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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





Form 10-K

ANNUAL REPORT

PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)

|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended: December 31, 2008



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from                      to

Commission file
number: 000-50676





Icagen, Inc.

(Exact name of
registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 56-1785001                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

4222 Emperor Boulevard, Suite 350

Durham, North Carolina 27703

(Address of principal executive offices,
including zip code)

Registrants telephone number, including area code: (919) 941-5206

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



|                                         |  |                                       
|---------------------------------------- |  | --------------------------------------
|Common Stock, $0.001 par value per share |  | The Nasdaq Global Market              
|(Title of class)                         |  | (Name of exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933, or the Securities
Act.    Yes   ̈    No  x.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act.    Yes   ̈    No  x.

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

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

Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of
the Exchange Act. (Check One):



|                                              |  |                             
|--------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                    |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈                      |  | Smaller Reporting Company  x
|(Do not check if a smaller reporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule
12b-2 of the Exchange Act).    Yes   ̈    No  x

The aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant, as of June 30, 2008, was approximately
$44,044,124 based on the closing sale price of the common stock on such date as reported on the Nasdaq Global Market. For purposes of the immediately preceding sentence, the term affiliate consists of each director, executive officer and
greater than 10% stockholder of the registrant.

The number of shares of the registrants common stock, $0.001 par value per share,
outstanding on February 28, 2009 was 46,995,276.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants Definitive Proxy Statement for its 2009 Annual Meeting of Stockholders scheduled to be held on June 2, 2009, or the
2009 Proxy Statement, which will be filed with the Securities and Exchange Commission, or SEC, not later than 120 days after December 31, 2008, are incorporated by reference into Part III of this Annual Report on Form 10-K. With the
exception of the portions of the 2009 Proxy Statement expressly incorporated into this Annual Report on Form 10-K by reference, such document shall not be deemed filed as part of this Annual Report on Form 10-K.

Icagen and our logo are our trademarks. Each of the other trademarks, trade names or service marks appearing in this report belongs to its respective
holder.









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ICAGEN, INC.

INDEX TO ANNUAL REPORT ON FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31,
2008



|         |  |                                                                                                              |  |     
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|         |  | Caption                                                                                                      |  | Page
|PART I   |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 3   
|         |  |                                                                                                             
|         |  | Executive Officers of the Registrant                                                                         |  | 26  
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 27  
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 44  
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  | 44  
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  | 44  
|         |  |                                                                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 44  
|         |  |                                                                                                             
|PART II  |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 45  
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  | 46  
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 48  
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 60  
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 60  
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 60  
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  | 60  
|         |  |                                                                                                             
|Item 9B. |  | Other Information                                                                                            |  | 63  
|         |  |                                                                                                             
|PART III |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 63  
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  | 63  
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 63  
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 64  
|         |  |                                                                                                             
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 64  
|         |  |                                                                                                             
|PART IV  |  |                                                                                                              |  |     
|         |  |                                                                                                             
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 64  
|         |  |                                                                                                             
|         |  | Signatures                                                                                                   |  | 65  
|         |  |                                                                                                             
|         |  | Index to Financial Statements                                                                                |  | 66  
|         |  |                                                                                                             
|         |  | Exhibit Index                                                                                                |  | 94  



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain forward-looking statements that
involve substantial risks and uncertainties. In some cases you can identify these statements by forward-looking words such as anticipate, believe, could, estimate, expect,
intend, may, should, will, and would, or similar words. You should read statements that contain these words carefully because they discuss future expectations, contain projections of future
results of operations or of financial position or state other forward-looking information. The important factors listed below, as well as any cautionary language elsewhere in this Annual Report on Form 10-K, provide examples of risks,
uncertainties and events that may cause our actual results to differ materially from the expectations described in these forward-looking statements. You should be aware that the occurrence of the events described in the Risk Factors
section below and elsewhere in this Annual Report on Form 10-K could have an adverse effect on our business, results of operations and financial position.

Any forward-looking statements in this Annual Report on Form 10-K are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such
forward-looking statements, possibly materially. We disclaim any duty to update any forward-looking statements.

PART I

ITEM 1BUSINESS

Overview

We are a biopharmaceutical company focused
on the discovery, development and commercialization of novel orally-administered small molecule drugs that modulate ion channel targets. Ions are charged particles, such as sodium, potassium, calcium and chloride. Ion channels are protein structures
found in virtually every cell of the human body. Ion channels span the cell membrane and regulate the flow of ions into and out of cells. There are currently over 35 drugs marketed by third parties for multiple indications that modulate ion channels
according to data from IMS Health. We believe this demonstrates that ion channels are attractive drug targets.

Utilizing our proprietary
know-how and integrated scientific and drug development capabilities, we have identified multiple drug candidates that modulate ion channels. Our two most advanced programs are:



| |  |  | ICA-105665 for epilepsy and neuropathic pain, for which we are conducting a Phase I multiple ascending dose study in healthy volunteers and epilepsy patients; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Senicapoc, previously referred to as ICA-17043, for asthma, for which we are conducting two Phase II proof-of-concept clinical trials.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------

We are also conducting ongoing drug discovery programs focused on new therapeutics for pain and inflammatory disorders. In each of these programs, we
have identified small molecule compounds that have demonstrated activity on specific ion channels. When we tested these compounds in preclinical studies, including in some cases animal models, they showed desired activities and profiles, validating
these ion channels as potential therapeutic targets for the particular indication. In addition to our internal programs, we have established a collaboration with Pfizer Inc focused on three sodium channel targets for the treatment of pain and
related disorders. We plan to generate revenue from any product candidates that we successfully develop either through direct sales, collaboration arrangements with leading pharmaceutical and biotechnology companies or a combination of these
approaches.



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Scientific Background

Ion Channels as Drug Targets

Ions generally cannot move freely across cell membranes, but must enter or exit a cell
through pores created by ion channels. Ion channels open and close, or gate, in response to particular stimuli, including ions, other cellular factors, changes in electrical voltage or drugs.

LOGO

The concentration of specific ions in particular cells in the body is critically important to many vital
physiological functions. Consequently, ion channels play a key role in a wide variety of processes in the human body, which can be broadly grouped into three categories:



| |  |  | Electrical impulse generation and conduction along nerves in the central and peripheral nervous system, the heart and other organs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | Signal transduction within and among cells, including immune system cells that, when activated, trigger an inflammatory response; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Fluid balance within cells and across cell membranes, including fluid balance in red blood cells, cells in the eye and other cells throughout the body.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

Small molecule compounds have been shown to both activate and inhibit ion channels. As a result, ion channels represent
an important class of targets for pharmaceutical intervention in a broad range of disease areas. Examples of currently marketed drugs that exert their effects through ion channel modulation include:



| |  |  | calcium channel blockers, such as Norvasc and verapamil, which are used for the treatment of hypertension and various other cardiovascular disorders;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | sodium channel blockers, such as Lamictal, which is used for the treatment of epilepsy, and lidocaine, a local anesthetic; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | potassium channel blockers, such as Glipizide, which is used in the treatment of diabetes.
| | - |  | ------------------------------------------------------------------------------------------

Despite the number of successful ion channel drugs on the market today, the majority of these drugs were developed without prior knowledge of their
mechanism of action. Only recently have drug researchers identified and cloned a substantial number of ion channel genes, enabling integration of genetic information with the drug discovery process and allowing for a more methodical and scientific
approach to the identification and selection of both the ion channel target and potential drug.

We believe that many pharmaceutical and
biotechnology companies historically have avoided drug discovery programs targeting ion channels due to significant technical challenges and complexities associated



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with the structure and function of ion channels. Ion channel drug discovery is a complex endeavor that requires a comprehensive understanding of ion channel
function. Ion channel drug discovery also requires specialized functional assays to characterize the interaction between a drug and an ion channel and determine the ability of a compound to modify the activity of an ion channel target, often across
a range of physiologic conditions. Functional assays are difficult and time-consuming to develop, tend to be low throughput and require significant technical expertise. Ion channel drug discovery also requires expertise in electrophysiology to
determine the effects of drugs on ion channel activity. Electrophysiology is the study of ion channel function and involves the measurement of the electrical current generated when ions flow through ion channel pores. For these reasons, we believe
that the majority of the promising ion channel targets remain unexploited and that a significant opportunity exists for an integrated approach to ion channel drug discovery that can be applied across a wide spectrum of therapeutic areas.

Ion Channel Complexity

Ion channels are
complex protein structures typically comprised of two or more subunits, or building blocks. These subunits associate to form a pore through which ions are able to pass when the channel is in the open state. Other subunits are important in
determining whether an ion channel is gated open or closed or whether the specific ion channel is expressed in a specific cell, tissue or organ. Subunits are capable of associating with each other in multiple combinations, allowing for the number of
ion channel drug targets to be substantially greater than the number of ion channel genes. We have identified and cloned over 300 human ion channel genes coding for these subunits.

Ion channels possess gating mechanisms which may cause the channel to undergo changes in shape or molecular arrangement, called conformational changes.
These conformational changes may occur in response to particular stimuli, including ions, other cellular factors, and changes in electrical voltage or drugs. Conformational changes may expose additional sites on the channels that can be targeted for
drug interactions. In studying the function of ion channels, it is important to understand the different channel conformational states so that potential drugs can be discovered and appropriately characterized.

Ion channels are classified into families based upon the type of ion or ions that pass through the channel and the gating mechanism. Within a given
family, ion channels share similarities in structure and functional properties, facilitating the study of multiple channels within a family. Across different ion channel families, there may also be similarities in structure and functional
properties, although to a lesser degree than within the same family. Despite the potential similarities, there are key areas on ion channels that allow for potent and selective drug interactions.

A comprehensive knowledge base that spans multiple ion channels and ion channel families enhances ion channel drug discovery because it enables
identification of similarities and differences among ion channels. Similarities among channels are important because they can lead to the identification of related chemical structures that have activity against many related ion channels. These
related chemical structures can then be modified to provide for the desired specificity against a particular ion channel target. Similarities among ion channels are also important because they can lead to side effects if a small molecule modulator
is not appropriately targeted. Differences among ion channels are important because they provide the opportunity to develop specific, targeted therapies.

Our Approach to Ion Channel Drug Discovery and Development

Over the past decade, we have established an interdisciplinary
environment that is designed to meet the challenges and complexities faced in ion channel drug discovery. Our capabilities include molecular biology and the use of complex functional assays, electrophysiology, medicinal and computational chemistry,
bioanalytics, pharmacology and clinical development. We believe that this integrated set of capabilities enhances our ability to develop drug candidates that modulate ion channels for the treatment of a range of diseases with significant unmet
medical need and commercial opportunity.



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We utilize a target class approach to drug discovery. Whereas traditional drug discovery starts with the
disease and seeks to identify potential intervention points, or drug targets, our target class approach starts with all potential ion channel targets and seeks to identify applications to the treatment of various diseases. We believe that our
understanding of the ion channel genome and ability to apply this knowledge in a target class approach to drug discovery facilitates our identification of small molecule drug candidates with novel mechanisms of action and enhanced selectivity and
specificity profiles. Moreover, because our drug discovery and development process screens for potential side effects at an earlier stage than some alternative approaches, we believe that this process enables us to identify small molecule drug
candidates that may have a reduced risk of clinical failure and may shorten clinical development timelines.

Complementary to our target
class approach is our expertise across the therapeutic areas that are the focus of our current research efforts. Not only do we have a deep understanding of the functional activity of our ion channel targets, but we also understand the role that
these targets play in the relevant physiologic system. For example, much of our current research efforts are focused on disorders of the central and peripheral nervous system. To understand the role of ion channels in these systems and in the
disease areas of interest to us, we have developed the capability to study our targets in a variety of in vitro and in vivo models. These models include cell-based assays, tissue-based assays, and complex animal models of seizure and
pain disorders. We combine our expertise in ion channel targets with our capabilities in systems-based biology and understanding of physiologic systems to identify attractive opportunities for therapeutic intervention.

Using our drug discovery and development approach, we have:



| |  |  | developed two clinical stage programs with what we believe are novel chemical entities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | established an ongoing collaboration with a leading pharmaceutical company; and
| | - |  | -------------------------------------------------------------------------------



| |  |  | developed ongoing research stage programs spanning multiple and diverse therapeutic areas and providing us with a pipeline of compounds that modulate ion channel
targets.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our Strategy

Our goal is to become a fully-integrated biopharmaceutical company and a leader in the discovery, development and commercialization of novel small molecule drugs that modulate ion channel targets and address disease areas with significant
unmet medical need and commercial potential. We intend to achieve this goal through the execution of our strategy, key elements of which are as follows:

Build and advance our product candidate pipeline. Through our ion channel drug discovery and development programs, we have created a pipeline of drug candidates that address diseases with significant
unmet medical need and commercial potential across a range of therapeutic areas. Either through our internal efforts or through one or more collaborations, we plan to pursue the development and commercialization of these drug candidates, including
ICA-105665 and the lead compounds that we are developing for the treatment of epilepsy and neuropathic pain, and senicapoc, which we are developing for asthma. We believe that the breadth of our capabilities in ion channel drug discovery technology
will enable us to continue to identify and develop additional drug candidates on an efficient and rapid basis. In addition to developing drug candidates internally, we continue to evaluate opportunities to in-license promising compounds and
technologies.

Strengthen and expand our core ion channel drug discovery technologies and development capabilities. All of
our drug candidates and research programs have resulted from our core ion channel drug discovery technologies. We have steadily built these technologies, which span the key disciplines of biology, chemistry and pharmacology, over a number of years.
We intend to continue to invest in these core technologies, including our ion channel focused compound library, as the key to our future research programs and drug candidates. We also plan to augment our existing development team by adding personnel
with experience in drug safety, regulatory affairs, statistical methods, project management and medical affairs.



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Establish strategic alliances with leading pharmaceutical and biotechnology companies. We
plan to selectively enter into new strategic alliances with leading pharmaceutical and biotechnology companies to assist us in advancing our drug discovery and development programs. We expect that these alliances will provide us with access to the
therapeutic area expertise and research, development and commercialization resources of our collaborators as well as augment our financial resources. We believe that our expertise in ion channel drug discovery and development helps us to secure
collaborations, such as our collaboration with Pfizer, on attractive terms. We expect that in some of these alliances we will seek to maintain rights in the development of drug candidates and the commercialization of drugs as part of our effort to
build our internal clinical development and sales and marketing capabilities.

Establish specialized sales and marketing
capabilities. We plan to retain United States marketing and sales rights or copromotion rights for our product candidates for which we receive marketing approvals in situations in which we believe it is possible to access the market, or a
portion of the market, through a focused, specialized sales force. For example, although ICA-105665 for epilepsy and neuropathic pain will require a substantial detailing effort if approved, we believe that a subset of physicians who specialize in
the treatment of epilepsy is sufficiently concentrated to enable us to effectively copromote to this market with a small internal sales force. For situations in which a large sales force is required to access the market and with respect to markets
outside of the United States, we generally plan to commercialize our drug candidates through a variety of types of collaboration arrangements with leading pharmaceutical and biotechnology companies.

Clinical Programs

The following table summarizes key
information about our product candidates that are in clinical trials. The compounds in these programs are the result of our internal research efforts. In these programs, we are developing small molecule drugs that target specific ion channels.



|                                             |  |                  |  |                         |  |                                                  
|-------------------------------------------- |  | ---------------- |  | ----------------------- |  | -------------------------------------------------
|Product Candidate/Indication                 |  | DevelopmentPhase |  | CommercializationRights |  | Status                                           
|ICA-105665 for epilepsy and neuropathic pain |  | Phase I          |  | Icagen                  |  | Phase I multiple ascending dose study in progress
|                                             |  |                  | 
|Senicapoc for asthma                         |  | Phase II         |  | Icagen                  |  | Phase II proof-of-concept studies in progress    

ICA-105665 and our other Lead Compounds for Epilepsy and Neuropathic Pain

Our most advanced compound for the treatment of epilepsy and neuropathic pain is ICA-105665, for which we are currently conducting a Phase I multiple
ascending dose study. ICA-105665 targets specific potassium channels, which are located primarily on the membrane of nerve cells, or neurons, present in particular regions of the central and peripheral nervous system. In addition, we have identified
several lead compounds that also target these channels. We have retained all worldwide rights to these compounds.

ICA-105665 and
Other Lead Compounds for Epilepsy

Disease overview. Epilepsy is a disorder characterized by episodic abnormal
electrical activity in the brain resulting in seizures. There are many causes of epilepsy, including a history of trauma to the brain, tumor, bleeding, metabolic conditions and genetic conditions. There are three principal types of epilepsy:



| |  |  | partial seizures, which affect a portion of the brain;
| | - |  | ------------------------------------------------------



| |  |  | generalized seizures, which affect the entire brain; and
| | - |  | --------------------------------------------------------



| |  |  | absence seizures, a type of generalized seizure that results in temporary loss of consciousness.
| | - |  | ------------------------------------------------------------------------------------------------



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Regardless of the underlying cause or the specific type of seizure activity, seizures are the result of abnormal
excitability of neurons in the brain that generate and transmit electrical impulses inappropriately.

Electrical impulses are generated
within and between neurons as a result of ion movements across cell membranes. During an epileptic seizure there may be an imbalance of ion channel activity due to, or leading to, an imbalance in electrical activity in various neurons in specific
regions of the brain. By reducing abnormal neuronal excitability through the modulation of ion channels, drugs may prevent seizures.

The
ion channel target for the lead compounds that we are developing for the treatment of epilepsy and neuropathic pain is one of the potassium ion channels responsible for determining the excitability of neurons in the central and peripheral nervous
system. This channel is highly expressed in the central nervous system, including regions linked to seizure disorders, such as the cortex, hippocampus and thalamus. When this channel is activated, it permits the flow of positively charged potassium
ions out of the nerve cells in which these channels reside, thereby making the resting membrane potential inside these cells more negative. This more negative resting membrane potential decreases the electrical excitability of the nerve cell,
thereby decreasing the likelihood for inappropriate or excessive electrical signals, such as those which occur during epileptic episodes. Genetic evidence also suggests a role for this channel in maintaining an appropriate negative resting membrane
potential in nerve cells. Specifically, a rare genetic mutation in which this channel is not able to open properly has been linked to a syndrome involving convulsions in infancy.

Market opportunity and current treatment. Epilepsy represents a large and growing market opportunity. According to the Epilepsy Foundation,
there is an estimated prevalence of 2.5 million patients in the United States, with approximately 180,000 new cases diagnosed in the United States each year. Sales of drugs currently marketed for the treatment of epilepsy totaled approximately
$8.9 billion in the United States during 2006, according to IMS Health. These sales included prescriptions of these drugs for both epilepsy and other indications, including neuropathic pain. Despite the variety of drugs currently available,
approximately one-third of the epilepsy patient population remains resistant to currently available medical treatment according to Brain, a journal of neurology.

Drugs currently approved for the treatment of epilepsy include Neurontin, Depakote, Topamax, Lamictal, Keppra and Tegretol. These drugs are believed to work through a variety of mechanisms, including inhibition of
sodium ion channels and enhancement of an inhibitory neurotransmitter named GABA. Some drugs are more effective against some types of epilepsy than others, and individual therapy must be tailored to the particular patient. Many patients require
combination therapy to adequately control seizure activity. Each of these drugs is associated with side effects, such as dizziness, drowsiness, fatigue, nausea and depression as well as mood, attention and sleeping disorders, which limit their
utility in the treatment of many patients. For patients who are resistant to pharmaceutical treatment, implantable devices or surgery are sometimes considered as therapeutic options. Although such devices or surgery may be effective for some
patients, invasive treatment options carry the risk of bleeding, infection or other complications, are generally reserved for a small subset of severely ill patients and are usually used only after medical therapy has failed.

ICA-105665 and Other Lead Compounds for Neuropathic Pain

Disease overview. Neuropathic pain is a particularly severe form of chronic pain that results from damage to the peripheral nervous system. Damage to the nervous system can result in neurons that are
highly sensitized and that can produce pain in response to stimuli that would normally not be perceived as painful. The most common causes of neuropathic pain include diabetes and shingles, both of which are conditions in which there is damage to
the peripheral nerves. Though rare, neuropathic pain may also be produced by damage to the central nervous system, particularly regions of the brain and spinal cord that are part of the normal pain pathways, including the thalamus. Neuropathic pain
is often severe and notoriously unresponsive to standard pain treatments.

The ion channel target for the lead compounds that we are
developing for the treatment of epilepsy and neuropathic pain is expressed in the central and peripheral nervous system in pain pathways, including in sensory



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nerve cells such as the dorsal root ganglia. Near the spinal cord, the dorsal root ganglia collect and integrate pain impulses from the peripheral nerves. We
believe that activation of this ion channel may reduce the excessive neuronal excitability that contributes to the sensation of neuropathic pain.

Market opportunity and current treatment. According to Datamonitor, over 1.5 million patients in the United States, Japan, the United Kingdom, France, Germany, Italy and Spain are estimated to suffer from neuropathic pain, and
the neuropathic pain market is estimated to be worth $2.6 billion across these markets in 2007. A variety of drugs are used for the treatment of neuropathic pain, including some anticonvulsants, tricyclic antidepressants and antiarrhythmics.

Many anticonvulsants, such as Neurontin, Depakote and Lamictal, that were initially developed for the treatment of epilepsy have
subsequently been demonstrated to be effective in other disorders of the central and peripheral nervous system, including neuropathic pain, bipolar disorder and migraine headache. Despite the availability of several such drugs, neuropathic pain
remains a poorly treated condition. According to the International Association for the Study of Pain, Neurontin is the drug most commonly prescribed for this condition, but is effective in only approximately 30% of patients. In addition,
anticonvulsant drugs are associated with a number of side effects, as noted above. According to the International Association for the Study of Pain, tricyclic antidepressants, such as Amitriptyline, and antiarrhythmics, such as Mexiletine, also have
limited efficacy. The use of antidepressants and antiarrhythmics is limited by their side effects, which may include sedation, nausea and dizziness.

Two additional agents, Cymbalta and Lyrica, have been approved by the U.S. Food and Drug Administration, or FDA, for the treatment of specified types of neuropathic pain. In clinical trials, the most common side
effects associated with Cymbalta included nausea, somnolence, dizziness, dry mouth, constipation, hyperhidrosis, decreased appetite and asthenia, while those associated with Lyrica included dizziness, somnolence, dry mouth, peripheral edema, blurred
vision, weight gain and difficulty with attention. In addition, Lyrica has been labeled as a controlled substance by the FDA, and is therefore subject to a number of restrictions regarding its distribution and use.

ICA-105665 and Other Lead Compounds. ICA-105665 and our other lead compounds target particular potassium ion channels that are expressed in
the central nervous system, including regions linked to seizure disorders such as the cortex, hippocampus and thalamus, and in pain pathways in the central and peripheral nervous system. In preclinical studies, these compounds:



| |  |  | increased the activity of the target potassium channels in a selective and specific manner in vitro, thereby increasing the outflow of positively charged
potassium ions from the nerve cell and decreasing excessive electrical activity;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | demonstrated broad spectrum anti-epileptic activity, including activity in animal models of partial seizures, generalized seizures and treatment-resistant seizures;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | demonstrated activity in several animal models of neuropathic pain, including the Chung model, which is one of the most predictive models of neuropathic pain.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

During the third quarter of 2007, the Company initiated a single ascending dose Phase I clinical trial of ICA-105665 to
assess the safety, tolerability and pharmacokinetics of this novel compound in healthy volunteers. Nine cohorts of healthy volunteers were studied at doses ranging from 30mg to 400mg administered orally. ICA-105665 was well tolerated at all dose
levels. There were no serious adverse events, no dose limiting toxicities, and no dropouts from this study. Pharmacokinetics were linear, dose proportional, and consistent with the potential for twice daily dosing.

During the second quarter of 2008 the Company initiated a multiple ascending dose Phase I clinical trial of ICA-105665 to further assess the safety,
tolerability and pharmacokinetics of this novel compound. Three cohorts of healthy volunteers were studied at doses of 50mg, 100mg and 200mg administered orally twice daily for a period of seven days. ICA-105665 was well tolerated at all dose
levels. There were no serious adverse events, no



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dose limiting toxicities, and no dropouts from this portion of the study. Pharmacokinetics were linear, dose proportional, and consistent with the potential
for twice daily dosing. In order to assess the safety, tolerability and pharmacokinetics of ICA-105665 in the target population, the study was subsequently expanded to include patients with epilepsy. Based upon study results to date, there were no
serious adverse events, no dose limiting toxicities and no dropouts from this portion of the study. Full results from this study are expected to be available in the second quarter of 2009.

In March 2009, the Company discussed its plans for the further development of ICA-105665 with the FDA. The FDA agreed with the Companys plans to
proceed with a proof-of-concept study in pain. The Company is planning to conduct its epilepsy proof-of-concept study in patients with photosensitive seizures. The FDA requested that the Company submit the protocol for this study to the FDA for
approval prior to initiating the study.

No assessment of the efficacy or safety of a product candidate can be considered definitive until
all clinical trials needed to support a submission for marketing approval are complete. Success in preclinical studies does not mean that subsequent clinical trials will confirm the earlier findings.

Senicapoc for Asthma

Senicapoc is a novel
small molecule potassium channel inhibitor that we are developing for the treatment of asthma, for which we are currently conducting two Phase II proof-of-concept studies. Senicapoc targets a particular potassium channel that is expressed on a
number of cells believed to be important in the pathogenesis of asthma, including various cells of the immune and inflammatory system and airway epithelial cells. Senicapoc is taken orally and is being developed for once-a-day dosing. We retain all
worldwide rights to senicapoc.

Disease overview. Asthma is a lung disease characterized by airway obstruction, airway
inflammation, and increased airway responsiveness to a variety of stimuli. Typical symptoms include shortness of breath, cough and wheezing in response to particular stimuli. The disease varies in severity from a mild intermittent form to a severe
persistent form. While asthma cannot be cured, most people with asthma are able to be treated so that they are able to live active lives.

While spasmatic constriction of the airways, or bronchospasm, is an important aspect of the disease, there is believed to be an underlying inflammatory process that triggers bronchospasm when a patient is exposed to certain stimuli. The
inflammation results in narrowed, swollen airways, increased mucus and frequently is accompanied by constriction of the smooth muscle in the airways, or bronchoconstriction, causing difficulty breathing and the familiar wheeze often associated with
the disease. Relevant inflammatory cells are believed to include the bronchial mucosal mast cell, lymphocytes and eosinophils.

The ion
channel target for senicapoc is a potassium channel that is expressed in mast cells, lymphocytes, eosinophils, airway epithelial cells and other cell types. This potassium channel facilitates the influx of calcium into certain cells in the immune
and inflammatory systems, thus contributing to the activation of these cells during immune and inflammatory responses to certain stimuli. Blocking this channel in these cells decreases the calcium-dependent activation. Moreover, this potassium
channel has also been shown to be expressed at increased levels in activated T-lymphocytes and, when inhibited by selective blockers, to decrease T-cell proliferation in a dose-dependent manner.

Market opportunity and current treatment. According to the National Heart Lung and Blood Institute, about 20 million people have been
diagnosed with asthma in the United States, nearly 9 million of whom are children. A variety of drugs are used for the treatment of asthma, including inhaled beta agonists, inhaled and oral corticosteroids, cromolyn and leukotriene inhibitors.
Sales of drugs used for the treatment of asthma exceeded $8.0 billion in 2007, according to data from Datamonitor.

Drugs currently
approved for the treatment of asthma include both inhaled and orally available therapies. Inhaled agents include beta agonists, inhaled corticosteroids, and cromolyn, while orally available agents include systemic corticosteroids and leukotriene
inhibitors such as Singulair. These drugs are believed to work through a



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variety of mechanisms, including relaxation of the bronchial smooth muscle and inhibition of the inflammatory process. Many patients require combination
therapy to adequately control their asthma symptoms. These drugs are therefore typically utilized in a stepwise manner, with inhaled agents used for patients with more mild asthma on a rescue basis and oral agents typically added to
inhalation therapy for those with more severe and persistent forms of asthma. Each of these drugs is associated with certain side effects, the most problematic of which are caused by the corticosteroids when administered orally on a chronic basis.
In addition, many patients do not respond adequately to orally available leukotriene inhibitors, leaving a large group of patients without a satisfactory long-term orally available therapy.

Senicapoc. Senicapoc is a novel small molecule ion channel inhibitor that targets a particular potassium channel that is expressed on a
number of cells believed to be important in the pathogenesis of asthma, including mast cells, macrophages, eosinophils and airway epithelia. We submitted an Investigational New Drug Application, or IND, for the use of senicapoc for the treatment of
asthma during the fourth quarter of 2007. During 2008 we conducted a multiple ascending dose study in healthy volunteers to explore higher doses than those used previously in our clinical trials of senicapoc for sickle cell disease. Four cohorts of
healthy volunteers were studied at doses of 15mg, 20mg, 30mg and 40mg administered orally once daily for periods ranging from seven to twenty-eight days. In this study, senicapoc was well tolerated with no serious adverse events, no dose limiting
toxicities, and no dropouts. Pharmacokinetics were linear, dose proportional, and consistent with the potential for once daily dosing.

In
October 2008 the Company initiated a Phase II proof-of-concept clinical trial to evaluate the safety and efficacy of senicapoc in patients with allergic asthma. This Phase II trial is a double-blind, placebo-controlled, parallel group study that is
designed to assess the safety and efficacy of senicapoc on pulmonary function in patients with allergic asthma following exposure to an allergen. Approximately 30 patients from two clinical research centers in the United Kingdom are being randomized
(1:1) to receive senicapoc or placebo once a day for two weeks. Patients receiving senicapoc are receiving 40mg once daily following an initial loading dose. The primary efficacy analysis is the comparison between treatment arms of the late
asthmatic response following inhalation of an allergen, as measured by the percent change in Forced Expiratory Volume 1, or FEV1, the amount of air that can be forcefully exhaled in one second. FEV1 is a standard, commonly used test to measure lung
function.

In March 2009, the Company initiated a second Phase II proof-of-concept study in patients with exercise-induced asthma. This
double-blind, placebo-controlled, parallel group study is designed to assess the safety and efficacy of senicapoc on pulmonary function in patients with exercise-induced asthma. Aggravation of asthma symptoms upon exercise is a common finding for
many asthma patients. Approximately 60 patients from approximately 15 clinical research centers in the United States will be randomized (1:1) to receive senicapoc or placebo once a day for four weeks. Patients receiving senicapoc will receive
40mg once daily following an initial loading dose. The primary efficacy analysis is the comparison between treatment arms in the percent change in FEV1 following exercise.

A sheep model demonstrating naturally occurring bronchoconstriction and airway hyperreactivity in response to exposure to a certain antigen was used in
preclinical efficacy studies. Following exposure to the natural antigen, this model demonstrates an early and a late antigen response characterized by increases in airway resistance and airway hyperreactivity. In controlled studies conducted in this
model, senicapoc was demonstrated to reduce the antigen induced changes in both late phase airway resistance and airway hyperreactivity following intravenous, inhalation and oral administration. These results were statistically significant.
Furthermore, in the intravenous study, in which two different doses were tested, the results were dose dependent and at the high dose, there was additionally a statistically significant reduction in the early phase airway resistance.

Previously we had been developing senicapoc for the treatment of sickle cell disease. In our Phase II trial, senicapoc was demonstrated to improve the
hematologic profile of patients with sickle cell disease. This finding was further confirmed in the open label extension study to the Phase II study and in our pivotal Phase III study. However, our pivotal Phase III trial was halted prior to
completion by the Data Monitoring Committee, or DMC, as a result of lack of efficacy in reducing crisis rate, the primary endpoint of that study. We are therefore no longer pursuing senicapoc as a potential treatment for sickle cell disease.



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During the development program for sickle cell disease, 445 clinical trial participants received one or
more doses of senicapoc. Of these, 159 were healthy volunteers and 286 were patients with sickle cell disease. In these studies, we obtained safety information that we believe will be important in our development program for asthma. During the
development program for sickle cell disease, senicapoc was generally found to be safe and well-tolerated. In a published Phase II study of senicapoc in patients with sickle cell disease, diarrhea and nausea occurred more frequently in patients who
received either of two doses of senicapoc than in those who received a placebo. The most common serious adverse events were related to sickle cell disease and none were considered to be related to senicapoc. Patients who took senicapoc had small
increases in serum gamma-glutamyl transpeptidase, or GGT, a protein found in the liver and biliary tract, but the clinical significance of this change is not known.

However, adverse events, if any, with long-term chronic use of the doses we may use in the asthma studies may be different from those observed in prior long-term studies. Furthermore, no assessment of the efficacy or
safety of a product candidate can be considered definitive until all clinical trials needed to support a submission for marketing approval are complete. Success in preclinical studies does not mean that subsequent clinical trials will confirm
earlier findings.

Research Programs

We believe that many of the ion channel targets we have identified offer opportunities to discover and develop novel therapies for a wide range of human diseases. We are currently pursuing research programs in two principal areas: pain
disorders and inflammatory disorders. In each of these programs we have identified multiple ion channel targets that have been validated through preclinical research and compounds with demonstrated in vitro and, in many cases, in vivo
activity. We also intend to initiate new research programs in disease areas in which we believe that our approach offers clinically meaningful therapeutic advantages and for which there is a significant unmet medical need and commercial opportunity.

Pain Disorders

Scientific Overview. Pain disorders are classified into several categories based upon their cause. Neuropathic pain is a particularly severe pain disorder that results from damage to the central and peripheral nervous system.
Inflammatory pain results from the effects of inflammatory mediators and cellular debris that are released into surrounding tissues as the immune system is activated, whether appropriately to fight infection, or inappropriately, such as in
auto-immune disorders, including rheumatoid arthritis. Both neuropathic pain and inflammatory pain are types of chronic pain.

Ion channels
play an important role in the detection, transmission and cognitive recognition of pain signals. Ion channels are critical at each step in the pain pathway, including the detection of local stimuli, the transmission of the electrical impulses to the
brain and the interpretation of electrical impulses as pain signals. The underlying mechanism through which ion channels are involved in the sensation of pain is through the modulation of the level of excitability of specialized nerve cells in the
pain pathway. Consequently, we believe that by selectively modulating particular ion channels in the pain pathway, the detection, transmission or cognitive recognition of pain can be reduced.

Program Status. We have identified several ion channel targets that are expressed in pain pathways in both the central and peripheral nervous
system. For several of these targets, we have identified lead compounds with in vivo efficacy in animal models of pain disorders. In August 2007, we entered into a collaborative research and license agreement with Pfizer with respect to three
of these sodium channel targets. See Our CollaborationsPfizer below for a description of our collaboration with Pfizer.

Inflammatory Disorders

Scientific Overview. Inflammation is a reaction of the body to actual or perceived
injury and is characterized by pain, heat, redness and swelling in the affected area. Under normal circumstances inflammation is a protective



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response, the goal of which is to eliminate both the initial cause of injury, such as bacteria or toxins, and the consequences of such injury, such as dead
cells and tissues. However, if triggered or directed inappropriately, the inflammatory response can itself become harmful, leading to cell, tissue and organ destruction. Examples of such inappropriate or pathologic inflammation include some of the
most common and disabling diseases, such as rheumatoid arthritis, Crohns disease, lupus, psoriasis, asthma and chronic bronchitis. Although several different diseases and mechanisms can trigger the inflammatory response, the underlying process
in each of these diseases is closely related, involving a number of different inflammatory cell types and chemical signaling factors.

Ion
channels may play a key role in either the activation or modulation of the inflammatory response. For example, the activation of T-lymphocytes, an important cell type in this response, is believed to involve the influx of calcium into these cells
through specialized ion channels. We believe the opening and closing of ion channels may modulate the movement of some immune system cells to the site of inflammation, the release of chemical signaling factors from immune system cells and the
proliferation of these cells in response to activation of the immune system.

Program Status. We have completed profiling the
distribution of all human ion channels known to us in various cells of the immune system. As a result, we have identified several ion channel targets that are expressed at high levels in some immune system cells and that may play an important role
in modulating the inflammatory response. We have discovered compounds that are active in vitro against some of these targets, leading to decreases in calcium entry into immune system cells, decreases in immune system cell proliferation,
decreases in immune system cell migration into tissues and other measures of inflammatory responses. We have also demonstrated effects of some of our compounds in animal models of inflammatory diseases.

Our Ion Channel Drug Discovery Technologies

We have
established an integrated set of core technologies for the discovery of drugs that act upon ion channel targets. Our technologies broadly cover the key disciplines of importance to ion channel drug discovery, including molecular biology,
electrophysiology, high throughput screening, chemistry, bioanalytics and pharmacology. Key elements of our core ion channel drug discovery technologies include the following:

Comprehensive Library of Ion Channel Genes

As the foundation of our ion channel focused drug
discovery efforts, we have cloned over 300 human ion channel genes, which we believe represent substantially all of the human ion channel genome. We have approximately 900 cell lines comprising many of these genes in a variety of specific
configurations which mimic native channels in the human body. We also have developed a substantial number of cell lines that we can use as functional screening assays. This comprehensive library of clones, cell lines and assays enables us to:



| |  |  | rapidly initiate new ion channel drug discovery programs;
| | - |  | ---------------------------------------------------------



| |  |  | perform high throughput screens in parallel across multiple ion channel targets; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | understand the relationships among various ion channels and classes of compounds that are active against ion channels.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

Parallel High Throughput Screening Systems

We
conduct high throughput screening against our ion channel targets in a parallel manner. Specifically, as we screen a particular ion channel target with a library of small molecules, we simultaneously screen other important safety or selectivity ion
channel targets with the same set of compounds. The data we derive from these parallel screens provide important information not just on the potency of the compounds on the target of interest, but also on the potential of these compounds to cause
side effects from activity at other ion channels. This approach enables us to focus our medicinal chemistry efforts only on those compounds that demonstrate both potency and selectivity for the target, thereby eliminating compounds that are likely
to induce significant



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side effects. We believe that we apply this type of parallel screening earlier in the drug development process than many other companies pursuing ion channel
drug discovery and that this approach may reduce our risk of failure in clinical trials.

Extensive Library of Ion Channel Focused Small Molecules

We have developed an extensive library of approximately 250,000 small molecules that have been selected for potential activity at
ion channel targets. We have used our experience in working across a range of different ion channel targets to develop this library. We have found that some families of compounds show increased levels of activity against particular classes of ion
channels. Through our synthetic medicinal chemistry efforts, combined with our proprietary computational chemistry technology, we continually enrich and expand our small molecule compound library with compounds that have demonstrated activity at ion
channel targets.

Proprietary Computational Chemistry Technology

We have developed a proprietary computational chemistry technology that we use to identify active compounds based upon the information provided by our
high throughput screening systems. Through the application of statistical techniques, this computational chemistry technology uses the information on relevant chemical parameters of the active compounds to construct a mathematical model of the
general properties of compounds that may be active against the targeted ion channel. We use this model to perform a computer search of our compound library, the libraries of our collaborators and commercially available libraries, as well as the
millions of compounds accessible in silico, for compounds with potential activity against the target. Through this approach, we are able to generate an enriched library containing multiple classes of compounds with activity against the
targeted ion channel for subsequent medicinal chemistry efforts. We are able to generate this enriched library by screening a relatively small number of compounds, thereby accelerating our drug discovery process.

Extensive Database and Bioinformatics Platform

We have built an extensive database containing information on many ion channels across most ion channel families. We use this database to capture information we have obtained from studying the interactions between ion channel targets and
small molecule compounds, and we apply this information across our drug discovery programs. We have created a discovery informatics infrastructure that facilitates our efficient management of large and complex data sets representing valuable ion
channel information. We organize this data in a format that is readily accessible by our scientists, thereby facilitating decision making. Our database contains important information regarding:



| |  |  | the characterization of each of our targets and compounds;
| | - |  | ----------------------------------------------------------



| |  |  | the potency and selectivity of particular compounds or groups of compounds against ion channel targets we have studied;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | bioanalytical and pharmacological data; and
| | - |  | -------------------------------------------



| |  |  | information accessed from other proprietary and publicly available databases and sources.
| | - |  | -----------------------------------------------------------------------------------------

Electrophysiology Know-How and Technical Expertise

We have assembled an experienced electrophysiology group equipped with state-of-the-art technologies and the capability to perform a wide variety of electrophysiologic measurements. The skill and expertise of our electrophysiology group
enables us to understand the function of each of our ion channel targets under varying physiologic conditions and its modulation by drug candidates. Through the detailed analyses performed by this group, we are better able to understand the likely
role of the channel in the tissue of interest and the likely effects of its modulation by small molecule compounds. In addition to our expertise in the application of traditional electrophysiologic techniques, we have also advanced our capabilities
through the integration of recently developed high throughput electrophysiology equipment and techniques into our drug discovery process.



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Pharmacology and Bioanalytics Expertise

We conduct iterative in vitro and in vivo testing of our compounds to characterize their pharmacologic and pharmacokinetic properties in
detail. We employ a wide variety of animal models in disease areas of interest to understand the activity of our drug candidates in appropriate model systems. We also have advanced on-site bioanalytic capabilities in order to rapidly provide our
scientists with important data regarding compound pharmacokinetics and metabolism.

Key Features of our Technology

We believe that our integrated technology platform enhances our capabilities in the discovery of drugs that act upon ion channel targets. We believe that
our platform has the following key features:

Efficiencies Across Research Programs. By working broadly across the human ion
channel genome, we can realize significant efficiencies in our drug discovery process, both in biology and in chemistry. Ion channels within a given family often share common characteristics. For example, when we determine the appropriate molecular
biology techniques for constructing a cell line and high throughput screening assay for one member of a particular ion channel family, we typically obtain information that is important in determining the appropriate techniques for other members of
the same family. Similarly, because of the structural similarity among ion channels of a given family, compounds in a series that are active at one member of a particular family may assist us in our efforts to identify compounds that are active at
other members of the same family as well.

Efficient Target Validation and Lead Generation. While traditional drug discovery
starts with the disease and seeks to identify potential intervention points, or drug targets, our target class approach starts with all potential ion channel targets and seeks to identify applications to the treatment of various diseases. We believe
that our approach provides for a more efficient drug discovery process, because our in-depth understanding of the targets and methods for finding small molecule modulators of these targets obviates the need to develop new research tools each time a
new target is identified. Instead, we use our knowledge and skill to quickly find potential small molecule modulators of particular ion channel targets. We then use these small molecules to validate the particular target in a relevant animal model
of the disease. If such a small molecule demonstrates activity in a therapeutically relevant animal model, it both validates the target and provides a starting point for further medicinal chemistry efforts. We believe that our target class approach,
combined with our integrated target validation and lead generation process, represents a more efficient drug discovery process than many traditional approaches.

Accelerated Development Cycle. Several elements of our technology platform contribute to an acceleration of the development cycle, including our cell lines and assay systems for many of our ion channel
targets, our parallel high throughput screening systems, and our focused library of ion channel active compounds. In addition, our computational chemistry technology reduces the need for screening large collections of compounds. Finally, our
internal capabilities in animal studies, including our high throughput bioanalytics, which involve the measurement of compounds in the relevant animal systems, enable us to rapidly identify potent and selective drug candidates. When combined, these
components of our discovery technology have enhanced our ability to efficiently advance from the initiation of a program to preclinical studies, thus allowing us to work simultaneously on several ion channel targets across a range of therapeutic
areas.

Our Collaborations

A key
element of our strategy is to establish strategic collaborations with leading pharmaceutical and biotechnology companies. We currently have one active collaboration with Pfizer. Our collaboration with Astellas Pharma Inc., formerly Yamanouchi
Pharmaceutical Co, Ltd., concluded in 2008. Two of our collaborations, with McNeil Pediatrics Division (formerly the McNeil Consumer & Specialty Pharmaceuticals Division) of McNeil PPC, Inc., a subsidiary of Johnson & Johnson, and
Bristol-Myers Squibb Company, concluded in 2007. Our past and present collaborators have devoted substantial scientific and financial resources to our joint discovery efforts.



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Pfizer

In August 2007, we entered into a collaborative research and license agreement with Pfizer for the discovery, development, manufacture and commercialization of compounds and products that modulate three specific sodium ion channels as new
potential treatments for pain and related disorders. Under the terms of the agreement, we and Pfizer are combining resources to identify compounds that target these three ion channels in a global research and development collaboration. We and Pfizer
have formed a joint research committee to monitor and oversee the collaboration.

The ion channel targets included in the collaboration are
important in the generation of electrical signals in nerve fibers that mediate the initiation, transmission and sensation of pain. In preclinical studies, compounds identified by us have demonstrated efficacy in pain models. We have also established
a broad portfolio of intellectual property in this area, covering multiple promising compounds targeting sodium channels.

Under the terms
of the collaboration, we have granted Pfizer a worldwide exclusive license, with the right to grant sublicenses, to our patent rights and know-how with respect to drugs arising from the collaboration. In addition, we have granted Pfizer the first
right to enforce our intellectual property rights in order to protect these drugs and have retained a right to enforce our intellectual property rights. Pfizer is responsible for funding all aspects of the collaboration and for worldwide clinical
development and commercialization of drugs arising from the collaboration.

Pursuant to the collaboration arrangement, Pfizer paid us an
initial upfront license fee of $12.0 million. In addition to the upfront license fee, Pfizer is providing us with research and development funding over a two-year research period pursuant to the agreement. Pfizer is obligated to make payments to us
upon achievement of specified research, development, regulatory and commercialization milestones of up to $359.0 million for each drug candidate developed. We are also eligible to receive tiered royalties, against which Pfizer may credit any
commercialization milestones, based on specified percentages of net product sales. Pfizers obligation to pay us royalties with respect to a product will expire generally on a country-by-country basis on the expiration of the last-to-expire of
specified patent rights covering the product.

The collaborative research and license agreement will expire on a product-by-product basis
on the later of the end of the research term, which will be two years from the effective date of the agreement unless earlier terminated or extended, and the date on which all royalty obligations end. Pfizer may terminate the collaborative research
and license agreement following the research term with respect to products that Pfizer no longer intends to develop or commercialize. Either party may terminate the collaborative research and license agreement in the event that the other party
materially breaches its obligations under the agreement and fails to cure such breach within a specified cure period. If we terminate the collaborative research and license agreement based on a material breach by Pfizer, or if Pfizer terminates the
collaborative research and license agreement with respect to specified products that Pfizer no longer intends to develop or commercialize, the rights to then identified products and product candidates to which Pfizers rights terminate will be
transferred to us.

In August 2007, in connection with the collaborative research and license agreement with Pfizer, we also entered into a
purchase agreement with Pfizer to sell to Pfizer up to $15.0 million of our common stock. In a first closing of the transaction on August 20, 2007, we sold 2,688,172 shares of common stock to Pfizer at a price of $1.86 per share, which was the
closing bid price of our common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the execution of the purchase agreement, resulting in gross proceeds to us of approximately $5.0 million. In a
subsequent closing of the transaction on February 13, 2008, we sold 5,847,953 shares of common stock to Pfizer at a price of $1.71 per share, which was the closing bid price of our common stock as reported on the Nasdaq Global Market as of 4:00
p.m. Eastern time on the business day preceding the date of our exercise of our put option to sell the shares, resulting in gross proceeds to us of approximately $10.0 million.

In March 2008, we and Pfizer entered into a collaboration with the laboratory of Professor B. A. Wallace at Birkbeck College, University of London, to
study the structural biology of sodium channels. This three party



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relationship was created to support our collaboration with Pfizer. In connection with the Birkbeck collaboration, we also entered into a supplemental
agreement with Pfizer that requires Pfizer to reimburse us for certain equipment to be used in the collaboration and to pay us for additional research and development services over a two year term. We are also contributing services to the
collaboration.

Astellas

We had
previously collaborated with Astellas to discover small molecule ion channel inhibitors that target a particular potassium channel located on the membrane of neurons in the hippocampus, a region of the brain that has been demonstrated to be
important in the formation of memories and other central nervous system, or CNS, functions, as well as in certain other areas of the central nervous system. The research term of this collaboration agreement expired in December 2003. Astellas was
evaluating certain of these compounds for the chronic treatment of memory loss associated with aging, such as occurs in dementia, including Alzheimers disease. We had previously considered developing certain of these compounds for certain
other CNS indications, such as attention deficit/ hyperactivity disorder, or ADHD, and sleep disorders, but are no longer pursuing these indications.

During 2004, Astellas selected one of these compounds for advanced preclinical studies. During 2005, Astellas decided not to pursue further development of that particular compound but instead decided to develop other
lead compounds. During the fourth quarter of 2007, Astellas notified us that it had decided not to continue the development of another of these lead compounds due to genotoxicity issues. During the third quarter of 2008, Astellas notified us that
following further evaluation of certain compounds discovered in collaboration with us for the chronic treatment of memory loss associated with aging, such as occurs in dementia, including Alzheimers disease, it has decided not to pursue their
further development. As a result of this decision, our collaboration with Astellas has now concluded.

McNeil

In June 2004, we entered into collaboration and copromotion agreements with McNeil to develop and commercialize senicapoc for the treatment of sickle cell
disease. This collaboration was terminated in September 2007 following the unsuccessful Phase III clinical trial of senicapoc for sickle cell disease.

Bristol-Myers Squibb

In October 1997, we entered into a collaboration with Bristol-Myers Squibb to discover, develop
and commercialize novel small molecule drugs that act on a specified ion channel target and that are identified as potential treatments for atrial fibrillation. This collaboration concluded in 2007 following the decision by Bristol-Myers Squibb to
terminate preclinical development of a lead compound that had been discovered in collaboration with us.

Research and Development

For the years ended December 31, 2008, 2007 and 2006, we spent approximately $22.1 million, $27.9 million and $28.8 million, respectively, on
research and development activities. The aggregate revenues that we have recognized from our collaborators for research and development in each of the last three years were as follows: 2008  $12.3 million; 2007  $21.1 million; and 2006
 $8.4 million. For more information regarding our research and development expenses, please see Financial Operations Overview in Managements Discussion and Analysis of Financial Condition and Results of
Operations.

Intellectual Property

Patents
and Trade Secrets

Our success depends in part on our ability to obtain and maintain proprietary protection for our product
candidates, technology and know-how, to operate without infringing the proprietary rights of others and to



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prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing United
States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and
in-licensing opportunities to develop and maintain our proprietary position.

As of February 28, 2009, we owned approximately 60
United States patents and approximately 60 United States patent applications as well as numerous foreign counterparts to many of these patents and patent applications. Our patent portfolio includes patents and patent applications with claims
directed to the composition of matter, pharmaceutical formulations and methods of use of many of our compounds, including ICA-105665, the lead compound that we are developing for the treatment of epilepsy and neuropathic pain, and senicapoc. We
consider two patents directed at senicapoc and the patent covering the chemotype which includes ICA-105665 to be material to our business.

The patent rights relating to senicapoc owned or licensed by us consist of two issued United States patents, one that expires in 2014 and a second, which is a composition of matter patent, that expires in 2019, and counterpart patents and
patent applications in a number of other jurisdictions, including Europe and Japan. The patent rights relating to ICA-105665 and other lead compounds that we are developing for the treatment of epilepsy and neuropathic pain owned by us consist of
two issued United States patents, one relating to composition of matter and one relating to method of use for pain, and one United States patent application relating to composition of matter, as well as counterpart patent applications in a number of
other jurisdictions, including Europe and Japan. United States patents generally have a term of 20 years from the date of nonprovisional filing.

The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our
success in obtaining effective claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and
those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or the length of term of patent protection that we may
have for our products. In addition, our competitors may independently develop similar technologies or duplicate any technology developed by us, and the rights granted under any issued patents may not provide us with any meaningful competitive
advantages against these competitors. Furthermore, because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products can be commercialized, any related
patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

We
may rely, in some circumstances, on trade secrets to protect our technology. However, trade secrets are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees,
consultants, scientific advisors and other contractors, as well as physical security of our premises and our information technology systems. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our
trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related
or resulting know-how and inventions.

License Agreements

We are a party to a number of license agreements, primarily with academic institutions, under which we license patents, patent applications and other intellectual property. We enter into these agreements to augment
the significant intellectual property created by our scientists. The licensed intellectual property covers some of the compounds that we are researching and developing, some ion channel targets and some of the scientific processes



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that we use. These licenses impose various diligence and financial payment obligations on us. We expect to continue to enter into these types of license
agreements in the future. The only existing license that we consider to be material to our business is our agreement with Childrens Medical Center Corporation, or CMCC, which is described below.

In February 2000, we entered into an agreement with CMCC for a worldwide exclusive license to products covered by the licensed patent rights. The patent
rights licensed to us by CMCC include patent rights directed to the use of compounds such as senicapoc for most fields of human and veterinary therapeutics and diagnostics. We have the right to grant sublicenses under this license. Patents licensed
under our agreement with CMCC expire over the period from 2012 through 2016.

In exchange for the rights licensed from CMCC, we paid CMCC
an upfront license fee and license maintenance fees aggregating $250,000. We also paid CMCC $500,000 over the three-year period ended February 2003 for research conducted by CMCC that we agreed to sponsor in accordance with a sponsored research
agreement entered into by CMCC and us in August 2000. In our sponsored research agreement with CMCC, CMCC granted us a right of first negotiation to obtain a worldwide exclusive license under patent rights resulting from the sponsored research.

We are obligated to pay CMCC specified amounts with respect to any sublicense income received by us. In connection with our collaboration
with McNeil, this sublicense income included upfront and milestone payments, royalties and our share of profits in the copromotion territory under our collaboration agreement with McNeil. McNeil paid us an initial upfront payment of $10.0 million,
$1.3 million of which we paid to CMCC, and a milestone payment of $5.0 million upon acceptance of the protocol for our Phase III clinical trial of senicapoc by the FDA, $650,000 of which we paid to CMCC.

Under our license agreement with CMCC, we are required to pay CMCC royalties on net product sales by us or our affiliates. We also are required to make
payments to CMCC aggregating up to an additional $250,000 based on achieving specified development and regulatory milestones with respect to each licensed product, which is not a sublicensed product. We are entitled to a credit for the development
and regulatory milestone payments that we make against the royalties that we would otherwise be obligated to pay of up to, but not more than, 50% of the royalties due in any given payment period.

Our royalty obligation with respect to each licensed product extends until the expiration of the last-to-expire patent, which is September 16, 2014
with respect to licensed products containing senicapoc, licensed from CMCC covering the licensed product in any country. Upon the later of the expiration of the last-to-expire licensed patent or February 2015, the agreement expires.

The agreement obligates us to use good faith and diligent efforts to develop senicapoc in accordance with an agreed development timetable and to use good
faith and diligent efforts to commercialize one or more licensed products. CMCC has the right to terminate the agreement if we breach the agreement and fail to cure our breach within specified cure periods or in the event of our bankruptcy,
liquidation, dissolution or cessation of operations.

Competition

The biotechnology and pharmaceutical industries are characterized by rapidly advancing technologies, intense competition and a strong emphasis on proprietary products. We face competition from many different sources,
including commercial pharmaceutical and biotechnology enterprises, academic institutions, government agencies and private and public research institutions. We believe that our most significant competitors in the area of drugs that work by modulating
the activity of ion channels are Neurosearch A/S and Vertex Pharmaceuticals, Inc. In addition, there are a number of other companies, including large pharmaceutical companies, that have programs focused on specific ion channel drug discovery.



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Many of our competitors have significantly greater financial resources and expertise in research and
development, manufacturing, preclinical testing, clinical trials, regulatory approvals and marketing approved products than we do. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative
arrangements with large and established companies. Our commercial opportunity will be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective, have fewer side effects or are less expensive than any
products that we may develop. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring
technologies and technology licenses complementary to our programs or advantageous to our business.

We rely upon our collaborator for
support in advancing certain of our drug candidates and intend to rely on our collaborator for the commercialization of these products. Our collaborator may be conducting multiple product development efforts within the same disease area that is the
subject of its agreement with us. Generally, our agreements with our collaborator do not preclude it from pursuing development efforts using a different approach from that which is the subject of our agreement with it. Therefore, any of our drug
candidates may be subject to competition with a drug candidate under development by our collaborator.

There are currently approved
therapies for the diseases and conditions addressed by our drug candidates that are undergoing clinical trials, which are described under Clinical Programs above. Specifically,



| |  |  | drugs such as Neurontin, Depakote and Lamictal are approved for the treatment of epilepsy and, in the case of Neurontin, prescribed for neuropathic pain;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Cymbalta and Lyrica are approved for the treatment of specified types of neuropathic pain; and
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | drugs such as Albuterol, Advair and Singulair are approved for the treatment of asthma.
| | - |  | ---------------------------------------------------------------------------------------

There are also a number of companies working to develop new drugs and other therapies for these diseases that are undergoing clinical trials. The key competitive factors
affecting the success of all of our drug candidates are likely to be their efficacy, safety, convenience and price.

Government Regulation

Government authorities in the United States, at the federal, state and local level, and other countries extensively regulate, among
other things, the research, development, testing, manufacture, labeling, promotion, advertising, distribution, marketing and export and import of pharmaceutical products such as those we are developing. The process of obtaining regulatory approvals
and the subsequent substantial compliance with appropriate federal, state, local and foreign statutes and regulations require the expenditure of substantial time and financial resources.

United States Government Regulation

In the United States, the FDA regulates drugs under the
Federal Food, Drug, and Cosmetic Act and implementing regulations. If we fail to comply with the applicable United States requirements at any time during the product development process, approval process or after approval, we may become subject to
administrative or judicial sanctions. These sanctions could include the FDAs refusal to approve pending applications, withdrawal of an approval, clinical holds, warning letters, product recalls, product seizures, total or partial suspension of
production or distribution, injunctions, fines, civil penalties or criminal prosecution. Any agency enforcement action could have a material adverse effect on us.

The steps ordinarily required before a drug may be marketed in the United States include:



| |  |  | preclinical laboratory tests, animal studies and formulation studies under the FDAs good laboratory practices regulations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



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| |  |  | adequate and well-controlled clinical trials to establish the safety and efficacy of the product for each indication;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | submission to the FDA of a New Drug Application, or NDA;
| | - |  | --------------------------------------------------------



| |  |  | satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with current Good
Manufacturing Practices, or cGMP; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FDA review and approval of the NDA.
| | - |  | -----------------------------------

Preclinical tests include laboratory evaluations of product chemistry, toxicity and formulation, as well as animal studies to assess the potential safety and efficacy of the product. An IND sponsor must submit the results of the preclinical
tests, together with manufacturing information, analytical data, a proposed clinical trial protocol and other information to the FDA as part of the IND. The IND must become effective before human clinical trials may begin. An IND will automatically
become effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns or questions about issues such as the conduct of the trials as outlined in the IND. In that case, the IND sponsor and the FDA must resolve any
outstanding FDA concerns or questions before clinical trials can proceed. If these issues are unresolved, the FDA may not allow the clinical trials to commence.

Clinical trials involve the administration of the investigational product to human subjects under the supervision of qualified investigators. Clinical trials must be conducted in compliance with federal regulations
and requirements, including good clinical practices, under protocols detailing, among other things, the objectives of the study, the parameters to be used in monitoring safety and the effectiveness criteria to be evaluated. Each protocol must be
submitted to the FDA as part of the IND.

Clinical trials typically are conducted in three sequential phases, but the phases may overlap or
be combined. The study protocol and informed consent information for subjects in clinical trials must be reviewed and approved by an independent Institutional Review Board, or IRB, before the clinical trial can begin at each site. Phase I trials
usually involve the initial introduction of the investigational drug into humans to evaluate the products safety, dosage tolerance, metabolism and pharmacodynamics and, if possible, to gain an early indication of its effectiveness.

Phase II trials usually involve controlled trials in a limited patient population to:



| |  |  | evaluate dosage tolerance and appropriate dosage;
| | - |  | -------------------------------------------------



| |  |  | identify possible adverse effects and safety risks; and
| | - |  | -------------------------------------------------------



| |  |  | evaluate preliminarily the efficacy of the drug for specific indications.
| | - |  | -------------------------------------------------------------------------

Phase III trials usually further evaluate clinical efficacy and test further for safety in an expanded patient population, typically at geographically
dispersed clinical trial sites, to establish the overall benefit-risk relationship of the drug and to provide adequate information for the labeling of the drug. Phase I, Phase II and Phase III testing may not be completed successfully within any
specified period, if at all. The FDA closely monitors the progress of each of the three phases of clinical trials that are conducted in the U.S. In addition, the Food and Drug Administration Amendment Act of 2007, or FDAAA, significantly expands the
federal governments clinical trial registry to cover more trials and more information, including information on the results of completed trials. The FDA, an IRB or we may suspend or terminate clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an unacceptable health risk. Similarly, an IRB can suspend or terminate approval of research when the research is not being conducted in accordance with the IRBs
requirements or has been associated with unexpected serious harm to patients.

Assuming successful completion of the required clinical
testing, the results of the preclinical studies and of the clinical studies, together with other detailed information, including information on the manufacture and composition of the product, are submitted to the FDA in the form of an NDA requesting
approval to market the product for one or more indications. In most cases, the NDA must be accompanied by a substantial user fee and



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the manufacturer and/or sponsor under an approved NDA are also subject to annual product and establishment user fees. The FDA reviews an NDA to determine,
among other things, whether a product is safe and effective for its intended use.

Under the Pediatric Research Equity Act of 2003, or
PREA, as amended and reauthorized by the FDAAA, NDAs or supplements to NDAs for a new active ingredient, new indication, new dosage form, new dosing regimen, or new route of administration must contain data to assess the safety and effectiveness of
the drug for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for which the drug is safe and effective. The FDA may, on its own initiative or at the request of
the applicant, grant deferrals for submission of some or all pediatric data until after approval of the drug for use in adults, or full or partial waivers from the pediatric data requirements. Unless otherwise required by regulation, PREA does not
apply to any drug for an indication for which orphan designation has been granted.

Before approving an application, the FDA will inspect
the facility or the facilities where the product is manufactured. The FDA will not approve the product unless it determines that the manufacturing processes and facilities are in compliance with cGMP requirements and adequate to assure consistent
production of the product within required specifications. The FDA will issue an approval letter if it determines that the application, manufacturing process and manufacturing facilities are acceptable and satisfy the regulatory criteria for
approval. If the FDA determines the application, manufacturing process or manufacturing facilities are not acceptable, it will issue a complete response letter, which outlines the deficiencies in the submission and when possible,
recommends actions that the applicant might take to place the application in condition for approval. Such actions may include, among other things, conducting additional safety or efficacy studies after which the sponsor may resubmit the application
for further review. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.

The testing and approval process requires substantial time, effort and financial resources, and each may take several years to complete. The FDA may not
grant approval on a timely basis, or at all. We may encounter difficulties or unanticipated costs in our efforts to secure necessary governmental approvals, which could delay or preclude us from marketing our products. The FDA may limit the
indications for use or place other conditions on any approvals that could restrict the commercial application of the products. After approval, some types of changes to the approved product, such as adding new indications, manufacturing changes and
additional labeling claims, are subject to further FDA review and approval.

After regulatory approval of a product is obtained, we are
required to comply with a number of post-approval requirements. For example, as a condition of approval of an application, the FDA may require post-marketing testing, including Phase IV trials, and surveillance to monitor the products safety
or efficacy. In addition, holders of an approved NDA are required to report certain adverse reactions and production problems to the FDA, to provide updated safety and efficacy information and to comply with requirements concerning advertising and
promotional labeling for their products. Also, quality control and manufacturing procedures must continue to conform to cGMP after approval. The FDA periodically inspects manufacturing facilities to assess compliance with cGMP, which imposes certain
procedural and documentation requirements. Accordingly, manufacturers must continue to expend time, money and effort in the area of production and quality control to maintain compliance with cGMP and other aspects of regulatory compliance.

We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our product
candidates. Future FDA inspections may identify compliance issues at our facilities or at the facilities of our contract manufacturers that may disrupt production or distribution, or require substantial resources to correct. In addition, discovery
of previously unknown problems with a product or the failure to comply with regulatory requirements may result in restrictions on a product, manufacturer or holder of an approved NDA, including withdrawal or recall of the product from the market or
other voluntary or FDA-initiated action that could delay further marketing. Newly discovered or developed safety or effectiveness



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data may require changes to a products approved labeling, including the addition of new warnings and contraindications, which require further FDA
review and approval. Also, new government requirements may be established, including those requirements resulting from new legislation, that could delay or prevent regulatory approval of our products under development.

New Legislation

From time to time,
legislation is drafted and introduced in Congress that could significantly change the statutory provisions governing the approval, manufacturing and marketing of drug products. For example, the FDAAA granted significant new powers to the FDA, many
of which are aimed at improving the safety of drug products before and after approval. In particular, the FDAAA authorizes the FDA to, among other things, require post-approval studies and clinical trials, mandate changes to drug labeling to reflect
new safety information, and require risk evaluation and mitigation strategies for certain drugs, including certain currently approved drugs. In addition, it significantly expands the federal governments clinical trial registry and results
databank and creates new restrictions on the advertising and promotion of drug products. Under the FDAAA, companies that violate these and other provisions of the law are subject to substantial civil monetary penalties.

In addition, FDA regulations and guidance are often revised or reinterpreted by the agency in ways that may significantly affect our business and
development of our product candidates and any products that we may commercialize. It is impossible to predict whether additional legislative changes will be enacted, or FDA regulations, guidance or interpretations changed, or what the impact of any
such changes may be.

Foreign Regulation

In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing, among other things, clinical trials and commercial sales and distribution of our products. Whether or not we obtain FDA
approval for a product, we must obtain the necessary approvals by the comparable regulatory authorities of foreign countries before we can commence clinical trials or marketing of the product in those countries. The approval process varies from
country to country and can involve additional product testing and additional review periods, and the time may be longer or shorter than that required to obtain FDA approval. The requirements governing, among other things, the conduct of clinical
trials, product licensing, pricing and reimbursement vary greatly from country to country. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may
negatively impact the regulatory process in others.

Under European Union regulatory systems, we may submit marketing authorization
applications either under a centralized or decentralized procedure. The centralized procedure, which is compulsory for medicines produced by certain biotechnological processes and products with a new active substance indicated for the treatment of
certain diseases such as cancer, and optional for those which are highly innovative, provides for the grant of a single marketing authorization that is valid for all European Union member states, or Member States. All marketing authorizations for
products designated as orphan drugs must be granted in accordance with the centralized procedure. The decentralized procedure provides for approval by one or more other, or concerned, Member States of an assessment of an application performed by one
Member State, known as the reference Member State. Under this procedure, an applicant submits an application, or dossier, and related materials including a draft summary of product characteristics, and draft labeling and package leaflet, to the
reference Member State and concerned Member States. The reference Member State prepares a draft assessment and drafts of the related materials within 120 days after receipt of a valid application. Within 90 days of receiving the reference Member
States assessment report, each concerned Member State must decide whether to approve the assessment report and related materials. If a Member State cannot approve the assessment report and related materials on the grounds of potential serious
risk to the public health, the disputed points may eventually be referred to the European Commission, whose decision is binding on all Member States.



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Pharmaceutical Pricing and Reimbursement

In both domestic and foreign markets, sales of any products for which we receive regulatory approval for commercial sale will depend in part on the
availability of reimbursement from third-party payors. Third-party payors include government healthcare program administrative authorities, managed care providers, private health insurers and other organizations. These third-party payors are
increasingly challenging the price and examining the cost-effectiveness of medical products and services. In addition, significant uncertainty exists as to the scope of coverage and payment amounts for newly approved healthcare products. We may need
to conduct expensive pharmacoeconomic studies in order to demonstrate the cost-effectiveness of our products. Our product candidates may not be considered medically necessary or cost-effective. Adequate third-party reimbursement may not be available
to enable us to maintain price levels sufficient to realize an appropriate return on our investment in product development.

Any products
for which we receive marketing approval may be eligible for coverage in the U.S. under the Medicare prescription drug benefit program, which became effective in January 2006. Government payment for some of the costs of prescription drugs may
increase demand for any products for which we receive marketing approval. However, to obtain payments under this program, we would be required to sell products to Medicare recipients through drug procurement organizations operating pursuant to this
legislation. These organizations would negotiate discounted prices for our products, which are likely to be lower than we might otherwise charge. Any products for which we receive marketing approval may also be acquired by state-operated Medicaid
programs. Medicaid rules constrain prices by requiring pharmaceutical suppliers to enter into rebate agreements that provide for quarterly payments to states based on the drugs average manufacturer price and best price, according to standards
provided in Medicaid regulations. Private, non-governmental third-party payors frequently base their coverage policies and the prices they agree to pay on the policies and payment rates under the Medicare and Medicaid programs. Federal, state, and
local governments in the United States continue to consider legislation to limit the growth of healthcare costs, including the cost of prescription drugs. Future legislation could limit payments for pharmaceuticals such as the drug candidates that
we are developing.

The marketability of any products for which we receive regulatory approval for commercial sale may suffer if the
government and third-party payors fail to provide adequate coverage and reimbursement. In addition, an increasing emphasis on managed care in the United States has increased and will continue to increase the pressure on pharmaceutical pricing.

Drug prices may be further constrained by possible Congressional action regarding drug reimportation into the United States. Some proposed
legislation would allow the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. Some governmental authorities in the U.S. are
pursuing lawsuits to obtain expanded reimportation authority. Such legislation, regulations or judicial decisions could reduce the prices we receive for any products that we may develop, negatively affecting our revenues and prospects for
profitability. Even without legislation authorizing reimportation, patients have been purchasing prescription drugs from Canadian and other non-United States sources, which has reduced the price received by pharmaceutical companies for their
products.

Manufacturing

We do not
currently own or operate manufacturing facilities for the production of clinical or commercial quantities of ICA-105665 and the lead compounds that we are developing for the treatment of epilepsy and neuropathic pain or senicapoc. We currently rely,
and expect to continue to rely, on third parties for the manufacture of our product candidates and any products that we may develop, other than small amounts of compounds that we synthesize ourselves for preclinical testing. We contract with one
third-party manufacturer to supply us with ICA-105665 bulk drug substance and a second manufacturer to perform fill/finish services. We contract with one third-party manufacturer to supply us with the senicapoc bulk drug substance and a second
manufacturer to perform fill/finish services. We obtain our supplies of the product candidates from both of these



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manufacturers on a purchase order basis. If any of these manufacturers should become unavailable to us for any reason, we believe that there are a number of
potential replacements, although we might incur some delay in identifying or qualifying such replacements.

All of our drug candidates are
organic compounds of low molecular weight, generally called small molecules. We have selected these compounds not only on the basis of their efficacy and safety, but also for their ease of synthesis and the low cost of their starting
materials. In particular, ICA-105665 and the lead compounds that we are developing for the treatment of epilepsy and neuropathic pain and senicapoc are both manufactured in a simple synthetic process from readily available starting materials. There
are no complicated chemistries or unusual equipment required in the manufacturing process. We expect to continue to develop drug candidates that can be produced cost-effectively at contract manufacturing facilities.

Sales and Marketing

If we receive regulatory
approval for our product candidates, we plan to commence commercialization activities by building a focused sales and marketing organization complemented by copromotion and other arrangements with pharmaceutical or biotechnology collaborators. Our
sales and marketing strategy is to:



| |  |  | Build our own domestic sales force. We believe that we can access key prescribing physicians in the United States for a number of the drug candidates that we
are developing through a relatively small, specialized sales force. In particular, we believe that such a sales force could address the community of neurologists who specialize in the treatment of epilepsy, for which we are currently conducting a
Phase I clinical study for ICA-105665.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Recruit a marketing organization. We plan to build a marketing and sales management organization to create and implement marketing strategies for any
products that we market through our own sales organization and to oversee and support our sales force. The responsibilities of the marketing organization would include developing educational initiatives with respect to approved products and
establishing relationships with thought leaders in relevant fields of medicine.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establish marketing and sales alliances. We plan to selectively enter into new strategic alliances with leading pharmaceutical and biotechnology companies to
assist us in advancing our drug discovery and development programs. We also plan to retain United States marketing and sales rights or copromotion rights for our product candidates for which we receive marketing approvals in situations in which we
believe it is possible to access the market through a focused, specialized sales force. For situations in which a large sales force is required to access the market and with respect to markets outside of the United States, we generally plan to
commercialize our drug candidates through various types of collaboration arrangements with leading pharmaceutical and biotechnology companies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Scientific and Clinical Advisors

We have relationships with scientific and clinical advisors who are leading experts in the
fields of ion channel biology and chemistry, preclinical studies, drug manufacturing or clinical trials. Our scientific and clinical advisors consult with us regularly on matters relating to:



| |  |  | our research and development programs;
| | - |  | --------------------------------------



| |  |  | the design and implementation of our clinical trials;
| | - |  | -----------------------------------------------------



| |  |  | market opportunities from a clinical perspective;
| | - |  | -------------------------------------------------



| |  |  | new technologies relevant to our research and development programs; and
| | - |  | -----------------------------------------------------------------------



| |  |  | scientific and technical issues relevant to our business.
| | - |  | ---------------------------------------------------------



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Employees

As of February 28, 2009, we had a total of 73 employees, 70 of whom were full-time, including 30 with doctoral degrees. Of our workforce, 61 employees are engaged in research and development and 12 are engaged in business development,
finance and administration. None of our employees is represented by labor unions or covered by collective bargaining agreements. We consider our relationship with our employees to be good.

Our Corporate Information

We were incorporated under
the laws of Delaware in November 1992. Our principal executive offices are located at 4222 Emperor Boulevard, Suite 350, Durham, North Carolina 27703, and our telephone number is (919) 941-5206.

Available Information

We maintain a website at
www.icagen.com. We make available, free of charge on our website, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file those reports with, or furnish them to, the Securities and Exchange Commission, or the SEC. We also similarly
make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the Exchange Act as soon as reasonably practicable after copies of those
filings are provided to us by those persons. We are not including the information contained at www.icagen.com, or at any other Internet address as part of, or incorporating it by reference into, this Annual Report on Form 10-K.

EXECUTIVE OFFICERS OF THE REGISTRANT

Our
executive officers and their respective ages and positions as of March 12, 2009 are as follows:



|                           |  |     |  |                                                                                                   
|-------------------------- |  | --- |  | --------------------------------------------------------------------------------------------------
|Name                       |  | Age |  | Position                                                                                          
|P. Kay Wagoner, Ph.D.      |  | 60  |  | President, Chief Executive Officer and Director                                                   
|                           |  |    
|Richard D. Katz, M.D.      |  | 45  |  | Executive Vice President, Finance and Corporate Development, Chief Financial Officer and Treasurer
|                           |  |    
|Seth V. Hetherington, M.D. |  | 56  |  | Senior Vice President, Clinical and Regulatory Affairs                                            

P. Kay Wagoner, Ph.D.Dr. Wagoner is a co-founder of our company and has served as our
president and a director since our inception and as chief executive officer since September 1996. Prior to founding Icagen, Dr. Wagoner served in research management positions at Glaxo Inc., a pharmaceutical company, where she initiated and led
Glaxos U.S. ion channel discovery efforts in central nervous system, cardiovascular and metabolic disease. Dr. Wagoner received her Ph.D. in physiology from the University of North Carolina, Chapel Hill. In 2001, Dr. Wagoner received
the distinguished alumna award for science and business from the University of North Carolina, Chapel Hill. Dr. Wagoner also serves or has served on a variety of boards of directors, including the University of North Carolinas Graduate
School Advisory Board and the Governing Body of the Biotechnology Industry Organizations (BIO) Emerging Companies Section. In 2004, Dr. Wagoner was awarded the Entrepreneurial Excellence Award by the Research Triangle based Council for
Entrepreneurial Development, the largest entrepreneurial support organization in the United States, and the Ernst & Young Entrepreneur of the Year Regional Award for Life Sciences and Healthcare.

Richard D. Katz, M.D.Dr. Katz has been our executive vice president, finance and corporate development, chief financial officer and
treasurer since March 2008. From April 2001 to March 2008, Dr. Katz was our senior vice president, finance and corporate development, chief financial officer and treasurer. From August 1996 to 2001, Dr. Katz worked in the Investment
Banking Division of Goldman Sachs, an investment banking firm, most recently as a vice president in the Healthcare Group. Prior to joining Goldman Sachs, Dr. Katz earned a Masters



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in Business Administration from Harvard Business School where he graduated as a Baker Scholar. Dr. Katz earned his M.D. from the Stanford University
School of Medicine and completed an internship in general surgery at the Hospital of the University of Pennsylvania. Dr. Katz received his A.B. in applied mathematics with high distinction from Harvard University.

Seth V. Hetherington, M.D.Dr. Hetherington has been our senior vice president, clinical and regulatory affairs since June 2006. From June
2002 to June 2006, Dr. Hetherington served as Vice President, Clinical Development and Chief Medical Officer at Inhibitex, Inc., a biotechnology company. From May 1995 to June 2002, Dr. Hetherington held positions of increasing
responsibility in clinical development, most recently Clinical Program Head, at GlaxoSmithKline and Glaxo Wellcome. Prior to joining Glaxo Wellcome, Dr. Hetherington held appointments at several leading academic medical centers, including the
University of Tennessee, St. Jude Childrens Research Hospital in Memphis and Albany Medical College. Dr. Hetherington earned his M.D. at the University of North Carolina, Chapel Hill.

Our officers are elected on an annual basis and serve at the discretion of our Board of Directors.

ITEM 1ARISK FACTORS

Risks Related to Our Financial Results and Need for Additional Financing

We have incurred losses since inception and anticipate that
we will continue to incur substantial losses for the foreseeable future. We might never achieve or maintain profitability.

We have
a limited operating history and have not yet commercialized any products or generated any product revenues. As of December 31, 2008, we had an accumulated deficit of $126.4 million. We have incurred losses in each year since our inception in
1992. Our net losses were $14.8 million in 2008, $10.9 million in 2007 and $24.8 million in 2006. These losses resulted principally from costs incurred in our research and development programs and from our general and administrative expenses. We
expect to continue to incur significant and increasing operating losses for at least the next several years as we continue our research activities, conduct development of, and seek regulatory approvals for, our initial drug candidates, and
commercialize any approved drugs. These losses, among other things, have had and will continue to have an adverse effect on our stockholders equity, total assets and working capital.

We have financed our operations and internal growth principally through the issuance of equity securities and funding under collaborations with leading
pharmaceutical companies. We have devoted substantially all of our efforts to research and development, including clinical trials, and we have not completed development of any drugs. Because of the numerous risks and uncertainties associated with
developing drugs targeting ion channels, we are unable to predict the extent of any future losses, whether or when any of our product candidates will become commercially available, or when we will become profitable, if at all. Even if we do achieve
profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

If we are unable to achieve and
then maintain profitability, the market value of our common stock will decline.

We will need substantial additional funding and may be unable to
raise capital when needed, which would force us to delay, reduce or eliminate our product development programs or commercialization efforts.

We expect our research and development expenses to increase in connection with our ongoing activities, particularly as the scope of the clinical trials that we are conducting expands. In addition, subject to
regulatory approval of any of our product candidates, we expect to incur significant commercialization expenses for product sales, marketing, manufacturing and distribution. We will need substantial additional funding and may be unable to raise
capital when needed or on attractive terms, particularly in the current economic environment. An inability to raise necessary funds would force us to delay, reduce or eliminate our research and development programs or commercialization efforts.



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We believe that our existing cash and cash equivalents, including the gross proceeds of approximately
$10.0 million from our exercise of the equity put option with Pfizer in February 2008, will be sufficient to enable us to fund our operating expenses, obligations under our equipment debt financing and capital expenditure requirements through the
second quarter of 2010. Our future capital requirements will depend on many factors, including:



| |  |  | the scope and results of our research, preclinical and clinical development activities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals;
| | - |  | -------------------------------------------------------------------------



| |  |  | the cost of commercialization activities, including product marketing, sales and distribution;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the
results of such litigation;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or invest in businesses, products and technologies;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the success of our collaboration with Pfizer; and
| | - |  | -------------------------------------------------



| |  |  | our ability to establish and maintain additional collaborations.
| | - |  | ----------------------------------------------------------------

Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through public or private equity offerings, debt financings and corporate collaboration and licensing
arrangements. If we raise additional funds by issuing equity securities, our stockholders may experience dilution. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific
actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences, that are not favorable to us or our
stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, research programs or product candidates or grant licenses on terms
that may not be favorable to us.

Our business and results of operations may be negatively impacted by general economic and financial market
conditions and such conditions may exacerbate the other risks that affect our business.

The worlds financial markets are
currently experiencing significant turmoil, resulting in reductions in available credit, constraints in access to capital, extreme volatility in security prices, rating downgrades of investments and reduced valuations of securities generally. These
economic conditions have had, and we expect will continue to have, an adverse impact on the pharmaceutical and biotechnology industries. Our business depends on our ability to raise substantial additional capital and to maintain and enter into
new collaborative research, development and commercialization agreements with leading pharmaceutical and biotechnology companies. Current market conditions could impair our ability to raise additional capital when needed for our research and
development programs, or on attractive terms. Our arrangements with collaborators typically require our collaborators to make a significant commitment of capital and other resources. Recent economic conditions may reduce the amount of discretionary
investment that our current collaborator and prospective collaborators may have available to invest in our business. This may result in prospective collaborators electing to defer entering into collaborative agreements with us, or our existing
collaborator choosing not to extend our existing collaboration when it expires. A reduction in research and development funding, even if economic conditions improve, would significantly adversely impact our business, operating results and financial
condition.

We are unable to predict the likely duration and severity of the current disruption in financial markets and adverse economic
conditions in the U.S. and abroad, but the longer the duration the greater risks we face in operating our business. There can be no assurance, therefore, that current economic conditions or worsening economic conditions or a prolonged or
recurring recession will not have a significant adverse impact on our operating results.



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If we fail to continue to meet all applicable Nasdaq Global Market requirements and Nasdaq determines to delist our
common stock, the delisting could adversely affect the market liquidity of our common stock, impair the value of your investment and harm our business.

Our common stock is listed on the Nasdaq Global Market. In order to maintain that listing, we must satisfy minimum financial and other requirements. On October 27, 2006, we received notice from the Nasdaq Listing
Qualifications Department that our common stock had not met the $1.00 per share minimum bid price requirement for 30 consecutive business days and that, if we were unable to demonstrate compliance with this requirement during the applicable grace
periods, our common stock would be delisted after that time. On January 17, 2007, we were notified by Nasdaq that we had regained compliance with this listing requirement.

The closing bid price of our common stock on the Nasdaq Global Market was $0.46 on March 12, 2009, and has been below $1.00 each trading day since
November 10, 2008. Nasdaq has temporarily suspended enforcement of the minimum bid price requirement through April 19, 2009 due to current economic conditions. However, it is possible that after Nasdaq resumes enforcement of the
requirement on April 20, 2009, the minimum bid price of our common stock could remain below the required level for 30 consecutive business days such that we are no longer in compliance. We may seek shareholder approval to effect a reverse stock
split to prevent our common stock from dropping below the minimum bid price requirement; however, a reverse stock split may not prevent the common stock from dropping back down towards the Nasdaq minimum per share price requirement or below the
required level. It is also possible that we would otherwise fail to satisfy another Nasdaq requirement for continued listing of our common stock.

If we fail to continue to meet all applicable Nasdaq Global Market requirements in the future and Nasdaq determines to delist our common stock, the delisting could adversely affect the market liquidity of our common stock, adversely affect
our ability to obtain financing for the continuation of our operations and harm our business. This delisting could also impair the value of your investment.

If our stock price is volatile, purchasers of our common stock could incur substantial losses.

Our stock price is
likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies, particularly in
recent months due to the turmoil in world financial markets. As a result of this volatility, investors may not be able to sell their common stock at or above the price at which they purchase it. The market price for our common stock may be
influenced by many factors, including:



| |  |  | results of clinical trials of our product candidates or those of our competitors;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | regulatory developments in the United States and foreign countries;
| | - |  | -------------------------------------------------------------------



| |  |  | variations in our financial results or those of companies that are perceived to be similar to us;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | changes in the structure of healthcare payment systems;
| | - |  | -------------------------------------------------------



| |  |  | market conditions in the pharmaceutical and biotechnology sectors and issuance of new or changed securities analysts reports or recommendations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic, industry and market conditions; and
| | - |  | -----------------------------------------------------



| |  |  | the other factors described in this Risk Factors section.
| | - |  | -----------------------------------------------------------

Risks Related to Development of Product Candidates

We depend heavily on the success of
our most advanced internal product candidates, ICA-105665 and our other lead compounds for epilepsy and neuropathic pain and senicapoc for asthma, which are still under development. If we are unable to commercialize any of these product candidates,
or experience significant delays in doing so, our business will be materially harmed.

We have invested a significant portion of
our efforts and financial resources in the development of our most advanced internal product candidates, ICA-105665 and our other lead compounds for the treatment of epilepsy



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and neuropathic pain and senicapoc for asthma. Our ability to generate product revenues, which we do not expect in any case will occur for at least the next
several years, will depend heavily on the successful development and commercialization of these product candidates. The commercial success of these product candidates will depend on several factors, including the following:



| |  |  | successful completion of clinical trials;
| | - |  | -----------------------------------------



| |  |  | receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establishing commercial manufacturing arrangements with third-party manufacturers;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | launching commercial sales of the product, whether alone or in collaboration with others; and
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | acceptance of the product in the medical community and with third-party payors.
| | - |  | -------------------------------------------------------------------------------

Our efforts to commercialize ICA-105665 and the other lead compounds that we are developing for epilepsy and neuropathic pain and senicapoc are at an
early stage. We submitted an IND and began Phase I clinical trials with respect to ICA-105665 during the third quarter of 2007. We submitted an IND for senicapoc as a potential treatment for asthma during the fourth quarter of 2007 and initiated a
Phase I multiple dose escalation study to explore doses higher than those used in previous clinical trials for sickle cell disease during the first quarter of 2008. This trial was completed during the third quarter of 2008. In October 2008 we
initiated a Phase II proof-of-concept clinical trial in patients with allergic asthma, and in March 2009, we initiated a Phase II proof-of-concept clinical trial in patients with exercise-induced asthma to evaluate the safety and efficacy of
senicapoc. Previously we had conducted a pivotal Phase III clinical trial of senicapoc for the chronic treatment of sickle cell disease. Following a planned meeting in April 2007, the Data Monitoring Committee, or DMC, recommended that the clinical
trial be terminated because of the low probability of achieving a reduction in crisis rate, the primary endpoint. In accordance with the recommendation of the DMC, we terminated the study following notification provided to the FDA. At this time, we
do not expect to resume clinical development of senicapoc as a potential treatment for sickle cell disease.

If we are not successful in
commercializing either or both of ICA-105665 or one of our other lead compounds for epilepsy and neuropathic pain or senicapoc for asthma, or are significantly delayed in doing so, our business will be materially harmed.

We will not be able to commercialize our product candidates if our preclinical studies do not produce successful results or our clinical trials do not demonstrate
safety and efficacy in humans.

Before obtaining regulatory approval for the sale of our product candidates, we must conduct, at
our own expense, extensive preclinical tests and clinical trials to demonstrate the safety and efficacy in humans of our product candidates. Preclinical and clinical testing is expensive, difficult to design and implement, can take many years to
complete and is uncertain as to outcome. Success in preclinical testing and early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results. A
failure of one or more of our clinical trials can occur at any stage of testing. We may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to
receive regulatory approval or commercialize our product candidates, including:



| |  |  | regulators or institutional review boards may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our preclinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional
preclinical testing or clinical trials or we may abandon projects that we expect to be promising. For example, our pivotal Phase III clinical trial of senicapoc for sickle cell disease was not successful. As another example, we were notified in the
third quarter of 2007 by our collaborator Bristol-Myers Squibb that it had decided, based on formulation issues, among others, not to pursue further development of a lead compound discovered in collaboration with us for the treatment of atrial
fibrillation. As a third example, we were notified in the
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | fourth quarter of 2007 by our collaborator, Astellas, that it had decided, based on genotoxicity issues, not to pursue further development of a lead compound
discovered in collaboration with us for the treatment of dementia, including Alzheimers disease;
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enrollment in our clinical trials may be slower than we currently anticipate, resulting in significant delays. For example, enrollment of patients in our Phase II
clinical trial of senicapoc for sickle cell disease took longer than we initially expected. Additionally, participants may drop out of our clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we might have to suspend or terminate our clinical trials if the participating patients are being exposed to unacceptable health risks. For example, in March 2005,
results of our multiple dose safety, tolerability and pharmacokinetic study of ICA-69673 did not support the continued development of ICA-69673 for the chronic oral treatment of epilepsy and neuropathic pain. As a result, at this time, we have
decided not to pursue the further clinical development of this compound;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulators or institutional review boards may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with
regulatory requirements;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of our clinical trials may be greater than we currently anticipate;
| | - |  | ----------------------------------------------------------------------------



| |  |  | any regulatory approval we ultimately obtain may be limited or subject to restrictions or post-approval commitments that render the product not commercially viable;
and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the effects of our product candidates may not be the desired effects or may include undesirable side effects or the product candidates may have other unexpected
characteristics.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

During the development program for sickle cell disease, 445 clinical trial participants received one or
more doses of senicapoc. Of these, 159 were healthy volunteers and 286 were patients with sickle cell disease. In these studies, we obtained safety information that we believe will be important in our development program for asthma. During the
development program for sickle cell disease, senicapoc was generally found to be safe and well-tolerated. In a published Phase II study of senicapoc in patients with sickle cell disease, diarrhea and nausea occurred more frequently in patients who
received either of two doses of senicapoc than in those who received a placebo. The most common serious adverse events were related to sickle cell disease and none were considered to be related to senicapoc. Patients who took senicapoc had small
increases in serum gamma glutamyl transpeptidase, or GGT, a protein found in the liver and biliary tract, but the clinical significance of this change is not known.

During 2008 we completed a Phase I multiple dose escalation study of senicapoc to explore doses higher than those used in previous clinical trials. In October 2008, we initiated a Phase II proof-of-concept study of
senicapoc in patients with allergic asthma, and in March 2009, we initiated a Phase II study of senicapoc in patients with exercise-induced asthma. Analyses of data from these Phase II trials or data from future trials may reveal information that
leads us to discontinue development of senicapoc in asthma or other indications.

If we are required to conduct additional clinical trials
or other testing of our product candidates beyond those that we currently contemplate, if we are unable to successfully complete our clinical trials or other testing or if the results of these trials or tests are not positive or are only modestly
positive, we may:



| |  |  | be delayed in obtaining marketing approval for our product candidates;
| | - |  | ----------------------------------------------------------------------



| |  |  | not be able to obtain marketing approval; or
| | - |  | --------------------------------------------



| |  |  | obtain approval for indications that are not as broad as intended.
| | - |  | ------------------------------------------------------------------

Our product development costs will also increase if we experience delays in testing or approvals. We do not know whether planned clinical trials will begin as planned, will need to be restructured or will be completed
on schedule, if at all. For example, in our Phase III trial of senicapoc, the DMC initially recommended a



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modification to the protocol and subsequently recommended termination of the trial, as described above. Significant clinical trial delays also could allow
our competitors to bring products to market before we do and impair our ability to commercialize our products or product candidates.

Risks Related to Our Dependence on Third Parties for Manufacturing,

Research and Development and Marketing and
Distribution Activities

We depend significantly on collaborations with third parties to discover, develop and commercialize some of our product
candidates.

A key element of our business strategy is to collaborate with third parties, particularly leading pharmaceutical
companies, to research, develop and commercialize some of our product candidates. We are currently a party to one such collaboration with Pfizer. In 2008, research funding from our collaboration with Pfizer accounted for all of our net revenues. Our
collaboration with McNeil terminated effective September 18, 2007. Our collaboration with Bristol-Myers Squibb concluded in the third quarter of 2007 upon notification by Bristol-Myers Squibb that it was no longer pursuing a lead compound
discovered in collaboration with us for the treatment of atrial fibrillation. The substantial majority of our research funding under our collaboration with Pfizer is scheduled to end in the third quarter of 2009. Our collaborations may not be
scientifically or commercially successful. The termination of any of these arrangements might adversely affect the development of the related product candidates and our ability to derive revenue from them.

The success of our collaboration arrangements will depend heavily on the efforts and activities of our collaborators. Our collaborators have significant
discretion in determining the efforts and resources that they will apply to these collaborations. The risks that we face in connection with these collaborations, and that we anticipate being subject to in future collaborations, include the
following:



| |  |  | our collaboration agreements are for fixed terms and subject to termination by our collaborators in the event of a material breach by us;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our collaborators in some cases have the first right to maintain or defend our intellectual property rights and, although we have the right to assume the
maintenance and defense of our intellectual property rights if our collaborators do not, our ability to do so may be compromised by our collaborators acts or omissions; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our collaborators may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property
rights or expose us to potential liability.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Collaborations with pharmaceutical companies and other third parties often
are terminated or allowed to expire by the other party. A termination or expiration of our current collaboration with Pfizer or any potential future collaborations would adversely affect us financially and could harm our business reputation.

If one of our collaborators were to change its strategy or the focus of its development and commercialization efforts with respect to our
relationship, the success of our product candidates and our operations could be adversely affected.

There are a number of factors
external to us that may change our collaborators strategy or focus with respect to our relationship with them. For example:



| |  |  | our collaborators may develop and commercialize, either alone or with others, products and services that are similar to or competitive with the products that are
the subject of the collaboration with us;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated
their priorities from time to time, including following mergers and consolidations, which have been common in recent years in these industries. For example, in May 2004 our collaborator Yamanouchi signed a definitive merger agreement with Fujisawa
Pharmaceutical Co., Ltd., which took effect on April 1, 2005, and Yamanouchi and Fujisawa were renamed Astellas Pharma Inc. As additional examples, during 2006
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Johnson & Johnson acquired the Consumer Healthcare Business of Pfizer Pharmaceuticals, and integrated this unit with McNeil, and in January 2009,
Pfizer announced its planned acquisition of Wyeth; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability of our product candidates and products to reach their potential could be limited if our collaborators decrease or fail to increase spending relating to
such products. For example, McNeil provided notification of termination of our collaboration, effective as of September 18, 2007. As another example, our collaboration with Bristol-Myers Squibb concluded upon notification by Bristol-Myers
Squibb in the third quarter of 2007 that it was no longer pursuing a lead compound discovered in collaboration with us for the treatment of atrial fibrillation.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If any of the above factors were to occur, our collaborator might terminate the collaboration or not commit sufficient resources to the development,
manufacture or marketing and distribution of our product or product candidate that is the subject of the collaboration. In such event, we might be required to devote additional resources to the product or product candidate, seek a new collaborator
or abandon the product or product candidate, any of which could have an adverse effect on our business.

We may not be successful in establishing
additional collaborations, which could adversely affect our ability to discover, develop and commercialize products.

If we are
unable to reach new agreements with suitable collaborators, we may fail to meet our business objectives for the affected product or program. We face significant competition in seeking appropriate collaborators. Moreover, these collaboration
arrangements are complex and time-consuming to negotiate and document. We may not be successful in our efforts to establish additional collaborations or other alternative arrangements. The terms of any additional collaborations or other arrangements
that we establish may not be favorable to us. Moreover, these collaborations or other arrangements may not be successful.

If third parties do not
manufacture our product candidates in sufficient quantities and at an acceptable cost, clinical development and commercialization of our product candidates could be delayed, prevented or impaired.

We do not currently own or operate manufacturing facilities and have little experience in manufacturing pharmaceutical products. We rely and expect to
continue to rely on third parties for the production of clinical and commercial quantities of our product candidates. There are a limited number of manufacturers that operate under the FDAs cGMP regulations and that are both capable of
manufacturing for us and willing to do so. We do not have any long-term manufacturing agreements with third parties, and manufacturers under our short-term supply agreements are not obligated to accept any purchase orders we may submit. Our current
and anticipated future dependence upon others for the manufacture of our product candidates may adversely affect our future profit margins and our ability to develop product candidates and commercialize any products that receive regulatory approval
on a timely and competitive basis. In particular, if the third parties that are currently manufacturing the lead compounds, including ICA-105665, which we are developing for the treatment of epilepsy and neuropathic pain, or senicapoc, which we are
developing for the treatment of asthma, for our preclinical studies or clinical trials should cease to continue to do so for any reason, we expect that we would experience delays in advancing these trials while we identify and qualify replacement
suppliers.

Use of third-party manufacturers may increase the risk that we will not have adequate supplies of our product candidates.

Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured product candidates or
products ourselves, including:



| |  |  | reliance on the third party for regulatory compliance and quality assurance;
| | - |  | ----------------------------------------------------------------------------



| |  |  | the possible breach of the manufacturing agreement by the third party; and
| | - |  | --------------------------------------------------------------------------



| |  |  | the possible termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or inconvenient for us.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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If we are not able to obtain adequate supplies of our product candidates and any approved products, it
will be more difficult for us to develop our product candidates and compete effectively. Our product candidates and any products that we successfully develop may compete with product candidates and products of third parties for access to
manufacturing facilities.

Our contract manufacturers are subject to ongoing, periodic, unannounced inspection by the FDA and corresponding
state and foreign agencies or their designees to ensure strict compliance with cGMP regulations and other governmental regulations and corresponding foreign standards. We cannot be certain that our present or future manufacturers will be able to
comply with cGMP regulations and other FDA regulatory requirements or similar regulatory requirements outside the United States. We do not control compliance by our contract manufacturers with these regulations and standards. Failure of our
third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, including fines, injunctions, civil penalties, failure of regulatory authorities to grant marketing approval of our product
candidates, delays, suspension or withdrawal of approvals, license revocation, seizures or recalls of product candidates or products, operating restrictions and criminal prosecutions, any of which could significantly and adversely affect supplies of
our product candidates and products.

If third parties on whom we rely for clinical trials do not perform as contractually required or as we expect
or fail to comply with all applicable regulatory requirements, we may not be able to obtain regulatory approval for or commercialize our product candidates, and our business may suffer.

We do not have the ability to independently conduct the clinical trials required to obtain regulatory approval for our products. We depend on independent
clinical investigators, contract research organizations and other third-party service providers to conduct the clinical trials of our product candidates and expect to continue to do so for at least the next several years. We rely on Quintiles
Transnational Corp. for the performance of some of our clinical trials. One of our directors, Dr. Dennis B. Gillings, is chairman and chief executive officer of Quintiles Transnational Corp., and PharmaBio Development Inc. d/b/a NovaQuest,
the holder of approximately 4% of our outstanding capital stock, is a wholly owned subsidiary of Quintiles Transnational Corp.

We rely
heavily on independent clinical investigators, contract research organizations and other third-party service providers for successful execution of our clinical trials, but do not control many aspects of their activities. We are responsible for
ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and protocols for the trial. Moreover, the FDA requires us to comply with standards, commonly referred to as Good Clinical Practices, for
conducting and recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate and that the rights, integrity and confidentiality of trial participants are protected. The FDA closely monitors
the progress of clinical trials that are conducted in the U.S., and the FDAAA significantly expands the federal governments clinical trial registry to cover more trials and more information, including information on the results of completed
trials. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. Third parties may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory
requirements or our stated protocols. The failure of these third parties to carry out their obligations could delay or prevent the development, approval and commercialization of our product candidates.

We plan to expand our internal clinical development and regulatory capabilities. We will not be successful in doing so unless we are able to recruit
appropriately trained personnel and add to our infrastructure.

Risks Related to Our Intellectual Property

If we are unable to obtain and maintain protection for the intellectual property relating to our technology and products, the value of our technology and products
will be adversely affected.

Our success will depend in large part on our ability to obtain and maintain protection in the United
States and other countries for the intellectual property covering or incorporated into our technology and products. The patent situation in the field of biotechnology and pharmaceuticals generally is highly uncertain and involves



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complex legal and scientific questions. We may not be able to obtain additional issued patents relating to our technology or products. Even if issued,
patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either
patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection.

Our patents also may not afford us protection against competitors with similar technology. Because patent applications in the United States and many
foreign jurisdictions are typically not published until 18 months after filing, or in some cases not at all, and because publications of discoveries in the scientific literature often lag behind actual discoveries, neither we nor our licensors can
be certain that we or they were the first to make the inventions claimed in issued patents or pending patent applications, or that we or they were the first to file for protection of the inventions set forth in these patent applications.

If we fail to comply with our obligations in our intellectual property licenses with third parties, we could lose license rights that are important to our
business.

We are a party to a number of license agreements. We consider only our license with CMCC to be material to our business.
We expect to enter into additional licenses in the future. Our existing licenses impose, and we expect future licenses will impose, various diligence, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with these
obligations, the licensor may have the right to terminate the license, in which event we might not be able to market any product that is covered by the licensed patents.

If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected.

In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We seek to protect this information in part
by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be
independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, competitors may be able to use this information to develop products that compete with our products, which could
adversely impact our business.

If we infringe or are alleged to infringe intellectual property rights of third parties, it will adversely affect our
business.

Our research, development and commercialization activities, as well as any product candidates or products resulting from
these activities, may infringe or be claimed to infringe patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad.
These third parties could bring claims against us or our collaborators that would cause us to incur substantial expenses and, if successful against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought
against us or our collaborators, we or they could be forced to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential claims, we or our collaborators may choose or be required to seek a license
from the third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we or our collaborators were able to obtain a license, the rights may be nonexclusive, which
could result in our competitors gaining access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business operations, if, as a result of actual or threatened
patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.



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There has been substantial litigation and other proceedings regarding patent and other intellectual
property rights in the pharmaceutical and biotechnology industries. In addition to infringement claims against us, we may become a party to other patent litigation and other proceedings, including interference proceedings declared by the United
States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their substantially greater financial resources. Uncertainties resulting
from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time.

Risks Related to Regulatory Approval of Our Product Candidates

If we are not able to obtain required regulatory approvals, we will not be able to commercialize our product candidates, and our ability to generate revenue will be materially impaired.

Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety,
efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other
countries. Failure to obtain regulatory approval for a product candidate will prevent us from commercializing the product candidate. We have not received regulatory approval to market any of our product candidates in any jurisdiction. We have only
limited experience in filing and prosecuting the applications necessary to gain regulatory approvals and expect to rely on third-party contract research organizations to assist us in this process. Securing FDA approval requires, among other things,
the submission of extensive preclinical and clinical data, information about product manufacturing processes and supporting information to the FDA for each therapeutic indication and inspection of facilities to establish the product candidates
safety and efficacy. Our future products may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or
prevent or limit commercial use.

The process of obtaining regulatory approvals is expensive, often takes many years, if approval is
obtained at all, and can vary substantially based upon the type, complexity and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of additional statutes
or regulations, or changes in regulatory review for each submitted product application, may delay or prevent regulatory approval of an application. The FDA has substantial discretion in the approval process and may refuse to accept any application
or may decide that our data are insufficient for approval and require additional preclinical, clinical or other studies. In addition, varying interpretations of the data obtained from preclinical and clinical testing or negative, inconsistent or
inconclusive results obtained from preclinical or clinical trials could delay, limit or prevent regulatory approval of a product candidate.

Our
products could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements, or if we experience unanticipated problems with our products, when and if any of them are
approved.

Any product for which we obtain marketing approval, along with the manufacturing processes, post-approval clinical data,
labeling, advertising and promotional activities for such product, will be subject to continual requirements of and review by the FDA and other regulatory bodies. These requirements include, among other things, submissions of safety and other
post-marketing information and reports, registration requirements, cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents, and requirements regarding the distribution of samples to
physicians and recordkeeping. Even if regulatory approval of a product is granted, the approval may be subject to limitations on the indicated uses for which the product may be marketed or to the conditions of approval, or contain



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requirements for costly post-marketing testing and surveillance to monitor the safety or efficacy of the product. Later discovery of previously unknown
problems with our products, manufacturers or manufacturing processes, or failure to comply with regulatory requirements, may result in:



| |  |  | restrictions on such products, manufacturers or manufacturing processes;
| | - |  | ------------------------------------------------------------------------



| |  |  | warning letters;
| | - |  | ----------------



| |  |  | withdrawal of the products from the market;
| | - |  | -------------------------------------------



| |  |  | refusal to approve pending applications or supplements to approved applications that we submit;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | required labeling changes;
| | - |  | --------------------------



| |  |  | required post-marketing studies or clinical trials;
| | - |  | ---------------------------------------------------



| |  |  | distribution and use restrictions;
| | - |  | ----------------------------------



| |  |  | voluntary recall;
| | - |  | -----------------



| |  |  | fines;
| | - |  | ------



| |  |  | suspension or withdrawal of regulatory approvals;
| | - |  | -------------------------------------------------



| |  |  | refusal to permit the import or export of our products;
| | - |  | -------------------------------------------------------



| |  |  | product seizure; and
| | - |  | --------------------



| |  |  | injunctions or the imposition of civil or criminal penalties.
| | - |  | -------------------------------------------------------------

Failure to obtain regulatory approval in international jurisdictions would prevent us from marketing our products abroad.

We intend to market our products, if approved, outside the United States. In order to market our products in the European Union and other foreign jurisdictions, we must obtain separate regulatory approvals and comply
with numerous and varying regulatory requirements. With respect to some of our product candidates, our collaborator has, or we expect that a future collaborator will have, responsibility to obtain regulatory approvals outside the United States, and
we will depend on our collaborators to obtain these approvals. The approval procedure varies among countries and can involve additional testing and additional review periods. The time required to obtain approval may differ from and may be longer
than that required to obtain FDA approval. The foreign regulatory approval process may include all of the risks associated with obtaining FDA approval as well as additional risks. We may not obtain foreign regulatory approvals on a timely basis, if
at all. Approval by the FDA does not ensure approval by regulatory authorities in other countries or jurisdictions, and approval by one foreign regulatory authority does not ensure approval by regulatory authorities in other foreign countries or
jurisdictions or by the FDA, but a failure or delay in obtaining regulatory approval in one country may negatively impact the regulatory process in others. We and our collaborators may not be able to file for regulatory approvals and may not receive
necessary approvals to commercialize our products in any market.

Risks Related to Commercialization

The commercial success of any products that we may develop will depend upon the degree of market acceptance by physicians, patients, healthcare payors and others
in the medical community.

Any products that we bring to the market may not gain market acceptance by physicians, patients,
healthcare payors and others in the medical community. If these products do not achieve an adequate level of acceptance, we may not generate material product revenues and we may not become profitable. The degree of market acceptance of our product
candidates, if approved for commercial sale, will depend on a number of factors, including:



| |  |  | the prevalence and severity of any side effects;
| | - |  | ------------------------------------------------



| |  |  | the efficacy and potential advantages over alternative treatments;
| | - |  | ------------------------------------------------------------------



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| |  |  | the ability to offer our product candidates for sale at competitive prices;
| | - |  | ---------------------------------------------------------------------------



| |  |  | relative convenience and ease of administration;
| | - |  | ------------------------------------------------



| |  |  | the willingness of the target patient population to try new therapies and of physicians to prescribe these therapies;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | the strength of marketing and distribution support; and
| | - |  | -------------------------------------------------------



| |  |  | sufficient third-party coverage or reimbursement.
| | - |  | -------------------------------------------------

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate product revenues.

We do not have a sales organization and have no experience in the sale, marketing or distribution of pharmaceutical products. To achieve commercial
success for any approved product, we must either develop a sales and marketing organization or outsource these functions to third parties. Currently, we plan to build a focused specialty sales and marketing infrastructure to market or copromote some
of our product candidates if and when they are approved. There are risks involved with establishing our own sales and marketing capabilities, as well as in entering into arrangements with third parties to perform these services. For example,
developing a sales force is expensive and time-consuming and could delay any product launch. If the commercial launch of a product candidate for which we recruit a sales force and establish marketing capabilities is delayed as a result of FDA
requirements or other reasons, we would incur related expenses too early relative to the product launch. This may be costly, and our investment would be lost if we cannot retain our sales and marketing personnel. In addition, marketing and promotion
arrangements in the pharmaceutical industry are heavily regulated, and many marketing and promotional practices that are common in other industries are prohibited or restricted. These restrictions are often ambiguous and subject to conflicting
interpretations, but carry severe administrative, civil, and criminal penalties for noncompliance. It may be costly to implement internal controls to facilitate compliance by our sales and marketing personnel.

If we are unable to obtain adequate reimbursement from third-party payors for any products that we may develop or acceptable prices for those products, our
revenues and prospects for profitability will suffer.

Most patients will rely on Medicare and Medicaid, private health insurers
and other third-party payors to pay for their medical needs, including any drugs we or our collaborators may market. If third-party payors do not provide adequate coverage or reimbursement for any products that we may develop, our revenues and
prospects for profitability will suffer.

Regulatory approval to market a drug product does not assure that the product will be eligible
for coverage by third-party payors or, assuming it is covered, that it will receive a profitable price. The process for obtaining third-party coverage and payment is costly and time-consuming. We may need to conduct expensive pharmacoeconomic
studies in order to demonstrate the cost-effectiveness of our products. Our products may not be considered medically necessary or cost- effective. Adequate third-party reimbursement may not be available to enable us to maintain price levels
sufficient to realize an appropriate return on our investment in product development.

Coverage through the Medicare prescription drug
benefit program may increase demand for our products, but participating suppliers are required to negotiate prices with drug procurement organizations on behalf of Medicare beneficiaries. These prices are likely to be lower than we might otherwise
obtain. Future legislation might allow government agencies to negotiate prices directly with drug companies, which could lead to even lower prices. Drugs sold to state-operated Medicaid programs are subject to mandatory rebate agreements that
require quarterly payments to states based on the drugs average manufacturer price and best price. Private, non-governmental third-party payors frequently base their coverage policies and the prices they are willing to pay on the policies and
payment rates under the Medicare and Medicaid programs.



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A primary trend in the United States healthcare industry is toward cost containment. Third-party payors
are challenging the prices charged for medical products and services, and many third-party payors limit reimbursement for newly-approved healthcare products. In particular, third-party payors may limit the indications for which they will reimburse
patients who use any products that we may develop. Cost control initiatives could decrease the price we might establish for products that we may develop, which would result in lower product revenues to us.

U.S. drug prices may be further constrained by possible Congressional action regarding drug reimportation into the United States. Legislation proposed in
past Congressional sessions would allow the reimportation of approved drugs originally manufactured in the United States back into the United States from other countries where the drugs are sold at a lower price. Some governmental authorities
in the U.S. are pursuing lawsuits to obtain expanded reimportation authority. Such legislation, regulations, or judicial decisions could reduce the prices we receive for any products that we may develop, if approved, negatively affecting our
revenues and prospects for profitability. Alternatively, in response to legislation such as this, we might elect not to seek approval for or market our products in foreign jurisdictions in order to minimize the risk of reimportation, which could
also reduce the revenue we generate from our product sales. Even without legislation authorizing reimportation, patients have been purchasing prescription drugs from Canadian and other non-United States sources, which has reduced the price received
by pharmaceutical companies for their products.

In addition, in some foreign countries, particularly the countries of the European Union,
the pricing of prescription pharmaceuticals is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take six to 12 months or longer after the receipt of regulatory marketing approval for a
product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial that compares the cost-effectiveness of our product candidates or products to other available therapies. The conduct of such a
clinical trial could be expensive and result in delays in commercialization of our products.

If product liability lawsuits are brought against us,
we may incur substantial liabilities and may be required to limit commercialization of any products that we may develop.

We face
an inherent risk of product liability exposure related to the testing of our product candidates in human clinical trials and will face an even greater risk if we commercially sell any products that we may develop. If we cannot successfully defend
ourselves against claims that our product candidates or products caused injuries, we will incur substantial liabilities. Regardless of merit or eventual outcome, liability claims may result in:



| |  |  | decreased demand for any product candidates or products that we may develop;
| | - |  | ----------------------------------------------------------------------------



| |  |  | injury to our reputation;
| | - |  | -------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | costs to defend the related litigation;
| | - |  | ---------------------------------------



| |  |  | substantial monetary awards to trial participants or patients;
| | - |  | --------------------------------------------------------------



| |  |  | loss of revenue; and
| | - |  | --------------------



| |  |  | the inability to commercialize any products that we may develop.
| | - |  | ----------------------------------------------------------------

We have product liability insurance that covers our clinical trials up to a $5.0 million annual aggregate limit with a deductible of $25,000 per claim. The amount of insurance that we currently hold may not be
adequate to cover all liabilities that may occur. We intend to expand our insurance coverage to include the sale of commercial products if we obtain marketing approval for any products. Insurance coverage is increasingly expensive. We may not be
able to maintain insurance coverage at a reasonable cost and we may not be able to obtain insurance coverage that will be adequate to satisfy any liability that may arise.



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We face substantial competition which may result in others discovering, developing or commercializing products
before or more successfully than we do.

The development and commercialization of new drugs is highly competitive. We face
competition with respect to our current product candidates and any products we may seek to develop or commercialize in the future from major pharmaceutical companies, specialty pharmaceutical companies and biotechnology companies worldwide. Our
competitors may develop products that are more effective, safer, more convenient or less costly than any that we are developing. Our competitors may also obtain FDA or other regulatory approval for their products more rapidly than we may obtain
approval for ours. We believe that our most significant competitors in the area of drugs that work by modulating the activity of ion channels are large pharmaceutical companies which have internal ion channel drug discovery groups as well as smaller
more focused companies engaged in ion channel drug discovery.

There are approved products on the market for all of the diseases and
indications for which we are developing products. In many cases, these products have well known brand names, are distributed by large pharmaceutical companies with substantial resources and have achieved widespread acceptance among physicians and
patients. In addition, we are aware of product candidates of third parties that are in development, which, if approved, would compete against product candidates for which we receive marketing approval.

Many of our competitors have significantly greater financial resources and expertise in research and development, manufacturing, preclinical testing,
conducting clinical trials, obtaining regulatory approvals and marketing approved products than we do. Smaller or early stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and
established companies. These third parties compete with us in recruiting and retaining qualified scientific and management personnel, establishing clinical trial sites and patient registration for clinical trials, as well as in acquiring
technologies complementary to or necessary for our programs or advantageous to our business.

Our business activities involve the use of hazardous
materials, which require compliance with environmental and occupational safety laws regulating the use of such materials. If we violate these laws, we could be subject to significant fines, liabilities or other adverse consequences.

Our research and development programs involve the controlled use of hazardous materials. Accordingly, we are subject to federal,
state and local laws governing the use, handling and disposal of these materials. Although we believe that our safety procedures for handling and disposing of these materials comply in all material respects with the standards prescribed by state and
federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In addition, our collaborators may not comply with these laws. In the event of an accident or failure to comply with
environmental laws, we could be held liable for damages that result, and any such liability could exceed our assets and resources. We maintain liability insurance for some of these risks, but our policy excludes pollution and has a coverage limit of
$5.0 million.

Risks Related to Employees and Growth

If we fail to attract and keep senior management and key scientific personnel, we may be unable to successfully develop or commercialize our product candidates.

Our success depends on our continued ability to attract, retain and motivate highly qualified managerial and key scientific personnel. We consider
retaining Dr. P. Kay Wagoner, our president and chief executive officer, to be key to our efforts to develop and commercialize our product candidates. All of our employees, other than Dr. Wagoner, Dr. Richard D. Katz and
Dr. Seth V. Hetherington, are at-will employees and can terminate their employment at any time. Our employment agreements with Dr. Wagoner, Dr. Katz and Dr. Hetherington are terminable by them on short notice.



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In addition, our growth will require us to hire a significant number of qualified scientific and
commercial personnel, including clinical development, regulatory, marketing and sales executives and field personnel, as well as additional administrative personnel. There is intense competition from other companies and research and academic
institutions for qualified personnel in the areas of our activities. If we cannot continue to attract and retain, on acceptable terms, the qualified personnel necessary for the continued development of our business, we may not be able to sustain our
operations or grow.

Risks Relating to Our Private Placements

The number of shares of our common stock outstanding has increased substantially as a result of the private placement that closed on February 6, 2007, and certain purchasers beneficially own significant
blocks of our common stock; these shares have been registered under the Securities Act of 1933, as amended, or the Securities Act, and are generally available for resale in the public market.

Upon the closing of a private placement on February 6, 2007, we issued to a group of institutional and other accredited investors a total of
15,423,640 shares of our common stock, plus warrants to purchase a total of 5,398,256 additional shares of common stock. We refer to this transaction as the private placement. The issuance of these shares and warrants resulted in substantial
dilution to stockholders who held our common stock prior to the private placement. Certain purchasers in the private placement will have significant influence over the outcome of any stockholder vote, including the election of directors and the
approval of mergers or other business combination transactions.

In accordance with the securities purchase agreement for the private
placement, we filed a registration statement with the SEC covering the resale of the 15,423,640 shares of common stock issued in the private placement and the 5,398,256 shares of common stock issuable upon exercise of the warrants. This registration
statement became effective on May 1, 2007. These shares are now generally available for immediate resale in the public market. The market price of our common stock could fall due to an increase in the number of shares available for sale in the
public market.

If we do not maintain effectiveness of the registration statement covering the resale of the shares issued in the private placement,
we will be required to pay certain liquidated damages, which could be material in amount.

The terms of the securities purchase
agreement that we entered into in connection with the private placement require us to pay liquidated damages to the purchasers in the private placement in the event that the registration statement is suspended by us or ceases to remain continuously
effective as to all registrable securities for which it is required to be effective, with certain specified exceptions. We refer to this event as a registration default. Subject to the specified exceptions, for each 30-day period or portion thereof
during which a registration default remains uncured, we are obligated to pay each purchaser an amount in cash equal to 1% of that purchasers aggregate purchase price, up to a maximum of 10% of the aggregate purchase price paid by that
purchaser. These amounts could be material, and any liquidated damages we are required to pay could have a material adverse effect on our financial condition.

The number of shares of our common stock outstanding has increased substantially as a result of the equity investments by Pfizer that closed on August 20, 2007 and February 13, 2008; Pfizer beneficially owns a significant
block of our common stock; and upon registration under the Securities Act, these shares will be generally available for resale in the public market.

Upon the closing of the equity investment by Pfizer on August 20, 2007, we issued 2,668,172 shares of our common stock to Pfizer. Upon the closing of the equity investment by Pfizer on February 13, 2008, we
issued an additional 5,847,953 shares of our common stock to Pfizer as a result of the exercise of our put option to sell to Pfizer up to an additional $10.0 million of common stock at the fair market value of the common stock at the time of
exercise. The issuance of the aggregate of 8,516,125 shares to Pfizer, which owns approximately 18% of our common stock as of February 28, 2009, resulted in substantial dilution to stockholders who held our common stock prior to the equity
investments by Pfizer.



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In accordance with the purchase agreement for the equity investment by Pfizer, we have agreed to file, at
any time after August 20, 2008, upon the request of Pfizer, a registration statement with the SEC covering the resale of the aggregate number of shares issued pursuant to the purchase agreement. Upon such registration of the shares issued in
the equity investment by Pfizer, these shares will become generally available for immediate resale in the public market. In addition, Pfizer may sell these shares prior to their registration in transactions exempt from registration under the
Securities Act. The market price of our common stock could fall due to an increase in the number of shares available for sale in the public market or if Pfizer decides to sell our shares of common stock.

If we do not obtain and maintain effectiveness of the registration statement covering the resale of the shares issued in the equity investment by Pfizer, upon the
request of Pfizer, we will be required to pay certain liquidated damages, which could be material in amount.

The terms of the
purchase agreement that we entered into in connection with the equity investment by Pfizer require us to pay liquidated damages to Pfizer in the event that we do not file the registration statement with the SEC within 30 days after the request by
Pfizer to file such registration statement, the registration statement does not become effective or its effectiveness is not maintained beginning 90 days after the registration request (if the registration statement is not reviewed by the SEC) or
120 days after the registration request (if it is so reviewed) or, after the registration statement is declared effective by the SEC, the registration statement is suspended by us or ceases to remain continuously effective as to all registrable
securities for which it is required to be effective, with certain specified exceptions. We refer to each of these events as a registration default. Subject to the specified exceptions, for each 30-day period or portion thereof during which a
registration default remains uncured, we are obligated to pay Pfizer an amount in cash equal to 1% of Pfizers aggregate purchase price, up to a maximum of 10% of the aggregate purchase price paid by Pfizer. These amounts could be material, and
any liquidated damages we are required to pay could have a material adverse effect on our financial condition.

General Company Related
Risks

Our executive officers, directors and principal stockholders have substantial control over us and could limit your ability to influence
the outcome of matters submitted to stockholders for approval.

As of February 28, 2009, our executive officers, directors and
stockholders who owned more than 5% of our outstanding common stock beneficially owned, in the aggregate, shares representing approximately 64% of our capital stock. As a result, if these stockholders were to choose to act together, they could
influence or control matters submitted to our stockholders for approval, as well as our management and affairs. For example, these persons, if they choose to act together, could influence the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets. This concentration of voting power could lead to a delay in or prevent an acquisition of our company on terms that other stockholders may desire.

Our corporate charter documents, our stockholder rights plan, Delaware law and our collaboration agreement with Pfizer contain provisions that may prevent or
frustrate attempts by our stockholders to change our management and hinder efforts to acquire a controlling interest in us.

Provisions of our corporate charter and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive
a premium for their shares. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:



| |  |  | a classified board of directors;
| | - |  | --------------------------------



| |  |  | limitations on the removal of directors;
| | - |  | ----------------------------------------



| |  |  | advance notice requirements for stockholder proposals and nominations;
| | - |  | ----------------------------------------------------------------------



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| |  |  | the inability of stockholders to act by written consent or to call special meetings; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------

The affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote is necessary to amend or repeal the above
provisions of our corporate charter. In addition, absent approval of our board of directors, our bylaws may only be amended or repealed by the affirmative vote of the holders of at least 75% of our shares of capital stock entitled to vote.

On December 2, 2008, we adopted a stockholder rights plan pursuant to which we issued a dividend of one preferred share purchase
right for each share of our common stock held by stockholders of record on December 15, 2008. Each right entitles stockholders to purchase one one-thousandth of a share of our newly created Series A Junior Participating Preferred Stock at
a price of $7.50, subject to adjustment under certain circumstances. Unless we redeem or exchange the rights at an earlier date, they will expire upon the close of business on the earlier of (1) December 2, 2018 or
(2) December 2, 2009, if our stockholders do not approve the rights plan by that date.

The rights issued under our rights plan
will automatically trade with the underlying common stock and will initially not be exercisable. If a person acquires or commences a tender offer for 15% (or in the case of Pfizer, which currently owns approximately 18% of our common stock, 20%) or
more of our common stock in a transaction that was not approved by our board of directors, each right, other than those owned by the acquiring person, would instead entitle the holder to purchase $15.00 worth of our common stock for the $7.50
exercise price. If we are involved in a merger or other transaction with another company that is not approved by our board of directors, in which we are not the surviving corporation or which transfers more than 50% of our assets to another company,
then each right, other than those owned by the acquiring person, would instead entitle the holder to purchase $15.00 worth of the acquiring companys common stock for the $7.50 exercise price. The rights will cause substantial dilution to a
person or group that attempts to acquire us on terms not approved by our board of directors. Although we believe that our stockholder rights plan will help enhance our ability to negotiate with a prospective acquirer in order to ensure that all
company stockholders realize the long-term value of their investment, it could have the effect of discouraging, delaying or preventing a change of control of our company, including under circumstances that some stockholders may consider favorable.

Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a business
combination with an interested stockholder, generally a person which together with its affiliates owns or within the last three years has owned 15% of our voting stock, for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is approved in a prescribed manner. Accordingly, Section 203 may discourage, delay or prevent a change of control of our company.

Pfizer has agreed to constitute and appoint our president and treasurer, and each of them, with full power of substitution, as the proxies of
Pfizer with respect to matters on which Pfizer is entitled to vote as a holder of common stock, and authorize each of them to represent and to vote all of Pfizers shares with respect to matters other than a merger or acquisition of our
company, the disposition of all or substantially all of our assets, or a change of control of our company. In addition, if on the record date for any vote of our common stock Pfizer holds greater than 10% of the outstanding shares of our common
stock, with respect to any of Pfizers shares in excess of the number of shares equal to 10% of the outstanding shares of our common stock, Pfizer has agreed to constitute and appoint such persons as the proxies of Pfizer and authorize each of
them to represent and to vote with respect to matters related to a merger or acquisition of our company, the disposition of all or substantially all of our assets, or a change of control of our company, in the same manner and in the same
proportion as shares of common stock held by our other shareholders are voted on such matters. However, if both (1) we issue common stock that represents more than 10% of our then outstanding common stock to a third party strategic
investor in



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connection with a collaboration agreement and (2) the voting rights granted to such third party contain fewer restrictions, then Pfizers voting
rights shall be deemed to be automatically modified so as to make such rights no less favorable to Pfizer than those granted to the third party strategic investor. Pfizer will have significant influence over the outcome of a stockholder vote with
respect to the approval of mergers or other business combination transactions. In addition, with respect to matters other than the approval of mergers or other business combination transactions, our management will control how
Pfizers shares are voted and therefore may have significant influence over the outcome of a stockholder vote with respect to such matters.

A significant portion of our total outstanding shares may be sold into the market at any time. This could cause the market price of our common stock to drop significantly, even if our business is doing well.

Sales of a substantial number of shares of our common stock in the public market could occur at any time. These sales, or the perception in the market
that the holders of a large number of shares intend to sell shares, could reduce the market price of our common stock. As of February 28, 2009, we had 46,995,276 shares of common stock outstanding. Substantially all of these shares, including
those shares issued in the private placement, may be resold in the public market at any time. Moreover, holders of an aggregate of approximately 11,200,000 shares of our common stock, which include the 8,516,125 shares of common stock issued to
Pfizer as discussed above, have rights, subject to some conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other stockholders. We
also have registered all shares of common stock that we may issue under our equity compensation plans. As a result, they can be freely sold in the public market upon issuance.

ITEM 1BUNRESOLVED STAFF COMMENTS

None.

ITEM 2PROPERTIES

Our principal facilities consist of approximately 32,000 square feet of research and office space located at 4222 Emperor Boulevard, Durham, North Carolina and research space located at 3908 Patriot Drive, Durham, North Carolina which we
occupy under several leases that expire over the period from 2010 to 2012.

ITEM 3LEGAL PROCEEDINGS

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

ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.



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PART II

ITEM 5MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information and Holders

Our common stock has
traded on the Nasdaq Global Market (formerly the Nasdaq National Market) under the symbol ICGN since our initial public offering, or IPO, on February 3, 2005. The following table sets forth, for the calendar periods indicated, the
range of high and low sales prices for our common stock on the Nasdaq Global Market:



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|2007           |  | High |      | Low
|First Quarter  |  | $    | 3.09 |     | $ | 1.04
|Second Quarter |  | $    | 2.19 |     | $ | 1.20
|Third Quarter  |  | $    | 2.80 |     | $ | 1.59
|Fourth Quarter |  | $    | 2.20 |     | $ | 1.42



|               |  |      |      |     |   |     
|-------------- |  | ---- | ---- | --- | - | ----
|2008           |  | High |      | Low
|First Quarter  |  | $    | 2.00 |     | $ | 1.36
|Second Quarter |  | $    | 1.74 |     | $ | 1.40
|Third Quarter  |  | $    | 2.20 |     | $ | 0.95
|Fourth Quarter |  | $    | 1.28 |     | $ | 0.35

On February 28, 2009, there were 108 stockholders of record of our common stock. On February 27, 2009,
the last sale price reported on the Nasdaq Global Market for our common stock was $0.46 per share.

Performance Graph

The graph below compares the cumulative total stockholder return on our common stock for the period from February 3, 2005, the date of our initial
public offering, through December 31, 2008 with the cumulative total return on the Nasdaq Market Index and the Nasdaq Biotechnology Index. Each comparison assumes the investment of $100 on February 3, 2005 in our common stock and in each
of the indices and, in each case, assumes reinvestment of all dividends.

LOGO



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|                               |  |                 |        |               |   |                   |  |                   |        |                  |   |               |  |                   |        |                   |   |                  |  |   |        |  |   |        |  |   |       
|------------------------------ |  | --------------- | ------ | ------------- | - | ----------------- |  | ----------------- | ------ | ---------------- | - | ------------- |  | ----------------- | ------ | ----------------- | - | ---------------- |  | - | ------ |  | - | ------ |  | - | ------
|                               |  | February 3,2005 |        | March 31,2005 |   | June 30,2005      |  | September 30,2005 |        | December 31,2005 |   | March 31,2006 |  | June 30,2006      |        | September 30,2006 |   | December 31,2006
|Icagen, Inc.                   |  | $               | 100    |               | $ | 87.12             |  | $                 | 107.53 |                  | $ | 92.47         |  | $                 | 88.36  |                   | $ | 113.70           |  | $ | 68.49  |  | $ | 12.60  |  | $ | 13.84 
|The Nasdaq Market Index        |  |                 | 100    |               |   | 97.11             |  |                   | 100.49 |                  |   | 104.99        |  |                   | 107.95 |                   |   | 114.50           |  |   | 106.88 |  |   | 111.15 |  |   | 119.14
|The Nasdaq Biotechnology Index |  |                 | 100    |               |   | 91.20             |  |                   | 97.27  |                  |   | 115.68        |  |                   | 120.14 |                   |   | 124.22           |  |   | 112.03 |  |   | 117.41 |  |   | 119.84
|                               |  |                 |        |               |   |                   |  |                   |       
|                               |  | March 31,2007   |        | June 30,2007  |   | September 30,2007 |  | December 31,2007  |        | March 31,2008    |   | June 30,2008  |  | September 30,2008 |        | December 31,2008  |   |                 
|Icagen, Inc.                   |  | $               | 22.05  |               | $ | 27.40             |  | $                 | 27.40  |                  | $ | 23.01         |  | $                 | 22.19  |                   | $ | 21.37            |  | $ | 13.42  |  | $ | 7.40   |  |   |       
|The Nasdaq Market Index        |  |                 | 119.54 |               |   | 128.54            |  |                   | 133.31 |                  |   | 130.99        |  |                   | 112.23 |                   |   | 112.98           |  |   | 103.35 |  |   | 77.69  |  |   |       
|The Nasdaq Biotechnology Index |  |                 | 115.02 |               |   | 120.20            |  |                   | 126.95 |                  |   | 119.94        |  |                   | 116.62 |                   |   | 118.28           |  |   | 122.98 |  |   | 113.25 |  |   |       

The information included under the heading Performance Graph in Item 5 of this
Annual Report on Form 10-K is furnished and not filed and shall not be deemed to be soliciting material or subject to Regulation 14A, shall not be deemed filed for purposes of Section 18 of
the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We currently
intend to retain all of our future earnings to finance the growth and development of our business. We do not intend to pay cash dividends to our stockholders in the foreseeable future.

Recent Sales of Unregistered Securities

We did not sell any equity securities that were not
registered under the Securities Act in the fourth quarter of 2008.

Issuer Purchases of Equity Securities

We did not make any purchases of our shares of common stock in the fourth quarter of fiscal 2008, nor did any affiliated purchaser or anyone acting on
behalf of us or an affiliated purchaser.

ITEM 6SELECTED FINANCIAL DATA

The selected financial data set forth below should be read together with Managements Discussion and Analysis of Financial Condition and
Results of Operations and our financial statements and related notes included in this Annual Report on Form 10-K.

The selected
financial data set forth below as of December 31, 2008 and 2007 and for the years ended December 31, 2008, 2007 and 2006 are derived from our audited financial statements included in this Annual Report on Form 10-K. All other selected
financial data set forth below is derived from our audited financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of our results of operations to be expected in the future.



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|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|------------------------------------------------------------------------ |  | ----------------------------------------------- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | --------- | -
|                                                                         |  | Year ended December 31,                         |           
|                                                                         |  | 2008                                            |            |   | 2007 |   |            | 2006 |  |   | 2005       |   |  | 2004 |           
|                                                                         |  | (in thousands, except share and per share data) |           
|Selected statement of operations data:                                   |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Collaborative research and development revenues:                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Research and development fees                                            |  | $                                               | 11,711     |   |      | $ | 17,383     | (1)  |  | $ | 1,953      |   |  | $    | 4,454      |   |  | $ | 4,643     |  
|Reimbursed research and development costs                                |  |                                                 | 580        |   |      |   | 3,734      |      |  |   | 6,467      |   |  |      | 4,340      |   |  |   | 1,851     |  
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Total collaborative research and development revenues                    |  |                                                 | 12,291     |   |      |   | 21,117     |      |  |   | 8,420      |   |  |      | 8,794      |   |  |   | 6,494     |  
|Operating expenses:                                                      |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Research and development                                                 |  |                                                 | 22,140     |   |      |   | 27,854     |      |  |   | 28,820     |   |  |      | 25,906     |   |  |   | 20,390    |  
|General and administrative                                               |  |                                                 | 5,748      |   |      |   | 5,940      |      |  |   | 5,907      |   |  |      | 4,589      |   |  |   | 3,041     |  
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Total operating expenses                                                 |  |                                                 | 27,888     |   |      |   | 33,794     |      |  |   | 34,727     |   |  |      | 30,495     |   |  |   | 23,431    |  
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Loss from operations                                                     |  |                                                 | (15,597    | ) |      |   | (12,677    | )    |  |   | (26,307    | ) |  |      | (21,701    | ) |  |   | (16,937   | )
|Other income, net                                                        |  |                                                 | 782        |   |      |   | 1,792      |      |  |   | 1,499      |   |  |      | 1,452      |   |  |   | 214       |  
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Net loss                                                                 |  | $                                               | (14,815    | ) |      | $ | (10,885    | )    |  | $ | (24,808    | ) |  | $    | (20,249    | ) |  | $ | (16,723   | )
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Basic and diluted net loss per share attributable to common stockholders |  | $                                               | (0.32      | ) |      | $ | (0.29      | )    |  | $ | (1.12      | ) |  | $    | (1.03      | ) |  | $ | (10.61    | )
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Weighted average common shares outstandingbasic and diluted             |  |                                                 | 46,167,902 |   |      |   | 37,432,144 |      |  |   | 22,219,662 |   |  |      | 19,636,848 |   |  |   | 1,575,923 |  
|                                                                         |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|                                                                         | 
|                                                                         |  | December 31,                                    |           
|                                                                         |  | 2008                                            |            |   | 2007 |   |            | 2006 |  |   | 2005       |   |  | 2004 |           
|                                                                         |  | (in thousands)                                  |           
|Selected balance sheet data:                                             |  |                                                 |            |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |           |  
|Cash and cash equivalents                                                |  | $                                               | 34,215     |   |      | $ | 43,513     |      |  | $ | 25,131     |   |  | $    | 47,763     |   |  | $ | 30,217    |  
|Working capital                                                          |  |                                                 | 26,429     |   |      |   | 32,896     |      |  |   | 19,571     |   |  |      | 42,394     |   |  |   | 26,756    |  
|Total assets                                                             |  |                                                 | 37,880     |   |      |   | 46,657     |      |  |   | 30,815     |   |  |      | 54,393     |   |  |   | 38,137    |  
|Equipment debt financing, less current portion                           |  |                                                 | 971        |   |      |   | 757        |      |  |   | 774        |   |  |      | 1,194      |   |  |   | 732       |  
|Accumulated deficit                                                      |  |                                                 | (126,440   | ) |      |   | (111,625   | )    |  |   | (100,740   | ) |  |      | (75,932    | ) |  |   | (55,683   | )
|Total stockholders equity                                               |  |                                                 | 28,112     |   |      |   | 30,684     |      |  |   | 12,047     |   |  |      | 33,992     |   |  |   | 17,227    |  



|(1) | Amount includes $11.5 million of incremental revenue recognized as a result of the termination of the collaboration agreement with McNeil. The Company had recorded an upfront
payment and a milestone payment from McNeil totaling $15.0 million as deferred revenue and was amortizing such deferred revenue over the original 15 year estimated service period of the contract. In June 2007, the Company revised its estimate of the
term of its substantive obligations under the contract from ending in June 2019 to ending in September 2007. Accordingly, the Company recognized the remaining balance of deferred revenue in 2007 as the collaboration ended and the Companys
contractual obligations became complete.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 7MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together
with our financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report
on Form 10-K, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the section entitled Risk
Factors of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following
discussion and analysis.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of novel orally-administered small molecule drugs that modulate ion channel targets. Utilizing our proprietary know-how and integrated scientific
and drug development capabilities, we have identified multiple drug candidates that modulate ion channels. We are conducting research and development activities in a number of disease areas, including epilepsy, asthma, pain and inflammation.

Since our incorporation in November 1992, we have devoted substantially all of our resources to the discovery and development of drug
candidates with activity at ion channels. We currently have two clinical development programs, as well as other drug discovery programs addressing specific ion channel targets. We have not received approval to market any product and, to date, have
received no product revenues.

Since our inception, we have incurred substantial losses and, as of December 31, 2008, we had an
accumulated deficit of $126.4 million. These losses and accumulated deficit have resulted from the significant costs incurred in the research and development of our compounds and technologies and general and administrative costs. We expect that our
operating losses will continue and likely increase substantially for at least the next several quarters and years as we continue to expand our research, development and clinical trial activities and infrastructure.

A substantial portion of our revenue for at least the next several years will depend on our achieving development and regulatory milestones in our
existing collaborative research and development program and entering into new collaborations. Our revenue may vary substantially from quarter to quarter and year to year. Our operating expenses may also vary substantially from quarter to quarter and
year to year based on the timing of clinical trial patient enrollment and our research activities. In particular, as we advance ICA-105665 and the other lead compounds that we are developing for the treatment of epilepsy and neuropathic pain and as
we pursue the development of senicapoc, formerly ICA-17043, for the treatment of asthma, we expect that our research and development expenses will increase significantly. We believe that period-to-period comparisons of our results of operations are
not meaningful and should not be relied on as indicative of our future performance.

The successful development of our product candidates
is highly uncertain. We estimate that we will incur at least approximately $4.0 million over the course of the next year for the currently ongoing Phase I multiple ascending dose study and the planned proof-of-concept trials for ICA-105665. The
actual amount of expenses is subject to a number of variables, including successful completion of the ongoing Phase I trial and the planned proof-of-concept trial in pain, as well as the approval by the FDA of a proposed proof-of-concept study in
epilepsy. Additionally, we expect to incur at least approximately $3.0 million over the course of the next year to complete the two ongoing proof-of-concept trials of senicapoc for the treatment of asthma. The conduct of these programs beyond these
proof-of-concept studies will be dependent upon the availability of additional capital or the formation of one or more new collaborations.

We cannot reasonably estimate or know the nature, timing and estimated expenses of the efforts necessary to complete the remainder of the development of, or the period in which material net cash inflows will



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commence from, any of our product candidates due to the numerous risks and uncertainties associated with developing drugs, including the uncertainty of:



| |  |  | the scope, rate of progress and expense of our clinical trials and other research and development activities;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | future clinical trial results;
| | - |  | ------------------------------



| |  |  | the expense of clinical trials for additional indications;
| | - |  | ----------------------------------------------------------



| |  |  | the success of our collaboration with Pfizer;
| | - |  | ---------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing and other arrangements that we may establish;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the expense and timing of regulatory approvals;
| | - |  | -----------------------------------------------



| |  |  | the expense of establishing clinical and commercial supplies of our product candidates and any products that we may develop;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | the effect of competing technological and market developments; and
| | - |  | ------------------------------------------------------------------



| |  |  | the expense of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - |  | ---------------------------------------------------------------------------------------------------------------------

However, we do not expect to generate product revenue for at least the next several years. If any of our programs experience delays or do not result in a commercial
product, we would not generate revenue from that program in a timely manner or at all.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth below are based on our financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On
an ongoing basis, we evaluate our estimates and judgments, including those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and
assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our significant judgments and estimates used in the preparation of our
financial statements.

Revenue Recognition

Our collaboration agreements contain multiple elements, including non-refundable upfront license fees, payments for reimbursement of research and development costs, payments for ongoing research and development,
milestone payments associated with achieving development, regulatory and commercial milestones and royalties based on specified percentages of net product sales, if any. We consider a variety of factors in determining the appropriate method of
revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

We record cash received in advance of revenue recognition as deferred revenue and recognize revenues as services are performed over the applicable term
of the agreement. When the period of deferral cannot be specifically identified from the agreement, we estimate the period based upon other factors contained within the agreement. We continually review these estimates, which could result in a change
in the deferral period and the timing and the amount of revenue recognized.



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When a payment is specifically tied to a separate earnings process, we recognize revenues when the
specific performance obligation associated with the payment is completed. Performance obligations typically consist of significant milestones in the development life cycle of the related program, such as the initiation or completion of clinical
trials, filing for approval with regulatory agencies and receipt of approvals by regulatory agencies. Revenues from milestone payments may be considered separable from funding for research and development services because of the uncertainty
surrounding the achievement of milestones for products in early stages of development. Accordingly, we can recognize these payments as revenues if and when the performance milestone is achieved if they represent a separate earnings process as
described in Emerging Issues Task Force, or EITF, Issue 00-21, Revenue Arrangements with Multiple Deliverables, or EITF 00-21.

In
connection with our research and development collaborations, we recognize revenues from non-refundable upfront license fees, which we do not believe are specifically tied to a separate earnings process, ratably over the term of the agreement.
Research and development services provided under our collaboration agreement with Pfizer are on a fixed fee basis. We recognize revenues associated with long-term, fixed fee contracts based on the performance requirements of the agreements and as
services are performed. Our collaboration agreement with Pfizer allows for research term extensions upon mutually agreeable terms. We recognize revenues from contract extensions as we perform the extended services.

In connection with our collaboration with Pfizer, Pfizer paid us an initial upfront license fee of $12.0 million. We are recognizing this payment from
Pfizer as revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition, or SAB 104, EITF 00-21 and other relevant accounting literature. Specifically, we recorded the $12.0 million upfront payment as
deferred revenue, which we are amortizing to revenue over the initial two-year term of the research collaboration.

In connection with our
collaboration with McNeil, McNeil paid us an initial upfront payment of $10.0 million, and a milestone payment of $5.0 million upon acceptance of the protocol for our Phase III clinical trial of senicapoc for sickle cell disease by the FDA. We
recognized these payments from McNeil as revenue in accordance with SAB 104, EITF 00-21 and other relevant accounting literature. Specifically, we recorded both the $10.0 million upfront payment and the $5.0 million milestone payment as
deferred revenue, which was amortized to revenue over our estimate of the substantive service obligations of the contract. We initially estimated these substantive service obligations to conclude on the expiration of the last-to-expire patent
covered by the agreement in June 2019, but this estimate was later revised to September 2007 to coincide with the September 18, 2007 contract termination date. Accordingly, we recognized the remaining $12.5 million unamortized balance of the
$15 million upfront license and milestone payment from McNeil as revenue during the year ended December 31, 2007. At the time of the execution of the agreement, we did not consider the achievement of the milestone above to represent a separate
earnings process, and therefore we elected to treat this payment in a manner consistent with the accounting treatment applied to the $10.0 million upfront payment rather than recognize this payment as revenue when received.

We also recognize revenues derived from reimbursement of direct out-of-pocket expenses for research and development costs associated with our
collaboration with Pfizer and with our cost sharing arrangement with McNeil, which terminated on September 18, 2007, in accordance with EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent. We reflect the associated
research costs in our research and development expense.

None of the payments that we have received from collaborators to date, whether
recognized as revenue or deferred, are refundable even if the related program is not successful.

Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services that
have been performed on our behalf and estimating the level of service



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performed and the associated cost incurred for such service where we have not yet been invoiced or otherwise notified of actual cost. We make these estimates
as of each balance sheet date in our financial statements. Examples of estimated accrued expenses include:



| |  |  | fees payable to contract research organizations in conjunction with clinical trials;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | fees payable to contract manufacturers in conjunction with the production of clinical trial materials; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | professional service fees.
| | - |  | --------------------------

In
accruing service fees, we estimate the time period over which services will be provided and the level of effort in each period. If the actual timing of the provision of services or the level of effort varies from the estimate, we will adjust the
accrual accordingly. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify costs that have begun to be incurred or we underestimate or overestimate the level of services
performed or the costs of such services, our actual expenses could differ from such estimates. The date on which some services commence, the level of services performed on or before a given date and the cost of such services are often subjective
determinations. We make judgments based upon the facts and circumstances known to us at each reporting period end.

Research and Development

We expense research and development costs as incurred. Research and development expense includes, among other things, clinical trial costs.
We account for our clinical trial costs by estimating the total cost to treat a patient in each clinical trial and recognizing this cost, based on a variety of factors, beginning with the preparation for the clinical trial. This estimated cost
includes payments to our contract research organizations for trial site and patient-related costs, including laboratory costs related to the conduct of the trial, and other costs. Our cost per patient varies based on the type of clinical trial, the
site of the clinical trial and the length of the treatment period for each patient. As actual costs become known to us, we adjust our accrual; these changes in estimates may result in a material change in our clinical study accrual, which could
materially affect our results of operations. Research and development expense includes those costs described under Financial Operations OverviewResearch and Development Expense below.

Stock-Based Compensation

Effective
January 1, 2006, we account for stock-based compensation in accordance with the fair value recognition provisions of Financial Accounting Standards Board, or FASB, Statement No. 123 (revised 2004), Share-Based Payments,or Statement
123(R). We use the Black-Scholes-Merton option-pricing model, which requires the input of subjective assumptions. These assumptions include estimating the length of time vested stock options are retained before being exercised, or the expected term,
the estimated volatility of our common stock price over the expected term and the number of options that will ultimately expire or be forfeited. Changes to these subjective assumptions can materially affect the estimate of fair value of stock-based
compensation and, consequently, the related amount recognized on the statements of operations.

Accounting for Income Taxes

Under our income tax policy, we record the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and
amounts reported in the accompanying balance sheets, as well as operating loss and tax credit carryforwards, including orphan drug credit carryforwards. We have recorded a full valuation allowance to reduce our deferred tax assets as, based on
available objective evidence, it is more likely than not that the deferred tax asset will not be realized. In the event that we determine that we will be able to realize our deferred tax assets in the future, an adjustment to the valuation allowance
would increase net income in the period the determination is made.



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As of December 31, 2008, we had net operating loss carryforwards of approximately $110.2 million and
research and development credit carryforwards of approximately $3.6 million for income tax purposes that begin to expire in the year 2011. Our orphan drug credit carryforwards of $12.4 million as of December 31, 2008 for income tax purposes
begin to expire in 2020. The future utilization of our net operating loss carryforwards may be limited based upon changes in ownership pursuant to regulations promulgated under the Internal Revenue Code.

Financial Operations Overview

Revenue

We do not currently have any commercial products for sale and do not anticipate having any commercial products for at least the next several years. To
date, our revenue has been derived solely from our collaborations. The aggregate revenues that we have recognized from our collaborators for research and development in each of the last three years were as follows: 2008$12.3 million;
2007$21.1 million; and 2006$8.4 million. During the year ended December 31, 2008, revenues from our collaboration with Pfizer accounted for all of our revenues, and currently we are only receiving research funding under our
collaboration with Pfizer. Research funding under our collaboration with McNeil ended on September 18, 2007 and research funding under our collaboration agreements with Abbott ended on December 31, 2005.

In connection with our collaboration with Pfizer, Pfizer paid us an initial upfront payment of $12.0 million. We are recognizing this payment from
Pfizer as revenue over the two-year initial term of the collaboration in accordance with SAB 104, EITF 00-21 and other relevant accounting literature.

In connection with our collaboration with McNeil, McNeil paid us an initial upfront payment of $10.0 million, $1.3 million of which we paid to CMCC in 2004, and a milestone payment of $5.0 million upon
acceptance of the protocol for our Phase III clinical trial of senicapoc by the FDA, $650,000 of which we paid to CMCC in 2005. Our collaboration agreement with McNeil terminated effective September 18, 2007. We recognized these payments from
McNeil as revenue in accordance with SAB 104, EITF 00-21 and other relevant accounting literature.

Research and Development Expense

Research and development expense consists primarily of:



| |  |  | salaries and related expenses for personnel;
| | - |  | --------------------------------------------



| |  |  | costs of facilities and equipment;
| | - |  | ----------------------------------



| |  |  | fees paid to contract research organizations in conjunction with clinical trials;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | fees paid to contract manufacturers in conjunction with the production of clinical materials;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | fees paid to research organizations in conjunction with preclinical animal studies;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | costs of materials used in research and development;
| | - |  | ----------------------------------------------------



| |  |  | upfront license fees and milestone payments under in-licensing agreements;
| | - |  | --------------------------------------------------------------------------



| |  |  | consulting, license and sponsored research fees paid to third parties; and
| | - |  | --------------------------------------------------------------------------



| |  |  | depreciation of capital assets used to develop our products.
| | - |  | ------------------------------------------------------------

We expense both internal and external research and development costs as incurred. Our collaborators have paid for a portion of our research and development expenses in each of the last three years. We expect that
research and development expenditures will increase substantially after 2009 due to the following:



| |  |  | clinical studies of ICA-105665 for the treatment of epilepsy and neuropathic pain;
| | - |  | ----------------------------------------------------------------------------------



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| |  |  | clinical studies of senicapoc for asthma; and
| | - |  | ---------------------------------------------



| |  |  | the continued development of our research programs.
| | - |  | ---------------------------------------------------

The conduct of our clinical stage programs beyond proof-of-concept studies will be dependent upon the availability of additional capital or the formation of one or more new collaborations.

We use our employee and infrastructure resources for several projects. Consistent with our target class approach to drug development, many of our costs
are not attributable to a specifically identified project, but instead are directed to broadly applicable research efforts. Accordingly, we do not account for internal research and development costs on a project-by-project basis. As a result, we
cannot state precisely the total costs incurred for each of our clinical and preclinical projects on a project-by-project basis. Senicapoc for asthma, and formerly senicapoc for sickle cell disease, and ICA-105665 and our other lead compounds for
epilepsy and neuropathic pain represent a substantial majority of the total research and development payments by us to third parties. The following table shows, for the periods presented, the total out-of-pocket payments made by us to third parties
for preclinical study support, clinical supplies and clinical trials associated with these programs:



|                                                                      |  |                         |       |      |   |        |  |   |       
|--------------------------------------------------------------------- |  | ----------------------- | ----- | ---- | - | ------ |  | - | ------
|                                                                      |  | Year ended December 31,
|Development Program                                                   |  | 2008                    |       | 2007 |   | 2006  
|                                                                      |  | (in thousands)         
|Senicapoc                                                             |  | $                       | 1,728 |      | $ | 7,551  |  | $ | 12,971
|ICA-105665 and other lead compounds for epilepsy and neuropathic pain |  |                         | 4,720 |      |   | 3,686  |  |   | 1,655 
|                                                                      |  |                         |       |      |   |        |  |   |       
|Total                                                                 |  | $                       | 6,448 |      | $ | 11,237 |  | $ | 14,626

We expect that a substantial percentage of our research and development expense in the future will
be incurred in support of our current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost to completion. In order to advance our drug development programs toward
eventual commercialization of a drug product, we test compounds in numerous preclinical studies for safety, toxicology and efficacy. We then conduct clinical trials for each drug candidate. Throughout the drug development process, we make
submissions to, and engage in discussions with, drug regulatory authorities, with the ultimate goal of submitting to these authorities and having approved applications for marketing approval. If we do not establish a collaboration for the program,
we fund these activities ourselves. As we obtain results from trials, we may elect to discontinue or delay clinical trials for some product candidates in order to focus our resources on more promising product candidates. Completion of clinical
trials by us or our collaborators may take several years or more, but the length of time generally varies substantially according to the type, complexity, novelty and intended use of a drug candidate. The cost of clinical trials may vary
significantly over the life of a project as a result of a variety of factors, including:



| |  |  | the number of patients who participate in the trials;
| | - |  | -----------------------------------------------------



| |  |  | the number of sites included in the trials;
| | - |  | -------------------------------------------



| |  |  | the length of time required to enroll trial participants;
| | - |  | ---------------------------------------------------------



| |  |  | the duration of patient follow-up; and
| | - |  | --------------------------------------



| |  |  | the efficacy and safety profile of the product candidate.
| | - |  | ---------------------------------------------------------

None of our drug candidates has received FDA or foreign regulatory marketing approval. During the first quarter of 2007, our pivotal Phase III trial of senicapoc for the treatment of sickle cell disease was
terminated. In order to achieve marketing approval, the FDA or foreign regulatory agencies must conclude that our or our collaborators clinical data establishes the safety and efficacy of the drug candidates. Furthermore, our strategy includes
entering into collaborations with third parties to participate in the development and commercialization of some of our products, such as our active collaboration with Pfizer and our past collaborations with several other pharmaceutical companies. In
situations in which third parties have control over the preclinical



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development or clinical trial process for a product, the estimated completion date is largely under control of that third party rather than under our
control. We cannot forecast with any degree of certainty which of our drug candidates will be subject to future collaborations or how such arrangements will affect our development plan or capital requirements.

As a result of the uncertainties discussed above, we are unable to determine the duration and completion costs of our research and development projects,
anticipated completion dates or when and to what extent we will receive cash inflows from the commercialization and sale of a product. However, we do not expect to generate product revenue for at least the next several years.

General and Administrative Expense

General
and administrative expense consists primarily of salaries and other related costs for personnel serving finance, accounting, intellectual property, information technology, human resource and administrative functions. Other costs include facility
costs not included in research and development expense, insurance, professional fees for legal, accounting and public relations services and the legal costs of pursuing patent protection for our intellectual property. We expect that general and
administrative expenditures will remain relatively stable during 2009 but may increase in subsequent years due to increasing payroll, public company expenses, our initial commercialization expenses if we receive marketing approvals, business
development costs and expanded operational infrastructure.

Interest Income and Interest Expense

Interest income consists of interest earned on our cash and cash equivalents. Interest expense consists of interest incurred on equipment debt financing.

Results of Operations

Comparison of Years Ended
December 31, 2008 and December 31, 2007

Collaborative Research and Development Revenue

Collaborative research and development revenues decreased by $8.8 million, or 42%, to $12.3 million for the year ended December 31, 2008 from $21.1
million for the year ended December 31, 2007. This decrease reflects a decrease of approximately $11.5 million in revenue resulting from the accelerated recognition of deferred revenue due to the termination of our collaboration with McNeil
during 2007 and a $5.2 million decrease in revenue related to reduced research and development fees and reduced cost-sharing reimbursement from the McNeil collaboration for the clinical development of senicapoc for the treatment of sickle cell
disease. This decrease was partially offset by an increase of $7.9 million in revenue from our collaboration with Pfizer.

Research
and Development Expense

Research and development expense decreased by $5.7 million, or 21%, to $22.1 million for the year ended
December 31, 2008 from $27.9 million for the year ended December 31, 2007. The decrease was due primarily to a decrease of $7.4 million in expense related to the development of senicapoc for the treatment of sickle cell disease, a decrease
of $1.6 million in expense related to the write-off of the capitalized payments that had been made to CMCC in connection with the termination of the McNeil collaboration, a decrease of $398,000 in equity compensation expense, a decrease of $389,000
in expense related to pharmacology studies, and a decrease of $351,000 related to license fee expense, partially offset by an increase of $1.6 million in expense related to the development of senicapoc for asthma, an increase of $1.1 million in
expense related to the development of ICA-105665 and our other lead compounds for epilepsy and neuropathic pain, an increase of $756,000 in salary and benefits expense, an increase of $487,000 in patent expense, an increase of $222,000 in laboratory
supplies expense and an increase of $207,000 in building rent and maintenance expense.



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General and Administrative Expense

General and administrative expense decreased by $192,000, or 3%, to $5.7 million for the year ended December 31, 2008 from $5.9 million for the year
ended December 31, 2007. The decrease was due primarily to a decrease of $233,000 in salary and benefits expense and a decrease of $226,000 in insurance expense, partially offset by an increase of $200,000 in business development expense and an
increase of $61,000 in travel and seminar expense.

Interest Income and Interest Expense

Interest income decreased $988,000, or 50%, to $972,000 for the year ended December 31, 2008 from $2.0 million for the year ended December 31,
2007. The decrease in interest income was attributable to lower interest rates.

Interest expense increased $22,000, or 13%, to $190,000
for the year ended December 31, 2008 from $168,000 for the year ended December 31, 2007. The increase in interest expense was attributable to a higher average debt balance.

Comparison of Years Ended December 31, 2007 and December 31, 2006

Collaborative Research and Development Revenue

Collaborative research and development revenues increased by $12.7
million, or 151%, to $21.1 million for the year ended December 31, 2007 from $8.4 million for the year ended December 31, 2006. This increase reflects an increase of approximately $11.5 million in revenue resulting from the accelerated
recognition of deferred revenue due to the termination of the McNeil collaboration and a $4.4 million increase in revenue due to the Pfizer collaboration, partially offset by a decrease in revenue of $3.2 million due to reduced research and
development fees and reduced cost-sharing reimbursement from the McNeil collaboration for the clinical development of senicapoc for the treatment of sickle cell disease.

Research and Development Expense

Research and development expense decreased by $966,000, or
3%, to $27.9 million for the year ended December 31, 2007 from $28.8 million for the year ended December 31, 2006. The decrease was due primarily to a decrease of $5.4 million in expense related to the development of senicapoc for the
treatment of sickle cell disease, a decrease of $142,000 in depreciation expense and a decrease of $106,000 related to relocation and recruiting expenses, offset by an increase of $2.0 million in expense related to the development of ICA-105665 and
our other lead compounds for epilepsy and neuropathic pain, an increase of $1.6 million in expense related to the write-off of the capitalized payments that had been made to CMCC in connection with the termination of the McNeil collaboration, an
increase of $372,000 related to license fee expense, an increase of $370,000 in patent expense, an increase of $205,000 in expense related to pharmacology studies and expense related to our inflammation and other pain studies and an increase in the
aggregate of $207,000 related to increases in equity compensation expense, travel and seminar expense and building rent and maintenance expense.

General and Administrative Expense

General and administrative expense increased by $33,000, or 1%, to $5.9 million
for the year ended December 31, 2007 from $5.9 million for the year ended December 31, 2006. The increase was due primarily to an increase of $313,000 in insurance expense, offset by a decrease of $287,000 in pre-commercialization expenses
for senicapoc for the treatment of sickle cell disease.

Interest Income and Interest Expense

Interest income increased $248,000, or 14%, to $2.0 million for the year ended December 31, 2007 from $1.7 million for the year ended
December 31, 2006. The increase in interest income was attributable to a higher average cash balance.



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Interest expense decreased $45,000, or 21%, to $168,000 for the year ended December 31, 2007 from
$213,000 for the year ended December 31, 2006. The decrease in interest expense was attributable to a lower average debt balance.

Liquidity and
Capital Resources

On February 8, 2005, we completed an IPO of 5,000,000 shares of our common stock at a price of $8.00 per share.
On March 9, 2005, the underwriters purchased an additional 100,000 shares of common stock pursuant to an over-allotment option. Our net proceeds from the IPO, including the over-allotment option and after deducting underwriters discounts
and commissions and offering expenses, were approximately $35.3 million.

On February 6, 2007, we completed a private placement of
15,423,640 shares of our common stock and warrants to purchase 5,398,256 million shares of our common stock at an exercise price of $1.45 per share. The private placement resulted in gross proceeds to us of approximately $22.0 million.

In June 2007, we received notification from McNeil of its termination of the collaboration agreement between us and McNeil for the
development of senicapoc for the treatment of sickle cell disease as of September 18, 2007. Consequently, we did not earn any revenue associated with this collaboration after September 18, 2007. We are bearing the full cost of development
of senicapoc for asthma.

In August 2007, we entered into a collaborative research and license agreement with Pfizer for the discovery,
development, manufacture and commercialization of compounds and products that modulate three specific sodium ion channels as new potential treatments for pain and related disorders. Pursuant to the collaboration arrangement, Pfizer paid us an
initial upfront license fee of $12.0 million. In addition to the upfront license fee, Pfizer is providing us with research and development funding over a two-year research period pursuant to the agreement. Pfizer is obligated to make payments to us
upon achievement of specified research, development, regulatory and commercialization milestones of up to $359.0 million for each drug candidate developed. We are also eligible to receive tiered royalties, against which Pfizer may credit any
commercialization milestones, based on specified percentages of net product sales.

In August 2007, in connection with the collaborative
research and license agreement with Pfizer, we also entered into a purchase agreement with Pfizer to sell to Pfizer up to $15.0 million of our common stock. In a first closing of the transaction on August 20, 2007, we sold 2,688,172 shares of
common stock to Pfizer at a price of $1.86 per share, which was the closing bid price of our common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the execution of the purchase agreement,
resulting in gross proceeds to us of approximately $5.0 million. In a subsequent closing of the transaction on February 13, 2008, we sold an additional 5,847,953 shares of common stock to Pfizer at a price of $1.71 per share, which was the
closing bid price of our common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the date of our exercise of our put option to sell the shares, resulting in gross proceeds to us of
approximately $10.0 million.

We have financed our operations since inception through the issuance of equity securities, payments received
under our collaboration agreements, proceeds from equipment debt financing and capital leases and interest income. From inception through December 31, 2008, we have raised net proceeds of $151.5 million from our IPO, private equity financings
and the exercise of stock options and warrants. From inception through December 31, 2008, we have also received $91.6 million in license fees and research and development funding, $8.9 million in proceeds from equipment debt financing and
capital leases and $12.3 million in interest income. To date, inflation has not had a material effect on our business.

Cash Flows

At December 31, 2008, our cash and cash equivalents were $34.2 million as compared to $43.5 million at December 31, 2007.
Our cash and cash equivalents are highly liquid investments with a maturity of one year or



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less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions and United
States government obligations.

Net cash used in operating activities was $18.0 million for the year ended December 31, 2008. This
reflects a net loss of approximately $14.8 million, a decrease of approximately $5.7 million in deferred revenue and a decrease of approximately $1.2 million in accounts payable and accrued expenses. These amounts were partially offset by $2.2
million of non-cash expenses related to stock-based compensation, $790,000 of non-cash expenses related to depreciation and amortization of property and equipment, an increase of $273,000 in other liabilities and a decrease of approximately $217,000
in prepaid expenses and other current and non-current assets.

Net cash used in investing activities in the year ended December 31,
2008 was $1.6 million and consisted of purchases of property and equipment.

Net cash provided by financing activities during the year
ended December 31, 2008 was $10.4 million and consisted primarily of $10.0 million in net proceeds from the issuance of equity securities and $1.0 million in proceeds from equipment debt financing, partially offset by $715,000 in principal
repayments related to our equipment debt financing.

Net cash used in operating activities was $7.6 million for the year ended
December 31, 2007. This reflects a net loss of approximately $10.9 million, a decrease of approximately $1.4 million in deferred revenue and a decrease of approximately $1.4 million in accounts payable and accrued expenses. These amounts were
partially offset by $2.6 million of non-cash expenses related to stock-based compensation, $1.6 million of non-cash expenses related to impairment of technology licenses, a decrease of approximately $1.0 million in prepaid expenses and other current
and non-current assets, $758,000 of non-cash expenses related to depreciation and amortization of property and equipment and $119,000 of non-cash expenses for amortization of technology licenses.

Net cash used in investing activities in the year ended December 31, 2007 was $543,000 and consisted primarily of purchases of property and
equipment.

Net cash provided by financing activities during the year ended December 31, 2007 was $26.5 million and consisted
primarily of $26.6 million in net proceeds from the issuance of equity securities, $370,000 in net proceeds from the exercise of stock options and warrants and $221,000 in proceeds from equipment debt financing, partially offset by $661,000 in
principal repayments related to our equipment debt financing.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Contractual Obligations

Our long-term commitments under operating leases consist of payments relating to our leases
of laboratory and office space as well as of office equipment. These leases expire over the period from 2009 to 2012. Our long-term commitments under equipment debt financing consist of payments relating to financing arrangements used primarily for
the purchase of laboratory equipment.

We are a party to a number of license agreements, primarily with academic institutions, under which
we license patents, patent applications and other intellectual property. The duration of these agreements varies from 10 years to the expiration date of the last-to-expire patent, and we have the option to renew some of these agreements at the end
of their terms. Our technology license agreements are generally terminable by us upon short notice. Under some conditions, we are permitted to grant sublicenses for which the licensors are entitled to receive a fee, a share of sublicense income or
both. Some of these licenses require annual technology license maintenance fees and periodic payments upon the achievement of specified development and regulatory



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milestones. We are obligated to pay specified royalties for licensed and sublicensed product sales, and in some cases minimum annual royalties. The table
below does not include contingent milestone amounts payable pursuant to these license agreements.

One of our license agreements is with
CMCC. Under this agreement, we are required to pay CMCC royalties on net product sales by us or our affiliates and a share of any sublicense income received by us. See BusinessIntellectual PropertyLicense Agreements above for
a description of the CMCC license agreement. We paid CMCC $1.3 million of the $10.0 million upfront payment that we received from McNeil in June 2004, and $650,000 of the $5.0 million milestone payment that we received from McNeil upon acceptance of
the protocol for our pivotal Phase III trial of senicapoc for the treatment of sickle cell disease by the FDA in February 2005. The amount of payments or obligations to CMCC were initially recorded on the balance sheet as long-lived assets under the
category technology licenses and related costs and were amortized to expense over the term of the agreement. Due to the termination of the McNeil collaboration agreement during 2007, we determined that these long-lived assets were no
longer recoverable. In accordance with Statement of Financial Accounting Standards, or SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144, we recorded an impairment loss of $1.6 million during the second
quarter of 2007, which is recorded as a component of research and development expense in the statement of operations for the year ended December 31, 2007.

The following table summarizes as of December 31, 2008 our contractual obligations for operating leases, equipment debt financing principal and interest payments, annual technology license maintenance fees and
other contractual obligations, including minimum annual royalties. This table should be read in conjunction with the notes accompanying our financial statements included elsewhere in this Annual Report on Form 10-K.



|                                           |  |                        |       |      |   |       |  |      |       |      |   |      |  |                   |     |  |   |     |  |   |    
|------------------------------------------ |  | ---------------------- | ----- | ---- | - | ----- |  | ---- | ----- | ---- | - | ---- |  | ----------------- | --- |  | - | --- |  | - | ---
|                                           |  | Payments Due By Period
|                                           |  | Total                  |       | 2009 |   | 2010  |  | 2011 |       | 2012 |   | 2013 |  | 2014andThereafter
|                                           |  | (in thousands)        
|Operating leases                           |  | $                      | 1,750 |      | $ | 528   |  | $    | 518   |      | $ | 498  |  | $                 | 199 |  | $ | 7   |  | $ |   
|Equipment debt financing                   |  |                        | 1,923 |      |   | 820   |  |      | 583   |      |   | 386  |  |                   | 134 |  |   |    |  |   |   
|Annual technology license maintenance fees |  |                        | 1,113 |      |   | 183   |  |      | 183   |      |   | 83   |  |                   | 63  |  |   | 294 |  |   | 307
|Other contractual obligations              |  |                        | 841   |      |   | 682   |  |      | 159   |      |   |     |  |                   |    |  |   |    |  |   |   
|                                           |  |                        |       |      |   |       |  |      |       |      |   |      |  |                   |     |  |   |     |  |   |    
|Total                                      |  | $                      | 5,627 |      | $ | 2,213 |  | $    | 1,443 |      | $ | 967  |  | $                 | 396 |  | $ | 301 |  | $ | 307
|                                           |  |                        |       |      |   |       |  |      |       |      |   |      |  |                   |     |  |   |     |  |   |    

Other contractual obligations as of December 31, 2008 consisted of $841,000 related to
commitments for contract research services for preclinical research and other commitments.

Funding Requirements

We expect to incur losses from operations for at least the next several years. In particular, as described above, we expect to incur increasing research
and development expense and general and administrative expense in the future. We believe our existing cash and cash equivalents will be sufficient to enable us to fund our operating expenses, obligations under our equipment debt financing and
capital expenditure requirements through the second quarter of 2010. Our future capital requirements will depend on many factors, including:



| |  |  | the scope and results of our research, preclinical and clinical development activities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals;
| | - |  | -------------------------------------------------------------------------



| |  |  | the cost of commercialization activities, including product marketing, sales and distribution;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and the
results of such litigation;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the extent to which we acquire or invest in businesses, products and technologies;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the success of our collaboration with Pfizer; and
| | - |  | -------------------------------------------------



| |  |  | our ability to establish and maintain additional collaborations.
| | - |  | ----------------------------------------------------------------

We do not anticipate that we will generate product revenue for at least the next several years. In the absence of additional funding, we expect our continuing operating losses to result in increases in our cash used
in operations over the next several quarters and years. To the extent our capital resources are insufficient to meet future capital requirements, we will need to finance future cash needs through public or private equity offerings, debt financings
or corporate collaboration and licensing arrangements. Except for collaboration revenue we expect to receive from Pfizer as funding for research and development activities through August 2009, we do not currently have any commitments for future
external funding.

Additional equity or debt financing, or corporate collaboration and licensing arrangements, may not be available on
acceptable terms, if at all, particularly in the current economic environment. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate our research and development programs, reduce our planned
commercialization efforts, or obtain funds through arrangements with collaborators or others that may require us to relinquish rights to certain drug candidates that we might otherwise seek to develop or commercialize independently. Additionally,
any future equity funding may dilute the ownership of our equity investors.

Recent Accounting Pronouncements

In December 2007, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 141 (revised 2007), Business Combinations,or SFAS
No. 141(R). SFAS No. 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. This
statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of
the business combination. SFAS No. 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning on or after December 15, 2008. We do not expect that
the adoption of SFAS No. 141(R) will have a material impact on our financial statements.

In June 2007, the FASB ratified the
consensus reached by the Emerging Issues Task Force, or EITF, on EITF Issue No. 07-3, Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities,or EITF 07-3. EITF 07-3 requires
companies to defer and capitalize prepaid, nonrefundable research and development payments to third parties and amortize them over the period that the research and development activities are performed or the services are provided, subject to an
assessment of recoverability. EITF 07-3 was effective for new contracts entered into during fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. The adoption of EITF 07-3, effective
January 1, 2008, did not have a material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities, or SFAS No. 159. SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value. Entities that elect the fair value
option will report unrealized gains and losses in earnings at each subsequent reporting date. The provisions of SFAS No. 159 were effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159, effective
January 1, 2008, did not have a material impact on our financial statements.

In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures
about fair value measurements. This pronouncement applies under the other accounting standards that require or permit fair value measurements.



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Accordingly, this statement does not require any new fair value measurements. SFAS No. 157 was effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years, for all financial assets and liabilities and for nonfinancial assets and liabilities that are recognized or disclosed at fair value at least annually. It is effective for fiscal
years beginning after November 15, 2008 for all other nonfinancial assets and liabilities. SFAS No. 157 is to be applied prospectively. The adoption of the requirements of SFAS No. 157 that were effective January 1, 2008 and
January 1, 2009 did not have a material impact on our financial statements.

ITEM 7AQUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk is currently confined to our cash and cash equivalents that have
maturities of less than one year. We currently do not hedge interest rate exposure. We have not used derivative financial instruments for speculation or trading purposes. Because of the short-term maturities of our cash and cash equivalents, we do
not believe that an increase in market rates would have any significant impact on the realized value of our investments.

We have operated
primarily in the United States and have received payments from our collaborators in United States dollars. Accordingly, we do not have any material exposure to foreign currency rate fluctuations.

ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See the index to our financial statements in Item 15 and the financial statements and notes that are filed as part of this Annual Report on Form 10-K
following the signature page and incorporated herein by this reference.

ITEM 9CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9ACONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2008. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the
evaluation of our disclosure controls and procedures as of December 31, 2008, our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable
assurance level.

Managements Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) or
15d-15(f) of the Exchange Act. Because of its inherent limitations,



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internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2008. In making this
assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal ControlIntegrated Framework. Based on this assessment, management concluded that, as of
December 31, 2008, our internal control over financial reporting is effective based on those criteria.

Ernst & Young LLP, an
independent registered public accounting firm, has issued an audit report on our internal control over financial reporting as of December 31, 2008 as set forth in their report which appears below.

Changes In Internal Control Over Financial Reporting

No change in our internal control over financial reporting occurred during the fiscal quarter ended December 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Icagen, Inc.

We have
audited Icagen, Inc.s internal control over financial reporting as of December 31, 2008, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Icagen, Inc.s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.

We conducted our audit in
accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Icagen, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on the COSO
criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheets of
Icagen, Inc. as of December 31, 2008 and 2007, and the related statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2008 of Icagen, Inc. and our report dated
March 5, 2009 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Raleigh, North Carolina

March 5, 2009



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ITEM 9BOTHER INFORMATION

None.

PART III

ITEM 10DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information required to be disclosed by this Item pursuant to Item 401 of Regulation S-K with respect to our executive officers is contained in
Part I of this Annual Report on Form 10-K under the caption, Executive Officers of the Registrant. The remaining information required to be disclosed by this Item pursuant to Item 401 of Regulation S-K is contained in the proxy
statement for our 2009 annual meeting of stockholders under the caption Information About our Directors, Officers and 5% Stockholders and is incorporated in this Annual Report on Form 10-K by reference.

The information required to be disclosed by this Item pursuant to Item 405 of Regulation S-K is contained in the proxy statement for our 2009 annual
meeting of stockholders under the caption Section 16(a) Beneficial Ownership Reporting Compliance and is incorporated in this Annual Report on Form 10-K by reference.

We have adopted a Code of Business Conduct and Ethics that applies to our principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions. The text of our Code of Business Conduct and Ethics is posted in the InvestorsCorporate Governance section of our website, www.icagen.com. We intend to disclose on our
website any amendments to, or waivers from, our Code of Business Conduct and Ethics that are required to be disclosed pursuant to the disclosure requirements of Item 5.05 of Form 8-K.

The information required to be disclosed by this Item pursuant to Item 407(c)(3), (d)(4) and (d)(5) of Regulation S-K is contained in the proxy
statement for our 2009 annual meeting of stockholders under the caption Corporate Governance and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 11EXECUTIVE COMPENSATION

The information required to be
disclosed by this Item pursuant to Items 402 and 407(e)(4) and (e)(5) of Regulation S-K is contained in the proxy statement for our 2009 annual meeting of stockholders under the captions Compensation of our Directors and Executive
Officers and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 12SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required to be disclosed by this Item pursuant
to Item 403 of Regulation S-K is contained in the proxy statement for our 2009 annual meeting of stockholders under the caption Information About our Directors, Officers and 5% StockholdersSecurity Ownership of Certain Beneficial
Owners and Management and is incorporated in this Annual Report on Form 10-K by reference.

The information required to be disclosed
by this Item pursuant to Item 201(d) of Regulation S-K is contained in the proxy statement for our 2009 annual meeting of stockholders under the caption Compensation of our Directors and Executive OfficersSecurities Authorized for
Issuance Under our Equity Compensation Plans and is incorporated in this Annual Report on Form 10-K by reference.



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ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required to be disclosed by this Item pursuant to Item 404 of Regulation S-K is contained in the proxy statement
for our 2009 annual meeting of stockholders under the captions Certain Relationships and Transactions with Related Persons and Compensation of our Directors and Executive Officers and is incorporated in this Annual Report on
Form 10-K by reference.

The information required to be disclosed by this Item pursuant to Item 407(a) of Regulation S-K is contained
in the proxy statement for our 2009 annual meeting of stockholders under the caption Corporate Governance and is incorporated in this Annual Report on Form 10-K by reference.

ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information
required to be disclosed by this Item pursuant to Item 9(e) of Schedule 14A is contained in the proxy statement for our 2009 annual meeting of stockholders under the caption Proposal 2Ratification of the Appointment of
Auditors and is incorporated in this Annual Report on Form 10-K by reference.

PART IV

ITEM 15EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) 1. Index to Financial Statements

The following financial statements of Icagen, Inc. are included in this report immediately following the signature page:



| |  |  | Report of Independent Registered Public Accounting Firm
| | - |  | -------------------------------------------------------



| |  |  | Balance Sheets at December 31, 2008 and 2007
| | - |  | --------------------------------------------



| |  |  | Statements of Operations for the years ended December 31, 2008, 2007 and 2006
| | - |  | -----------------------------------------------------------------------------



| |  |  | Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and 2006
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006
| | - |  | -----------------------------------------------------------------------------



| |  |  | Notes to the Financial Statements
| | - |  | ---------------------------------

2. Index to Financial Statement Schedules

Financial statement schedules are omitted because they are either not required
or the required information is provided in the consolidated financial statements or notes thereto.

3. Index to Exhibits

The exhibits filed herewith or incorporated by reference are set forth on the Exhibit Index attached hereto.



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.



ICAGEN, INC. (Registrant)By:

/s/    P. KAY WAGONER,
PH.D.P. Kay Wagoner, Ph.D. Chief Executive Officer and President


Date: March 16, 2009

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.



|                                                             |  |                                                                                                                                                     |  |               
|------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                                    |  | Title                                                                                                                                               |  | Date          
|                                                             |  |                                                                                                                                                    
|/s/    P. KAY WAGONER,
PH.D. P. Kay Wagoner, Ph.D.           |  | Director, Chief Executive Officer and President (Principal Executive Officer)                                                                       |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    RICHARD D. KATZ,
M.D. Richard D. Katz, M.D.           |  | Senior Vice President, Finance and Corporate Development and Chief Financial Officer (Principal Financial Officer and Principal Accounting
Officer) |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    ANDRÉ L. LAMOTTE,
SC.D. André L. Lamotte, Sc.D.       |  | Director                                                                                                                                            |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    ANTHONY B. EVNIN,
PH.D. Anthony B. Evnin, Ph.D.       |  | Director                                                                                                                                            |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    CHARLES A. SANDERS,
M.D. Charles A. Sanders, M.D.     |  | Director                                                                                                                                            |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    DENNIS B. GILLINGS,
PH.D. Dennis B. Gillings, Ph.D.   |  | Director                                                                                                                                            |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    RICHARD G. MORRISON,
PH.D. Richard G. Morrison, Ph.D. |  | Director                                                                                                                                            |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    MARTIN A.
SIMONETTI Martin A. Simonetti               |  | Director                                                                                                                                            |  | March 16, 2009
|                                                             |  |                                                                                                                                                    
|/s/    ADEOYE Y. OLUKOTUN,
M.D. Adeoye Y. Olukotun, M.D.     |  | Director                                                                                                                                            |  | March 16, 2009



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ICAGEN, INC.

INDEX TO FINANCIAL STATEMENTS



|                                                                                        |  |     
|--------------------------------------------------------------------------------------- |  | ----
|                                                                                        |  | Page
|Report of Independent Registered Public Accounting Firm                                 |  | 67  
|Balance Sheets at December 31, 2008 and 2007                                            |  | 68  
|Statements of Operations for the years ended December 31, 2008, 2007 and 2006           |  | 69  
|Statements of Stockholders Equity for the years ended December 31, 2008, 2007 and
2006 |  | 70  
|Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006           |  | 71  
|Notes to Financial Statements                                                           |  | 72  



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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of Icagen, Inc.

We have
audited the accompanying balance sheets of Icagen, Inc. as of December 31, 2008 and 2007, and the related statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31,
2008. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Icagen, Inc. at
December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Icagen, Inc.s internal control over
financial reporting as of December 31, 2008, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2009 expressed
an unqualified opinion thereon.

As discussed in Note 1 to the financial statements, effective January 1, 2006, the Company adopted the provisions of
Statement of Financial Standards No. 123(R), Share-Based Payment, to account for stock-based compensation.

/s/
Ernst & Young LLP

Raleigh, North Carolina

March 5, 2009



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Icagen, Inc.

Balance Sheets

(in thousands, except share and per share data)



|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---- | - | -------- | -
|                                                                                                                                                                                                 |  | December 31, |         
|                                                                                                                                                                                                 |  | 2008         |          |   | 2007 |  
|Assets                                                                                                                                                                                           |  |              |          |   |      |   |          |  
|Current assets:                                                                                                                                                                                  |  |              |          |   |      |   |          |  
|Cash and cash equivalents                                                                                                                                                                        |  | $            | 34,215   |   |      | $ | 43,513   |  
|Accounts receivable                                                                                                                                                                              |  |              | 14       |   |      |   | 53       |  
|Prepaid expenses and other                                                                                                                                                                       |  |              | 568      |   |      |   | 774      |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Total current assets                                                                                                                                                                             |  |              | 34,797   |   |      |   | 44,340   |  
|Property and equipment, net                                                                                                                                                                      |  |              | 2,586    |   |      |   | 1,736    |  
|Technology licenses and related costs, net of accumulated amortization of $383 and $393 as of December 31, 2008 and 2007, respectively                                                           |  |              | 392      |   |      |   | 465      |  
|Deposits and other                                                                                                                                                                               |  |              | 105      |   |      |   | 116      |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Total assets                                                                                                                                                                                     |  | $            | 37,880   |   |      | $ | 46,657   |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Liabilities and stockholders equity                                                                                                                                                             |  |              |          |   |      |   |          |  
|Current liabilities:                                                                                                                                                                             |  |              |          |   |      |   |          |  
|Accounts payable                                                                                                                                                                                 |  | $            | 1,436    |   |      | $ | 2,633    |  
|Accrued expenses                                                                                                                                                                                 |  |              | 892      |   |      |   | 866      |  
|Current portion of deferred revenue                                                                                                                                                              |  |              | 5,378    |   |      |   | 7,375    |  
|Current portion of equipment debt financing                                                                                                                                                      |  |              | 662      |   |      |   | 570      |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Total current liabilities                                                                                                                                                                        |  |              | 8,368    |   |      |   | 11,444   |  
|Deferred revenue, less current portion                                                                                                                                                           |  |              | 56       |   |      |   | 3,710    |  
|Equipment debt financing, less current portion                                                                                                                                                   |  |              | 971      |   |      |   | 757      |  
|Other non-current liabilities                                                                                                                                                                    |  |              | 373      |   |      |   | 62       |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Total liabilities                                                                                                                                                                                |  |              | 9,768    |   |      |   | 15,973   |  
|Commitments and contingencies                                                                                                                                                                    |  |              |          |   |      |   |          |  
|Stockholders equity:                                                                                                                                                                            |  |              |          |   |      |   |          |  
|Common stock, $0.001 par value; 120,000,000 shares authorized at December 31, 2008 and 2007; 46,906,589 and 40,870,619 shares issued and
outstanding at December 31, 2008 and 2007, respectively |  |              | 47       |   |      |   | 41       |  
|Additional paid-in capital                                                                                                                                                                       |  |              | 154,505  |   |      |   | 142,268  |  
|Accumulated deficit                                                                                                                                                                              |  |              | (126,440 | ) |      |   | (111,625 | )
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Total stockholders equity                                                                                                                                                                       |  |              | 28,112   |   |      |   | 30,684   |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                       |  | $            | 37,880   |   |      | $ | 46,657   |  
|                                                                                                                                                                                                 |  |              |          |   |      |   |          |  

See accompanying notes.



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Icagen, Inc.

Statements of Operations

(in thousands, except share and per share data)



|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------------------ |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                             |  | Years ended December 31, |           
|                                                             |  | 2008                     |            |   | 2007 |   |            | 2006 | 
|Collaborative research and development revenues:             |  |                          |            |   |      |   |            |      |  |   |            |  
|Research and development fees                                |  | $                        | 11,711     |   |      | $ | 17,383     |      |  | $ | 1,953      |  
|Reimbursed research and development costs                    |  |                          | 580        |   |      |   | 3,734      |      |  |   | 6,467      |  
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Total collaborative research and development revenues        |  |                          | 12,291     |   |      |   | 21,117     |      |  |   | 8,420      |  
|Operating expenses:                                          |  |                          |            |   |      |   |            |      |  |   |            |  
|Research and development                                     |  |                          | 22,140     |   |      |   | 27,854     |      |  |   | 28,820     |  
|General and administrative                                   |  |                          | 5,748      |   |      |   | 5,940      |      |  |   | 5,907      |  
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Total operating expenses                                     |  |                          | 27,888     |   |      |   | 33,794     |      |  |   | 34,727     |  
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Loss from operations                                         |  |                          | (15,597    | ) |      |   | (12,677    | )    |  |   | (26,307    | )
|Other income (expense):                                      |  |                          |            |   |      |   |            |      |  |   |            |  
|Interest income                                              |  |                          | 972        |   |      |   | 1,960      |      |  |   | 1,712      |  
|Interest expense                                             |  |                          | (190       | ) |      |   | (168       | )    |  |   | (213       | )
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Total other income, net                                      |  |                          | 782        |   |      |   | 1,792      |      |  |   | 1,499      |  
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Loss before income taxes                                     |  |                          | (14,815    | ) |      |   | (10,885    | )    |  |   | (24,808    | )
|Income taxes                                                 |  |                          |           |   |      |   |           |      |  |   |           |  
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Net loss                                                     |  | $                        | (14,815    | ) |      | $ | (10,885    | )    |  | $ | (24,808    | )
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Basic and diluted net loss per share                         |  | $                        | (0.32      | ) |      | $ | (0.29      | )    |  | $ | (1.12      | )
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  
|Weighted average common shares outstandingbasic and diluted |  |                          | 46,167,902 |   |      |   | 37,432,144 |      |  |   | 22,219,662 |  
|                                                             |  |                          |            |   |      |   |            |      |  |   |            |  



See accompanying notes.



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Icagen, Inc.

Statements of Stockholders Equity

(in thousands, except share and per
share data)



|                                                                                           |  |                 |  |                          |    |  |                      |         |   |                    |   |        |       |  |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | --------------- |  | ------------------------ | -- |  | -------------------- | ------- | - | ------------------ | - | ------ | ----- |  | - | -------- | - |  | - | ------- | -
|                                                                                           |  | Common Stock    |  | AdditionalPaid-InCapital |    |  | DeferredCompensation |         |   | AccumulatedDeficit |   |        | Total | 
|                                                                                           |  | Number ofShares |  | Amount                   |    |  |                      |        
|Balance at December 31, 2005                                                               |  | 21,991,491      |  | $                        | 22 |  | $                    | 112,883 |   |                    | $ | (2,981 | )     |  | $ | (75,932  | ) |  | $ | 33,992  |  
|Elimination of deferred compensation related to the adoption of SFAS 123(R)                |  |                |  |                          |   |  |                      | (2,981  | ) |                    |   | 2,981  |       |  |   |         |   |  |   |        |  
|Exercise of options for 320,775 common shares                                              |  | 320,775         |  |                          |   |  |                      | 335     |   |                    |   |       |       |  |   |         |   |  |   | 335     |  
|Stock-based compensation expense                                                           |  |                |  |                          |   |  |                      | 2,528   |   |                    |   |       |       |  |   |         |   |  |   | 2,528   |  
|Net loss                                                                                   |  |                |  |                          |   |  |                      |        |   |                    |   |       |       |  |   | (24,808  | ) |  |   | (24,808 | )
|                                                                                           |  |                 |  |                          |    |  |                      |         |   |                    |   |        |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2006                                                               |  | 22,312,266      |  |                          | 22 |  |                      | 112,765 |   |                    |   |       |       |  |   | (100,740 | ) |  |   | 12,047  |  
|Issuance of common stock and warrants in the 2007 private placement, net of offering costs |  | 15,423,640      |  |                          | 16 |  |                      | 21,653  |   |                    |   |       |       |  |   |         |   |  |   | 21,669  |  
|Issuance of common stock to Pfizer, net of issuance costs                                  |  | 2,688,172       |  |                          | 3  |  |                      | 4,906   |   |                    |   |       |       |  |   |         |   |  |   | 4,909   |  
|Issuance of restricted stock                                                               |  | 48,629          |  |                          |   |  |                      | (6      | ) |                    |   |       |       |  |   |         |   |  |   | (6      | )
|Exercise of options and warrants for 397,912 common shares                                 |  | 397,912         |  |                          |   |  |                      | 370     |   |                    |   |       |       |  |   |         |   |  |   | 370     |  
|Stock-based compensation expense                                                           |  |                |  |                          |   |  |                      | 2,580   |   |                    |   |       |       |  |   |         |   |  |   | 2,580   |  
|Net loss                                                                                   |  |                |  |                          |   |  |                      |        |   |                    |   |       |       |  |   | (10,885  | ) |  |   | (10,885 | )
|                                                                                           |  |                 |  |                          |    |  |                      |         |   |                    |   |        |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2007                                                               |  | 40,870,619      |  |                          | 41 |  |                      | 142,268 |   |                    |   |       |       |  |   | (111,625 | ) |  |   | 30,684  |  
|Issuance of common stock to Pfizer, net of issuance costs                                  |  | 5,847,953       |  |                          | 6  |  |                      | 9,988   |   |                    |   |       |       |  |   |         |   |  |   | 9,994   |  
|Issuance of restricted stock                                                               |  | 100,802         |  |                          |   |  |                      | (38     | ) |                    |   |       |       |  |   |         |   |  |   | (38     | )
|Exercise of options and warrants for 87,215 common shares                                  |  | 87,215          |  |                          |   |  |                      | 59      |   |                    |   |       |       |  |   |         |   |  |   | 59      |  
|Stock-based compensation expense                                                           |  |                |  |                          |   |  |                      | 2,228   |   |                    |   |       |       |  |   |         |   |  |   | 2,228   |  
|Net loss                                                                                   |  |                |  |                          |   |  |                      |        |   |                    |   |       |       |  |   | (14,815  | ) |  |   | (14,815 | )
|                                                                                           |  |                 |  |                          |    |  |                      |         |   |                    |   |        |       |  |   |          |   |  |   |         |  
|Balance at December 31, 2008                                                               |  | 46,906,589      |  | $                        | 47 |  | $                    | 154,505 |   |                    | $ |       |       |  | $ | (126,440 | ) |  | $ | 28,112  |  
|                                                                                           |  |                 |  |                          |    |  |                      |         |   |                    |   |        |       |  |   |          |   |  |   |         |  

See accompanying notes.



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Icagen, Inc.

Statements of Cash Flows

(in thousands)



|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                             |  | Years ended December 31, |        
|                                                                             |  | 2008                     |         |   | 2007 |   |         | 2006 | 
|Operating activities                                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Net loss                                                                     |  | $                        | (14,815 | ) |      | $ | (10,885 | )    |  | $ | (24,808 | )
|Adjustments to reconcile net loss to net cash used in operating activities:  |  |                          |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization of property and equipment                      |  |                          | 790     |   |      |   | 758     |      |  |   | 901     |  
|Amortization of technology licenses and related costs                        |  |                          | 47      |   |      |   | 119     |      |  |   | 185     |  
|Stock-based compensation                                                     |  |                          | 2,228   |   |      |   | 2,580   |      |  |   | 2,528   |  
|Loss on the disposal of equipment                                            |  |                          |        |   |      |   |        |      |  |   | 63      |  
|Write-off of technology licenses and related costs                           |  |                          | 26      |   |      |   | 1,599   |      |  |   |        |  
|Changes in operating assets and liabilities:                                 |  |                          |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                          |  |                          | 39      |   |      |   | (44     | )    |  |   | 292     |  
|Prepaid expenses and other current and non-current assets                    |  |                          | 217     |   |      |   | 1,036   |      |  |   | (95     | )
|Accounts payable and accrued expenses                                        |  |                          | (1,171  | ) |      |   | (1,378  | )    |  |   | (79     | )
|Other liabilities                                                            |  |                          | 273     |   |      |   | 56      |      |  |   |        |  
|Deferred revenue                                                             |  |                          | (5,651  | ) |      |   | (1,424  | )    |  |   | (1,087  | )
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in operating activities                                        |  |                          | (18,017 | ) |      |   | (7,583  | )    |  |   | (22,100 | )
|                                                                             |  |                          |        
|Investing activities                                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Acquisition of property and equipment                                        |  |                          | (1,640  | ) |      |   | (545    | )    |  |   | (400    | )
|Proceeds from the sale of equipment                                          |  |                          |        |   |      |   | 2       |      |  |   |        |  
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                        |  |                          | (1,640  | ) |      |   | (543    | )    |  |   | (400    | )
|                                                                             |  |                          |        
|Financing activities                                                         |  |                          |         |   |      |   |         |      |  |   |         |  
|Proceeds from sale of common stock and warrants, net of stock issuance costs |  |                          | 9,994   |   |      |   | 26,578  |      |  |   |        |  
|Proceeds from equipment debt financing                                       |  |                          | 1,021   |   |      |   | 221     |      |  |   | 271     |  
|Payments on equipment debt financing                                         |  |                          | (715    | ) |      |   | (661    | )    |  |   | (738    | )
|Proceeds from exercise of warrants and stock options                         |  |                          | 59      |   |      |   | 370     |      |  |   | 335     |  
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by (used in) financing activities                          |  |                          | 10,359  |   |      |   | 26,508  |      |  |   | (132    | )
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|(Decrease) increase in cash and cash equivalents                             |  |                          | (9,298  | ) |      |   | 18,382  |      |  |   | (22,632 | )
|Cash and cash equivalents at beginning of year                               |  |                          | 43,513  |   |      |   | 25,131  |      |  |   | 47,763  |  
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                     |  | $                        | 34,215  |   |      | $ | 43,513  |      |  | $ | 25,131  |  
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosure of cash flow information                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash paid for interest                                                       |  | $                        | 184     |   |      | $ | 162     |      |  | $ | 196     |  
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  
|Non-cash items                                                               |  |                          |         |   |      |   |         |      |  |   |         |  
|Equipment acquired through debt financing                                    |  |                          |        |   |      | $ | 385     |      |  |   |        |  
|                                                                             |  |                          |         |   |      |   |         |      |  |   |         |  

See accompanying notes.



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Icagen, Inc.

Notes to Financial Statements

December 31, 2008

1. Company Description and Significant Accounting Policies

Company Description

Icagen, Inc. (Icagen or the Company) was incorporated in Delaware in November
1992. Icagen is a biopharmaceutical company focused on the discovery, development and commercialization of novel orally-administered small molecule drugs that modulate ion channel targets. The Company has identified multiple drug candidates that
modulate ion channels. These drug candidates were developed internally or through collaborative research programs. The Company is conducting research and development activities in a number of disease areas, including epilepsy, asthma, pain and
inflammation.

Initial Public Offering

On February 8, 2005, the Company completed an initial public offering (IPO) of 5,000,000 shares of its common stock at a price of $8.00 per share. On March 9, 2005, the underwriters purchased an additional 100,000
shares of common stock pursuant to an over-allotment option. The Companys net proceeds from the IPO, including the over-allotment option and after deducting underwriters discounts and commissions and offering expenses, were approximately
$35.3 million.

All outstanding shares of the Companys Series A, Series B, Series C, Series D, Series E, Series E-1, Series F,
Series G, Series G-1 and Series H convertible preferred stock (Preferred Stock) automatically converted into shares of common stock upon completion of the IPO. Series A, Series B, Series C, Series D, Series E, Series F and Series H
convertible preferred stock converted at a ratio of one common share per preferred share. Series E-1 and Series G convertible preferred stock converted at a ratio of 1.13809 common shares per preferred share and Series G-1 convertible preferred
stock (Series G-1) converted at a ratio of 1.875 common shares per preferred share.

Private Placement

On February 6, 2007, the Company completed a private placement in which the Company issued 15,423,640 shares of common stock, together with
warrants to purchase an aggregate of 5,398,256 additional shares of common stock with an exercise price of $1.45 per share (the Securities) for a total price of $1.42375 per Security, resulting in gross proceeds of approximately $22.0
million. Pursuant to the terms of the securities purchase agreement signed in connection with the private placement, the Company filed a registration statement with the Securities and Exchange Commission (SEC) to register for resale the
shares of common stock sold in the private placement and the shares of common stock issuable upon the exercise of the warrants. This registration statement became effective May 1, 2007.

In August 2007, in connection with the collaborative research and license agreement with Pfizer Inc (Pfizer), the Company also entered into a
purchase agreement with Pfizer to sell to Pfizer up to $15.0 million of the Companys common stock. In a first closing of the transaction on August 20, 2007, the Company sold 2,688,172 shares of common stock to Pfizer at a price of $1.86
per share, which was the closing bid price of the Companys common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the execution of the purchase agreement, resulting in gross proceeds to
the Company of approximately $5.0 million. In the second closing of the transaction on February 13, 2008, the Company sold 5,847,953 shares of common stock to Pfizer at a price of $1.71 per share, which was the closing bid price of the
Companys common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the date of the Companys exercise of its put option to sell the shares, resulting in gross proceeds to the Company
of approximately $10.0 million.



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Icagen, Inc.

Notes to Financial Statements(Continued)



Revenue Recognition

The Companys collaboration agreements contain multiple elements, including non-refundable upfront license fees, payments for reimbursement of research and development costs, payments for ongoing research and
development, payments associated with achieving development, regulatory and commercialization milestones and royalties based on specified percentages of net product sales, if any. The Company applies the revenue recognition criteria outlined in
Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition (SAB 104) and Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables (EITF
00-21). In applying these revenue recognition criteria, the Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there
are determinable fair values and whether there is a unique earnings process associated with each element of a contract.

Cash received in
advance of revenue recognition is recorded as deferred revenue and recognized as revenue as services are performed over the applicable term of the agreement. When the period of deferral cannot be specifically identified from the agreement, the
deferral period is estimated based upon other factors contained within the agreement. The Company continually reviews these estimates, which could result in a change in the deferral period and which might impact the timing and the amount of revenue
recognized.

When a payment is specifically tied to a separate earnings process, revenues are recognized when the specific performance
obligation associated with the payment is completed. Performance obligations typically consist of significant milestones in the development life cycle of the related program, such as the initiation or completion of clinical trials, filing for
approval with regulatory agencies, receipt of approvals by regulatory agencies and the achievement of commercial milestones. Revenues from milestone payments may be considered separable from funding for research and development services because of
the uncertainty surrounding the achievement of milestones for products in early stages of development. Accordingly, these payments could be recognized as revenue if and when the performance milestone is achieved if they represent a separate earnings
process as described in EITF 00-21.

In connection with the Companys research and development collaborations, revenues are
recognized from non-refundable upfront license fees, which are not believed to be specifically tied to a separate earnings process, ratably over the term of the agreement. Research and development services provided under the Companys
collaboration agreement with Pfizer are on a fixed fee basis. Revenues associated with long-term, fixed fee contracts are recognized based on the performance requirements of the agreements and as services are performed. The Companys
collaboration agreement with Pfizer allows for research term extensions upon mutually agreeable terms. Revenues from contract extensions are recognized as the extended services are performed.

In connection with the Companys research and development collaborations with Pfizer and the McNeil Pediatrics Division (formerly McNeil
Consumer & Specialty Division) of McNeil-PPC, Inc., a subsidiary of Johnson & Johnson (McNeil), revenues are recognized from non-refundable upfront license fees, which the Company does not believe are specifically tied
to a separate earnings process, ratably over the term of the agreement. With respect to the Companys collaboration with Pfizer, this period is the initial term of the research phase of the collaboration. With respect to the Companys
collaboration with McNeil, this period was the estimated service period of the agreement, which initially was estimated to conclude on the expiration of the last-to-expire patent covered by the agreement in 2019, but was revised to be through the
termination of the agreement as of September 18, 2007 (See Note 2).

Revenues derived from reimbursement of direct out-of-pocket
expenses for research and development costs associated with the Companys collaboration with Pfizer and with the Companys cost sharing arrangement with McNeil are recorded in compliance with EITF Issue 99-19, Reporting Revenue Gross as
a Principal Versus Net



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Icagen, Inc.

Notes to Financial Statements(Continued)



as an Agent (EITF 99-19), and EITF Issue 01-14, Income Statement Characterization of Reimbursements Received for
Out-of-Pocket Expenses Incurred (EITF 01-14). According to the criteria established by these EITF issues, in transactions where the Company acts as a principal, with discretion to choose suppliers, bears credit risk and
performs part of the services required in the transaction, the Company records revenue for the gross amount of the reimbursement. The costs associated with these reimbursements are reflected as a component of research and development expense in the
statements of operations.

None of the payments that the Company has received from collaborators to date, whether deferred or recognized as
revenue, is refundable even if the related program is not successful.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The carrying values of cash and cash equivalents, accounts receivable and accounts
payable approximate fair values at December 31, 2008 and 2007 based on the liquidity of these financial instruments or their short term nature. The carrying value of equipment debt financing approximates fair values at December 31, 2008
and 2007 based on the market interest rates available to the Company for debt of similar risk and maturities.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash and cash
equivalents consist of the following as of (in thousands):



|                                                            |  |              |        |      |   |       
|----------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                                            |  | December 31,
|                                                            |  | 2008         |        | 2007
|Cash                                                        |  | $            | 172    |      | $ | 989   
|Money market funds and United States government obligations |  |              | 34,043 |      |   | 42,524
|                                                            |  |              |        |      |   |       
|Total                                                       |  | $            | 34,215 |      | $ | 43,513
|                                                            |  |              |        |      |   |       

Property and Equipment

Property and equipment are stated at cost. Depreciation of equipment and furniture and fixtures is computed using the straight-line method over the estimated useful lives (ranging from 3 to 5 years) of the assets
beginning when the assets are placed in service. Leasehold improvements are depreciated over the lesser of the estimated useful lives of the assets or the remaining lease terms. Depreciation and amortization recorded on property and equipment
totaled $790,000, $758,000 and $901,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Technology Licenses and Related Costs

Technology licenses are capitalized and amortized over the lesser of the patent lives or terms of the related agreements (ranging from
10 to 20 years) using the straight-line method. The Company assesses the recoverability of its capitalized technology licenses and related costs by comparing the book value of the asset to the future net undiscounted cash flows expected to be
generated by the asset.



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Icagen, Inc.

Notes to Financial Statements(Continued)



Pursuant to its license with the Childrens Medical Center Corporation (CMCC), the
Company paid approximately $2.0 million to CMCC based on the upfront and milestone payments received from McNeil. The Company recorded this payment on its balance sheet as a long-lived asset under the category technology licenses and related
costs. Due to the termination of the collaboration agreement with McNeil, the Company determined that this long-lived asset was no longer recoverable. In accordance with Statement of Financial Accounting Standards (SFAS)
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), the Company recorded an impairment loss of $1.6 million during the second quarter of 2007. These impairment losses are reflected as a
component of research and development expense in the statements of operations.

During the years ended December 31, 2008, 2007 and
2006, the Company recorded amortization of technology licenses and related costs of $47,000, $119,000 and $185,000, respectively. The weighted average remaining amortization period of all technology licenses is 18.5 years. The Company estimates that
future amortization of its technology licenses and related costs as of December 31, 2008 will be approximately $40,000 for each of the three years in the period ended December 31, 2011, approximately $38,000 in the year ended
December 31, 2012, approximately $37,000 in the year ended December 31, 2013 and an aggregate of $195,000 thereafter.

During
2008 and 2007, the Company identified certain technology licenses that no longer met its strategic objectives, which were determined to be unrecoverable and for which the Company had no alternative future uses. Accordingly, the Company recorded
impairment losses for such agreements at the time of determination totaling $26,000 and $37,000, respectively for the years ended December 31, 2008 and 2007.

Deposits and Other Assets

Deposits and other assets consist of utility and rent deposits, prepayments required under the
terms of clinical trial contracts for which the remaining term of the clinical trial exceeds one year and restricted cash.

Long-Lived Assets

Long-lived assets are reviewed for impairment when events or changes in circumstances indicate the book value of the assets may not be
recoverable. In accordance with SFAS 144, recoverability is measured by comparing the carrying value of the asset to the future net undiscounted cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the
impairment to be recognized is calculated using the amount by which the book value of the asset exceeds the projected discounted future net cash flows arising from the asset.

Accrued Expenses

The Company records all expenses in the period incurred. In addition to recording
expenses for invoices received, the Company estimates the cost of services provided by third parties or materials purchased for which no invoices have been received as of each balance sheet date. Accrued expenses as of December 31, 2008 and
2007 consist primarily of development and clinical trial expenses payable to contract research organizations in connection with the Companys research and development programs.

Significant Concentrations and Credit Risk

Financial instruments that potentially subject the
Company to a concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents in accounts with three major financial institutions in the United States. Substantially all
deposits in these institutions



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Icagen, Inc.

Notes to Financial Statements(Continued)



exceeded the amount of FDIC insurance provided on such deposits at December 31, 2008 and 2007. Concentrations of credit risk with respect to accounts
receivable, which are unsecured, are limited due to the strong financial position of the Companys collaborator.

The Company operates
in a single industry and is engaged in discovering drugs that may lead to treatments for disabling and life-threatening diseases. Collaborative research revenues from the Companys collaboration partners representing 10% or more of total
collaborative research revenues are as follows:



|       |  |                          |   |  |      |   |  |      |  
|------ |  | ------------------------ | - |  | ---- | - |  | ---- | -
|       |  | Years ended December 31, |  
|       |  | 2008                     |   |  | 2007 |   |  | 2006 |  
|Pfizer |  | 100                      | % |  | 21   | % |  |     |  
|McNeil |  |                         |   |  | 79   | % |  | 100  | %

Research and Development Costs

The Company expenses research and development costs as incurred. Research and development expense includes, among other items, clinical trial costs. The
Company accounts for its clinical trial costs by estimating the total cost to treat a patient in each clinical trial and recognizing this cost, based on a variety of factors, beginning with the preparation for the clinical trial. This estimated cost
includes payments to contract research organizations for trial site and patient-related costs, including laboratory costs related to the conduct of the trial and other costs. The cost per patient varies based on the type of clinical trial, the site
of the clinical trial and the length of the treatment period for each patient.

Income Taxes

The Company accounts for income taxes using the liability method in accordance with the provisions of SFAS No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of the Companys assets and liabilities and are estimated using enacted tax rates and laws that
will be in effect when the differences are expected to reverse. A valuation allowance is provided when the Company determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. As of
January 1, 2007, the Company accounts for uncertain tax positions in accordance with FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109.

During the second quarter of 2008, the Internal Revenue Service, (the IRS), notified the Company that it had been selected for a routine
audit of the Companys 2005 U.S. Federal income tax return. The audit was completed during the fourth quarter of 2008 and there were no proposed adjustments that had a material effect upon the Companys financial position or results of
operations.

Comprehensive Loss

The
Company has adopted the provisions of SFAS No. 130, Comprehensive Income, which establishes standards for the reporting and display of comprehensive income and its components for general purpose financial statements. For all periods
presented, there were no differences between net loss and comprehensive loss.

Net Loss Per Share Attributable to Common Stockholders

The Company computes net loss per share attributable to common stockholders in accordance with SFAS No. 128, Earnings Per Share (SFAS
128). Under the provisions of SFAS 128, basic net loss per share



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Icagen, Inc.

Notes to Financial Statements(Continued)



attributable to common stockholders (Basic EPS) is computed by dividing net loss attributable to common stockholders by the weighted average
number of common shares outstanding. Diluted net loss per share attributable to common stockholders (Diluted EPS) is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares and
dilutive common share equivalents then outstanding. Common share equivalents consist of the incremental common shares issuable upon the conversion of preferred stock, shares issuable upon the exercise of stock options, shares issuable upon the
vesting of restricted stock units and shares issuable upon the exercise of warrants. For the periods presented, Diluted EPS is identical to Basic EPS because common share equivalents, including all of the Companys Preferred Stock, outstanding
stock options, outstanding restricted stock units and outstanding warrants, are excluded from the calculation, as their effect is antidilutive. Had the Company been in a net income position, these securities may have been included in the
calculation. These potentially dilutive securities consist of the following on a weighted average basis:



|                                 |  |                          |  |            |  |          
|-------------------------------- |  | ------------------------ |  | ---------- |  | ---------
|                                 |  | Years ended December 31,
|                                 |  | 2008                     |  | 2007       |  | 2006     
|Outstanding common stock options |  | 5,636,519                |  | 5,039,193  |  | 4,039,258
|Restricted stock units           |  | 586,193                  |  | 300,459    |  | 180,480  
|Outstanding warrants             |  | 5,218,920                |  | 4,830,422  |  |         
|                                 |  |                          |  |            |  |          
|Total                            |  | 11,441,632               |  | 10,170,074 |  | 4,219,738
|                                 |  |                          |  |            |  |          

Stock-Based Compensation

Prior to January 1, 2006, the Company accounted for stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25),
and related Interpretations, as permitted by Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation (Statement 123). Under APB 25, when the exercise price of the
Companys stock options equals or exceeds the fair market value of the underlying common stock on the date of grant, no compensation expense is recognized. For stock options granted with an exercise price less than the fair value of the
underlying common stock on the date of grant, the Company recorded deferred compensation for the difference between the exercise price and the deemed fair value of the Companys common stock on such date. Deferred compensation was amortized
through December 31, 2005 on a straight-line basis over the related option vesting periods, which range from 12 to 48 months. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement
No. 123 (revised 2004), Share-Based Payment (Statement 123(R)), using the modified prospective transition method. Under this method, compensation cost recognized includes compensation costs for all share-based payments
granted prior to, but not yet vested as of December 31, 2005, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and compensation costs for all share-based payments granted subsequent to
December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

Segment Information

SFAS No. 131, Disclosure About Segments of an Enterprise and Related
Information, establishes standards for the reporting of information about operating segments. Since its inception, the Company has conducted its operations in one operating segment.



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Icagen, Inc.

Notes to Financial Statements(Continued)



Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS No. 141(R)). SFAS No. 141(R) establishes principles and requirements for how an
acquirer in a business combination recognizes and measures the assets acquired, liabilities assumed and any noncontrolling interest in the acquiree. This statement also provides guidance for recognizing and measuring the goodwill acquired in the
business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the first fiscal year beginning on or after December 15, 2008. The Company does not expect that the adoption of SFAS No. 141(R) will have a material impact on the
Companys financial statements.

In June 2007, the FASB ratified the consensus reached by the EITF on EITF Issue No. 07-3,
Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities (EITF 07-3). EITF 07-3 requires companies to defer and capitalize prepaid, nonrefundable research and development
payments to third parties and amortize them over the period that the research and development activities are performed or the services are provided, subject to an assessment of recoverability. EITF 07-3 was effective for new contracts entered into
during fiscal years beginning after December 15, 2007, including interim periods within those fiscal years. The adoption of EITF 07-3, effective January 1, 2008, did not have a material impact on the Companys financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159 permits an entity to measure certain financial assets and financial liabilities at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each
subsequent reporting date. The provisions of SFAS No. 159 were effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159, effective January 1, 2008, did not have a material impact on the
Companys financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with accounting principles generally accepted in the United States, and expands disclosures about fair value measurements. This
pronouncement applies under the other accounting standards that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurement. SFAS No. 157 was effective for fiscal years beginning after
November 15, 2007 and interim periods within those fiscal years, for all financial assets and liabilities and for nonfinancial assets and liabilities that are recognized or disclosed at fair value at least annually. It is effective for fiscal
years beginning after November 15, 2008 for all other nonfinancial assets and liabilities. SFAS No. 157 is to be applied prospectively. The adoption of the requirements of SFAS No. 157 that were effective January 1, 2008 and
January 1, 2009 did not have a material impact on the Companys financial statements.

2. Collaborations

The Company has entered into research collaboration agreements to extend the Companys ion channel drug discovery technology into additional
therapeutic areas and to benefit from the research, development and commercialization capabilities of the Companys collaborators, as well as to augment the Companys financial resources. A non-refundable upfront license fee was paid by
each collaborator for rights to certain of the Companys technology. These collaborative research agreements also provide for periodic payments to support the research phase of such programs and payments upon completion of specified research,
development, regulatory and commercial milestones. The Company may also receive reimbursement for certain research costs



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Icagen, Inc.

Notes to Financial Statements(Continued)



and royalty payments under these agreements based on specified percentages of net product sales, if any. As of December 31, 2008, the Company had one
collaboration with Pfizer. The Companys collaboration with McNeil terminated effective September 18, 2007.

Pfizer

On August 13, 2007, the Company entered into a collaborative research and license agreement with Pfizer for the discovery,
development, manufacture and commercialization of compounds and products that modulate three specific sodium ion channels as new potential treatments for pain and related disorders. Pursuant to the collaboration arrangement, Pfizer paid the Company
an initial upfront license fee of $12.0 million. The Company is recognizing this payment from Pfizer as revenue in accordance with SAB 104, EITF 00-21 and other relevant accounting literature. Specifically, the $12.0 million upfront license payment
was recorded as deferred revenue, which is being amortized to revenue over the two-year life of the research term. In addition to the upfront license fee, Pfizer is providing the Company with research and development funding over a two-year research
period pursuant to the agreement. The research term may be extended upon mutual agreement of Pfizer and the Company. Additionally, Pfizer is obligated to make payments to the Company upon achievement of specified research, development, regulatory
and commercialization milestones of $359.0 million for each drug candidate developed. The Company is also eligible to receive tiered royalties, against which Pfizer may credit any commercialization milestones, based on specified percentages of net
product sales. The Company recognized $12.3 million and $4.4 million of revenue related to the Pfizer collaboration agreement for the years ended December 31, 2008 and 2007, respectively.

In connection with the collaborative research and license agreement with Pfizer, on August 13, 2007, the Company also entered into a purchase
agreement with Pfizer to sell to Pfizer up to $15.0 million of the Companys common stock. In a first closing of the transaction on August 20, 2007, the Company sold 2,688,172 shares of common stock to Pfizer at a price of $1.86 per share,
which was the closing bid price of the common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the execution of the purchase agreement, resulting in gross proceeds to the Company of
approximately $5.0 million. In the second closing of the transaction on February 13, 2008, the Company sold 5,847,953 shares of common stock to Pfizer at a price of $1.71 per share, which was the closing bid price of the Companys common
stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the date of the Companys exercise of its put option to sell the shares, resulting in gross proceeds to the Company of approximately $10.0
million.

On March 14, 2008, together with Pfizer, the Company entered into a collaboration with the laboratory of Professor B. A.
Wallace at Birkbeck College, University of London, to study the structural biology of sodium channels. This three party relationship was created to support the previously established collaboration between Icagen and Pfizer for the discovery of
compounds which modulate specific sodium ion channels as potential new treatments for pain and related disorders. In connection with the Birkbeck collaboration, the Company also entered into a supplemental agreement with Pfizer that required Pfizer
to reimburse the Company for certain equipment to be used in the collaboration as well as pay the Company for additional research and development services over a two year term. The Company is also contributing services to the collaboration and is
recognizing these payments from Pfizer as revenue in accordance with SAB 104, EITF 00-21 and other relevant accounting literature.

McNeil

On June 14, 2004, the Company entered into collaboration and copromotion agreements with McNeil to
develop and commercialize senicapoc for the treatment of sickle cell disease. Pursuant to the collaboration arrangement, McNeil paid the Company an initial upfront payment of $10.0 million, $1.3 million of which the



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Icagen, Inc.

Notes to Financial Statements(Continued)



Company paid to Childrens Medical Center Corporation (CMCC), and a milestone payment of $5.0 million upon acceptance by the U.S. Food and
Drug Administration (FDA) of the protocol for the Companys Phase III clinical trial of senicapoc for the treatment of sickle cell disease, $650,000 of which the Company paid to CMCC in February 2005. The Company recognized these
payments from McNeil as revenue in accordance with SAB 104, EITF 00-21 and other relevant accounting literature. Specifically, both the $10.0 million upfront payment and the $5.0 million milestone payment were recorded as deferred revenue, which was
being amortized to revenue over the life of the agreement. At the time of the execution of the agreement, the achievement of the milestone above was not considered to represent a separate earnings process, and therefore this payment was treated in a
manner consistent with the accounting treatment applied to the $10.0 million upfront payment rather than recognized as revenue when received. McNeil was also potentially obligated to pay the Company up to an additional $48.0 million based on the
achievement of specified clinical and regulatory milestones.

Under the terms of the agreements, the Company and McNeil agreed to copromote
senicapoc for the treatment of sickle cell disease in the United States and share equally in profits and losses from the commercialization of senicapoc for the treatment of sickle cell disease in the United States. The Company was also entitled to
copromote senicapoc for the treatment of sickle cell disease with McNeil, at its option, in Canada. Under the collaboration agreement, the Company granted McNeil a worldwide exclusive license to senicapoc for the treatment of sickle cell disease and
other compounds covered by a specific patent. McNeil was entitled, subject to specified rights retained by the Company, to commercialize senicapoc for the treatment of sickle cell disease and the other licensed compounds outside the copromotion
territory pursuant to this license and was required to pay the Company a royalty on net product sales.

The Company and McNeil had agreed
to fund equally the ongoing development costs incurred pursuant to an agreed upon development plan for senicapoc in the copromotion territory for sickle cell disease. McNeil was required to fund all development costs outside of the copromotion
territory. The Company recorded revenue from reimbursed research and development costs for development expenses outside of the copromotion territory based on the actual percentage of patients enrolled at clinical trial sites outside the copromotion
territory.

During the second quarter of 2007, the Company received notification from McNeil of its termination of the collaboration
agreement between the Company and McNeil for the development of senicapoc (formerly ICA-17043) for the treatment of sickle cell disease effective as of September 18, 2007. A Phase III clinical trial to evaluate the ability of senicapoc to
reduce crisis rate, the primary endpoint, in patients with sickle cell disease was previously terminated during the second quarter of 2007. The Company had recorded an upfront payment and a milestone payment from McNeil totaling $15.0 million as
deferred revenue and was amortizing such deferred revenue over the original 15 year estimated service period of the contract. In June 2007, the Company revised its estimate of the term of its substantive obligations under the contract from ending in
June 2019 to ending in September 2007. Accordingly, the Company recognized the remaining balance of deferred revenue in 2007 as the collaboration ended and the Companys contractual obligations became complete.

For the year ended December 31, 2007, loss from continuing operations and net loss decreased by $11.5 million due to this change in estimate. For
the year ended December 31, 2007, basic and diluted net loss per share decreased by $0.31 due to this change in estimate.



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Icagen, Inc.

Notes to Financial Statements(Continued)



3. Property and Equipment, Net

Property and equipment, net consists of the following (in thousands):



|                                                |  |              |        |   |      |   |        |  
|----------------------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                                |  | December 31, |       
|                                                |  | 2008         |        |   | 2007 |  
|Equipment                                       |  | $            | 8,755  |   |      | $ | 7,598  |  
|Leasehold improvements                          |  |              | 1,715  |   |      |   | 1,389  |  
|Furniture and fixtures                          |  |              | 352    |   |      |   | 318    |  
|                                                |  |              |        |   |      |   |        |  
|                                                |  |              | 10,822 |   |      |   | 9,305  |  
|Less: accumulated depreciation and amortization |  |              | (8,236 | ) |      |   | (7,569 | )
|                                                |  |              |        |   |      |   |        |  
|Property and equipment, net                     |  | $            | 2,586  |   |      | $ | 1,736  |  
|                                                |  |              |        |   |      |   |        |  

4. Accrued Expenses

Accrued expenses consist of the following (in thousands):



|                                                |  |              |     |      |   |    
|----------------------------------------------- |  | ------------ | --- | ---- | - | ---
|                                                |  | December 31,
|                                                |  | 2008         |     | 2007
|Accrued development and clinical trial expenses |  | $            | 761 |      | $ | 512
|Other accrued expenses                          |  |              | 131 |      |   | 354
|                                                |  |              |     |      |   |    
|Total accrued expenses                          |  | $            | 892 |      | $ | 866
|                                                |  |              |     |      |   |    

5. Commitments and Contingencies

The Companys obligations consist of equipment debt financing, noncancelable operating leases, technology licenses, employment arrangements and other
contractual obligations.

Equipment Debt Financing

In July 1999, the Company entered into an equipment financing agreement with Oxford Finance Corporation, which was subsequently amended to provide for the acquisition of up to $3.7 million in equipment and other fixed
assets. The financing agreement carries an interest rate indexed to the average yields on four-year U.S. Treasury Notes, as published by the Dow Jones Telerate Access Service, and requires repayment of principal and interest over 36 to 48 months
with a final maturity of 2012. The applicable interest rates through December 31, 2008 ranged from 11.52% to 13.35%. This financing is structured as individual equipment notes, secured by the assets financed under such notes, and does not allow
additional asset purchases under this financing beyond December 2008.

In November 2007, the Company entered into a Master Security
Agreement with General Electric Capital Corporation (the GE Agreement) to finance up to $1.0 million of additional equipment, computer hardware and office furniture through December 31, 2007. Borrowings under the GE Agreement bear
interest at a fixed rate of 11.30% per year and are payable in monthly installments over 36 to 42 months with a final maturity date of 2011. This financing is structured as individual equipment notes, secured by the assets financed under such
notes, and does not allow additional asset purchases under this financing beyond December 2007.

As of December 31, 2008 and 2007,
approximately $1.6 million and $1.3 million of the equipment debt financing notes were outstanding, respectively. Total equipment with a net carrying value of $1.7 million collaterizes the outstanding equipment debt financing balance at
December 31, 2008.



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Notes to Financial Statements(Continued)



Property and equipment includes the following amounts financed through equipment debt financing
(in thousands):



|                                  |  |              |        |   |      |   |        |  
|--------------------------------- |  | ------------ | ------ | - | ---- | - | ------ | -
|                                  |  | December 31, |       
|                                  |  | 2008         |        |   | 2007 |  
|Equipment, furniture and fixtures |  | $            | 2,966  |   |      | $ | 2,465  |  
|Less: accumulated depreciation    |  |              | (1,225 | ) |      |   | (1,207 | )
|                                  |  |              |        |   |      |   |        |  
|                                  |  | $            | 1,741  |   |      | $ | 1,258  |  
|                                  |  |              |        |   |      |   |        |  

As of December 31, 2008, future annual principal payments under equipment debt financing
consist of the following for the years ending December 31 (in thousands):



|                                               |  |   |       |  
|---------------------------------------------- |  | - | ----- | -
|2009                                           |  | $ | 662   |  
|2010                                           |  |   | 493   |  
|2011                                           |  |   | 350   |  
|2012                                           |  |   | 128   |  
|                                               |  |   |       |  
|Total                                          |  |   | 1,633 |  
|Current portion of equipment debt financing    |  |   | (662  | )
|                                               |  |   |       |  
|Equipment debt financing, less current portion |  | $ | 971   |  
|                                               |  |   |       |  

Noncancelable Operating Leases

The Company leases certain office equipment under noncancelable operating leases expiring in 2013. The Company leases its facilities under various
noncancelable operating leases that expire from 2010 through 2012. At December 31, 2008, the Company had provided one of its lessors with an irrevocable letter of credit with a balance of $100,000 during the lease term. This letter of credit is
secured by a cash deposit, which is included in deposits and other in the accompanying balance sheets.

As of December 31, 2008,
future annual minimum payments under noncancelable operating leases with terms in excess of one year consist of the following for the years ending December 31 (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|2009                         |  | $ | 528  
|2010                         |  |   | 518  
|2011                         |  |   | 498  
|2012                         |  |   | 199  
|2013                         |  |   | 7    
|                             |  |   |      
|Total minimum lease payments |  | $ | 1,750
|                             |  |   |      

Rental expense associated with operating leases was $690,000, $498,000 and $423,000 for the years
ended December 31, 2008, 2007 and 2006, respectively.

Technology Licenses

The Company is a party to a number of license agreements, primarily with academic institutions, under which it licenses patents, patent applications and
other intellectual property for which the Company paid upfront license fees. The duration of these agreements varies from 10 years to the expiration date of the last-to-expire patent, and the Company has the option to renew some of these agreements
at the end of their terms. The



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Notes to Financial Statements(Continued)



Companys technology license agreements are generally terminable by the Company upon short notice. Under certain conditions, the Company can grant
sublicenses for which the licensors receive a fee. Some of these licenses require annual maintenance fees and periodic payments upon the achievement of specified development and regulatory milestones. The Company is obligated to pay specified
royalties for licensed and sublicensed product sales or specified percentages of income received from sublicenses, and in some cases minimum annual royalties. As of December 31, 2008 and 2007, there were no milestone payments or royalties due
under these technology license agreements.

In February 2000, the Company entered into an agreement with CMCC for a worldwide exclusive
license to products covered by the patent rights licensed from CMCC. The patent rights licensed to the Company by CMCC include patent rights directed to the use of specified classes of compounds for most fields of human and veterinary therapeutics
and diagnostics, including the Companys drug candidate for the treatment of asthma. The Company has the right to grant sublicenses under this license. Patents licensed under the CMCC agreement expire over the period from 2012 through 2016.

In exchange for the rights licensed from CMCC, the Company paid CMCC an upfront license fee and license maintenance fees aggregating
$250,000. Under the Companys license agreement with CMCC, the Company is required to pay CMCC royalties on net product sales by the Company or the Companys affiliates. The Company is also required to make payments to CMCC aggregating up
to an additional $250,000 based on achieving specified development and regulatory milestones with respect to each licensed product, which is not a sublicensed product. The Company is entitled to a credit for the development and regulatory milestone
payments that it makes against the royalties that the Company would otherwise be obligated to pay of up to, but not more than, 50% of the royalties due in any given payment period. The Company is obligated to pay CMCC specified amounts with respect
to any sublicense income received by the Company.

The Companys royalty obligation with respect to each licensed product extends
until the expiration of the last-to-expire patent, which expires on September 16, 2014, licensed from CMCC covering the licensed products in any country. Upon the later of the expiration of the last-to-expire licensed patent or February 2015,
the agreement expires.

Pursuant to its license with CMCC, the Companys obligation to pay CMCC specified amounts with respect to
sublicense income applies to the upfront and milestone payments, royalties and share of profits in the copromotion territory received by the Company under the Companys collaboration agreement with McNeil. The Company paid CMCC $1.3 million of
the $10.0 million upfront payment that the Company received from McNeil in June 2004, and paid CMCC $650,000 of the $5.0 million milestone payment that the Company received from McNeil upon acceptance of the protocol for the Companys pivotal
Phase III clinical trial of senicapoc for the treatment of sickle cell disease by the FDA. Payments or obligations to CMCC were originally recorded on the balance sheet as long-term assets under the category technology licenses and related
costs and were amortized to expense over the term of the agreement. Due to the termination of the collaboration agreement with McNeil, the Company determined that this long-lived asset was no longer recoverable. In accordance with SFAS 144,
the Company recorded an impairment loss of $1.6 million during the second quarter of 2007, which is recorded as a component of research and development expense in the statement of operations for the year ended December 31, 2007.



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Icagen, Inc.

Notes to Financial Statements(Continued)



As of December 31, 2008, future annual license maintenance fees under the Companys
technology license agreements consist of the following for the years ending December 31 (in thousands):



|                  |  |   |      
|----------------- |  | - | -----
|2009              |  | $ | 183  
|2010              |  |   | 183  
|2011              |  |   | 83   
|2012              |  |   | 63   
|2013              |  |   | 294  
|2014 through 2024 |  |   | 307  
|                  |  |   |      
|Total             |  | $ | 1,113
|                  |  |   |      

The aggregate amount of the annual maintenance fees under these technology license agreements was
$111,000, $108,000 and $117,000 in 2008, 2007 and 2006, respectively.

Employment Arrangements

The Company provides a severance arrangement for certain of its executive officers and key employees, which includes salary and bonus continuance and
continued health benefits. At December 31, 2008 and 2007, the Company had not incurred or recorded any obligation related to these arrangements.

Other Contractual Obligations

Other contractual obligations as of December 31, 2008 consisted of $841,000 related to
commitments for contract research services for preclinical research and other commitments.

6. Stockholders Equity

Capital Structure

As of December 31, 2008 and
2007, the Company was authorized to issue up to 120,000,000 shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock in one or more series.

Common Stock

In connection with the collaborative research and license agreement with Pfizer, on
August 13, 2007, the Company entered into a purchase agreement with Pfizer to sell to Pfizer up to $15.0 million of the Companys common stock. In the first closing of the transaction on August 20, 2007, the Company sold 2,688,172
shares of common stock to Pfizer at a price of $1.86 per share, which was the closing bid price of the common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the execution of the purchase
agreement, resulting in gross proceeds to the Company of approximately $5.0 million. In the second closing of the transaction on February 13, 2008, the Company sold 5,847,953 shares of common stock to Pfizer at a price of $1.71 per share, which
was the closing bid price of the Companys common stock as reported on the Nasdaq Global Market as of 4:00 p.m. Eastern time on the business day preceding the date of the Companys exercise of its put option to sell the shares, resulting
in gross proceeds to the Company of approximately $10.0 million.

Pursuant to the purchase agreement that the Company entered into in
connection with the equity investment by Pfizer, the Company has agreed to file, at any time after August 20, 2008, upon the request of Pfizer, a registration statement with the SEC covering the resale of the aggregate number of shares issued
pursuant to the



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Notes to Financial Statements(Continued)



purchase agreement. The terms of the purchase agreement require the Company to pay liquidated damages to Pfizer in the event that the Company does not file
the registration statement with the SEC within 30 days after the request by Pfizer to file such registration statement, the registration statement does not become effective or its effectiveness is not maintained beginning 90 days after the
registration request (if the registration statement is not reviewed by the SEC) or 120 days after the registration request (if it is so reviewed) or, after the registration statement is declared effective by the SEC, the registration statement is
suspended by the Company or ceases to remain continuously effective as to all registrable securities for which it is required to be effective, with certain specified exceptions (Pfizer Registration Default). Subject to the specified
exceptions, for each 30-day period or portion thereof during which a Pfizer Registration Default remains uncured, the Company is obligated to pay Pfizer an amount in cash equal to 1% of Pfizers aggregate purchase price, up to a maximum of 10%
of the aggregate purchase price paid by Pfizer.

On February 6, 2007, the Company completed a private placement in which the Company
issued 15,423,640 shares of common stock, together with warrants to purchase an aggregate of 5,398,256 additional shares of common stock with an exercise price of $1.45 per share for a total price of $1.42375 per Security, resulting in gross
proceeds of approximately $22.0 million. Pursuant to the terms of the securities purchase agreement signed in connection with the private placement, the Company filed a registration statement with the SEC to register for resale the shares of common
stock sold in the private placement and the shares of common stock issuable upon the exercise of the warrants. This registration statement became effective May 1, 2007.

The terms of the securities purchase agreement that the Company entered into in connection with the private placement require the Company to pay
liquidated damages to the purchasers in the private placement in the event that the registration statement is suspended by the Company or ceases to remain continuously effective as to all registrable securities for which it is required to be
effective, with certain specified exceptions (Registration Default). Subject to the specified exceptions, for each 30-day period or portion thereof during which a Registration Default remains uncured, the Company is obligated to pay each
purchaser an amount in cash equal to 1% of that purchasers aggregate purchase price, up to a maximum of 10% of the aggregate purchase price paid by that purchaser.

As of December 31, 2008 and 2007, the Company had a total of 46,906,589 and 40,870,619 shares of common stock outstanding, respectively.

Stockholder Rights Plan

On December 2, 2008, the Company adopted a stockholder rights plan
pursuant to which it issued a dividend of one preferred share purchase right for each share of common stock held by stockholders of record on December 15, 2008. Each right entitles stockholders to purchase one one-thousandth of a share of the
Companys Series A Junior Participating Preferred Stock at a price of $7.50, subject to adjustment under certain circumstances.

The rights issued under the stockholder rights plan will automatically trade with the underlying common stock and will initially not be exercisable. If a person acquires or commences a tender offer for 15% (or in the case of Pfizer, which
currently owns approximately 18% of the Companys common stock, 20%) or more of the Companys common stock in a transaction that was not approved by the Companys Board of Directors, each right, other than those owned by the acquiring
person, would instead entitle the holder to purchase $15.00 worth of common stock for the $7.50 exercise price. If the Company is involved in a merger or other transaction with another company that is not approved by its Board of Directors, in which
the Company is not the surviving corporation or which transfers more than 50% of its assets to another company, then each right, other than those owned by the acquiring person, would instead entitle the holder to purchase $15.00 worth of the
acquiring companys common stock for the $7.50 exercise price.



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Notes to Financial Statements(Continued)



The Companys Board of Directors may redeem the rights for $0.001 per right at any time until
ten business days after a person acquires 15% (or in the case of Pfizer, 20%) of the Companys common stock, or on the date on which any executive officer of Icagen has actual knowledge of such acquisition, whichever is later. The Board of
Directors may also extend the date by which the rights may be redeemed. Unless the rights are redeemed or exchanged earlier, they will expire upon the close of business on the earlier of (1) December 2, 2018 or (2) December 2,
2009, if the Companys stockholders do not approve the rights plan by that date.

Warrants

In connection with the Companys private placement completed on February 6, 2007, the Company issued warrants to purchase an aggregate of
5,398,256 shares of common stock with an exercise price of $1.45 per share. These warrants may be exercised for cash or on a cashless basis and expire in February 2012. During the year ended December 31, 2007, warrants to purchase 179,336
shares of common stock were exercised resulting in the issuance of 169,863 shares of common stock. At December 31, 2008 and 2007 there were warrants to purchase 5,218,920 shares of common stock outstanding.

Common Stock Reserved for Future Issuance

The
Company had reserved shares of common stock for future issuance as follows:



|                                                                 |  |                 
|---------------------------------------------------------------- |  | ----------------
|                                                                 |  | December 31,2008
|Outstanding stock options                                        |  | 5,683,558       
|Outstanding restricted stock units                               |  | 559,948         
|Outstanding warrants                                             |  | 5,218,920       
|Possible future issuance under the 2004 equity compensation plan |  | 2,887,234       
|                                                                 |  |                 
|Total shares reserved                                            |  | 14,349,660      
|                                                                 |  |                 

7. Stock-Based Compensation

In January 1996, the Board of Directors adopted and the stockholders approved the Icagen, Inc. Equity Compensation Plan (the 1996 Plan) to create an additional incentive for key employees, directors and
consultants or advisors. The 1996 Plan authorized the issuance of stock options to be granted as incentive and nonqualified stock options, restricted stock, and other stock-based awards. The Board of Directors determined the exercise prices of all
options granted. The options vest based on terms provided for in the individual stock option agreements issued pursuant to the 1996 Plan. Options generally vest on a monthly basis over a period of one to four years and have a contractual life of ten
years.

In February 2004, the Board of Directors adopted and on May 19, 2004, the stockholders approved, the 2004 Stock Incentive Plan
(the 2004 Plan), which became effective on February 3, 2005, the date on which the Companys registration statement for its IPO was declared effective. The 2004 Plan provides for the grant of incentive stock options,
non-statutory stock options, restricted stock awards and other stock-based awards. Upon effectiveness of the 2004 Plan, the number of shares of common stock reserved for issuance under the 2004 Plan was 3,080,892 shares. The 2004 Plan also contains
a provision that allows for an automatic annual increase in the number of shares authorized under the 2004 Plan, beginning in 2006, subject to certain limitations specified in the 2004 Plan. On June 26, 2007, the 2004 plan was amended to
increase the number of shares reserved for issuance under the plan from 3,150,000 to 6,150,000.



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Notes to Financial Statements(Continued)



The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton
option pricing model, using the assumptions noted in the following table. Expected volatility is based on the historical volatility of the Companys common stock price and the volatility of the common stock prices of other comparable companies
in the biotechnology industry. The Company uses historical data to estimate option exercises and forfeitures used in the model. The expected term of options granted represents the period of time that options granted are expected to be outstanding.
The Company analyzed separate groups of employees with similar exercise behavior to determine the expected term. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at
the time of grant. As of December 31, 2008, the Company had 5,683,558 options outstanding with a weighted average exercise price of $2.15, and 559,948 restricted stock units outstanding. Remaining compensation expense as of December 31,
2008 to be recognized on these options and restricted stock units through December 2012 is approximately $1.1 million and $796,000, respectively. The weighted-average period of time over which these costs will be recognized for stock options and
restricted stock units is 2.0 and 2.6 years, respectively. As of December 31, 2008, the Company had 4,507,383 options exercisable with a weighted average exercise price of $2.27. As of December 31, 2008, the Company had 5,680,261 options
vested and expected to vest with a weighted average exercise price of $2.15. The weighted-average remaining contractual terms of the exercisable options and options vested and expected to vest at December 31, 2008 is 5.7 and 6.3 years,
respectively. The aggregate intrinsic value of exercisable options and options vested and expected to vest at December 31, 2008 was $8,000 and $8,200, respectively.

The fair value of each option grant was determined using the Black-Scholes-Merton option pricing model with the following weighted average assumptions:



|                                                                              |  |                          |       |   |      |   |      |      |  |   |      |  
|----------------------------------------------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                              |  | Years ended December 31, |      
|                                                                              |  | 2008                     |       |   | 2007 |   |      | 2006 | 
|Expected dividend yield                                                       |  |                          | 0.0   | % |      |   | 0.0  | %    |  |   | 0.0  | %
|Risk-free interest rate                                                       |  |                          | 3.3   | % |      |   | 4.5  | %    |  |   | 4.8  | %
|Expected volatility                                                           |  |                          | 100.0 | % |      |   | 70.0 | %    |  |   | 60.0 | %
|Expected life (in years)                                                      |  |                          | 5.7   |   |      |   | 4.8  |      |  |   | 4.8  |  
|Estimated weighted average grant date fair value per share of options granted |  | $                        | 1.19  |   |      | $ | 0.92 |      |  | $ | 1.60 |  

The following table summarizes activity related to stock options and restricted stock units as of
December 31, 2008, and changes during the year then ended:



|                             |  |                           |   |  |                          |   |  |                               |      |                                  |          |  
|---------------------------- |  | ------------------------- | - |  | ------------------------ | - |  | ----------------------------- | ---- | -------------------------------- | -------- | -
|                             |  | Shares Availablefor Grant |   |  | Stock OptionsOutstanding |   |  | WeightedAverageExercise Price |      | Restricted StockUnitsOutstanding |         
|Balance at December 31, 2007 |  | 2,861,034                 |   |  | 5,069,303                |   |  | $                             | 2.21 |                                  | 413,964  |  
|Authorized                   |  | 1,000,000                 |   |  |                         |   |  |                               |     |                                  |         |  
|Granted                      |  | (976,990                  | ) |  | 704,360                  |   |  |                               | 1.53 |                                  | 272,630  |  
|Exercised/Released           |  |                          |   |  | (87,215                  | ) |  |                               | 0.69 |                                  | (126,346 | )
|Forfeited/Cancelled          |  | 3,190                     |   |  | (2,890                   | ) |  |                               | 1.86 |                                  | (300     | )
|                             |  |                           |   |  |                          |   |  |                               |      |                                  |          |  
|Balance at December 31, 2008 |  | 2,887,234                 |   |  | 5,683,558                |   |  | $                             | 2.15 |                                  | 559,948  |  
|                             |  |                           |   |  |                          |   |  |                               |      |                                  |          |  

On September 27, 2006, the Compensation Committee of the Board of Directors approved an
employee retention program with the objective of revitalizing the incentive value of the stock options held by the Companys employees. The employee retention program was comprised of two components: stock option grants to Company employees
holding outstanding stock options having an exercise price of $2.00 or greater (the



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Retention Grant Program), and offers to eligible Company management employees, whereby such employees could surrender certain outstanding stock
options (the Old Options) issued under the 2004 Stock Plan in exchange for a reduced number of new options (the New Options) (the Option Exchange Program).

Pursuant to the Retention Grant Program, the Company granted to substantially all employees, including the Companys executive officers, additional
stock options for common stock equivalent to two shares of common stock for every three shares of common stock covered by certain outstanding options having an exercise price of $2.00 or greater, with the number of shares issuable upon exercise of
each new option rounded to the nearest share. The new options were granted at the exercise price of $0.87, equal to the closing price of the Companys common stock on the Nasdaq Global Market on September 27, 2006, the date on which the
options were granted.

Pursuant to the Option Exchange Program, the Company offered each eligible management employee, including the
Companys executive officers, the opportunity to exchange Old Options for New Options at a rate of two shares of common stock for every three shares issuable upon the exercise of an Old Option, rounded to the nearest share. Old Options eligible
for the Option Exchange Program were excluded from the Retention Grant Program. The Company granted New Options at the exercise price of $0.90, equal to the closing price of the Companys common stock on the Nasdaq Global Market on
September 28, 2006, the date on which the eligible management employees elected to exchange their options and the New Options were granted.

Pursuant to the Retention Grant Program and the Option Exchange Program, the Compensation Committee authorized the grant of stock options for the purchase of up to approximately 1,800,000 shares of the Companys common stock. After
giving effect to the cancellation of certain stock options held by management employees for the purchase of approximately 650,000 shares of common stock pursuant to the Option Exchange Program, shares of the Companys common stock issuable
pursuant to stock options increased by approximately 1,150,000 shares as a result of these programs.

All options granted pursuant to the
Retention Grant Program and the Option Exchange Program were granted pursuant to the terms of the 2004 Plan, with each option vesting as to 25% of the shares covered thereby on the date that is six months after the grant date; an additional 25% of
the shares on the date that is twelve months after the grant date; an additional 17% of the shares on the date that is eighteen months after the grant date; an additional 17% of the shares on the date that is twenty-four months after the grant date;
and the remaining 16% of the shares on the date that is thirty months after the grant date.

The awards granted under the Retention Grant
Program were accounted for as new awards under Statement 123(R). The awards granted under the Option Exchange Program were accounted for as modifications under Statement 123(R) resulting in an incremental compensation cost of $147,000 which will be
amortized to expense over the vesting period described above.



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Icagen, Inc.

Notes to Financial Statements(Continued)



Selected information regarding stock options as of December 31, 2008 follows:



|                         |  |                     |  |                                        |  |                               |      |                  |           |                               |   |     
|------------------------ |  | ------------------- |  | -------------------------------------- |  | ----------------------------- | ---- | ---------------- | --------- | ----------------------------- | - | ----
|Options Outstanding      |  | Options Exercisable
|Range of Exercise Prices |  | Number ofOptions    |  | Weighted AverageRemaining Life inYears |  | WeightedAverageExercise Price |      | Number ofOptions |           | WeightedAverageExercise Price
|$0.50  $0.75            |  | 477,784             |  | 1.5                                    |  | $                             | 0.64 |                  | 473,039   |                               | $ | 0.64
|0.76    1.08            |  | 1,939,730           |  | 7.8                                    |  |                               | 0.91 |                  | 1,536,501 |                               |   | 0.90
|1.09    1.92            |  | 814,255             |  | 8.9                                    |  |                               | 1.51 |                  | 316,425   |                               |   | 1.51
|1.93    2.50            |  | 1,491,440           |  | 4.6                                    |  |                               | 2.11 |                  | 1,288,208 |                               |   | 2.12
|2.51    5.00            |  | 387,446             |  | 5.5                                    |  |                               | 4.94 |                  | 376,359   |                               |   | 4.95
|5.01    6.50            |  | 377,715             |  | 6.2                                    |  |                               | 6.28 |                  | 350,832   |                               |   | 6.29
|6.51    8.00            |  | 144,850             |  | 6.5                                    |  |                               | 7.19 |                  | 124,613   |                               |   | 7.18
|8.01    9.12            |  | 50,338              |  | 6.7                                    |  |                               | 8.78 |                  | 41,406    |                               |   | 8.79
|                         |  |                     |  |                                        |  |                               |      |                  |           |                               |   |     
|$0.50  $9.12            |  | 5,683,558           |  | 6.3                                    |  | $                             | 2.15 |                  | 4,507,383 |                               | $ | 2.27
|                         |  |                     |  |                                        |  |                               |      |                  |           |                               |   |     

The intrinsic value of options exercised during the years ended December 31, 2008, 2007 and
2006 was $76,000, $295,000 and $1,513,000, respectively. The total fair value of options vested during the years ended December 31, 2008, 2007 and 2006 was $1.6 million, $2.0 million and $2.0 million, respectively.

At December 31, 2008 and 2007, 4,507,383 and 3,393,480 of the Companys outstanding options were exercisable, respectively.

8. Related Party Transactions

At December 31,
2008 and 2007, Pfizer held 8,536,125 and 2,688,172 shares, respectively, of the Companys common stock. Total revenues from Pfizer totaled approximately $12.3 million, $4.4 million and $0 in 2008, 2007 and 2006, respectively, including partial
recognition of a non-refundable upfront license fee of $12.0 million in 2008 and 2007 that is being recognized as revenue ratably over the initial two-year research term of the Companys collaboration agreement with Pfizer.

The Company incurred expense of $658,000, $6.3 million and $7.5 million from Quintiles Transnational Corp. for development and clinical trial services in
2008, 2007 and 2006, respectively. Quintiles Transnational Corp. is an affiliate of one of the Companys stockholders, and the chairman of the board and chief executive officer of Quintiles Transnational Corp. is a stockholder and a member of
the Companys Board of Directors. The amounts paid to Quintiles Transnational Corp. are included in research and development expense on the statements of operations. Amounts included in accounts payable related to these services totaled $0 and
$1.1 million at December 31, 2008 and 2007, respectively.



89



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Icagen, Inc.

Notes to Financial Statements(Continued)



9. Income Taxes

A reconciliation of the Companys income tax benefit at the federal statutory rate to actual income tax benefit is as follows (in thousands):



|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                             |  | 2008 |        |   | 2007 |   |        | 2006 | 
|Income tax benefit at federal statutory rate |  | $    | (5,185 | ) |      | $ | (3,810 | )    |  | $ | (8,683 | )
|State taxes, net of federal expense          |  |      | (741   | ) |      |   | (544   | )    |  |   | (1,240 | )
|Research and development credit              |  |      | (434   | ) |      |   | 103    |      |  |   | (460   | )
|Orphan drug credit                           |  |      | 5,887  |   |      |   | (1,145 | )    |  |   | (3,502 | )
|Stock compensation                           |  |      | 641    |   |      |   | 749    |      |  |   | 577    |  
|Other, net                                   |  |      | (616   | ) |      |   | 83     |      |  |   | 139    |  
|Change in valuation allowance                |  |      | 448    |   |      |   | 4,564  |      |  |   | 13,169 |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |  
|                                             |  | $    |       |   |      | $ |       |      |  | $ |       |  
|                                             |  |      |        |   |      |   |        |      |  |   |        |  

A reconciliation of the statutory income tax rate to the effective income tax rate as recognized
in the statements of operations is as follows:



|                                        |  |       |    |  |       |    |  |       |   
|--------------------------------------- |  | ----- | -- |  | ----- | -- |  | ----- | --
|                                        |  | 2008  |    |  | 2007  |    |  | 2006  |   
|Federal statutory rate                  |  | 35.0  | %  |  | 35.0  | %  |  | 35.0  | % 
|State tax rate, net of federal benefit  |  | 5.0   | %  |  | 5.0   | %  |  | 5.0   | % 
|Tax credits and non-deductible expenses |  | (41.2 | )% |  | 10.5  | %  |  | 14.0  | % 
|Change in valuation allowance           |  | 1.2   | %  |  | (50.5 | )% |  | (54.0 | )%
|                                        |  |       |    |  |       |    |  |       |   
|                                        |  | 0.0   | %  |  | 0.0   | %  |  | 0.0   | % 
|                                        |  |       |    |  |       |    |  |       |   

The income tax effects of temporary differences that give rise to significant portions of deferred
tax assets are as follows as of December 31 (in thousands):



|                                                  |  |      |         |   |      |   |         |  
|------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                  |  | 2008 |         |   | 2007 |  
|Deferred tax assets:                              |  |      |         |   |      |   |         |  
|Deferred revenue                                  |  | $    | 2,174   |   |      | $ | 4,434   |  
|Excess book depreciation                          |  |      | 338     |   |      |   | 362     |  
|Stock-based compensation expense                  |  |      | 1,094   |   |      |   | 688     |  
|Net operating loss carryforwards                  |  |      | 44,073  |   |      |   | 32,858  |  
|Research and development credit carryforwards     |  |      | 3,645   |   |      |   | 3,211   |  
|Orphan drug credit carryforward                   |  |      | 12,427  |   |      |   | 21,750  |  
|Alternative minimum tax credit                    |  |      | 5       |   |      |   | 5       |  
|                                                  |  |      |         |   |      |   |         |  
|Total deferred tax assets                         |  |      | 63,756  |   |      |   | 63,308  |  
|Less: valuation allowance for deferred tax assets |  |      | (63,756 | ) |      |   | (63,308 | )
|                                                  |  |      |         |   |      |   |         |  
|Net deferred tax assets                           |  | $    |        |   |      | $ |        |  
|                                                  |  |      |         |   |      |   |         |  

At December 31, 2008 and 2007, the Company had net operating loss carryforwards of
approximately $110.2 million and $91.9 million, respectively, and research and development credit carryforwards of approximately $3.6 million and $3.2 million, respectively, for income tax purposes that begin to expire in the year 2011.
The Companys orphan drug credit carryforwards of $12.4 million and $21.7 million as of December 31, 2008 and 2007, respectively, for income tax purposes begin to expire in 2020. For financial



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Icagen, Inc.

Notes to Financial Statements(Continued)



reporting purposes, a valuation allowance has been recognized to offset the deferred tax assets related to these carryforwards as the Company has determined
that it is more likely than not that the deferred tax assets will not be realized.

Based on the number of shares of common and preferred
stock issued, the Company has exceeded the limit allowable under the Tax Reform Act of 1986 related to changes in ownership percentage governing future utilization of net operating loss carryforwards and tax credit carryforwards. Ownership changes
subsequent to December 31, 2008 may reduce the availability of net operating losses to offset future taxable income.

Effective
January 1, 2007, the Company adopted the FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, Accounting for Income Taxes(FIN 48). FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The evaluation of a tax position in accordance with this Interpretation is a
two-step process. The first step is recognition: the Company determines whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the Company must presume that the positions will be examined by the appropriate taxing authority that has full knowledge
of all relevant information. The second step is measurement: a tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in
one of the following: an increase in a liability for income taxes payable or a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability, or a combination of each. The Company must
recognize tax positions that previously failed to meet the more-likely-than-not recognition threshold in the first subsequent financial reporting period in which that threshold is met. The Company must de-recognize previously recognized tax
positions that no longer meet the more-likely-than-not recognition threshold in the first subsequent financial reporting period in which that threshold is no longer met. The Company may not use a valuation allowance as a substitute for derecognition
of tax positions.

The Company adopted this standard as of the beginning of the Companys first quarter of 2007; however, the adoption
of this interpretation did not have a material effect on the Companys financial condition, results of operations or cash flows. In accordance with FIN No. 48, the Company will classify any interest and penalty expense in interest expense
and general and administrative expense, respectively.

During the year ended December 31, 2008, the Company recorded a decrease to its
liability for unrecognized tax benefits of approximately $414,000. During the year ended December 31, 2007, the Company recorded an increase to its liability for unrecognized tax benefits of approximately $1.7 million. Interest or penalties
have not been accrued. If the tax benefit is ultimately recognized, there will be no impact to the Companys effective tax rate as a result of the Companys valuation allowance. The Company does not anticipate any significant increases or
decreases to its liability for unrecognized tax benefits within the next 12 months.



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Icagen, Inc.

Notes to Financial Statements(Continued)



A reconciliation of the beginning and ending amount of unrecognized tax benefits, which are not
recorded as a liability because they are offset by net operating loss carryforwards, are as follows:



|                                                            |  |   |       |  
|----------------------------------------------------------- |  | - | ----- | -
|Balance, January 1, 2007                                    |  | $ | 0     |  
|Increases for tax positions taken during a prior period     |  |   | 1,466 |  
|Increases for tax positions taken during the current period |  |   | 246   |  
|                                                            |  |   |       |  
|Balance, December 31, 2007                                  |  |   | 1,712 |  
|Increases for tax positions taken during the current period |  |   | 77    |  
|Decreases related to settlements                            |  |   | (491  | )
|                                                            |  |   |       |  
|Balance, December 31, 2008                                  |  | $ | 1,298 |  
|                                                            |  |   |       |  

The tax years 2004 forward are open for assessment of underpayment of tax. The net operating
losses dating back to 1995 are open to adjustment by taxing authorities. During the second quarter of 2008, the IRS notified the Company that it had been selected for a routine audit of the Companys 2005 U.S. Federal income tax return. In
connection with the IRS audit, the Company revised the amounts recorded for the orphan drug credit and the net operating loss. The audit was completed during the fourth quarter of 2008 and there were no proposed adjustments that had a material
effect upon the Companys financial position or results of operations.

10. Defined Contribution Benefit Plan

The Company has adopted a 401(k) plan (the 401(k) Plan) covering all qualified employees. The effective date of the 401(k) Plan is
August 1, 1997. Participants may elect a salary reduction from 1% to 100% as a contribution to the 401(k) Plan subject to Internal Revenue Service limitations. The 401(k) Plan permits the Company to match these elective deferrals by a
percentage determined on an annual basis. Through October 31, 2007 the Company matched 10% of participants contributions. Effective November 1, 2007, the Company match was increased to 20% of participants contributions. The
Company made matching contributions in the amount of $136,000, $78,000 and $61,000 in 2008, 2007 and 2006, respectively.

11. Quarterly Results of
Operations (Unaudited)

The following is a summary of the unaudited quarterly results of operations (in thousands, except share and per
share amounts):



|                                                                         |  |                              |            |   |             |   |            |             |  |   |             |   |  |   |            |  
|------------------------------------------------------------------------ |  | ---------------------------- | ---------- | - | ----------- | - | ---------- | ----------- |  | - | ----------- | - |  | - | ---------- | -
|                                                                         |  | Year ended December 31, 2008 |           
|                                                                         |  | 1st Quarter                  |            |   | 2nd Quarter |   |            | 3rd Quarter |  |   | 4th Quarter |  
|Collaborative research and development revenues                          |  | $                            | 2,968      |   |             | $ | 3,184      |             |  | $ | 3,129       |   |  | $ | 3,010      |  
|Loss from operations                                                     |  |                              | (4,014     | ) |             |   | (3,962     | )           |  |   | (3,749      | ) |  |   | (3,872     | )
|Net loss attributable to common stockholders                             |  |                              | (3,645     | ) |             |   | (3,713     | )           |  |   | (3,572      | ) |  |   | (3,885     | )
|Basic and diluted net loss per share attributable to common stockholders |  | $                            | (0.08      | ) |             | $ | (0.08      | )           |  | $ | (0.08       | ) |  | $ | (0.08      | )
|Weighted average common shares outstandingbasic and diluted             |  |                              | 44,030,160 |   |             |   | 46,834,932 |             |  |   | 46,885,500  |   |  |   | 46,905,029 |  



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Icagen, Inc.

Notes to Financial Statements(Continued)



|                                                                        |  |                              |            |   |             |   |            |                 |  |             |            |  |   |            |  
|----------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ----------- | - | ---------- | --------------- |  | ----------- | ---------- |  | - | ---------- | -
|                                                                        |  | Year ended December 31, 2007 |           
|                                                                        |  | 1st Quarter                  |            |   | 2nd Quarter |   |            | 3rd Quarter (1) |  | 4th Quarter |           
|Collaborative research and development revenues                         |  | $                            | 1,990      |   |             | $ | 3,382      |                 |  | $           | 12,870     |  | $ | 2,875      |  
|(Loss) income from operations                                           |  |                              | (6,864     | ) |             |   | (6,889     | )               |  |             | 5,146      |  |   | (4,070     | )
|Net (loss) income attributable to common stockholders                   |  |                              | (6,485     | ) |             |   | (6,454     | )               |  |             | 5,612      |  |   | (3,558     | )
|Basic net (loss) income per share attributable to common stockholders   |  | $                            | (0.20      | ) |             | $ | (0.17      | )               |  | $           | 0.14       |  | $ | (0.09      | )
|Diluted net (loss) income per share attributable to common stockholders |  | $                            | (0.20      | ) |             | $ | (0.17      | )               |  | $           | 0.13       |  | $ | (0.09      | )
|Weighted average common shares outstandingbasic                        |  |                              | 31,637,662 |   |             |   | 37,928,862 |                 |  |             | 39,245,452 |  |   | 40,796,031 |  
|Weighted average common shares outstandingdiluted                      |  |                              | 31,637,662 |   |             |   | 37,928,862 |                 |  |             | 41,623,856 |  |   | 40,796,031 |  



|(1) | The results for the third quarter of 2007 include the impact of $10.1 million of the $11.5 million of incremental revenue recognized as a result of the termination of the
collaboration agreement with McNeil. The Company had recorded an upfront payment and a milestone payment from McNeil totaling $15.0 million as deferred revenue and was amortizing such deferred revenue over the original 15 year estimated service
period of the contract. In June 2007, the Company revised its estimate of the term of its substantive obligations under the contract from ending in June 2019 to ending in September 2007. The Company recognized the remaining balance of deferred
revenue in 2007 as the collaboration ended and the Companys contractual obligations became complete.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance
with prescribed reporting requirements, the sum of per share losses by quarter may not equal loss per share for the full year due to the changes in average share calculations.

12. Subsequent Events

On January 2, 2009, the Company issued 741,425 restricted stock units to
Company employees at a fair value of $0.51 per share, the market price of the common stock on the date of grant. The restricted stock units vest annually over a period of four years.

On January 23, 2009, the Compensation Committee of the Board of Directors approved the issuance of 711,290 restricted stock units to Company
executives at a fair value of $0.56 per share, the market price of the common stock on the date of grant. The restricted stock units vest annually over a period of four years.



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                    
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                        
|3.1(1)        |  | Restated Certificate of Incorporation of the Registrant, as amended.                                                                                                                                                               
|              | 
|3.1.1(22)     |  | Certificate of Designations of Series A Junior Participating Preferred Stock of the Registrant, dated December 2, 2008.                                                                                                            
|              | 
|3.2(1)        |  | Amended and Restated Bylaws of the Registrant, as amended.                                                                                                                                                                         
|              | 
|4.1(2)        |  | Specimen Stock Certificate.                                                                                                                                                                                                        
|              | 
|4.2(2)        |  | Amended and Restated Stockholders Agreement, dated December 15, 2003, by and among the Registrant and the parties listed therein.                                                                                                 
|              | 
|4.2.1(3)      |  | Stockholder Waiver, Amendment and Termination Agreement, dated July 10, 2007, among the Registrant and certain stockholders of the Registrant party to the Amended and Restated Stockholders
Agreement dated as of April 16, 2004.
|              | 
|4.3(2)        |  | Warrant to Purchase Shares of Series B Preferred Stock, dated December 28, 1994, issued to Dominion Fund III.                                                                                                                      
|              | 
|4.4(2)        |  | Warrant to Purchase Shares of Series D Preferred Stock, dated May 23, 1997, issued to Dominion Fund III.                                                                                                                           
|              | 
|4.5(2)        |  | Warrant to Purchase Shares of Series E Preferred Stock, dated September 3, 1998, issued to Dominion Fund III.                                                                                                                      
|              | 
|4.6(2)        |  | First Amendment to Warrants to Purchase Shares of Preferred Stock of Icagen, Inc., dated May 14, 2004, by and between the Registrant, Dominion Fund III and Dominion
Ventures.                                                     
|              | 
|4.7(2)        |  | Form of Warrant to Purchase Shares of Series D Convertible Preferred Stock, dated March 15, 1997, issued to certain persons in connection with offering of Series D Preferred
Stock.                                               
|              | 
|4.8(4)        |  | Securities Purchase Agreement, dated January 26, 2007, among the Registrant and the purchasers listed on Exhibit A thereto.                                                                                                        
|              | 
|4.9(5)        |  | Form of Warrant to Purchase Shares of Common Stock, dated February 6, 2007, issued to certain purchasers in connection with a private placement.                                                                                   
|              | 
|4.10(6)       |  | Purchase Agreement, dated August 13, 2007, between the Registrant and Pfizer Inc.                                                                                                                                                  
|              | 
|4.11(22)      |  | Rights Agreement, dated December 2, 2008, between the Registrant and American Stock Transfer & Trust Company LLC.                                                                                                                  
|              | 
|10.1*(2)      |  | 1996 Equity Compensation Plan, as amended.                                                                                                                                                                                         
|              | 
|10.2*(1)      |  | 2004 Stock Incentive Plan, as amended.                                                                                                                                                                                             
|              | 
|10.3*(3)      |  | Form of Incentive Stock Option Agreement under the 2004 Stock Incentive Plan.                                                                                                                                                      
|              | 
|10.4*(3)      |  | Form of Nonstatutory Stock Option Agreement under the 2004 Stock Incentive Plan.                                                                                                                                                   
|              | 
|10.4.1*(3)    |  | Form of Nonstatutory Stock Option Agreement for Director Options under the 2004 Stock Incentive Plan.                                                                                                                              
|              | 
|10.4.2*(7)    |  | Nonstatutory Stock Option Agreement, dated January 27, 2006, between the Registrant and Charles A. Sanders.                                                                                                                        
|              | 
|10.4.3*(8)    |  | Form of Incentive Stock Option Agreement for the Retention Grant Program and Option Exchange Program under the 2004 Stock Incentive Plan.                                                                                          
|              | 
|10.4.4*(8)    |  | Form of Nonstatutory Stock Option Agreement for the Retention Grant Program and Option Exchange Program under the 2004 Stock Incentive Plan.                                                                                       
|              | 
|10.5*(9)      |  | Form of Restricted Stock Unit Agreement under the 2004 Stock Incentive Plan.                                                                                                                                                       



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|              |  |                                                                                                                                                         
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                             
|10.5.1*       |  | Form of Restricted Stock Unit Agreement for Director Restricted Stock Units under the 2004 Stock Incentive Plan.                                        
|              | 
|10.5.2*(7)    |  | Restricted Stock Unit Agreement, dated February 1, 2006, between the Registrant and Richard D. Katz.                                                    
|              | 
|10.6*         |  | Summary of Director Compensation.                                                                                                                       
|              | 
|10.7*         |  | Summary of 2009 Bonus Targets.                                                                                                                          
|              | 
|10.8*(10)     |  | Second Amended and Restated Executive Employment Agreement, dated August 21, 2007, between the Registrant and P. Kay Wagoner.                           
|              | 
|10.8.1*(23)   |  | Amendment No. 1 to Second Amended and Restated Executive Employment Agreement, dated December 24, 2008, between the Registrant and P. Kay Wagoner.      
|              | 
|10.8.2*(24)   |  | Letter Agreement, dated February 11, 2009, between the Registrant and P. Kay Wagoner.                                                                   
|              | 
|10.9*(10)     |  | Second Amended and Restated Executive Employment Agreement, dated August 21, 2007, between the Registrant and Richard D. Katz.                          
|              | 
|10.9.1*(11)   |  | Amendment No. 1 to Second Amended and Restated Executive Employment Agreement, dated February 1, 2008, between the Registrant and Richard D. Katz.      
|              | 
|10.9.2*(20)   |  | Amendment No. 2 to Second Amended and Restated Executive Employment Agreement, dated March 18, 2008, between the Registrant and Richard D. Katz.        
|              | 
|10.9.3*(23)   |  | Amendment No. 3 to Second Amended and Restated Executive Employment Agreement, dated December 24, 2008, between the Registrant and Richard D. Katz.     
|              | 
|10.10*(10)    |  | Amended and Restated Executive Employment Agreement, dated August 22, 2007, between the Registrant and Seth V. Hetherington.                            
|              | 
|10.10.1*(11)  |  | Amendment No. 1 to Amended and Restated Executive Employment Agreement, dated February 1, 2008, between the Registrant and Seth V. Hetherington.        
|              | 
|10.10.2*(23)  |  | Amendment No. 2 to Amended and Restated Executive Employment Agreement, dated December 24, 2008, between the Registrant and Seth V. Hetherington.       
|              | 
|10.11*(10)    |  | Amended and Restated Executive Employment Agreement, dated August 22, 2007, between the Registrant and Edward P. Gray.                                  
|              | 
|10.11.1*(11)  |  | Amendment No. 1 to Amended and Restated Executive Employment Agreement, dated February 4, 2008, between the Registrant and Edward P. Gray.              
|              | 
|10.12(2)      |  | Lease Agreement, dated December 17, 1992, between the Registrant and Royal Center IC, LLC, successor in interest to Petula Associates, LTD., as amended.
|              | 
|10.13(12)     |  | Sixth Amendment to Lease, dated August 3, 2005, by and between the Registrant and Royal Center IC, LLC.                                                 
|              | 
|10.14(2)      |  | Lease Agreement, dated October 1997, between the Registrant and Royal Center IC, LLC, successor in interest to Petula Associates, LTD., as amended.     
|              | 
|10.15(13)     |  | Fifth Amendment to Lease, dated June 4, 2007, by and between the Registrant and Royal Center IC, LLC.                                                   
|              | 
|10.16(6)      |  | Lease dated August 8, 2007, between the Registrant and 3908 Patriot Drive LLC.                                                                          
|              | 
|10.17(2)      |  | Master Loan and Security Agreement, dated July 14, 1999, between the Registrant and Oxford Venture Finance, as amended.                                 
|              | 
|10.17.1(14)   |  | Letter Agreement, dated April 15, 2005, from Oxford Finance Corporation to the Registrant.                                                              



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|              |  |                                                                                                                                                                 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                     
|10.17.2(15)   |  | Letter Agreement, dated February 14, 2006, from Oxford Finance Corporation to the Registrant.                                                                   
|              | 
|10.17.3(16)   |  | Letter Agreement, dated August 27, 2007, from Oxford Finance Corporation to the Registrant.                                                                     
|              | 
|10.17.4(19)   |  | Letter Agreement, dated February 14, 2008, from Oxford Finance Corporation to the Registrant.                                                                   
|              | 
|10.18(17)     |  | Master Security Agreement, dated November 28, 2007, between the Registrant and General Electric Capital Corporation.                                            
|              | 
|10.19(3)     |  | Exclusive License Agreement, dated February 29, 2000, between the Registrant and Childrens Medical Center Corporation, as amended.                             
|              | 
|10.20(21)    |  | Master Services Agreement, dated June 25, 2008, between the Registrant and Quintiles, Inc.                                                                      
|              | 
|10.21(18)    |  | Collaborative Research and License Agreement, dated August 13, 2007, between the Registrant and Pfizer Inc.                                                     
|              | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                       
|              | 
|31.1          |  | Certification of Chief Executive Officer and President pursuant to Exchange Act Rule 13a-14(a).                                                                 
|              | 
|31.2          |  | Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).                                                                           
|              | 
|32.1          |  | Certification of Chief Executive Officer and President pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|              | 
|32.2          |  | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.          



|(1) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on July 2, 2007.
|--- | ----------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to the exhibits to the Registrants Registration Statement on Form S-1 (File No. 333-114336).
|--- | -----------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to the exhibits to the Registrants Quarterly Report on Form 10-Q filed with the SEC on August 7, 2007.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on January 31, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to the exhibits to the Registrants Annual Report on Form 10-K filed with the SEC on March 6, 2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------



|(6) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on August 14, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------------



|(7) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on February 1, 2006.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(8) | Incorporated by reference to the exhibits to the Registrants Quarterly Report on Form 10-Q filed with the SEC on November 14, 2006.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



|(9) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on January 19, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------



|(10) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on August 22, 2007.
|---- | -------------------------------------------------------------------------------------------------------------------------------



|(11) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on February 4, 2008.
|---- | --------------------------------------------------------------------------------------------------------------------------------



|(12) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on August 9, 2005.
|---- | ------------------------------------------------------------------------------------------------------------------------------



|(13) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on June 22, 2007.
|---- | -----------------------------------------------------------------------------------------------------------------------------



|(14) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on April 19, 2005.
|---- | ------------------------------------------------------------------------------------------------------------------------------



|(15) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on February 21, 2006.
|---- | ---------------------------------------------------------------------------------------------------------------------------------



|(16) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on September 17, 2007.
|---- | ----------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(17) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on November 30, 2007.
|---- | ---------------------------------------------------------------------------------------------------------------------------------



|(18) | Incorporated by reference to the exhibits to the Registrants Quarterly Report on Form 10-Q filed with the SEC on November 5, 2007.
|---- | -----------------------------------------------------------------------------------------------------------------------------------



|(19) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on February 15, 2008.
|---- | ---------------------------------------------------------------------------------------------------------------------------------



|(20) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on March 19, 2008.
|---- | ------------------------------------------------------------------------------------------------------------------------------



|(21) | Incorporated by reference to the exhibits to the Registrants Quarterly Report on Form 10-Q filed with the SEC on August 6, 2008.
|---- | ---------------------------------------------------------------------------------------------------------------------------------



|(22) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on December 5, 2008.
|---- | --------------------------------------------------------------------------------------------------------------------------------



|(23) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on December 24, 2008.
|---- | ---------------------------------------------------------------------------------------------------------------------------------



|(24) | Incorporated by reference to the exhibits to the Registrants Current Report on Form 8-K filed with the SEC on February 12, 2009.
|---- | ---------------------------------------------------------------------------------------------------------------------------------



| | Confidential treatment granted by the SEC as to certain portions.
|- | -----------------------------------------------------------------



|* | Management contract or compensatory plan or arrangement filed herewith in response to Item 15(a) of Form 10-K.
|- | --------------------------------------------------------------------------------------------------------------



97