IMMC Immunicon (MM)

Business

Item 1.     Business

Overview

Our business principally involves the development, manufacture, marketing and sale of proprietary cell-based diagnostic and research products and certain service activities with a primary focus on cancer. We believe that our products can provide clinical benefits by giving physicians better information to understand, treat, monitor and predict outcomes. Our technologies can identify, count and characterize circulating tumor cells, or CTCs, and other rare cells present in a blood sample from a patient. We also employ our technologies to provide analytical services to pharmaceutical and biotechnology companies to assist them in the development of new therapeutic agents.

Relationship with and Arbitration with Veridex, LLC, Status of NASDAQ listing, Amendment of Certain Terms of Subordinated Notes and other Recent Material Events

In August 2000, we entered into a Development, License and Supply Agreement, or the DLS Agreement, with Ortho-Clinical Diagnostics, or OCD, a Johnson & Johnson company, which subsequently assigned all rights and obligations under the agreement to Veridex, LLC, or 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.

Veridex is responsible for marketing our cancer diagnostic products including the CellSearch reagents. Adoption of our cancer diagnostic products to date had not been as rapid as we expected. As part of our efforts to better understand this declining growth rate, in April 2007, we notified Veridex of our intention to exercise our right to conduct a contract audit to ensure that Veridex was complying with its obligations under the DLS Agreement.

On May 31, 2007, we announced that we had filed a Demand for Arbitration against Veridex pursuant to which we were seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products and rescission of all licenses currently held by Veridex under the DLS Agreement, based on “repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products.” We also sought monetary damages including compensatory damages of $220.2 to $254.2 million and punitive damages of $480 million.

Under the DLS Agreement, Veridex was appointed as exclusive sales agent, licensee and distributor responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits to us. In the arbitration, we alleged, among other things, that Veridex breached its “obligation to use its best efforts to market” those products and thereafter “reneg(ed) on its express commitment to engage and deploy sales representatives to personally promote, or ‘detail,’ the Immunicon products to doctors.” We further alleged, “(w)hile seriously damaging to us and to our shareholders, Veridex’s actions are depriving cancer patients—who are in severe need of the best treatment and testing—and their doctors of our US Food and Drug Administration, or FDA, cleared cancer diagnostic tests.” We further alleged in the arbitration that “Veridex refused outright to permit a meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon products, and erected a series of other roadblocks to a meaningful audit.”

On May 25, 2007, after Veridex was informed that we were discontinuing the audit and that we intended to file claims against it, Veridex sent us a notification asserting that we were in “material breach” of the DLS Agreement. We have recorded approximately $12.6 million in legal fees associated with this action in the year ended December 31, 2007.

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Veridex’s answer and counterclaim asserted, among other things, that Immunicon had failed to perform its development, manufacturing and quality assurance obligations pursuant to the DLS Agreement and violated Veridex’s exclusive right to sell Immunicon products. Veridex’s counterclaim originally claimed damages of $35.6 million. In a revised claim dated October 19, 2007, Veridex revised its claim seeking damages of $168 million for alleged breach of our obligation to refrain from selling products in the “Field of Cancer” except through Veridex.

On March 3, 2008, the arbitrator in the arbitration proceedings issued a final award, or the Decision. In the Decision, the arbitrator determined that Veridex was not in breach of its “best efforts” marketing obligation and dismissed our claims. The arbitrator awarded Veridex approximately $304,000 in contract damages, pursuant to Veridex’s counterclaim in which Veridex had challenged our use of circulating tumor cell, or CTC reagents and analyzers as part of our “Pharma Service” business. The Decision also dictated that the arbitrator’s compensation and expenses of approximately $222,000 is to be paid equally by us and Veridex.

On November 12, 2007, we received a deficiency letter from The Nasdaq Stock Market indicating that we did not comply with Marketplace Rule 4450(a)(3), which required us to have a minimum of $10,000,000 in stockholders’ equity for continued listing on The Nasdaq Global Market. As a response, we submitted an application to transfer our listing from The Nasdaq Global Market to The Nasdaq Capital Market and were granted such listing. Continued listing on The Nasdaq Capital Market requires us to meet certain qualitative standards, including maintaining a certain number of independent Board members and independent audit committee members, and certain quantitative standards, including that we maintain at least $2.5 million in shareholders’ equity and that the closing price of our common stock not be less than $1.00 per share for 30 consecutive trading days.

On January 23, 2008, we received notice from the Nasdaq Capital Market, that the minimum bid price of our common stock had fallen below $1.00 for the previous 30 consecutive business days and that our common stock is, therefore, subject to delisting from the Nasdaq Capital Market. Nasdaq Marketplace Rule 4310(c)(4) requires a $1.00 minimum bid price for continued listing of an issuer’s common stock.

In accordance with Nasdaq Marketplace Rule 4310(c)(8)(D), we have until July 21, 2008 (180 calendar days from January 23, 2008) to regain compliance. No assurance can be given that we will regain compliance during that period. We can regain compliance with the minimum bid price rule if the bid price our common stock closes at $1.00 or higher for a minimum of 10 consecutive business days during the initial 180-day period, although Nasdaq may, in its discretion, require an issuer to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days (but generally no more than 20 consecutive business days) before determining that the issuer has demonstrated the ability to maintain long-term compliance. In addition, Nasdaq may send future notices to us regarding other violations of the Nasdaq compliance rules if we are unable to maintain compliance with these rules.

We are reviewing strategies related to the listing of our common stock on a publicly traded market; however, there can be no assurance we will be able to continue our listing on the The Nasdaq Capital Market. If that is the case, management intends to pursue a quotation of our common stock on the Over-the-Counter Bulletin Board, although we may not be able to successfully do so.

On February 29, 2008, we entered into, and consummated the transactions contemplated by, the Prepayment Agreement and Amendments, or the Prepayment Agreements, with each of the holders, or the Holders, of our 6.00% Subordinated Convertible Notes, or the Notes. The Notes were first issued December 6, 2006 in tandem with warrants, or the Warrants, to purchase shares of our common stock pursuant to that certain Securities Purchase Agreement, dated December 6, 2006, or the Purchase Agreement. Upon the terms and subject to the conditions of the Prepayment Agreements, the Holders exchanged $3,000,000 of original principal amount and accrued but unpaid interest on the Notes, or the Exchanged Debt, with us in exchange for the issuance of 3,571,433 shares of common stock in the

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aggregate to the Holders in a transaction exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as amended. Immunicon also prepaid $8,500,000 of original principal amount and accrued but unpaid interest on the Notes to the Holders.

In addition, certain terms of the Notes were amended and restated, including to provide that we may prepay without penalty any amount of the principal and interest of the Notes by providing five business days notice to the Holders, subject to certain change of control premium obligations in the event of a prepayment in connection with a change of control, and we may list our common stock on the Over-the-Counter Bulletin Board, as well as other stock exchanges, in order to remain compliant with the covenants in the Note. Further, the “Available Cash Test”, as defined in the Notes, existing under the Notes was amended and restated such that the effective measurement date for the test will begin with the quarter ended December 31, 2008 and will be measured each quarter thereafter until the maturity of the Notes on December 6, 2009. The definition of “Events of Default” under the Notes was amended such that a breach or default under any agreement binding us that would result in an Event of Default specifically excludes a breach or default related to the DLS Agreement, to the extent such default or event of default arose out of or in connection with any matters related to our arbitration against Veridex.

In March 2008, Immunicon prepaid $3.3 million to Silicon Valley Bank, which represented the outstanding principal and interest remaining under its credit facility with Silicon Valley Bank.

We have incurred significant negative cashflow for several years due to lower than expected revenue, significant legal costs due to the arbitration and continuing efforts in research and development programs to improve our products and develop new products. Subsequent to fiscal year 2007, we have paid $8.5 million to the Holders in the transaction mentioned above and $5.7 million in legal costs from our arbitration. In order to reduce our cash burn, On March 10, 2008, we committed to actions to realign staff levels and incur certain expenses in order to better facilitate the Company’s current strategy, near-term outlook and ongoing operations. This initiative principally includes a workforce reduction of approximately 40% of the Company’s full-time equivalent staff, primarily in platform development programs, research and development of new products, marketing of current and new products and related roles at the Company. See note 17 to our Financial Statements for information on our restructuring plan. We are considering additional measures to reduce our cash burn. Our operations are subject to certain additional risks and uncertainties including, among others, uncertainties of adequate financing to continue as a going concern, dependence on Veridex to market our cancer diagnostic product candidates, the uncertainty of product development (including clinical trial results), regulatory clearance and approval, supplier and manufacturing dependence, competition, reimbursement availability, dependence on exclusive licenses and other relationships, uncertainties regarding patents and proprietary rights, dependence on key personnel, convertible debt covenants and other risks related to governmental regulations and approvals. We believe, however, that cash, cash equivalents and short term investments at December 31, 2007 will be sufficient to maintain operations through the third quarter of 2008.

The consolidated financial statements included herein have been prepared on a going concern basis, which contemplates continuity of operations and the realization of assets and liquidation of liabilities in the ordinary course of business. The report of our independent registered public accounting firm for the fiscal year ended December 31, 2007, contains an explanatory paragraph which states that we have incurred recurring losses from operations, capital deficiency and negative cashflows and, based on our operating plan and existing working capital, which raises substantial doubt about our ability to continue as a going concern. We will need additional funds to continue to fund our business beyond the third quarter of 2008. Our capital requirements will depend on several factors, including investment to implement our business strategy and seeking arrangements with corporate partners. Our inability to adequately raise funds to support the growth of our project portfolio will materially adversely affect our business.

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Overview of products and technology

As of March 1, 2008, Veridex has received FDA clearance for the use of the CellSearch Circulating Tumor Cell Kit, or CTC Kit, as an aid for monitoring patients with metastatic breast cancer, metastatic colorectal cancer and metastatic prostate cancer. We believe that our CTC Kit is the only cancer diagnostic test cleared by the FDA. CTC count predicts progression-free and overall survival and the kit is intended as an aid in monitoring patients with these metastatic cancers.

Veridex received 510(k) clearance from the FDA in January 2004 for in vitro diagnostic , or IVD, use of the Veridex CellSearch Circulating Tumor Cell Kit, or CTC Kit in the management of metastatic breast cancer (breast cancer that has spread beyond the primary breast tumor). Commercialization of our products for IVD use began in October 2004. In June 2005, we announced the release for sale of our next generation rare cell analysis platform, the CellTracks Analyzer II, which had replaced the CellSpotter Analyzer. Veridex received FDA clearance in October 2005 for expanded claims for the CellSearch CTC Kit in metastatic breast cancer. Veridex received FDA clearance in November 2007 for IVD use to monitor patients with metastatic colorectal cancer. In February 2008, Veridex received FDA clearance for IVD use to monitor patients with metastatic prostate cancer.

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 physicians, and research scientists to collect, isolate, label, count and analyze CTCs and other rare cells and their derivative components such as DNA and chromosomes. 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 demonstrated that the presence of even a few CTCs in a blood sample is biologically and clinically important, as it predicts progression-free and overall survival. Therefore the test may be used as an aid in management of patient therapy.

Our products currently are being sold to hospitals, reference laboratories, large oncology practices, clinical research organizations, or CROs, and pharmaceutical/biotechnology companies under the terms of our agreement with Veridex. We have shipped our products to customers in the US, Canada, Europe, Japan and Asia. Our customer base includes some of the largest cancer treatment centers in these geographic areas as well as Quest Diagnostics Incorporated and SRL, Inc., the largest reference laboratories in the US and Japan, respectively. Quest Diagnostics Incorporated and SRL, Inc. and several other reference laboratories in the US have multiple instrument systems installed and offer testing for both CTCs and circulating endothelial cells, or CECs.

Complete systems are comprised of one cell analyzer and one CellTracks AutoPrep System. We recognize revenue for instrument placements at the time that all necessary conditions for the recognition of revenue have been met. Specifically, if we grant an evaluation period to the customer, recognition of revenue is delayed for a period of several months. Also, in certain instances, the customer may be provided with an opportunity to return the instrument to us. We therefore recognize the revenue associated with these instrument placements only at the point when all revenue recognition criteria have been met and that no continuing right of return remains.

A summary of cumulative instrument shipments and instruments sold as of December 31, 2007 is included below:

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We believe that our proprietary technologies may be used to further analyze CTCs by examining the sub-cellular components of the cells. We have developed techniques to evaluate the DNA and chromosomes in CTCs. Specific genes can be analyzed and may be useful to direct therapy, such as amplification of the HER2/neu gene that indicates that Herceptin or similar drugs may be effective. In addition, this technology can be used to confirm cancer by determining if more than two copies of a chromosome are present in a cell. This technology may be useful to confirm whether cancer is present when even a single CTC is present in a sample of blood.

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. The CellTracks Endothelial Cell Kit is used in conjunction with our CellTracks AutoPrep System for blood sample preparation and our CellTracks Analyzer II 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.

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 scans, 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 trials and research studies, we believe that our products will enable physicians to predict the likely time to disease progression and survival in metastatic breast, colorectal and prostate cancer more accurately and earlier than existing methods such as imaging. In our pivotal trials, 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:

Moreover, we believe that our products address many of the limitations of currently available diagnostic and research methods and provide physicians and patients with the following benefits:

We believe that our products can also be used to analyze CTCs for the expression of specific genes and proteins. This information may be useful in the selection of specific therapies. We also have developed a

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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.

Corporate Overview

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. As of December 31, 2007, we have received an aggregate of approximately $183.7 million from the sale of our equity securities and notes and have generated an accumulated deficit of approximately $167.6 million.

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 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 our filings with the Securities and Exchange Commission, or the SEC, available through a link provided in the Investor Information section of our website, 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 Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We include the website 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 website. The material on our website 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.

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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 2008” estimates that approximately 10.8 million Americans with a history of cancer were alive in January, 2004. This report also estimated that in 2008 over approximately 1.4 million Americans would be diagnosed with cancer and over 556,000 Americans would die from the disease.

We now have demonstrated the clinical usefulness of our products in aiding in the management of breast, colorectal and prostate cancer patients. These represent three of the four cancers which have the highest incidence. 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 these treatments need accurate and reliable monitoring tools. The American Cancer Society estimates that approximately 2.3 million women with a history of breast cancer were alive in January 2002. In 2008 approximately 184,000 people, primarily women, will be newly diagnosed with breast cancer and approximately 41,000 people will die from this disease. An estimated 108,070 cases of colon and 40,740 cases of rectal cancer are expected to occur in 2008. Colorectal cancer is the third most common cancer in both men and women. An estimated 49,960 deaths from colon and rectum cancer are expected to occur in 2008, accounting for 9% of all cancer deaths. An estimated 186,320 new cases of prostate cancer will occur in the US during 2008. Prostate cancer is the most frequently diagnosed cancer in men. With an estimated 28,660 deaths in 2008, prostate cancer is a leading cause of cancer death in men.

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.

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; the physician must balance the benefits of the chemotherapy with its undesirable effects. Therefore, any tool that can assist the physician in

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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, colorectal and prostate 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, colorectal and prostate 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 or earlier in the disease process. Additionally, our products are designed to address many of the limitations of existing diagnostic tools.

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, colorectal and prostate cancer. Physicians may select a more appropriate cancer therapy based on the presence or absence of CTCs. Our products may 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.

Effective monitoring 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) regulatory submission 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.

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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.

Other benefits

We believe that the 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 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 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 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 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 generally used 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.

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

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.

Sample presentation

The CellTracks MagNest Cell Presentation Device is a proprietary product for presenting magnetically labeled cells for analysis on our 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

CellTracks Analyzer II

CellTracks Analyzer II is a semi-automated fluorescence microscope for rare cell analysis. We received 510(k) clearance for the CellTracks Analyzer II for IVD use in March 2005 and the product has been commercialized.

EasyCount System

We are developing the 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. We plan to develop a menu of immunomagnetic applications which use the CellTracks MagNest cell presentation device, as well as slide-based applications for life science research.

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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 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 our proprietary technology and is intended for the enumeration of circulating tumor cells. The presence of CTC in the peripheral blood is associated with decreased progression free survival and decreased overall survival in patients treated for metastatic breast cancer. The test is to be used as an aid in the monitoring of patients with metastatic breast cancer. A CTC count of 5 or more per 7.5 mL of blood at any time during the course of the disease is predictive of shorter progression free survival and overall survival. We provide certain reagents in bulk to Veridex for final fill and finish of this kit. We have completed pivotal clinical trials in metastatic breast, colorectal and prostate cancer and met the primary and secondary endpoints in each trial. As of this date, Veridex has received FDA clearance for the use of the CellSearch test for monitoring metastatic breast, metastatic colorectal and metastatic prostate cancer.

CellSearch Profile Kit

The CellSearch Profile Kit is a Veridex product that incorporates our 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 Circulating Endothelial Cell Kit and the CellTracks CEC Subset kits are our 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.

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Tumor Phenotyping Reagents for Cell Characterization

Tumor Phenotyping Reagents are research reagents for cell characterization. These reagents are fluorescently labeled antibodies that are used to characterize target cells and can be used to evaluate new therapies in clinical trials. For example, approximately 30% of breast cancer patients show higher than normal expression of 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. In 2005, we commercialized for RUO, an initial family of Tumor Phenotyping Reagents for markers that are implicated in cancer such as MUC-1, HER2neu and EGFR. We believe that there are opportunities to develop other Tumor Phenotyping Reagents in cancer and cell profile reagents for other types of rare cells, such as endothelial cells. We believe these reagents represent a potential product opportunity and would be a natural extension of our technologies.

CLINICAL DEVELOPMENT AND RESEARCH PROGRAMS

We conduct 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 products or expanded product applications for existing products. 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.

We have completed successful pivotal trials in patients with metastatic breast, metastatic colorectal and metastatic prostate cancer which show that our technology can be used to provide information to physicians for monitoring therapy.

Metastatic breast cancer. The first pivotal trial related to patients with metastatic breast cancer was completed in January 2004. We completed a 177-patient, controlled, multi-center pivotal trial designed to determine if CTCs in the blood of women with metastatic breast cancer could provide information to physicians for monitoring therapy. The results of this trial were published in the August 19, 2004 edition of the New England Journal of Medicine and the results for 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 . Data describing analytical performance of the CellSearch system and the frequency of CTC in patients with various carcinomas were published in Clinical Cancer Research on October 15, 2004. We expanded the study to include patients where the disease burden could not be measured (non-measurable or bone only disease). Data from this study that now includes a total of 223 patients with expanded follow-up was presented during the May 2005 meeting of ASCO and the December 2005 San Antonio Breast Cancer Symposium.

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 now included in the product labeling of the CellSearch Circulating Tumor Cell Kit.

The graphs below show the significance of the number of CTCs in predicting 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 at three to four week intervals following initiation of the therapy

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for up to six months. The first set of analyses examined survival outcome of patients with CTC counts above or below a threshold of five CTCs/7.5 mL of blood. A CTC count of five or more per 7.5 mL is predictive of shorter PFS and OS. Figure 1 shows OS using the baseline CTC test.

Figure 1. Overall Survival Analysis Using Baseline CTC Results

The graph plots the probability of patient survival based on whether they had fewer than five CTCs at baseline or five or more CTCs at baseline. Patients with fewer than five CTCs had median survival of 21.9 months beyond baseline whereas patients with five or more CTCs had median survival of 10.9 months beyond baseline.

The next analysis was done to determine the value of CTC testing at each time point during the six months of CTC testing. Depending on the success of treatment, patients can move between groups. The study demonstrated that CTCs are predictive at multiple time points.

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Figure 2. CTCs are predictive of Overall Survival at Multiple Time Points

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 was presented at the ASCO meeting in May 2005. The study concluded that the presence of CTCs in metastatic breast cancer patients may be useful as a surrogate endpoint for PFS and OS and may be an earlier and more reliable predictor of outcome than traditional radiology techniques.

In December 2006, we received FDA clearance for the CTC kit for use as an aid in the monitoring of patients with metastatic breast cancer. The expansion of the current label indicated that serial testing for CTC count should be used in conjunction with other clinical methods for monitoring breast cancer. The additional label claims indicated that a CTC count of 5 or more per 7.5 mL of blood at any time during the course of the disease is predictive of shorter progression-free survival and overall survival.

Metastatic colorectal cancer.     In September 2006, we announced that we had achieved the primary and secondary endpoints associated with our pivotal clinical trial in metastatic colorectal cancer. The primary endpoint was that the number of CTCs 3-5 weeks after the initiation of therapy would correspond with a patient’s response to therapy as determined by imaging 6-12 weeks after initiation of therapy. The secondary endpoint was that the number of CTCs prior to and after the initiation of therapy would predict progression-free survival and overall survival. The prospective, multi-center trial was designed for longitudinal enumeration of CTCs in patients with metastatic colorectal carcinomas measurable by imaging. A total of 481 patients were enrolled into the trial. Imaging studies were performed prior to the initiation of therapy and at subsequent intervals of approximately 6-12 weeks. CTCs were measured at baseline, 1-2 and 3-5 weeks after the initiation of therapy, and at the time of all subsequent imaging studies (approximately every 6-12 weeks) using our technology. Veridex received FDA clearance for the use of the CellSearch test for the management of metastatic colorectal cancer in November 2007.

Metastatic prostate cancer.     In January 2007, we announced that we had met our primary endpoint associated with the pivotal clinical trial in metastatic androgen-independent prostate cancer. The primary endpoint was that CTC levels three-to-five weeks after the initiation of chemotherapy would predict overall survival. The study also showed that CTC levels predict overall survival at each of the tested time points. The prospective, multi-center trial using our CTC kit, was designed for longitudinal enumeration

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of CTCs in patients with metastatic androgen-independent prostate carcinomas about to start either their first or later line of chemotherapy. A total of 276 patients were enrolled into the trial between October 2004 and February 2006. All patients had whole-body bone scans performed prior to the initiation of therapy, and those with measurable disease had CT scans of the abdomen and pelvis performed prior to the initiation of therapy and at subsequent intervals following institutional guidelines. All patients had serum samples collected for prostate specific antigen (PSA) measurements at baseline and at approximately monthly intervals thereafter. CTCs were also measured at baseline and at approximately monthly intervals thereafter using our technology. Veridex received FDA clearance for the use of the CellSearch test for the management of metastatic prostate cancer in February 2008.

As shown below, we have demonstrated that the measurement of CTCs prior to the initiation of therapy as well as at multiple time points after the initiation of therapy predicts survival for patients with metastatic breast, metastatic colorectal and metastatic prostate cancer.

Figure 3. CTCs are predictive of overall survival for breast, colorectal and prostate cancer when measured prior to Initiation of Therapy

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Figure 4. CTCs are predictive of overall survival for breast, colorectal and prostate cancer when measured at multiple time points after the initiation of therapy

Other planned or on-going clinical studies

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. These clinical trials will be conducted in conjunction with medical institutions in the US and Europe. The completion 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.

Breast and colorectal cancer.     We have ongoing pilot studies 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 completed the development of an assay that detects tumor cells in bone marrow of such patients have developed a cancer confirmatory assay that identifies chromosomal abnormalities in the cells. 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.

Prostate Cancer .    We have completed a pilot study 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. Samples from this study have been stored for future analysis by molecular means.

Endothelial cells.     We have developed and commercialized for RUO 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 were published in Cytometry Part A in 2007. 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 the metastatic colorectal and prostate cancer trials. We also initiated 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

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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

Relationship with and Arbitration with Veridex, LLC

In August 2000, we entered into a DLS Agreement with Ortho-Clinical Diagnostics, or OCD, a Johnson & Johnson company, which subsequently assigned all rights and obligations under the agreement to Veridex, LLC, or 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.

Veridex is responsible for marketing our cancer diagnostic products including the CellSearch reagents. Adoption of our cancer diagnostic products to date had not been as rapid as we expected. As part of our efforts to better understand this declining growth rate, in April 2007, we notified Veridex of our intention to exercise our right to conduct a contract audit to ensure that Veridex was complying with its obligations under the DLS Agreement.

On May 31, 2007, we announced that we had filed a Demand for Arbitration against Veridex pursuant to which we were seeking termination of the 20-year exclusive worldwide agreement to market, sell and distribute our cancer diagnostic products and rescission of all licenses currently held by Veridex under the DLS Agreement, based on “repudiation and fundamental breaches by Veridex of its contractual, agency and other fiduciary obligations to market, sell and distribute our cancer diagnostic products.” We also sought monetary damages including compensatory damages of $220.2 to $254.2 million and punitive damages of $480 million.

Under the DLS Agreement, Veridex was appointed as exclusive sales agent, licensee and distributor responsible for selling cancer diagnostic products we developed and remitting royalties on the sales of reagent kits to us. In the arbitration, we alleged, among other things, that Veridex breached its “obligation to use its best efforts to market” those products and thereafter “reneg(ed) on its express commitment to engage and deploy sales representatives to personally promote, or ‘detail,’ the Immunicon products to doctors.” We further alleged, “(w)hile seriously damaging to us and to our shareholders, Veridex’s actions are depriving cancer patients—who are in severe need of the best treatment and testing—and their doctors of our FDA cleared cancer diagnostic tests.” We further alleged in the arbitration that “Veridex refused outright to permit a meaningful audit of its performance as exclusive sales agent and licensee for selling and marketing the Immunicon products, and erected a series of other roadblocks to a meaningful audit.”

On May 25, 2007, after Veridex was informed that we were discontinuing the audit and that we intended to file claims against it, Veridex sent us a notification asserting that we were in “material breach” of the DLS Agreement. We have recorded approximately $12.6 million in legal fees associated with this action in the year ended December 31, 2007.

Veridex’s answer and counterclaim asserted, among other things, that Immunicon had failed to perform its development, manufacturing and quality assurance obligations pursuant to the DLS Agreement and violated Veridex’s exclusive right to sell Immunicon products. Veridex’s counterclaim originally claimed damages of $35.6 million. In a revised claim dated October 19, 2007, Veridex revised its claim seeking damages of $168 million for alleged breach of our obligation to refrain from selling products in the “Field of Cancer” except through Veridex.

On March 3, 2008, the arbitrator in the arbitration proceedings issued a final award, or the Decision. In the Decision, the arbitrator determined that Veridex was not in breach of its “best efforts” marketing

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obligation and dismissed our claims. The arbitrator awarded Veridex approximately $304,000 in contract damages, pursuant to Veridex’s counterclaim in which Veridex had challenged our use of circulating tumor cell, or CTC reagents and analyzers as part of our “Pharma Service” business. The Decision also dictated that the arbitrator’s compensation and expenses of approximately $222,000 is to be paid equally by us and Veridex.

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 31% 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 AutoPrep System, CellSpotter Analyzer and CellTracks II Analyzer. 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, as defined, 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 are required to supply Veridex based on the forecasts that Veridex is required to provide to us and the actual orders for these systems placed with us by Veridex.

We are responsible for developing these cell analysis products and our cell analysis systems under the 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, 2007 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 for at least the next 12 months.

Beginning with commercialization of the first IVD product under this agreement, which occurred in October 2004, we are required 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

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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. We believe that we exceeded our funding obligation under this section of the agreement for the year ended December 31, 2007.

The DLS 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 $6.9 million as of December 31, 2007. We have also continuously reviewed the status of the remaining development milestones and, where appropriate, have renegotiated the development requirement and payment terms. We do not believe that these renegotiations will have a material adverse effect on our product development or financial position. We expect to earn the remaining $3.6 million in development milestone payments over the next three to five years.

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 specific 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 for the product specified 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. In the case of the CellSearch product related to metastatic breast cancer, we agreed with Veridex that we did not reach a certain development milestone within the time period specified and therefore we will receive approximately 31% of net sales for this product.

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 for the foreseeable future.

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.

The DLS 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 also may terminate for additional reasons including upon a change of control of us, as defined in the DLS 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, a wholly-owned subsidiary of Johnson & Johnson, Inc., beneficially own approximately 6% of our common stock.

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.

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Diagnostic HYBRIDS

In December 2006, we entered into a license, development, supply and distribution agreement with Diagnostic Hybrids, Inc., or DHI, to develop and commercialize products in the field of clinical virology diagnostics, starting with a panel of multiplex respiratory virus and sexually transmitted infectious disease assays. In consideration for the grant of the rights and licenses under this agreement, we will receive a license fee from DHI as well as research and development support fees. We will share revenue from any products resulting from this agreement in the ratio of 41% and 59% paid to us and DHI, respectively.

KREATECH Biotechnology of Amsterdam, The Netherlands

In January 2006, we entered into a license agreement with Kreatech Biotechnology B.V., or Kreatech, under which Kreatech granted to us a royalty-bearing, non-exclusive, non-transferable license to offer for sale, sell, distribute, import, and export to resellers and end users reagents processed using Kreatech’s Universal Linkage System technology for use with our imaging technologies and instrument platforms. In consideration for the grant of the rights and licenses under this agreement, we paid to Kreatech an initial license fee.

In April 2007, we entered into a new agreement with Kreatech (“Cross-License Agreement”) wherein the terms and conditions of this initial agreement were terminated and the research collaboration was expanded. Under the Cross-License Agreement, we have provided an exclusive right to Kreatech to utilize certain of our technologies to improve existing Kreatech products and to manufacture and supply such improved products in exchange for the exclusive right to sell these products in North America. As a result of the new Cross-License Agreement, the old license fee was fully amortized.

As a result of the negative outcome of the arbitration we reviewed our long-lived assets for impairment in accordance with Statement of Financial Accounting Standards No. 144, Accounting for Impairment or Disposal of Long-lived Assets , or SFAS 144. Our investment and license agreement with Kreatech are the principal long-lived assets which were subject to such review. We recorded a non-cash impairment charge of $940,000 for our license agreement with Kreatech and $107,000 non-cash impairment charge for our investment in Kreatech. These impairments are based on the deterioration in financial condition of the respective companies and substantial doubt about Kreatech’s ability to continue to fulfill its obligations and earn the remaining milestones. The impairment charge for the license agreement is recorded in our selling, general and administrative expenses and the impairment related to the investment in Kreatech is recorded in other income and expense in our Consolidated Statement of Operations.

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 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, among other things, and we have rights to commercialize products that result from the agreement.

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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. The products currently available for sale for IVD use through Veridex include the CellSave Preservative Tube, CellTracks AutoPrep System, CellTracks Analyzer II, the CellSearch Circulating Tumor Cell Kit and the CellSearch CTC Control Kit. The CellSearch Profile Kit, two CellSearch tumor Profiling Reagents and the CellSearch Endothelial Cell kit are sold by Veridex for RUO. These products are in use in reference laboratories, large cancer centers, pharmaceutical companies, contract research organizations and several large oncology group practices in the United States. Veridex has also placed systems in academic centers in Europe and in Japan including SRL, the largest reference laboratory in Japan.

Pharmaceutical development market

We believe that our products can be used to aid pharmaceutical and biotechnology companies with therapeutic development programs. We offer assay development services and clinical laboratory testing services to pharmaceutical and biotechnology companies. In addition, we and Veridex market our cancer products to reference laboratories and CROs that service the pharmaceutical and biotechnology industry and directly to pharmaceutical and biotechnology companies. We have entered into a number of agreements with various pharmaceutical companies such as Pfizer, Astra Zeneca and Novartis relating to ongoing collaboration that incorporate our technology into their drug development programs. As a result of the arbitration, we continue to evaluate our “Pharma Service” business.

Reimbursement

Veridex has responsibility for obtaining coverage and reimbursement from major national and regional managed care organizations and insurance carriers throughout the US and internationally. Positive coverage decisions have been secured in many states for the CellSearch CTC test. 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.

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.

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.

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The development, FDA clearance or 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 face competition 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 Clarient, Inc., Applied Imaging Corp., MetaSystems, Inc., Guava Technologies, Inc. and CompuCyte Corp.

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.

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 46,945 square feet, of which 8,000 square feet of space are 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 cGMP and 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 obtained the Conformite´ Europeene, or 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 that manufacturing capacity at our instrument suppliers is sufficient for continued commercialization of our IVD products. Sparton Medical Systems, formerly Astro Instrumentation LLC, based in Strongsville, Ohio, manufactures both the CellTracks AutoPrep System and the CellTracks Analyzer II. HEI, Inc. based in Boulder, Colorado, manufactures the EasyCount System under contract. Kendall, a Covidien Group company, manufactures the CellSave Preservative Tube for us. We manufacture the bulk cell preservative

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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. 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. We have obtained trademark registrations for “Immunicon”, the Immunicon logo, CellTracks AutoPrep logo, CellSpotter Analyzer logo, “CellSpotter”, “AutoPrep”, “EasyCount”, “Viasure”, “Magnest” and “CellTracks” and we continue to file trademark registration applications in preparation for commercial distribution activities on future products. In addition, 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 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, cancer diagnostic methodologies and FISH technology. 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 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.

As of March 3, 2008 our intellectual property portfolio of issued patents and pending patent applications, which we believe provides patent coverage for our proprietary technologies and products, consisted of 156 issued patents or patent applications, as follows:

Each of the foreign filings corresponds in subject matter to a US patent filing.

The 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 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.

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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.

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.

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-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

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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 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 II have received clearance through the 510(k) process. In total, our products have received a total of 13 510(k) clearances.

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.

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:

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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

Products may only be promoted by us and any of our distributors for indications approved or cleared by the FDA. 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 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, 2007, we had 96 employees at two facilities, consisting of one facility at our corporate address in Huntingdon Valley, PA and another facility in Enschede, The Netherlands. Ten of these employees hold Ph.D. degrees and one of these employees holds an M.D. and a Ph.D. degree. Of the 88 full-time and 8 part-time employees, 45 are directly involved in research and development, and 16 are involved in manufacturing operations. Six of our full time employees and one of our part-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.

In November 2005, we announced that our board of directors approved a top management succession plan under which Byron D. Hewett, assumed the title of President and Chief Executive Officer and was elected as a member of the board, effective on January 1, 2006. Edward L. Erickson served as Executive Chairman of our board of directors through March 31, 2006. Thereafter, Mr. Erickson continued as

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Chairman of our board of directors in a non-executive capacity. At the June 2007 scheduled shareholders meeting, Mr. Erickson did not stand for re-election to the Board.

We are liable for certain payments under employment contracts with our Chief Executive Officer, Chief Financial Officer, Chief Scientific Officer and Chief Counsel. These contracts require that we continue salary and benefits for these officers for a period of one year, accelerate any unvested options and vest unvested nonvested stock grants, if any, if the officer is terminated, except for cause, or in the event of a change of control, as defined in the contracts.

On February 29, 2008, James G. Murphy, our former Chief Financial Officer tendered his resignation to our Board, pursuant to which Mr. Murphy resigned his position as our Senior Vice President, Finance and Administration and Chief Financial Officer. Mr. Murphy’s resignation was effective on March 14, 2008. Mr. Murphy’s resignation was not as a result of any disagreement with Immunicon on any matter relating to our operations, policies or practices and Mr. Murphy will work closely with our management to ensure a smooth transition.

On March 10, 2008, we took certain actions to realign staff levels and incurred certain expenses in order to better facilitate our current strategy, near-term outlook and ongoing operations. This initiative principally included a workforce reduction of approximately 40% of our full-time equivalent staff, primarily in platform development programs, research and development of new products, marketing of current and new products and related roles. After giving effect to the staff reduction we now have approximately 55 full time equivalent staff as of March 24, 2008.

This restructuring reflects, and is a result of the detailed analysis of, several factors, including our revenue outlook and current expense structure; the adverse March 3, 2008 final award in our arbitration with Veridex, and the potential effect of the final award on our commercialization efforts; our desire to reduce its cost structure; our desire to preserve stockholder value; and management’s assessment of continued risk and uncertainty regarding the ability at the present time to extrapolate with confidence instrument placement and revenue growth rates.

We anticipate taking a charge in the first fiscal quarter of 2008 of up to approximately $1.3 million for severance and other costs related to this restructuring. All of the anticipated cash charge will be related to employee termination costs.

James L. Wilcox and Michael Kagan were terminated as part of the restructuring from their current respective positions of Vice President and Chief Counsel and Vice President, Manufacturing and Engineering. Mr. Wilcox and Mr. Kagan’s release was effective as of March 10, 2008. Mr. Wilcox and Mr. Kagan’s terminations were not as a result of any disagreement with Immunicon on any matter relating to our operations, policies or practices.

Our Board appointed Teresa O. Lipcsey as its new principal accounting officer, effective as of March 14, 2008. Ms. Lipcsey assumed the role of principal accounting officer from James G. Murphy, whose resignation as Immunicon’s Senior Vice President, Finance and Administration and Chief Financial Officer was effective as of March 14, 2008.

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Risk Factors