject to arbitration provisions in the event of any disputes that may arise. We must pay the first $5 million in clinical trial costs for the first cell analysis product for general population screening for a major cancer, and Veridex is responsible for the next $5 million of such clinical trial costs. We have agreed to negotiate in good faith for the allocation of costs in excess of $10 million. As of December 31, 2004 we have incurred no costs related to clinical trials for a product for general population screening and we do not anticipate spending any funds on clinical trials toward such a product through 2005.

Beginning with commercialization of the first product under this agreement, we are obligated to invest in certain research and development activities an amount equal to at least 10% of Veridex’s net sales, excluding revenues from instrument sales, from these products. These research and development activities may consist of any activities, such as product improvements, product line extensions and clinical trials, conducted to achieve the milestones described below, to advance the development program designed by the steering committee for this agreement, or to enhance the cancer-related cell analysis products or sample preparation and cell analysis systems based on our technologies. However, beginning with the first calendar year after the amount of these net sales exceeds $250 million we are only required to invest an amount equal to at least 8.5% of these net sales. In addition, if we achieve certain levels of sales of our reagents we may receive up to an additional $10 million in milestone payments from Veridex although we do not expect to receive any milestone payments related to sales goals until at least 2007.

Our agreement with Veridex provides for a total of up to $10.5 million in non-refundable license and milestone payments related to research and development activities, including up to $1.5 million for the initial license and up to $9.0 million related to the completion of certain instrument and clinical trial milestones. We have received $5.8 million as of December 31, 2004. During 2004 we completed a number of milestones as defined in our agreement with Veridex and received milestone payments totaling $1,833,000.

We expect to earn the remaining $4.7 million in milestone payments over the next three to five years.

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We currently do not expect that any of the specific milestone payments discussed above will be materially delayed beyond their applicable target dates. However, because these milestone payments are related to the successful completion of the payment criteria summarized above, including completion of clinical trials, development activities and receipt of regulatory clearances, we may be unable to successfully complete the payment criteria in a timely manner, if at all.

Veridex is responsible under the agreement for obtaining all regulatory clearances, in consultation with us, for these cell analysis products in the field of cancer.

If we do not successfully complete the payment criteria for a given future milestone, we will not receive the applicable milestone payment. If we do not successfully complete the payment criteria by the target date for a given milestone, we will continue to be entitled to receive the milestone payment in the future upon successful completion of the criteria. However, Veridex’s obligation to pay us a percentage of the net sales for the cell analysis product to which the milestone relates would be reduced by 0.5% for the ten-year period beginning with the shipment for commercial sale of the first product resulting from this agreement. In no event, however, would reductions due to missed target dates reduce our proportionate percentage share of net sales that we would otherwise be entitled to receive from Veridex for sales of all cell analysis products by Veridex under this agreement by more than 0.5% in the aggregate.

The agreement has an initial term of 20 years and is automatically renewed for three-year terms unless earlier terminated. There are various conditions that allow either party to terminate the agreement, including a material breach by either party or by mutual agreement. Veridex may also terminate for additional reasons including upon a change of control of us, as defined in the agreement, at any time prior to commercialization of any cell analysis products under the agreement with or without reason upon 180 days’ prior written notice, or at any time following commercialization of the first cell analysis product under the agreement with or without reason upon 24 months’ prior written notice. At this time we believe the latter provision is in effect due to initiation of commercialization in 2004. In certain circumstances of termination, Veridex may, at its option, retain certain worldwide rights to sell our cell analysis products if it agrees to pay us any unpaid license and milestone payments and an ongoing net sales royalty. Johnson and Johnson Development Corporation beneficially own approximately 8% of our common stock and is a wholly-owned subsidiary of Johnson & Johnson, Inc.

Other collaborations

In addition to our agreement with Veridex, we entered into a number of license, supply, research, development, manufacturing and marketing agreements relating to our products and technologies.

Research and Diagnostic Systems, Inc.

In August 2003, we entered into a license and supply agreement with Research and Diagnostic Systems, Inc., or R&D Systems, a subsidiary of Techne Corporation. Under this agreement, we granted R&D Systems a non-exclusive license, limited to certain life science research products (in markets not regulated by the FDA) utilizing R&D Systems antibodies in conjunction with our proprietary magnetic particles. This agreement allows R&D Systems to sell and use these products using our magnetic particle technology in certain of their current and planned cell isolation products, for life science RUO. Under this agreement, we will receive payment for the bulk materials they require for these research products and royalties on sales of any of these products that incorporate our technologies. The term of this agreement continues for the life of our patent rights pertaining to the license of our technologies under this agreement to R&D Systems, unless terminated earlier. There are various conditions, which allow either party to terminate the agreement, including for material breach by either party, for financial difficulties involving either party, by mutual agreement or for any reason by either party upon six

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months’ prior notice. Under the terms of a separate agreement entered into in August 2003, R&D Systems purchased 80,000 shares of our Series F Preferred Stock at a purchase price of $5.00 per share.

Pfizer Inc.

In February 2003, we entered into a research and development agreement with Pfizer Inc., under which we are collaborating with Pfizer to develop new reagents designed to detect proprietary antigens on CTCs. We believe this project may allow Pfizer to determine the efficacy of their therapeutic products significantly earlier than possible with current methods. We received an initial payment for research support under the agreement and we will receive additional payments upon the completion of certain agreed development goals. This agreement was amended in April 2004 to terminate on February 10, 2005. In December 2004, we and Pfizer entered into a second extension of the agreement, so that the agreement now extends to February 10, 2006. Immunicon believes this project may help Pfizer to determine the efficacy of certain of their therapeutic products significantly earlier than is possible with other methods. During this further extension, we will receive additional payments in support of our research work under the agreement. Pfizer has the right to terminate with or without reason upon five days’ prior written notice, in which case Pfizer’s only obligation will be to pay for services performed up to the termination date plus payment for any non-cancelable obligations.

igeneon

In December 2002, we entered into a master services agreement with igeneon, a biopharmaceutical company based in Vienna, Austria, which focuses on cancer immunotherapies designed to prevent or delay the formation of metastases in cancer of epithelial origin. igeneon is using our technologies to aid in evaluating the efficacy of its cancer vaccines. We currently analyze patient samples from igeneon’s trials and will be permitted to use this data on completion of the studies. Both parties bear the costs of their respective participation in this clinical trial agreement. The agreement may be terminated by either party for an uncured breach or insolvency, provided that, if igeneon terminates for reasons other than breach or insolvency it must pay certain fees to us upon such termination. Either party has the right to terminate the agreement, subject to survival of certain provisions, with or without reason, effective immediately upon notice.

Molecular Probes, Inc.

In November 2000, we entered into a non-exclusive license and supply agreement with Molecular Probes, Inc., which was subsequently acquired by Invitrogen Corporation, in August 2003. Under the terms of the agreement, we have granted to Molecular Probes a non-exclusive license to certain non-instrumented products incorporating our magnetic particle technology for RUO and to provide magnetic reagents and proprietary magnets to Molecular Probes to be packaged and incorporated by Molecular Probes into these products. We received a payment upon execution of the agreement and we will receive royalties on sales of any of these products that incorporate our technology. The term of this agreement continues for the life of our patent rights pertaining to the license of our technologies under this agreement to Molecular Probes, unless earlier terminated. There are various conditions that allow either party to terminate the agreement, including for material breach by either party, for financial difficulties involving either party, by mutual agreement, for any reason by us upon at least twelve months’ prior notice and payment of a termination fee to Molecular Probes, and for any reason by Molecular Probes upon 90 days’ prior notice.

University of Twente and STW

In June 2004 we entered into an addendum to our Technology Development Agreement and License Agreement with Twente, and STW, a research funding agency of the Dutch government. Under the

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modified agreement, STW will provide Twente with up to approximately $1 million toward developing an affordable and portable instrument to monitor patients with HIV. This instrument represents an additional application of our existing technology, specifically the CellTracks EasyCount system, which was developed through our collaboration with Twente. Under the agreement addendum, we will contribute “in kind” research effort toward the project such as personnel, equipment and supplies, and we have rights to commercialize products that result from the agreement.

SALES AND MARKETING

Commercialization of cancer products

Veridex is responsible for worldwide sales, marketing, distribution and service in the cancer market for products based on our technologies that use intact cells. Veridex has established its own marketing organization and sales force to sell to commercial reference and hospital laboratories. Veridex also uses additional commercial resources within other Johnson & Johnson companies that have existing relationships with relevant medical professionals to market these products. The products currently available for sale for IVD use through Veridex include the CellSave Preservative Tube, CellTracks AutoPrep System, CellSpotter Analyzer, the CellSearch Circulating Tumor Cell Kit and the CellSearch CTC Control Kit. The CellSearch Profile Kit is sold by Veridex for RUO. These products are in use in academic centers across the United States and several placements have been made in Europe and Japan including SRL, the largest reference laboratory in Japan. In addition, Quest Diagnostics offers assays using the CellSearch Circulating Tumor Cell Kit, our CellTracks AutoPrep System and CellSpotter Analyzer to its customers based upon in the US, and is actively promoting the assay with a specialized sales force that has expertise in esoteric testing. Together with Veridex, we plan to continue to execute clinical research and marketing studies using these products with opinion leaders in the US, Europe and Japan.

The objective of these studies will be to generate publications that support the potential utility of CTCs in various cancers and in earlier stages of the disease and on the overall performance of the products when used by customers.

Pharmaceutical development market

We believe that our products can be used to aid pharmaceutical and biotechnology companies with therapeutic development programs. We and Veridex market our cancer products to reference laboratories that service the pharmaceutical and biotechnology industry and directly to pharmaceutical and biotechnology companies. We have entered into an agreement with Pfizer relating to an ongoing collaboration that incorporates our technology into one of Pfizer’s drug development programs. We have sold a system to a major pharmaceutical company for use in various drug development and clinical trials and have shipped a system to a major clinical research organization in the U.S.

Life science research market

The life science research market includes academic centers and other private and public institutions in addition to corporations engaged in research in cell and molecular biology. Our agreements with R&D Systems Inc. and Molecular Probes (now part of Invitrogen Corporation) permit these companies to sell and use our magnetic particle technology in cell capture and analysis products in the life science research market. Additional strategies to market to this segment include:

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Reimbursement

We intend to focus with our marketing partners on obtaining coverage and reimbursement from major national and regional managed care organizations and insurance carriers throughout the US. Most of the third-party payor organizations independently evaluate new diagnostic products by reviewing the published literature or the Medicare coverage and reimbursement policy on the specific diagnostic product. To assist the third-party payors in their respective evaluations of our diagnostic products, we and Veridex intend to provide scientific and clinical data to support our claims of the safety and efficacy of our products. Furthermore, we believe that the FDA’s action to establish a new classification for use of our technology in cancer under their de novo review process may assist us and Veridex in obtaining attractive reimbursement rates.

Successful sales of our products in the US and other countries will depend on the availability of reimbursement from third-party payors such as private insurance plans, managed care organizations, and Medicare and Medicaid. There is significant uncertainty concerning third-party reimbursement for the use of any medical device incorporating new technology. Reimbursement by a third-party payor depends on a number of factors, including the level of demand by health care providers and the payor’s determination that the use of the product represents a clinical advance compared to current technology and is safe and effective, medically necessary, appropriate for specific patient populations and cost-effective. Since reimbursement approval is required from each payor individually, seeking such approvals is a time-consuming and costly process, which requires us to provide scientific and clinical data to support the use of our products to each payor separately.

In the US, the American Medical Association assigns specific Current Procedural Terminology, or CPT, codes, which are necessary for reimbursement for diagnostic tests. There are several steps for establishing reimbursement for products that use new technologies, including creating a new CPT code, establishing payment levels and securing coverage decisions with payors. Once the CPT code is established, the Centers for Medicare and Medicaid Services, or CMS (formerly the Health Care Financing Administration), establish reimbursement payment levels and coverage rules under Medicaid and Medicare, and private payers establish rates and coverage rules independently. Coding and coverage activities generally proceed simultaneously. Currently, there are no CPT codes that apply specifically to our products. However, early customers such as Quest Diagnostics have been successful in securing reimbursement using existing codes. Payment levels have been sufficient to support the pricing structure during the early phases of commercialization.

Healthcare providers are reimbursed by payors based on fee schedules for services and procedures. We believe that the pathology and laboratory fee schedule may be the applicable section for our current and future products. Each lab test on the fee schedule is identified by a unique code and descriptor.

In addition, Veridex has an active internal program for obtaining reimbursement, supplemented by various corporate resources within Johnson & Johnson. This program is aimed at establishing new CPT codes and simultaneously beginning the process of obtaining reimbursement and coverage from major national and regional managed care organizations and insurance carriers throughout the US. Veridex also has conducted research regarding reimbursement in Europe and Japan and is developing programs to address these key international markets.

However, we have no experience in obtaining reimbursement for any products in the US or other countries. In addition, third-party payors are routinely limiting reimbursement coverage for medical devices and in many instances are exerting significant pressure on medical suppliers to lower their prices.

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Also, outside of the US, healthcare reimbursement systems vary from country to country, and may not provide adequate reimbursement coverage, if any, for our products. We do not know whether third-party reimbursement will be available for our initial products or any other products that we may develop in the future, or that such third-party reimbursement, if obtained, will be adequate.

Competition

Rapid product development, technological advances, intense competition and a strong emphasis on proprietary products characterize the biotechnology, pharmaceuticals and medical device industries. Our products could be rendered obsolete or uneconomical by the introduction and market acceptance of competing products, by technological advances of our current or potential competitors or by other approaches.

The development, FDA approval and commercial marketing of competing products for cell-based diagnostics products could have a material adverse effect on our business, financial condition and results of operations. We face direct competition from a number of publicly traded and privately held companies, including other manufacturers of cancer diagnostics products.

We and Veridex compete on the basis of a number of factors, including product labeling and supporting clinical data, product design, automation and integration, product quality and performance, manufacturing efficiency, marketing and sales capabilities, intellectual property and customer service and support. We do not know if we will be able to compete successfully against current or future competitors or that competition, including the development and commercialization of new products and technologies, will not have a material adverse effect on our business, financial condition or results of operations.

We will experience competition for our IVD products from companies that manufacture and market current diagnostic products, including imaging and serum tumor markers. In addition, several companies have developed automated microscope-based analysis systems to be used for cellular analysis, including large companies such as Leica Camera AG, Olympus Corporation, Nikon Corporation, and Carl Zeiss, Inc. and smaller companies such as ChromaVision Medical Systems, Inc. (now Clarient, Inc.), Applied Imaging Corp., MetaSystems, Inc., Guava Technologies, Inc. and CompuCyte Corp.

In addition, companies offering tumor cell isolation or analysis products in the research market may attempt to develop products that might be functionally similar to ours. However we do not believe they currently have either the stand-alone capability or regulatory clearances to provide the complete commercial package of cell preservation, cell isolation, cell labeling, and cell detection techniques which we believe is required to address some of the current inadequacies of existing diagnostic methods.

For example, several companies offer research products for tumor cell isolation, including Miltenyi Biotec, Inc., Dynal Biotech, Inc. and StemCell Technologies, Inc. Several other companies supply fluorescently labeled antibodies that can be used to characterize tumor cells, including BD Biosciences and Beckman Coulter, Inc.

Given the market opportunity for cancer diagnostic products, many companies, including the competitors listed above, are conducting ongoing research and development activities designed to address the current inadequacies of existing cancer diagnostic methods, but we are not aware of any publicly announced cancer diagnostic procedures currently under development that effectively address all of these inadequacies.

Many of our competitors possess greater financial, managerial and technical resources and have established reputations for successfully developing and marketing diagnostic products, all of which put us at a competitive disadvantage. We may also face competition for the in-licensing of products from other companies that may be able to offer better terms to the licensors.

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Furthermore, new developments, including new cancer diagnostic methods, can occur rapidly in the industry. These developments may render our products or technologies obsolete or noncompetitive.

Manufacturing and supply

Our facilities currently comprise approximately 53,500 square feet, of which 10,200 square feet of space is dedicated to manufacturing of bulk reagents and instruments at our Huntingdon Valley, PA location. Our manufacturing operations are required to be conducted in accordance with the FDA’s current Good Manufacturing Practices, or cGMP, requirements in the FDA’s quality system regulations, or QSRs, and our space and manufacturing processes have been designed to comply with these QSRs. QSRs require, among other things, that we maintain documentation and process controls in a prescribed manner with respect to manufacturing, testing and quality control. We are subject to FDA inspections to verify compliance with QSRs. We are currently certified as being in compliance with the ISO 13485 standard, and we intend to obtain the CE mark, which is required for our products to be sold in the European Union.

We manufacture bulk reagents, the disposable components of the CellSearch Circulating Tumor Cell Kit and certain ancillary products. We purchase basic raw materials and perform value-added manufacturing processes such as bulk formulation and in some cases, packaging, at our facility. Certain raw materials used in the manufacturing of our reagent products are available from a limited number of sources, such as Invitrogen Corporation, Prozyme, Inc., International Specialty Products and Supelco, a subsidiary of Sigma-Aldrich Co. We acquire these raw materials on a purchase order basis. To date, we have not experienced any significant interruption in supply from these vendors. We believe our manufacturing capacity is sufficient for commercialization of our IVD products.

We manufacture the CellSpotter Analyzer and CellTracks Analyzer II on site from purchased components.

Astro Instrumentation LLC, based in Strongsville, Ohio, manufactures the CellTracks AutoPrep System under contract. We complete final assembly and perform quality control testing and release for this instrument at our facility.

Kendall, a Tyco Healthcare Company, manufactures the CellSave Preservative Tube for us. We manufacture the bulk cell preservative reagent under a non-exclusive license from Streck Laboratories, Inc., or Streck. We ship this bulk reagent to Kendall for filling and packaging.

Intellectual property and proprietary information

Protection of our intellectual property is a strategic priority for our business, and we rely on a combination of patent, trademark, copyright and trade secret laws to protect our interests. Our ability to protect and use our intellectual property rights in the continued development and commercialization of our technologies and products, operate without infringing the proprietary rights of others, and prevent others from infringing our proprietary rights, is crucial to our continued success. We will be able to protect our products and technologies from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents, trademarks or copyrights, or are effectively maintained as trade secrets, know-how or other proprietary information. Generally, US patents have a maximum term of 20 years from the date an application is filed.

We seek US and international patent protection for our processes, reagents and other components of diagnostic products, instrument system platforms and their major components, and all other commercially important technologies we develop.

While we own much of our intellectual property, including patents, patent applications, trademarks, copyrights, trade secrets, know-how and proprietary information, we also license related technology of

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importance to commercialization of our products. For example, to continue developing and commercializing our current and future products, we may license intellectual property from commercial or academic entities to obtain the rights to technology that is required for our research, development and commercialization activities. In connection with the commercial distribution of our products, we also have obtained trademark registrations in the US for “Immunicon”, the Immunicon logo, CellTracks AutoPrep logo, CellSpotter Analyzer logo, “CellSpotter”, “Magnest”, “CellSave”, and “CellTracks”. We have filed a number of trademark registration applications in preparation for commercial distribution activities on future products. Much of the proprietary software and related information utilized in our instrument systems is protected by our copyright rights or by such rights that we have licensed.

We devote significant resources to obtaining, enforcing and defending patents and other intellectual property and protecting our other proprietary information. We already have obtained patents or filed patent applications on a number of our technologies, including important patents and patent applications relating to the use of our cell separation and enrichment technologies and cancer diagnostic methodologies. If valid and enforceable, these patents may give us a means of blocking competitors from using similar or alternative technology to compete directly with our products. We also have certain proprietary trade secrets that are not patentable or for which we have chosen to maintain secrecy rather than file for patent protection. With respect to proprietary know-how that is not patentable, we have chosen to rely on trade secret protection and confidentiality agreements to protect our interests.

We solely own all of the patents and patent applications set forth above relating to our technologies, with the exception of the patents or patent applications related to technologies resulting from our collaboration with University of Texas, or Texas, which are jointly owned by Texas and us and are subject to the terms of the exclusive license to us from Texas described below.

We also have exclusively in-licensed significant intellectual property, including patents and know-how, related to our cell analysis instrumentation and cell isolation and enrichment products. In April 1997, we entered into a license agreement with the Twente. Under this agreement, Twente granted to us an exclusive, worldwide, royalty-bearing license to make, have made, use, lease and/or sell products comprising certain inventions and developments developed at Twente relating to analysis of various particles that are similar to cells and cell particles. This technology and the underlying patents and know-how contribute significantly to our CellTracks Analyzer. This agreement will terminate upon the later of April 2007 or the expiration date of the last to expire of the patents licensed under this agreement. In addition, Twente may unilaterally terminate this agreement if we are in material breach or if we become bankrupt or insolvent. Twente also may unilaterally terminate the license granted under this agreement if we do not maintain sufficient general and product liability insurance coverage once we have begun clinical trials and commercialization of our products.

In June 1999, we entered into a license agreement with the Texas. Under this agreement, Texas granted to us an exclusive, worldwide, royalty-bearing license to use, have used, manufacture, have manufactured, sell and/or have sold products comprising certain technologies, including patents and know-how, which we developed in collaboration with Texas, relating to the isolation, enrichment and characterization of circulating epithelial cells and determination of their relationship to cancer disease states. We are responsible for making royalty payments of 1% of reagent sales incorporating the intellectual property licensed to us under this agreement. This agreement terminates when all of Texas’s rights to the licensed technologies expire. In addition, Texas also may unilaterally terminate this agreement if we are in material breach or become bankrupt or insolvent. Texas also may unilaterally terminate the license granted under this agreement, or the exclusivity of such license, in any national political jurisdiction if we fail to provide written evidence satisfactory to Texas, within 90 days of receiving written notice from Texas that it intends to terminate this license, that we or our sublicensees have commercialized or are actively attempting to commercialize a licensed invention in these jurisdictions.

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In addition, in July 2002, we entered into a license agreement with Streck. Under this agreement, Streck granted to us a non-exclusive, worldwide, royalty-bearing license to practice certain of Streck’s cell preservation technology, including patents and know-how, for the research, development, manufacture and sale of our CellSave Preservative Tube to test for the presence of epithelial cells or CTCs in a sample of fluid from a patient. This agreement will terminate upon the expiration date of the last to expire of the patents licensed under this agreement or by mutual written agreement by Streck and us. In addition, either party also may terminate this agreement if the other party is in material breach or becomes involved in financial difficulties, including bankruptcy and insolvency. In December, 2004, we exercised our right under the amended license agreement to extend the field of the license to include testing for the presence of endothelial cells in a sample of fluid from a patient.

We have a portfolio of issued patents and patent applications, which we believe provides patent coverage for our proprietary technologies and products. As of March 1, 2005 our intellectual property estate consisted of 197 issued patents or patent applications, as follows:

Each of the foreign filings corresponds in subject matter to a US patent filing. Our patent portfolio as of March 1, 2005 is summarized in the following table:

Our family of patents covering our cancer-related products will expire from February 2019 to June 2023 for issued patents and pending applications when issued, respectively. Our patents relating to our immunomagnetic particle technology will expire from July 2019 to October 2020 for issued patents and pending applications when issued, respectively. Our patents relating to our instrumentation platforms will expire between June 2019 and December 2024 for issued patents and pending applications when issued, respectively. Our group of patent filings covering supportive technology, related to control cells, instrument disposable cartridge designs and apparatus for cellular enrichment, when issued, will expire between August 2019 and November 2024.

We generally require our employees, consultants, outside collaborators, and other advisors to execute confidentiality agreements upon the commencement of employment or consulting relationships. Under these agreements, all confidential and proprietary information developed by or made known in the course of the relationship with us is kept confidential and not disclosed to third parties except in specific circumstances.

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Government regulation

General

Our products are subject to various federal, state and international rules and regulations governing the medical products industry. In the US, we are subject to federal regulation by the FDA pursuant to the Federal Food, Drug and Cosmetic Act. The FDA regulates the clinical testing, manufacture, labeling, sale, distribution and promotion of medical devices. Failure to comply with applicable requirements can lead to sanctions, including withdrawal of products from the market, recalls, refusal to authorize government contracts, product seizures, civil money penalties, injunctions and criminal prosecution.

The FDA classifies medical devices into one of three classes on the basis of the controls deemed necessary to reasonably ensure their safety and effectiveness:

Before being introduced into the market, our products must obtain market clearance through either the 510(k) pre-market notification process or the PMA application process. A 510(k) clearance typically will be granted if a company demonstrates to the FDA that its device is substantially equivalent in intended use, safety and effectiveness to a legally marketed Class I or II medical device or to a Class III device marketed prior to 1976 for which the FDA has not yet required the submission of a PMA. In some cases, clinical trials may be required to support a claim of substantial equivalence. It generally takes from two to twelve months from the date of submission to obtain clearance of a 510(k) submission, but it may take longer.

After a medical device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a significant change in its intended use, requires a new 510(k) clearance or could require a PMA approval. The FDA requires each manufacturer to make this determination, but the FDA can review the decision. If the FDA disagrees with the manufacturer’s decision not to seek FDA authorization, the agency may retroactively require the manufacturer to seek 510(k) clearance or PMA approval. The FDA also can require the manufacturer to cease marketing until clearance or approval is obtained or take other action. Under the Medical Device User Fee and Modernization Act of 2002, or MDUFMA, we are subject to a fee of up to $3,500 for each 510(k) submission.

If a previously unclassified medical device does not qualify for the 510(k) pre-market notification process because there is no predicate device to which it is substantially equivalent, and the device may be adequately regulated through general controls or special controls, the device may be eligible for clearance through what is called the de novo review process. If FDA grants de novo classification, the device will be placed into either Class I or Class II, and allowed to be marketed. In order to use the de novo procedure, the manufacturer must receive a letter from FDA stating that the device has been found not substantially equivalent and placed into Class III, and then within 30 days submit to FDA a request for a new classification. The FDA has 60 days in which to approve or deny the de novo classification request. If a product is reclassified into Class I or II through the de novo process, then that device may serve as a predicate device for subsequent 510(k) pre-market notifications.

If a medical device does not qualify for the 510(k) pre-market notification process and is not eligible for clearance through the de novo review process, a company must file a PMA application. The PMA application process generally requires more extensive pre-filing testing than is required for a 510(k) pre-

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market notification and is more costly, lengthy and uncertain. The PMA process can take one to two years or more. The PMA application process requires the manufacturer to prove the safety and effectiveness of the device to the FDA’s satisfaction through extensive pre-clinical and clinical trial data, as well as information about the device and its components, including, among other things, device design, manufacturing and labeling. Before approving a PMA, the FDA generally also performs an on-site inspection of the applicant’s manufacturing facilities to ensure compliance with QSR requirements. The current MDUFMA fee for us to submit a PMA is up to $206,811 per PMA, but we may qualify for a small business reduction or first time exemption from the fee. After any PMA approval, a new PMA application or PMA supplement is required in the event of certain modifications to the device, it’s labeling, intended use or indication, or its manufacturing process.

The CellSearch Circulating Tumor Cell Kit, along with our CellSpotter Analyzer, has received clearance through the de novo review process. Our CellSave Preservative Tube, our CellPrep System, our CellTracks AutoPrep System and our CellTracks Analyzer have received clearance through the 510(k) process. Our CellTracks Analyzer, however, is cleared only as a differential cell analyzer for CD3/CD4 cell analysis, and has not been cleared for cancer applications. Veridex has received 510(k) clearance for the Control Cell Kit, a predicate version of the CellSearch Epithelial Cell Control. We believe that some of the products we are developing and anticipate will be sold in diagnostic kit form, especially products that may be used for screening, may require PMA approval, if we are unable to demonstrate to the FDA either that these potential products are substantially equivalent to a predicate device or are eligible for clearance through what is called the de novo review process.

Clinical trials

Generally, to conduct clinical trials of a medical device, a sponsor must comply with the Investigational Device Exemption, or the IDE regulations. Studies of IVD devices are exempt from the IDE regulations if the testing:

In addition, IVD devices that are exempt from IDE requirements must be labeled that they are for investigational use only and that their performance characteristics have not been established. Whether or not an investigation is subject to the IDE regulations, a clinical investigator’s data that may be submitted in connection with a marketing application must comply with the FDA’s regulations and scientific standards relating to informed consent, institutional review board, or IRB, oversight of inspections, adherence to investigational protocols, and pertinent reports and recordkeeping. These scientific and regulatory expectations extend to the sponsors when they engage in clinical trials. All of our clinical trials to date have been conducted under the FDA’s IDE exemption provisions. Although we typically consult with the FDA regarding the design of our studies prior to initiating them, this does not ensure that the FDA will accept the data from these studies. If the FDA were to determine that we should have complied with the IDE regulations for any of our studies, or if we fail to comply with any of these requirements, the FDA could refuse to grant permission to market our devices or impose other sanctions.

The FDA permits the distribution of products that are intended for research use in a laboratory-based phase of development. A research product may not be promoted for human clinical diagnostic or prognostic use. In addition, tests performed with products intended for research use must be labeled as such. We expect to market certain products, such as the CellSearch Profile Kit, initially for RUO.

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Analyte specific reagents

The FDA regulates the sale of certain reagents, including some of our reagents, used in laboratory tests. The FDA refers to the reagents used in these tests as ASRs. ASRs react with a biological substance including those intended to identify a specific DNA sequence or protein. ASRs generally do not require FDA PMA approval or clearance if they are sold in compliance with the ASR regulations and are sold to:

Products sold under this exemption must be labeled in accordance with FDA requirements, including a statement that their analytical and performance characteristics have not been established. A similar statement would also be required on all related advertising and promotional materials. The FDA also limits the kind of performance claims that ASR manufacturers may make. Laboratories also are subject to restrictions imposed by the Federal Trade Commission and comparable state agencies on the labeling and marketing of tests that have been developed using ASRs. ASRs also must be manufactured in accordance with QSRs. The ASR regulatory category is relatively new, and its regulatory boundaries are not well defined. We believe the ASRs that we intend to sell to research or clinical reference laboratories, currently do not require FDA approval or clearance. We cannot be sure, however, that the FDA will not change its policy to require pre-market approval or clearance for one or more of our ASRs. In addition, we cannot be sure that the FDA will not change its position in ways that could negatively affect our operations through regulation, policies or new enforcement initiatives.

Continuing regulation

Numerous requirements apply to manufacturers and distributors of marketed medical devices. Device manufacturers must be registered and their products listed with the FDA. Certain adverse events, product malfunctions, recalls and corrective actions must be reported to the FDA under post-market surveillance requirements. Manufacturers must comply with the FDA’s QSRs, which establish extensive requirements for quality control, documentation and manufacturing procedures. The FDA also regulates product labeling, promotion, and in some cases, advertising, of medical devices. Products may only be promoted by us and any of our distributors for their approved or cleared indications. The FDA has actively enforced regulations prohibiting the marketing of products for unapproved uses. Violations of the FDA regulations may result in agency enforcement action. The FDA periodically inspects facilities to ascertain compliance with these and other requirements.

Our product development and testing activities are also subject to a variety of state laws and regulations. Any applicable state or local regulations may hinder our ability to manufacture or test our products in those states or localities. We are also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control, and disposal of hazardous or potentially hazardous substances. We may incur significant costs to comply with such laws and regulations now or in the future.

Federal and state laws protect the confidentiality of certain patient health information, including patient records, and restrict the use and disclosure of that protected information. In particular, the US Department of Health and Human Services published patient privacy rules under the Health Insurance Portability and Accountability Act of 1996. These privacy rules protect medical records and other personal health information by limiting its use and release, giving patients the right to access their medical records and limiting most disclosures of health information to the minimum amount necessary to accomplish an intended purpose. We believe that we generally have taken all necessary steps to comply

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with health information privacy and confidentiality statutes and regulations in all jurisdictions, both state and Federal. However, we, or the parties with which we do business, may not be able to maintain compliance in all jurisdictions where we do business. Failure to maintain compliance, or changes in state or Federal laws regarding privacy, could result in civil and/or criminal penalties and could have a material adverse effect on our business.

EMPLOYEES

As of December 31, 2004, we had 139 employees at two facilities, consisting of one facility at our corporate address in Huntingdon Valley, PA and another facility in Enschede, The Netherlands. Fourteen of these employees hold Ph.D. degrees and one of these employees holds an M.D. and a Ph.D. degree. Of the 132 full-time and 7 part-time employees, 69 are directly involved in research and development, and 44 are involved in manufacturing operations. Four of our full time employees are employed in The Netherlands. None of our employees are represented by labor unions or covered by collective bargaining agreements. We have not experienced any work stoppages and we consider our relations with our employees to be good.

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RISK FACTORS

The following is a discussion of certain significant risk factors that could potentially negatively impact our financial condition, performance and prospects. In addition to other information contained in this report, you should carefully consider the following factors in evaluating our company. Any of the following factors could materially and adversely affect our business, financial position and results of operations.

RISKS RELATING TO OUR BUSINESS

We have a history of operating losses, expect to continue to incur substantial losses, and might never achieve or maintain profitability.

We are a development stage company with limited operating history. We have incurred significant net losses since we began operations in 1983. As of December 31, 2004, we had a deficit accumulated during our development stage of $91.5 million. For the 12 months ended December 31, 2004 and 2003 we had net losses of $27.9 million and $17.6 million, respectively. These losses have resulted primarily from costs incurred in our research and development programs and from our general and administrative expenses. Because our operating expenses are likely to increase significantly in the near term, we will need to generate significant additional revenue to achieve profitability. As we do not as yet have sufficient operating revenue from the sales of our products to offset our losses, we expect our losses to continue to increase as a result of ongoing research and development and clinical trial expenses, as well as increased manufacturing, sales and marketing expenses. These losses, among other things, have had and will continue to have an adverse effect on our working capital, total assets and stockholders’ equity. Because of the numerous risks and uncertainties associated with our product development efforts, market acceptance and uncertainties concerning the success of sales efforts by us and Veridex, we are unable to predict when we will become profitable, and we may never become profitable. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we are unable to achieve and then maintain profitability, the market value of our common stock will decline.

If our relationship with Veridex is terminated, we may be unable to continue to commercialize effectively certain of our products based on our technologies in the field of cancer.

We entered into a development, license and supply agreement with Veridex, under which we granted to Veridex a worldwide exclusive license in the field of cancer to commercialize cell analysis products based on our technologies. We also appointed Veridex as our exclusive sales, invoicing and collection agent for our cell analysis instrumentation in cancer. Veridex may terminate this agreement with or without reason at any time by providing us with 24 months’ prior written notice. Veridex also may terminate this agreement if we are in material breach or are acquired by a competitor in the IVD field. In addition, while we have granted Veridex the exclusive right to market, distribute and conduct field, technical, customer service and certain manufacturing finishing operations for these products, this agreement provides that Veridex has very limited obligations to perform these functions. For example, the agreement does not require Veridex to meet any minimum levels with respect to sales, marketing personnel or other marketing expenditures. If Veridex were to terminate, fail to meet its obligations under this agreement or fail to deploy adequate resources to commercialize products under this agreement:

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Any of these outcomes could result in delays in our ability to generate revenues from the sales of these products, an increase in our expenses and a resulting adverse impact on our operations and financial results, and the value of our common stock would likely decline.

If we and Veridex are able to generate product sales under our agreement, we are required to invest an amount ranging from between 8.5% and 10% of total net product sales by Veridex, excluding revenue from cell analysis system sales, in research and development for cancer-related cell analysis products.

If our products and Veridex’s products do not achieve market acceptance, we will be unable to generate significant revenues from them.

The future commercial success of our products and of Veridex’s products based on our technologies will depend primarily on:

To accomplish this, we and Veridex will need to convince oncologists, primary care physicians, surgeons, laboratory professionals and other members of the medical and biotechnology communities of the benefits of these products through published papers, presentations at scientific conferences and additional clinical trials. For example, at the present time we and Veridex do not have sufficient data to indicate that there may be a significant market for any of our products for monitoring of recurrence of cancer in patients. If we and Veridex are not successful in these efforts, the market acceptance for these products could be limited. Additionally, if ongoing or future clinical trials result in unfavorable or inconsistent results, these products may not achieve market acceptance. Other factors that might influence market acceptance of these products include the following:

If these products do not gain broad market acceptance, our business will suffer.

If we or Veridex are not able to obtain all of the regulatory approvals and clearances required to commercialize our products, our business would be significantly harmed.

The products based on our technologies are generally regulated as medical devices by the FDA and comparable agencies of other countries. In particular, FDA regulations govern, among other things, the activities that we and Veridex perform, including product development, product testing, product labeling, product storage, pre-market notification clearance (or 510(k)) or pre-market approval (or PMA), manufacturing, advertising, promotion, product sales, reporting of certain product failures and distribution.

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Most of the products that we plan to develop and commercialize in the US will require either 510(k) clearance, or PMA approval from the FDA prior to marketing. The 510(k) clearance process usually takes from two to twelve months from submission, but can take longer. The PMA process is much more costly, lengthy, uncertain and generally takes from one to two years or longer from submission.

All of the products that we or Veridex intend to submit for FDA clearance or approval will be subject to substantial restrictions, including, among other things, restrictions on the indications for which we and Veridex may market these products, which could result in lower revenues. The marketing claims we and Veridex will be permitted to make in labeling or advertising regarding our cancer diagnostic products, if cleared or approved by the FDA, will be limited to those specified in any clearance or approval. We expect that initially many of these products will be limited to RUO. In addition, both we and Veridex are subject to inspection and marketing surveillance by the FDA to determine our compliance with regulatory requirements. If the FDA finds that we or Veridex have failed to comply with these requirements, it can institute a wide variety of enforcement actions, ranging from a public warning letter to more severe sanctions, including:

Any of these enforcement actions could affect our ability or Veridex’s ability to commercially distribute our products in the US and may also harm our ability to conduct the clinical trials necessary to support the marketing, clearance or approval of these products.

If the third-party manufacturers we rely on either refuse or are unable to successfully manufacture certain of our products, we may be unable to commercialize these products.

We have limited commercial manufacturing experience and capabilities. We currently assemble or perform final assembly, test and release of the CellSpotter System, the CellTracks AutoPrep System and the CellTracks Analyzer II, as well as bulk reagents and other associated products used with the CellTracks AutoPrep System, at our facility located in Huntingdon Valley, Pennsylvania. We currently have adequate manufacturing capacity, or have planned for expansion of such capacity, to meet anticipated demand for 2005 and 2006. However, in order to meet anticipated demand thereafter, we will have to expand our manufacturing processes and facilities or increase our reliance on third-party manufacturers. Under our agreement with Veridex, we might be required to establish a third manufacturing facility or qualify a contract manufacturer in the future. We might encounter difficulties in expanding our manufacturing processes and facilities or in expanding our relationships with third-party manufacturers and might be unsuccessful in overcoming these difficulties. In that event, our ability to meet product demand could be impaired or delayed.

We face additional risks inherent in operating a single manufacturing facility for those products we manufacture ourselves. We do not have alternative production plans in place or alternative facilities available at this time. If there are unforeseen shutdowns to our facility, we will be unable to satisfy customer orders on a timely basis with respect to these products. We rely currently and intend to continue to rely significantly in the future on third-party manufacturers to produce some of our products.

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For example, we are dependent on a small, private, contract design, engineering and manufacturing company, Astro Instrumentation, LLC, or Astro, for our CellTracks AutoPrep System. If Astro loses key personnel or encounters financial or other difficulties, they may be unable to continue to manufacture this system and provide ongoing design and engineering support for commercialization and future enhancements of this system, and we may have difficulty replacing them. In addition, we currently use a third-party manufacturer for our CellSave Preservative Tube. We are dependent on these third-party manufacturers to perform their obligations in a timely and effective manner and in compliance with FDA and other regulatory requirements. If these third-party manufacturers fail to perform their obligations, our competitive position and ability to generate revenue could be adversely affected in a number of ways, including:

Any failures in manufacturing these products may also result in a breach of our agreement with Veridex.

If third-party payors do not reimburse customers for our products and Veridex’s products, they might not be used or purchased, which would adversely affect our revenues.

The majority of the sales of our products and Veridex’s products based on our technologies in the US and other markets will depend, in large part, on the availability of adequate reimbursement to users of these products from government insurance plans, including Medicare and Medicaid in the US, managed care organizations, private insurance plans and other third-party payors. Because these products have only recently been commercially introduced, third-party payors have no history of reimbursing for the cost of these products. Third-party payors are often reluctant to reimburse healthcare providers for the use of medical diagnostic products incorporating new technology. In addition, third-party payors are increasingly limiting reimbursement coverage for medical diagnostic products and, in many instances, are exerting pressure on medical products suppliers to reduce their prices. Consequently, third-party reimbursement might not be consistently available or adequate to cover the cost of our products. This could limit our ability or Veridex’s ability to sell these products or cause the prices of these products to be reduced, which would adversely affect our operating results.

Because each third-party payor individually approves reimbursement, obtaining these approvals is a time-consuming and costly process that will require us and Veridex to provide scientific and clinical support for the use of each of these products to each third-party payor separately with no assurance that approval will be obtained. This process could delay the market acceptance of new products and could have a negative effect on our revenues and operating results.

If we or any of our third-party manufacturers do not maintain high standards of manufacturing in accordance with Quality System Regulations, our ability to develop, and Veridex’s and our ability to commercialize our products, could be delayed or curtailed.

We and any third-party manufacturers that we currently rely on or will rely on in the future, including those we rely on to produce our CellTracks AutoPrep System and CellSave Preservative Tube, must continuously adhere to the current good manufacturing practices, or cGMP, set forth in the FDA’s QSRs, and enforced by the FDA through its facilities inspection program. In complying with QSR, we and any of our third-party manufacturers must expend significant time, money and effort in design and development, testing, production, record-keeping and quality control to assure that our products meet

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applicable specifications and other regulatory requirements. The failure to comply with these specifications and other requirements could result in an FDA enforcement action, including the seizure of products and shutting down production. We or any of these third-party manufacturers also may be subject to comparable or more stringent regulations of foreign regulatory authorities. If we or any of our third-party manufacturers fail to comply with these regulations, we might be subject to regulatory action, which could delay or curtail our ability to develop, and Veridex’s and our ability to commercialize, products based on our technologies.

If we fail to obtain necessary funds for our operations, we will be unable to continue to develop and commercialize new products and technologies.

We expect capital outlays and operating expenditures to increase over the next several years as we expand our infrastructure, commercialization, manufacturing, clinical trials and research and development activities. Specifically, we will need to raise additional capital to, among other things:

To date, we have raised capital through private equity, public equity and debt financings, license and milestone revenues from corporate collaborations, capital equipment and leasehold financing, government grants and interest earned on cash and investments. However, our present and future funding requirements will depend on many factors, including, among other things:

We do not know whether additional financing will be available on commercially acceptable terms when needed. If adequate funds are not available or are not available on commercially acceptable terms, our ability to fund our operations, develop products or technologies or otherwise respond to competitive pressures could be significantly delayed or limited, and we might need to downsize or halt our operations.

If we raise additional funds by issuing equity securities, further dilution to our stockholders could result, and new investors could have rights superior to those of our existing shareholders. Any equity securities

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issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise additional funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the debt securities issued could impose significant restrictions on our operations. If we raise additional funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our technologies or products, or grant licenses on terms that are not favorable to us. If adequate funds are not available, we may have to delay or may be unable to continue to develop our products.

If the third parties we intend to contract with for clinical trials do not perform in an acceptable manner, or if we suffer setbacks in these clinical trials, our business may suffer.

We do not have the ability to independently conduct the clinical trials required to obtain regulatory clearances for our products. We intend to rely on third-party expert clinical investigators and clinical research organizations to perform these functions. If we cannot locate and enter into favorable agreements with acceptable third parties, or if these third parties do not successfully carry out their contractual obligations, meet expected deadlines or follow regulatory requirements, including clinical laboratory, manufacturing and good clinical practice guidelines, then we may be the subject of an enforcement action by the FDA or some other regulatory body, and may be unable to obtain clearances for our products or to commercialize them on a timely basis, if at all.

The completion of clinical trials of our products may be delayed by many other factors, including the rate of enrollment of patients. Neither we nor any third-party clinical investigators and clinical research organizations can control the rate of patient enrollment, and this rate might not be consistent with our expectations or sufficient to enable clinical trials of our products to be completed in a timely manner or to be completed at all. In addition, regulatory authorities might not permit us to undertake additional clinical trials for one or more of these products. If we suffer any significant delays, setbacks or negative results in, or termination of, clinical trials for our products, we may be unable to generate product sales from these products in the future.

If we lose key management or scientific personnel, scientific collaborators or other advisors, our business would suffer.

Our success depends, in large part, on the efforts and abilities of Edward L. Erickson, who is our Chairman, President and Chief Executive Officer, Byron D. Hewett, who is our Chief Operating Officer and General Manager, Cancer Products, Leon W.M.M. Terstappen, who is our Senior Vice President of Research and Development and Chief Scientific Officer, and James G. Murphy, who is our Senior Vice President of Finance and Administration and Chief Financial Officer, as well as the other members of our senior management and our scientific and technical personnel. Given that the pool of individuals with relevant experience in biotechnology and diagnostic products in particular is limited, it would be costly and time-consuming to replace any of our senior management or scientific personnel. Although we maintain key-person life insurance on Mr. Erickson and Dr. Terstappen, we do not maintain key-person life insurance on any of our other officers, employees or consultants. We also depend on our scientific collaborators and other advisors, particularly with respect to our research and development efforts. If we lose the services of one or more of our key officers, employees or consultants, or are unable to retain the services of our scientific collaborators and other advisors, our research and development and product development efforts could be delayed or curtailed.

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If Veridex and the other third parties we intend to rely on to perform marketing, sales and distribution services for our products do not successfully perform these services, our business will be harmed.

We have limited marketing, sales and distribution experience and capabilities. In order to commercialize any of our products, we must either internally develop sales, marketing and distribution capabilities or make arrangements with third parties to perform these services. We intend to rely for the foreseeable future on sales, marketing and distribution arrangements with third parties for the commercialization of our products. Specifically, we will rely on Veridex for the commercialization of the initial cancer diagnostic products based on our technologies. We may be unable to enter into sales, marketing and distribution agreements with third parties on acceptable terms, if at all. Also, the sales, marketing, and distribution efforts of these third parties might not be successful. Any sales through these third parties might be less profitable to us than direct sales.

If we decide to perform any sales, marketing and distribution functions ourselves, we might face a number of risks, including:

If the limited number of suppliers we rely on fail to supply the raw materials we use in the manufacturing of our reagent products, we might be unable to satisfy product demand, which would negatively impact our business.

Several raw materials used in the manufacturing of our reagent products used in several of our platforms and instruments currently are available only from a limited number of suppliers. We acquire all of these raw materials on a purchase-order basis, which means that the supplier is not required to supply us with specified quantities of these raw materials over a certain period of time or to set aside part of its inventory for our forecasted requirements. Additionally, for certain of these raw materials, we have not arranged for alternative suppliers, and it might be difficult to find alternative suppliers in a timely manner and on terms acceptable to us. Consequently, as we continue our commercialization efforts, if we do not forecast properly, or if our suppliers are unable or unwilling to supply us in sufficient quantities or on commercially acceptable terms, we might not have access to sufficient quantities of these raw materials on a timely basis and might not be able to satisfy product demand.

In addition, if any of these components and raw materials are no longer available in the marketplace, we will be forced to further develop our technologies to incorporate alternate components and to do so in compliance with QSR. If we incorporate new components or raw materials into our products we might need to seek and obtain additional approvals or clearances from the FDA or foreign regulatory agencies, which could delay the commercialization of these products.

If our competitors develop and market technologies or research and diagnostic products faster than we or Veridex do or if those products are more effective than our products, our commercial opportunities will be reduced or eliminated.

The extent to which any of our technologies and products achieve market acceptance will depend on many competitive factors, many of which are beyond our control. Competition in the pharmaceutical and biotechnology industries, and the medical devices and diagnostic products segments in particular, is intense and has been accentuated by the rapid pace of technological development. Our competitors

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include large diagnostics and life sciences companies. Most of these entities have substantially greater research and development capabilities and financial, scientific, manufacturing, marketing, sales and service resources than we do. Some of them also have more experience than we do in research and development, clinical trials, regulatory matters, manufacturing, marketing and sales. These organizations also compete with us to:

If we or Veridex cannot successfully compete with new or existing products or technologies, sales of our products will suffer and we may never achieve profitability. Because of their greater experience with commercializing their technologies and larger research and development capabilities, our competitors might succeed in developing and commercializing technologies or products earlier and obtaining regulatory approvals and clearances from the FDA more rapidly than Veridex or us. Our competitors also might develop more effective technologies or products that are more predictive, more highly automated or more cost-effective, which may render our technologies or products obsolete or non-competitive.

If we experience delays in the development of new products or delays in planned improvements to our products, our commercial opportunities will be reduced.

To improve our competitive position, we believe that we will need to develop new products as well as improve our existing instruments, reagents and ancillary products. Improvements in automation and throughput (the number of tests that can be performed in a specified period of time) of our products will be important to the competitive position of our products as we market to a broader, perhaps less technically proficient, group of customers. Our ability to develop new products and make improvements in our products may face difficult technological challenges leading to development delays. For example, we had experienced delays in connection with the development of our CellTracks Analyzer cell analysis instrument for use in cancer diagnostic testing. These delays were the result of technical problems associated with reliability of the system to detect cancer cells. In response, we are planning to introduce a second-generation instrument, the CellTracks Analyzer II, which, among other improvements by compared to our CellSpotter Analyzer, implements enhancements such as the automation of data acquisition and enhanced detection of CTCs and other types of cells. We are also continuing to develop our analyzer platforms further because we believe that some of the planned features, such as the ability to quantify cellular markers using ASRs, may be required to address future potential research and clinical applications and to remain competitive. If we are unable to successfully complete development of new products or if we are unable to successfully complete the planned enhancements to our products, in each case without significant delays, our future competitive position may be adversely affected.

If product liability lawsuits are successfully brought against us, we might incur substantial liabilities and could be required to limit the commercialization of our products.

Our business exposes us to potential product liability risks that are inherent in the testing, manufacturing, marketing and sale of diagnostic products. We might be unable to avoid product liability claims. Product liability insurance generally is expensive for our industry. If we are unable to maintain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims, we may be unable to commercialize our products. A successful product liability claim brought against us in excess of any insurance coverage we have at that time could cause us to incur substantial liabilities and our business to fail.

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If we use biological and hazardous materials in a manner that causes injury, we could be liable for damages.

Our research and development activities sometimes involve the controlled use of potentially harmful biological materials, hazardous materials and chemicals. We cannot completely eliminate the risk of accidental contamination or injury to third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have. Additionally, we are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations might be significant and could negatively affect our profitability.

If we are unable to manage growth in connection with our transition from an early-stage development company to a company that commercializes research and diagnostic products, our operations will suffer.

We will need to add a significant number of new personnel and expand our capabilities in order to successfully pursue our commercialization strategy for our initial IVD products as well as our research and development efforts. Certain aspects of our operations must be scaled up, for example, to increase the batch sizes of antibodies and other bulk components that we will need to provide for use in the test kits manufactured by Veridex and the number of instrument systems we can manufacture per quarter. Organizational growth and scale-up of operations could strain our existing managerial, operational, financial and other resources. If we fail to manage this growth effectively, we may not be able to achieve our research and development and commercialization goals.

RISKS RELATED TO OUR INTELLECTUAL PROPERTY

If we are unable to protect our proprietary rights, we may not be able to compete effectively.

We have obtained patents in the US and in foreign countries relating to many of the technologies that are the basis of our products, such as the basic technologies relating to the separation and isolation of cells for the detection of cancer and the various aspects of the reagents, methods and instrument platforms that we are commercializing or plan to commercialize. In addition, we maintain trade secrets, especially where we believe patent protection is not appropriate or obtainable, on various aspects of our technologies and that we do not wish to become publicly known. However, obtaining, defending and enforcing our patents and other intellectual property rights involve complex legal and factual questions. For example, many of our key patents relating to our basic technologies for the separation and isolation of cells for the detection of cancer contain claims covering our processes for manufacturing and using our magnetic separation particles, or ferrofluids. If a competitor were to practice or use these processes without our knowledge or consent, these patents may be particularly difficult to defend or enforce because it may not be apparent from examination of the competitor’s products that the competitor is using our patented processes. In particular, if we were not able successfully to defend or enforce our patents that cover our ferrofluids, which are utilized as a key component of our CellTracks AutoPrep System, competitors could more easily produce systems that might be able to perform separation of CTCs from blood samples in a manner substantially equivalent to our CellTracks AutoPrep System without compensating us, resulting in substantial damage to our business.

Because the issuance of a patent is not conclusive of its validity or enforceability and can be challenged, we do not know how much protection, if any, our patents will provide to us if we attempt to enforce them or if others challenge their validity or enforceability in court. For example, if our patents relating to the separation of CTCs from blood samples were challenged and invalidated, we would not be able to prevent others from utilizing these key aspects of our technologies, which would substantially harm our

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business. Moreover, our patent applications may not result in issued patents, and even if issued, our patents may not contain claims that are sufficiently broad to prevent others from practicing our technologies or developing competing products. Accordingly, we cannot assure you that we will be able to obtain, defend or enforce our patent rights covering our technologies in the US or in foreign countries. In addition, if others discover or misappropriate the technologies that we have chosen to maintain as trade secrets, we may not be able to effectively maintain our technologies as unpatented trade secrets. Although we have taken measures to protect our unpatented trade secrets and other non-public information such as know-how, including the use of confidentiality and invention assignment agreements with our employees, consultants and some of our contractors, it is possible that these persons may unintentionally or willingly breach the agreements or that our competitors may independently develop or otherwise discover our trade secrets and know-how.

A challenge to one or more of our pending patent applications, or issued patents, may result in limiting the coverage of our patents so that a competitor can effectively avoid our patent claims. In addition, competitors may avoid our patents by using technologies that perform substantially as our technologies, but avoid infringing our patent claims. For example, if a competitor were to use a cell separation technology that performs as well, or nearly as well, as our patented ferrofluids, the competitor may be able to market products that may be functionally equivalent and perform as well or nearly as well as our products, thereby diminishing the competitive advantage afforded by our issued patents.

Although we may initiate litigation to stop the infringement of our patent claims or to attempt to force an unauthorized user of our patented inventions or trade secrets to compensate us for the infringement or unauthorized use, patent and trade secret litigation is complex and often difficult and expensive, and would consume the time of our management and other significant resources. If the outcome of litigation is adverse to us, third parties may be able to use our technologies without payments to us. Moreover, some of our competitors may be better able to sustain the costs of litigation because they have substantially greater resources. Because of these factors relating to litigation, we may be unable effectively to prevent misappropriation of our patent and other proprietary rights.

If the use of our technologies conflicts with the intellectual property rights of third-parties, we may incur substantial liabilities and we may be unable to commercialize products based on these technologies in a profitable manner, if at all.

Our competitors or others may have or acquire patent rights that they could enforce against us. If they do so, we may be required to alter our technologies, pay licensing fees or cease activities. If our technologies conflict with patent rights of others, third parties could bring legal action against us or our licensees, suppliers, customers or collaborators, claiming damages and seeking to enjoin manufacturing and marketing of the affected products. If these legal actions are successful, in addition to any potential liability for damages, we might have to obtain a license in order to continue to manufacture or market the affected products. A required license under the related patent may not be available on acceptable terms, if at all.

We may be unaware of issued patents that our technologies infringe. Because patent applications can take many years to issue, there may be currently pending applications, unknown to us, that may later result in issued patents upon which our technologies may infringe. There could also be existing patents of which we are unaware upon which our technologies may infringe. In addition, if third parties file patent applications or obtain patents claiming technology also claimed by us in pending applications, we may have to participate in interference proceedings in the US Patent and Trademark Office to determine priority of invention. If third parties file oppositions in foreign countries, we may also have to participate in opposition proceedings in foreign tribunals to defend the patentability of the filed foreign patent applications. We may also have to participate in interference proceedings involving our issued patents or our pending applications.

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If a third party claims that we infringe upon its proprietary rights, any of the following may occur:

If any of these events occurs, our business will suffer and the market price of our common stock will likely decline.

Our rights to use technologies licensed to us by third parties are not within our control, and we may not be able to implement our products without these technologies.

We have licensed patents and other rights that are necessary to commercialize our products. Our business will significantly suffer if these licenses terminate, if the licensors fail to abide by the terms of the license or fail to prevent infringement by third parties or if the licensed patents or other rights are found to be invalid.

We have exclusively in-licensed significant intellectual property, including patents and know-how, related to our cell analysis instrumentation and cell isolation and enrichment products. In April 1997 we entered into a license agreement with Twente, under which we were granted exclusive rights to technology developed at Twente relating to optical analysis of particles similar to cells and cell particles. This technology and the underlying patents and know-how contribute significantly to our cell analysis platforms. This agreement will terminate upon the later of April 2007 or the expiration date of the last to expire of the patents licensed under this agreement. In addition, Twente may unilaterally terminate this agreement if we are in material breach or if we become bankrupt or insolvent. Twente also may unilaterally terminate the license granted under this agreement if we do not maintain sufficient general and product liability insurance coverage once we have begun clinical trials and commercialization of our products. In addition, in September 1999, we entered into a license agreement with the University of Texas, or Texas, under which we were granted exclusive rights to technology, including patents and know-how, which we developed in collaboration with Texas, relating to the isolation, enrichment and characterization of circulating epithelial cells. Epithelial cells are cells that cover external and internal body surfaces and give rise to the majority of solid tumors. This technology and the underlying patents and know-how contribute significantly to our cell analysis products in the field of cancer diagnostics. We are responsible for making royalty payments of 1% of our sales of reagents incorporating the intellectual property licensed to us under this agreement. This agreement terminates when all of Texas’s rights to the licensed technologies expire. In addition, Texas also may unilaterally terminate this agreement if we are in material breach or become bankrupt or insolvent. Texas also may unilaterally terminate the license granted under this agreement, or the exclusivity of such license, in any national political jurisdiction if we fail to provide written evidence satisfactory to Texas, within 90 days of receiving written notice from Texas that it intends to terminate this license, that we or our sublicensees have commercialized or are actively attempting to commercialize a licensed invention in these jurisdictions. In addition, in July 2002, we entered into a license agreement with Streck. Under this agreement, Streck granted to us a non-exclusive, worldwide, royalty-bearing license to practice certain of Streck’s cell preservative technology, including patents and know-how, for the research, development, manufacture and sale of our CellSave

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Preservative Tube to test for the presence of epithelial cells or CTCs in a sample of fluid from a patient. This agreement will terminate upon the expiration date of the last to expire of the patents licensed under this agreement. In addition, either party also may terminate this agreement if the other party is in material breach or becomes involved in financial difficulties, including bankruptcy and insolvency.

If we violate the terms of our licenses, or otherwise lose our rights to these patents or patent applications, we may be unable to continue development of our products. Our licensors or others may dispute the scope of our rights under any of these licenses. Additionally, the licensors under these licenses might breach the terms of their respective agreements or fail to prevent infringement of the licensed patents by third parties. Loss of any of these licenses for any reason could materially harm our financial condition and operating results.

If we cannot obtain additional licenses to intellectual property owned by third parties that we desire to incorporate into new products we plan to develop, we may not be able to develop or commercialize these future products.

We are developing products designed to identify and characterize additional types of cells other than CTCs and epithelial cells, such as endothelial cells. We also plan to develop cell profile products using reagents that are fluorescently tagged antibodies designed to characterize target cells, which are classified by the FDA as analyte specific reagents, or ASRs. ASRs can be used in research as an aid in evaluating new therapies in clinical trials, and we plan to develop a family of ASRs for profiling of each rare cell type of interest. However, many, if not all, of the target-specific and other reagents, including antibodies, that we ultimately may use in the development and commercialization of these future cell profile products and in our future products for identifying additional types of cells may be protected by patent and other intellectual property rights owned by third parties. If we are unable to obtain rights to use this third party intellectual property under commercially reasonable terms, or at all, we may be unable to develop these products, and this could harm our ability to expand our commercial products offerings and to generate additional revenue from these products.

RISKS RELATING TO OUR COMMON STOCK

The market price of our common stock may be highly volatile.

We cannot assure you that an active trading market for our common stock will exist at any time. Holders of our common stock may not be able to sell shares quickly or at the market price if trading in our common stock is not active. Since initial trading of our stock began in April 2004 through February 28, 2005, our average daily trading volume has been 117,624 shares. Substantially all of the 23.2 million shares outstanding are eligible for sale in the public market. The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

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In addition, the stock market in general, the Nasdaq National Market and the market for technology companies in particular have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Further, there has been particular volatility in the market prices of securities of biotechnology and life sciences companies. These broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market, securities class-action litigation has often been instituted against companies. Such litigation, if instituted against us, could result in substantial costs and diversion of management’s attention and resources.

The future sale of our common stock and the exercise of outstanding options and warrants could negatively affect our stock price and cause dilution.

As of December 31, 2004, options to purchase 2,942,239 shares of our common stock and warrants to purchase 42,169 shares of our common stock were outstanding. A total of 1,211,111 of the outstanding options and warrants are “in the money” and exercisable as of December 31, 2004. “In the money” means that the current market price of the common stock is above the exercise price of the shares subject to the warrant or option. The issuance of common stock upon the exercise of these options and warrants could adversely affect the market price of the common stock or result in substantial dilution to our existing stockholders.

If the price and volume of our common stock experience fluctuations, this could lead to costly litigation for us.

Because we have a limited operating history and operate within the medical devices and diagnostic products segments of the pharmaceutical and biotechnology industries, our stock price is likely to be volatile. The market price of our common stock may fluctuate substantially due to a variety of factors, including:

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The market prices of the securities of biotechnology and diagnostic companies, particularly companies like ours without consistent product revenues and earnings, have been highly volatile and are likely to remain highly volatile in the future. This volatility has often been unrelated to the operating performance of particular companies. Moreover, market prices for stocks of biotechnology-related companies, particularly following an IPO, frequently reach levels that bear no relationship to the operating performance of these companies. These market prices generally are not sustainable and are highly volatile. In the past, companies that experience volatility in the market price of their securities have often faced securities class action litigation. Whether or not meritorious, litigation brought against us could result in substantial costs, divert our management’s attention and resources and harm our ability to grow our business.

Anti-takeover provisions in our certificate of incorporation and bylaws and under Delaware law could inhibit a change in control or a change in management that holders of our common stock consider favorable.

Provisions in our certificate of incorporation and bylaws could delay or prevent a change of control or change in management that would provide holders of our common stock with a premium to the market price of our common stock. These provisions include those:

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In addition, Section 203 of the Delaware General Corporation Law limits business combination transactions with 15% stockholders that have not been approved by our board of directors. These provisions and others could make it difficult for a third party to acquire us, or for members of our board of directors to be replaced, even if doing so would be beneficial to our stockholders. Because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt to replace the current management team. If a change of control or change in management is delayed or prevented, holders of our common stock may lose an opportunity to realize a premium on their shares of common stock or the market price of our common stock could decline.

We do not expect to pay dividends in the foreseeable future. As a result, holders of our common stock must rely on stock appreciation for any return on their investment.

We do not anticipate paying cash dividends on our common stock in the foreseeable future. Certain of our existing credit agreements prohibit the payment of cash dividends without lender consent. Any payment of cash dividends will also depend on our financial condition, results of operations, capital requirements and other factors and will be at the discretion of our board of directors. Accordingly, holders of our common stock will have to rely on capital appreciation, if any, to earn a return on their investment in our common stock. Furthermore, we may in the future become subject to contractual restrictions on, or prohibitions against, the payment of dividends.

Item 2.    Properties

We currently lease approximately 53,500 square feet of office and laboratory space in Huntingdon Valley, Pennsylvania. Our current space is adequate to support commercialization. The lease expires on September 30, 2010 although we can elect to terminate the lease any time after May 10, 2006, subject to an early termination payment.

We also lease approximately 1,400 square feet of office and laboratory research space in Enschede, The Netherlands, used to support our research and development activities. This lease expires on April 1, 2006 and is renewable for two-year periods and can be terminated at any time upon six months notice.

Item 3.    Legal proceedings

We are not currently a party to any material legal proceedings.

Item 4.    Submission of matters to a vote of security holders

None.

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Item 5.    Market for registrant’s common equity, related stockholder matters and issuer purchases of equity securities

Our common stock is quoted on the Nasdaq National Market under the symbol “IMMC” Trading of our common stock commenced on April 16, 2004, following completion of our IPO. The following table sets forth, for the periods indicated, the high and low prices for our common stock as reported by the Nasdaq National Market:

On February 28, 2005, the last reported sale price of our common stock on the Nasdaq National Market was $6.38 per share. On March 1, 2005, we had approximately 124 holders of record of our common stock.

Dividends

We have never declared or paid any cash dividends on our capital stock and we do not currently anticipate declaring or paying cash dividends on our capital stock in the foreseeable future. In addition, certain of our existing credit agreements prohibit the payment of dividends without lender consent. We currently intend to retain all of our future earnings, if any, to finance operations. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, financial conditions, future prospects, contractual restrictions and covenants and other factors that our board of directors may deem relevant.

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Item 6.    Selected financial data

The following selected consolidated financial data as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements. The selected consolidated financial data set forth below should be read together with the financial statements and the related notes to those financial statements, as well as “Management’s discussion and analysis of financial condition and results of operations,” appearing elsewhere in this Annual Report.

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Item 7.    Management’s discussion and analysis of financial condition and results of operations

OVERVIEW

Our business principally involves the development, manufacture, marketing and sale of proprietary cell-based diagnostic and research products with a primary focus on cancer. We believe that our products can provide significant clinical benefits by giving physicians better information to understand, treat, monitor and diagnose cancer. Furthermore, we believe that our proprietary technologies also have applications in fields of medicine outside of cancer.

We were incorporated in 1983. Since our inception, we have focused our activities on product development and life science research. In March 1999, we obtained $10.6 million in financing from the sale of our convertible preferred stock. As a result, we substantially increased investment in our cancer-related products and technologies, hired additional key management team members and redefined our business strategy. Since 1999, we have devoted substantially all of our efforts to the development of our cell analysis platforms and diagnostic tools for application in cancer. We completed the IPO of shares of our common stock on April 21, 2004. In the IPO, we sold 6.9 million shares of our common stock, including the underwriters’ over allotment option, at $8.00 per share and received proceeds of $49.4 million, net of fees and expenses. From inception through December 31, 2004 we raised $137.4 million from the sale of our capital stock, including the proceeds of our IPO. We are a development stage company and have incurred losses in the last five fiscal years. As of December 31, 2004, we had an accumulated deficit of $91.5 million. We expect to incur losses, which may increase over the next several years as we:

We are highly dependent on our collaboration with Veridex. In addition, we expect to continue to generate substantial losses for at least the next two years. We will need to obtain additional funding to support the activities described above.

Veridex collaboration

We expect that substantially all of our revenues from product sales for at least the years 2005 and 2006 will be derived from our relationship with Veridex. We have a development, license and supply agreement with Veridex, which provides Veridex with exclusive worldwide rights to commercialize cell analysis products based on our technologies in the field of cancer. Veridex submitted a 510(k) to the FDA in May 2003 for the use of the CellSearch Epithelial Cell Kit in the management of metastatic breast cancer. Veridex received clearance from the FDA for this use on January 21, 2004. We are responsible for all cellular research and development, including the costs of clinical development. Upon any sale by Veridex of these reagent-based products and test kits, consumable products and disposable items, Veridex is obligated to pay us approximately 30% of net sales for such products. We are responsible for the sale of instrument platforms such as our CellTracks AutoPrep System and CellSpotter Analyzer. Veridex acts as our sales agent for the sales of instrument platforms and receives approximately 15% of the sales price as a sales commission.

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Beginning with commercialization of the first product under this agreement which occurred on August 20, 2004, we are obligated to invest in certain research and development activities an amount equal to at least 10% of Veridex’s net sales, excluding revenues from instrument sales, from these products. However, beginning with the first calendar year after the amount of these net sales exceeds $250 million, we are only required to invest an amount equal to at least 8.5% of these net sales. We are also responsible for manufacturing reagents in bulk and delivering them to Veridex. We are responsible for all instrument manufacturing and certain ancillary products. We believe that we have manufacturing capacity available at our existing facilities to satisfy commercial demand through 2005, at least. Veridex is responsible for filling and packaging costs for the reagents, as well as sales, marketing, distribution, customer and technical support and field service of our cancer products, including instrumentation. We have retained worldwide commercialization rights to all non-cancer applications of our technologies.

The pace and outcome of both our commercialization efforts and clinical development programs are difficult to predict. As a result, we anticipate that our quarterly results will fluctuate for the foreseeable future. In view of this variability and of our limited operating history, we believe that period-to-period comparisons of our operating results are not meaningful and you should not rely on them as indicative of our future performance.

Revenues

We have not generated any significant product revenues since our inception. We initiated sales activities for instrument platforms and reagent kits for RUO in the first quarter of 2004 and for IVD use in the third quarter of 2004. As of December 31, we have shipped eighteen complete systems each consisting of a CellTracks AutoPrep System and CellSpotter Analyzer. Ten systems were shipped to laboratory customers and eight systems were placed with affiliates of Johnson & Johnson. We have now placed instruments in the USA, Europe and Japan. However, the recognition of revenue related to instrument shipments is typically delayed for a period of several months due to final evaluation of these systems at customer locations.

In addition, we have begun to generate reagent revenue from the sale of test kits and other consumable products to Veridex and to customers from our relationship with Veridex. For the year ended December 31, 2004 we recognized $1.1 million in product revenue.

We designated the period from August 2000 until December 31, 2003 as the initial product development period. During the initial development period, we recognized license revenue from Veridex of $183,000, $575,000, $621,000 and $2.6 million in 2000, 2001, 2002 and 2003, respectively. We earned this license revenue for completing research and development related milestones specified in our agreement with Veridex.

During 2004 we received $1,833,000 in milestone receipts related to product development milestones and we recognized license revenue of $334,000 related to milestone receipts. The Company will recognize these receipts as revenue over the estimated life of the related product development period which will vary by product.

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We can earn up to an additional $4.7 million in license revenue from Veridex for research-related milestones. We estimate that we will earn these license revenues from research milestones over the next three to five years. Therefore, we expect that the revenue earned from license revenue will be inconsistent. Also, we expect to continue to invest significant amounts in research and development, particularly in clinical trials and platform development, and therefore we do not believe that these expenses will fluctuate in relation to when we expect to earn the milestone revenue referred to above.

Under the Veridex agreement, we also can earn up to $10.0 million in revenue for achieving defined sales targets. Our agreement with Veridex provides for payments to us by Veridex of $2.0 million, $3.0 million and $5.0 million in the first year that sales recognized by Veridex of the CellSearch reagent products to third parties, excluding sales of instruments, reach $250 million, $500 million and $1 billion, respectively. We do not estimate that we will reach any of these sales targets until at least 2007 and therefore do not anticipate earning any sales-based milestone revenues until then.

Research and development expenses

Our research and development expenses consist of expenses incurred in developing reagent kits and instrument platforms and ancillary products, as well as the clinical research and trial costs to test these kits and systems. These expenses consist primarily of:

We are responsible for making royalty payments of 1% of sales of our reagents incorporating intellectual property licensed to us under a license agreement with Texas. No royalty payments have been made to Texas as of December 31, 2004.

We expense research and development costs as incurred. We believe that significant investment in product development is a competitive necessity and plan to continue these investments in order to realize the potential of our product candidates and proprietary technologies. We expect to continue to incur significant costs for clinical research and for trials and to make investments to improve our instrument platforms and reagents. From inception through December 31, 2004, we have incurred $78.1 million in total research and development expenses, the majority of which relate to our cell-based research and diagnostic products.

General and administrative expenses

Our general and administrative expenses consist primarily of salaries and other related costs for personnel in executive, finance, accounting, information technology, legal and human resource functions. Other costs include facility costs not otherwise included in research and development expense and professional fees for legal and accounting services. From inception through December 31, 2004, we have incurred $24.5 million in general and administrative expenses.

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Stock-based compensation expenses

Stock-based compensation expense, which is a non-cash charge, results from stock option grants to employees at exercise prices deemed for accounting purposes to be below the fair value of the underlying common stock resulting in our recording stock-based compensation expense associated with such grants. Stock-based compensation expenses is also recorded for stock option and warrant grants to non-employees and for restricted stock grants provided to directors and advisors in lieu of cash compensation. We amortize the deferred stock-based compensation to operating expenses over the vesting periods of the options and grants, subject to adjustment for forfeiture during the vesting period. As of December 31, 2004, we have recorded $5.1 million in deferred stock-based compensation expense and, from inception through December 31, 2004 we have recognized stock-based compensation expense of $2.8 million.

Interest income and expense

Interest income consists of interest earned on our cash, cash equivalents and investments. Investment holdings for the year ended December 31, 2004 consists primarily of mortgage back notes, federal agency notes and investment grade debt securities. We have the intent and the ability to hold all of our debt securities until maturity and have recorded them at amortized cost. Interest expense consists of interest incurred on equipment leases and on debt financings.

CRITICAL ACCOUNTING POLICIES

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

Revenue recognition

We derive revenues from three primary sources: license revenue, instrument product sales and reagent product sales. We recognize revenue on product sales in accordance with the SEC Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements, or SAB No. 104, when persuasive evidence of an arrangement exists, the contract price is fixed or determinable, the product or accessory has been delivered, title and risk of loss have passed to the customer, and collection of the resulting receivable is reasonably assured. We recognize revenue for instrument placements at the time that all necessary conditions for the recognition of revenue have been met. Specifically, we may place instruments with customers and allow the customer a period of time for training and validation as is common in our industry. Therefore there may be a delay between the time that an instrument is placed with a customer

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and the point at which the revenue for the instrument placement is recognized. Also in certain instances the customer may be provided with an opportunity to return the instrument to us prior to acceptance. We therefore recognize the revenue associated with these instrument placements only at the point when it is clear that all revenue recognition criteria have been met and that no continuing right of return remains.

In accordance with SAB No.104, up-front non-refundable license fees are recorded as deferred revenue and recognized over the estimated development period. Since August 2000, we have earned and received $5.8 million in license and milestone payments from Veridex. License and milestone payments are deferred and amortized on a straight-line basis over the product development period as defined for each specific product. Amounts received as reimbursement for research and development expenses are recorded as a reduction in research and development expense as the related costs are incurred.

Inventory capitalization

In August 2004, we launched our initial cancer diagnostic products which had received FDA clearance in January 2004. This represented the initiation of the commercialization of our products. We completed our first instrument sale to a third party laboratory customer during the fourth quarter of 2004. Therefore, effective October 1, 2004 we adopted a policy for capitalizing inventory and recognizing cost of sales. Prior to October 1, 2004, all costs associated with manufacturing were included in research and development expenses. In the fourth quarter of 2004, we began to capitalize in inventory the cost of manufactured products for commercial sale and to expense such costs as cost of products sold at the time of sale. However, as we sell that portion of our existing inventory that had previously been expensed as part of research and development expenses, there will be a period of time where we will recognize manufacturing revenue with minimum corresponding cost. Therefore, we anticipate that our gross margin on sales of our instruments and reagents will fluctuate from quarter to quarter during 2005.

We believe that our gross margins will be distorted for comparative purposes through at least the end of 2005 and depending on market demand for our products.

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

Accounting for research and development expenses

Our research and development expenses are primarily composed of costs associated with product development for our cancer diagnostic tests. Future research and development expenses may be directed toward development of non-cancer products such as products that may be used to diagnose and predict cardiovascular disease. Costs incurred to date include the development costs for instrument platforms, clinical trial and development costs and the costs associated with non-clinical support activities such as manufacturing process development and regulatory services. Clinical development costs represent internal costs for personnel, external costs incurred at clinical sites and contracted payments to third-party clinical research organizations to perform certain clinical trials. We have a discovery research effort, which is conducted in part on our premises by our scientists and in part through collaborative agreements with academic laboratories. Most of our research and development expenses are the result of the internal costs related directly to our employees. We accrue external costs for clinical trials based on the progress of the clinical trials, including patient enrollment, progress of the enrolled patients through the trial, and contracted costs with clinical research organizations and clinical sites. We record internal costs primarily related to personnel in clinical development and external costs related to non-clinical trials and basic research when incurred. Significant judgments and estimates must be made and used in determining the accrued balance in any accounting period. Actual costs incurred may not match the

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estimated costs for a given accounting period. We expect that expenses in the research and development category will increase for the foreseeable future as we add personnel, expand our clinical trial activities and increase our discovery research capabilities. The amount of the increase is difficult to predict due to the uncertainty inherent in the timing of clinical trial initiations, progress in our discovery research program, the rate of patient enrollment and the detailed design of future trials. In addition, the results from each of our trials will influence the number, size and duration of both planned and unplanned trials.

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

We record compensation expense when stock options are issued to employees and consultants at less than their fair market value. We record compensation expense based on fair market value when stock options are issued to consultants. These expenses are based on a comparison of the value of the options on the date of issue and their fair value of the options and common stock. For those options that were issued prior to our IPO, at a time when there had been no public market for our common stock, we estimated the fair value of these equity instruments using various valuation methods, including the minimum value and the Black-Scholes methods. When stock options are granted with an exercise price below the estimated fair value of our common stock at the grant date, the difference between the fair value of our common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred compensation is amortized to compensation expense on a straight-line basis over the vesting period of the stock option.

Accounting for income taxes

We must make significant management judgments when determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. At December 31, 2004, we recorded a full valuation allowance of $37.3 million against our net deferred tax asset balance, due to uncertainties related to our deferred tax assets as a result of our history of operating losses. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods we may need to change the valuation allowance, which could materially impact our financial position and results of operations.

Development stage enterprise

Although we initiated sales of our first cancer diagnostic products in August 2004, we have generated no significant product revenue to date. Our activities have consisted primarily of developing and licensing products, raising capital and recruiting personnel. Accordingly, we are considered to be in the development stage as of December 31, 2004 as defined by Statement of Financial Accounting Standards, or SFAS No. 7, Accounting and Reporting by Development Stage Enterprises.

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RESULTS OF OPERATIONS

Years ended December 31, 2004 and 2003

Revenue

In August 2004 we began selling our initial cancer diagnostic products and, in the fourth quarter of 2004 began to capitalize inventory. We recognized $1,127,000 in product revenue in 2004 compared to $-0- in 2003.

In 2004 we recognized revenue from instrument sales of $965,000, of which $726,000 was from Veridex. We sold 10 instrument systems, seven to Veridex and three to other third parties.

License revenue from related parties decreased to $423,000 in 2004 from $2,636,000 in 2003. We completed our initial product development period as of December 31, 2003. In the period from August 2000 up to the end of 2003 we received $4.0 million in license and milestone receipts under our agreement with Veridex, including $2.0 million in license and milestone receipts in 2003. We amortized these initial milestone receipts over the initial development period which ended at the end of 2003. We initially recorded these payments as deferred revenue and subsequently amortized these receipts over the initial development period. In 2004 we received $1,833,000 in additional milestone payments from Veridex for achieving development related milestones during 2004. The license revenue for these milestones will be recognized over the respective estimated product development period which we estimate will end at various times ending through December 31, 2008. In 2004, we recognized $334,000 of license revenue relating to the milestones.

Therefore total revenue dropped to $1,565,000 in 2004 from $2,974,000 in 2003.

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Research and development expenses

Research and development expenses increased by $7.5 million or by 46.9% to $23.5 million in 2004 from $16.0 million in 2003. Salary and salary related costs were $2.9 million or 37.9% higher in 2004 compared to 2003. This increase is due principally to hiring additional personnel to assist in the development of the CellTracks II cell analyzer and also to higher stock-based compensation expenses recognized in 2004. Increase in stock-based compensation expenses were the result of a full year of expense in 2004 versus three months expense in 2003. Laboratory supplies and expenses were $1.6 million or 70.8% higher in 2004 than in 2003. We continued to expend funds for development of other applications of the company’s technology in areas both within and outside of cancer diagnostics. Instrument development costs decreased by $1.3 million or 63.2%. Although we continue to make improvements to our instrument platforms, the principal development work was completed in mid-2003 and costs associated with development of the instruments, especially contracted development costs, declined thereafter. Clinical trial expenses were higher in 2004 by $1.7 million or 182.8% from 2003. In 2004, we initiated our colorectal and prostate clinical trials. Also, we completed our initial clinical trial for breast cancer monitoring in early 2003.

Contracted research costs decreased by $249,000 or 15.5% in 2004 over 2003. We employed contracted support to help with certain validation activities related to preparing our manufacturing processes for initial commercialization. These activities were concluded in large part by August 2004. A summary of the principal components of our research and development costs for the years ended December 31, 2004 and 2003 are shown below:

We expect salary related expenses to increase in future years as we hire additional personnel and continue to invest in research and clinical trial activities both within and outside the field of cancer diagnostics. We believe that costs related to laboratory supplies and expenses will be higher in future periods as we develop:

We expect instrument development costs as a percentage of total research and development expenditures generally to be lower in future years because we have completed the principal development work on our platforms. We do, however plan to continue to invest in instrument development to improve performance of the various components of the system and to increase the capabilities of the system in order to explore molecular diagnostic approaches for enrichment and analysis of cellular material.

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We expect clinical expenses to be higher in future years as we invest in clinical trials to investigate the effectiveness of our cancer diagnostic products on cancers other than breast cancer and into earlier stages of the disease in breast and other cancers, and as we develop other diagnostic tools for use in diseases such as cardiovascular and autoimmune diseases and for use in tools for drug development.

Depreciation expense increased from $-0- in 2003 to $1.1 million in 2004. This was due to the change in our accounting policy together with the change in policy to capitalize inventory and report costs of goods sold. We now allocate depreciation expense to both research and development and general and administrative expenses in order to properly record all costs associated with inventory and costs of goods sold. Up to December 31, 2003 we reported all depreciation expense as part of general and administrative expenses.

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

General and administrative expenses

General and administrative expenses increased by $1.6 million, or 34.4%, to $6.1 million in 2004 from $4.5 million in 2003. Salary related costs increased by $1.5 million in 2004 due principally to the addition of higher level professionals needed to assist the company with their public filings, a chief counsel to manage intellectual property and transactional matters, other legal affairs and various public reporting matters and a chief operating officer to manage the cancer business, manufacturing operations, regulatory affairs and strategic marketing. In addition, included in salary related costs, we recognized stock-based compensation expense of $416,000 in 2004. Depreciation expense decreased by $836,000, or 74.4%, to $287,000 in 2004 from $1.1 million in 2003. This was due to the change in our accounting policy in connection with the change in policy to capitalize inventory and report costs of goods sold. We now allocate depreciation expense to both research and development and general and administrative expenses in order to properly record all costs associated with inventory and costs of goods sold. Through December 31, 2003 we reported all depreciation expense as part of general and administrative expenses.

We expect that our general and administrative expenses will continue to increase but at a slower rate in future years. We have now hired the majority of our senior management team and do not plan any major additions to the senior management over the next year. We do not anticipate other large increases to our general and administrative expenses based on our current product development and business plan. However, there can be no assurance that we will successfully complete our current product development plans or that we will successfully commercialize these new product candidates.

Interest income

Interest income increased by $485,000 or 196% in 2004 to $732,000 from $247,000 in 2003. The increase in interest income was primarily a result of an increase in average invested cash balances in 2004. Our increase in invested cash balances resulted from our IPO which provided net cash proceeds of $49.4 million and which was completed on April 21, 2004.

Interest expense

Interest expense increased by $51,000 or 8.9% to $621,000 for 2004 from $570,000 for 2003. The increase was due to higher average interest rate on the debt outstanding in 2004 versus 2003.

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Stock-based compensation expenses

We record compensation expense when stock options are issued to employees at less than their fair market value. We record compensation expense based on fair market value when stock options are issued to consultants. Stock-based compensation expenses were $1.7 million and $642,000 for the years 2004 and 2003, respectively. We issued 610,000 options in 2004 and 817,000 options in 2003. The expense in 2004 was higher than in 2003 because we record stock-based compensation expense over the vesting period for the options. Therefore this expense is cumulative and will continue over the vesting periods of the various option grants which is typically four years. Also the expense is higher in 2004 because the difference between the fair market value of the options and the option exercise price at time of issuance was greater in 2004 than in 2003. We recognized these expenses as part of research and development expenses and general and administrative expenses as shown below.