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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q

(Mark one)

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



FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004



OR



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



Commission File Number: 000-30347



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CURIS, INC.

(Exact Name of Registrant as Specified in Its Charter)



|                                                                                    |  |                                                
|----------------------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware (State or Other Jurisdiction of Incorporation or Organization)             |  | 04-3505116 (I.R.S. Employer Identification No.)
|                                                                                    | 
|61 Moulton Street Cambridge, Massachusetts (Address of Principal Executive Offices) |  | 02138 (Zip Code)                               



Registrants
Telephone Number, Including Area Code: (617) 503-6500



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



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



As of April 23, 2004, there
were 41,439,983 shares of the Registrants common stock outstanding.



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CURIS, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q



INDEX



|               |  |                                                                                                                 |  |            
|-------------- |  | --------------------------------------------------------------------------------------------------------------- |  | -----------
|PART I.        |  | FINANCIAL INFORMATION                                                                                           |  | Page Number
|               |  |                                                                                                                
|Item 1.        |  | Financial Statements (unaudited)                                                                                |  |            
|               |  |                                                                                                                
|               |  | Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003                                |  | 3          
|               |  |                                                                                                                
|               |  | Consolidated Statements of Operations and Comprehensive Loss for the Three Months ended March 31, 2004 and 2003 |  | 4          
|               |  |                                                                                                                
|               |  | Consolidated Statements of Cash Flows for the Three Months ended March 31, 2004 and 2003                        |  | 5          
|               |  |                                                                                                                
|               |  | Notes to Unaudited Condensed Consolidated Financial Statements                                                  |  | 6          
|               |  |                                                                                                                
|Item 2.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                           |  | 9          
|               |  |                                                                                                                
|Item 3.        |  | Quantitative and Qualitative Disclosures About Market Risk                                                      |  | 29         
|               |  |                                                                                                                
|Item 4.        |  | Controls and Procedures                                                                                         |  | 29         
|               |  |                                                                                                                
|PART II.       |  | OTHER INFORMATION                                                                                               |  |            
|               |  |                                                                                                                
|Item 2.        |  | Changes in Securities and Use of Proceeds                                                                       |  | 30         
|               |  |                                                                                                                
|Item 6.        |  | Exhibits and Reports on Form 8-K                                                                                |  | 30         
|               | 
|SIGNATURE      |  | 31                                                                                                             
|               | 
|CERTIFICATIONS |  |                                                                                                                



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Item 1.
    FINANCIAL STATEMENTS



CURIS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                                                                                                                                              |  | March 31, 2004 |              |   | December 31, 2003 |  
|ASSETS                                                                                                                                                                                                                                                                                        |  |                |              |   |                   |   |              |  
|Current Assets:                                                                                                                                                                                                                                                                               |  |                |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                                                                                     |  | $              | 19,708,935   |   |                   | $ | 27,734,548   |  
|Cash equivalentsrestricted                                                                                                                                                                                                                                                                   |  |                | 190,688      |   |                   |   | 190,661      |  
|Marketable securities                                                                                                                                                                                                                                                                         |  |                | 13,854,066   |   |                   |   | 7,413,703    |  
|Accounts receivable                                                                                                                                                                                                                                                                           |  |                | 2,337,215    |   |                   |   | 2,184,973    |  
|Prepaid expenses and other current assets                                                                                                                                                                                                                                                     |  |                | 925,943      |   |                   |   | 1,202,993    |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Total current assets                                                                                                                                                                                                                                                                          |  |                | 37,016,847   |   |                   |   | 38,726,878   |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Property and Equipment, net                                                                                                                                                                                                                                                                   |  |                | 2,283,753    |   |                   |   | 2,500,703    |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Other Assets:                                                                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Long-term investments                                                                                                                                                                                                                                                                         |  |                | 4,611,929    |   |                   |   | 2,389,742    |  
|Goodwill, net                                                                                                                                                                                                                                                                                 |  |                | 8,982,000    |   |                   |   | 8,982,000    |  
|Other intangible assets, net (Note 5)                                                                                                                                                                                                                                                         |  |                | 158,426      |   |                   |   | 177,193      |  
|Long-term notes receivable                                                                                                                                                                                                                                                                    |  |                | 2,000,000    |   |                   |   | 2,000,000    |  
|Deposits and other assets                                                                                                                                                                                                                                                                     |  |                | 1,045,783    |   |                   |   | 959,974      |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Total other assets                                                                                                                                                                                                                                                                            |  |                | 16,798,138   |   |                   |   | 14,508,909   |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|                                                                                                                                                                                                                                                                                              |  | $              | 56,098,738   |   |                   | $ | 55,736,490   |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                                                          |  |                |              |   |                   |   |              |  
|Current Liabilities:                                                                                                                                                                                                                                                                          |  |                |              |   |                   |   |              |  
|Debt and lease obligations, current portion                                                                                                                                                                                                                                                   |  | $              | 12,617       |   |                   | $ | 322,884      |  
|Accounts payable                                                                                                                                                                                                                                                                              |  |                | 657,987      |   |                   |   | 456,860      |  
|Accrued liabilities                                                                                                                                                                                                                                                                           |  |                | 2,871,519    |   |                   |   | 2,427,783    |  
|Deferred revenue, current portion                                                                                                                                                                                                                                                             |  |                | 1,541,379    |   |                   |   | 1,241,379    |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                                                                                                                                                     |  |                | 5,083,502    |   |                   |   | 4,448,906    |  
|Convertible notes payable                                                                                                                                                                                                                                                                     |  |                | 5,427,551    |   |                   |   | 5,333,733    |  
|Deferred revenue, net of current portion                                                                                                                                                                                                                                                      |  |                | 7,936,260    |   |                   |   | 7,088,638    |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Total liabilities                                                                                                                                                                                                                                                                             |  |                | 18,447,313   |   |                   |   | 16,871,277   |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Commitments                                                                                                                                                                                                                                                                                   |  |                |              |   |                   |   |              |  
|Stockholders Equity:                                                                                                                                                                                                                                                                         |  |                |              |   |                   |   |              |  
|Common stock, $0.01 par value125,000,000 shares authorized at March 31, 2004 and December 31, 2003; 42,460,878 and 41,413,171 shares
issued and outstanding, respectively, at March 31, 2004 and 41,608,698 and 40,560,991 shares issued and outstanding, respectively, at December 31, 2003 |  |                | 424,610      |   |                   |   | 416,088      |  
|Additional paid-in capital                                                                                                                                                                                                                                                                    |  |                | 692,059,674  |   |                   |   | 689,489,382  |  
|Notes receivable                                                                                                                                                                                                                                                                              |  |                | (110,368     | ) |                   |   | (110,368     | )
|Treasury stock (at cost, 1,047,707 shares at March 31, 2004 and December 31, 2003)                                                                                                                                                                                                            |  |                | (891,274     | ) |                   |   | (891,274     | )
|Deferred compensation                                                                                                                                                                                                                                                                         |  |                | (724,942     | ) |                   |   | (963,931     | )
|Accumulated deficit                                                                                                                                                                                                                                                                           |  |                | (653,106,254 | ) |                   |   | (649,068,435 | )
|Accumulated other comprehensive income                                                                                                                                                                                                                                                        |  |                | (21          | ) |                   |   | (6,249       | )
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|Total stockholders equity                                                                                                                                                                                                                                                                    |  |                | 37,651,425   |   |                   |   | 38,865,213   |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  
|                                                                                                                                                                                                                                                                                              |  | $              | 56,098,738   |   |                   | $ | 55,736,490   |  
|                                                                                                                                                                                                                                                                                              |  |                |              |   |                   |   |              |  



See accompanying notes
to unaudited consolidated financial statements.



3



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CURIS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)



|                                                                                                   |  |                              |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                   |  | Three Months Ended March 31, |           
|                                                                                                   |  | 2004                         |            |   | 2003 |  
|REVENUES:                                                                                          |  |                              |            |   |      |   |            |  
|Collaboration revenues                                                                             |  | $                            | 855,805    |   |      | $ | 435,358    |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|Total revenues                                                                                     |  |                              | 855,805    |   |      |   | 435,358    |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|COSTS AND EXPENSES:                                                                                |  |                              |            |   |      |   |            |  
|Research and development                                                                           |  |                              | 2,807,835  |   |      |   | 2,739,798  |  
|General and administrative                                                                         |  |                              | 1,915,149  |   |      |   | 1,708,275  |  
|Stock-based compensation (A)                                                                       |  |                              | 301,701    |   |      |   | 263,866    |  
|Amortization of intangible assets                                                                  |  |                              | 18,768     |   |      |   | 18,771     |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|Total costs and expenses                                                                           |  |                              | 5,043,453  |   |      |   | 4,730,710  |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|Loss from operations                                                                               |  |                              | (4,187,648 | ) |      |   | (4,295,352 | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|OTHER INCOME (EXPENSE):                                                                            |  |                              |            |   |      |   |            |  
|Interest income                                                                                    |  |                              | 107,331    |   |      |   | 107,134    |  
|Other income                                                                                       |  |                              | 153,845    |   |      |   | 127,772    |  
|Interest expense                                                                                   |  |                              | (111,347   | ) |      |   | (229,358   | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|Total other income                                                                                 |  |                              | 149,829    |   |      |   | 5,548      |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|Net loss                                                                                           |  | $                            | (4,037,819 | ) |      | $ | (4,289,804 | )
|Accretion of preferred stock dividend                                                              |  |                              |           |   |      |   | (180,225   | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|Net loss applicable to common stockholders                                                         |  | $                            | (4,037,819 | ) |      | $ | (4,470,029 | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|Net loss per common share (basic and diluted)                                                      |  | $                            | (0.10      | ) |      | $ | (0.14      | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|Weighted average common shares (basic and diluted)                                                 |  |                              | 41,105,756 |   |      |   | 31,731,009 |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|Net loss                                                                                           |  | $                            | (4,037,819 | ) |      | $ | (4,289,804 | )
|Unrealized gain (loss) on marketable securities                                                    |  |                              | 6,228      |   |      |   | (14,645    | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|Comprehensive loss                                                                                 |  | $                            | (4,031,591 | ) |      | $ | (4,304,449 | )
|                                                                                                   |  |                              |            |   |      |   |            |  
|(A)   The following summarizes the departmental allocation of the stock-based compensation charge: |  |                              |            |   |      |   |            |  
|Research and development                                                                           |  | $                            | 211,114    |   |      | $ | 185,925    |  
|General and administrative                                                                         |  |                              | 90,587     |   |      |   | 77,941     |  
|                                                                                                   |  |                              |            |   |      |   |            |  
|Total stock-based compensation                                                                     |  | $                            | 301,701    |   |      | $ | 263,866    |  
|                                                                                                   |  |                              |            |   |      |   |            |  



See accompanying notes
to unaudited consolidated financial statements.



4



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CURIS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)



|                                                                            |  |                              |            |   |      |   |            |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                            |  | Three Months Ended March 31, |           
|                                                                            |  | 2004                         |            |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES: Net loss                              |  | $                            | (4,037,819 | ) |      | $ | (4,289,804 | )
|Adjustments to reconcile net loss to net cash used in operating activities- |  |                              |            |   |      |   |            |  
|Depreciation and amortization                                               |  |                              | 301,935    |   |      |   | 395,181    |  
|Stock-based compensation expense                                            |  |                              | 301,701    |   |      |   | 263,866    |  
|Non-cash interest expense on notes payable                                  |  |                              | 103,518    |   |      |   | 145,776    |  
|Amortization of intangible assets                                           |  |                              | 18,768     |   |      |   | 18,771     |  
|Impairment of property and equipment                                        |  |                              |           |   |      |   | 280        |  
|Changes in current assets and liabilities:                                  |  |                              |            |   |      |   |            |  
|Accounts receivable                                                         |  |                              | (152,242   | ) |      |   |           |  
|Prepaid expenses and other assets                                           |  |                              | 191,241    |   |      |   | 95,594     |  
|Accounts payable and accrued liabilities                                    |  |                              | 644,863    |   |      |   | (397,005   | )
|Deferred contract revenue                                                   |  |                              | 1,147,622  |   |      |   | (48,707    | )
|                                                                            |  |                              |            |   |      |   |            |  
|Total adjustments                                                           |  |                              | 2,557,406  |   |      |   | 473,756    |  
|                                                                            |  |                              |            |   |      |   |            |  
|Net cash used in operating activities                                       |  |                              | (1,480,413 | ) |      |   | (3,816,048 | )
|                                                                            |  |                              |            |   |      |   |            |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                       |  |                              |            |   |      |   |            |  
|Purchase of marketable securities                                           |  |                              | (8,580,091 | ) |      |   | (4,800,098 | )
|Sale of marketable securities                                               |  |                              | 2,145,929  |   |      |   | 2,900,389  |  
|Decrease in restricted cash                                                 |  |                              |           |   |      |   | 224,505    |  
|Purchase of long-term investments                                           |  |                              | (3,249,395 | ) |      |   |           |  
|Sale of long-term investments                                               |  |                              | 1,027,208  |   |      |   |           |  
|Increase in other assets                                                    |  |                              |           |   |      |   | 2,500      |  
|Purchases and dispositions of property and equipment                        |  |                              | (84,985    | ) |      |   | (11,109    | )
|                                                                            |  |                              |            |   |      |   |            |  
|Net cash used in investing activities                                       |  |                              | (8,741,334 | ) |      |   | (1,683,813 | )
|                                                                            |  |                              |            |   |      |   |            |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                       |  |                              |            |   |      |   |            |  
|Proceeds from issuance of common stock                                      |  |                              | 2,516,101  |   |      |   |           |  
|Purchases of treasury stock                                                 |  |                              |           |   |      |   | (21,890    | )
|Repayments of obligations under capital leases                              |  |                              | (319,967   | ) |      |   | (483,446   | )
|                                                                            |  |                              |            |   |      |   |            |  
|Net cash provided by (used in) financing activities                         |  |                              | 2,196,134  |   |      |   | (505,336   | )
|                                                                            |  |                              |            |   |      |   |            |  
|Effect of exchange rates on cash and cash equivalents                       |  |                              |           |   |      |   | (127,499   | )
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                   |  |                              | (8,025,613 | ) |      |   | (6,132,696 | )
|                                                                            |  |                              |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              |  |                              | 27,734,548 |   |      |   | 26,920,605 |  
|                                                                            |  |                              |            |   |      |   |            |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |  | $                            | 19,708,935 |   |      | $ | 20,787,909 |  
|                                                                            |  |                              |            |   |      |   |            |  



See accompanying notes
to unaudited consolidated financial statements.



5



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CURIS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)



|1. | Nature of Business
|-- | ------------------



Curis, Inc. (Curis or the Company) is a therapeutic drug development company principally focused on the discovery,
development and future commercialization of products that modulate key regulatory signaling pathways controlling the repair and regeneration of human tissues and organs. The Companys product development approach involves using small molecules,
proteins or antibodies to modulate these regulatory signaling pathways. The Company has successfully developed several preclinical product candidates in the fields of kidney disease, cancer, neurological disorders, cardiovascular disease and hair
growth regulation.



The Company is subject to
risks commensurate with its industry and stage of development including, but not limited to, the development by its competitors of new technological innovations, dependence on key personnel, its ability to protect proprietary technology, its
reliance on corporate partners to successfully research, develop and commercialize products based on the Companys technologies, its ability to comply with government regulations and approval requirements as well as its ability to grow its
business and obtain adequate financing to fund this growth.



|2. | Basis of Presentation
|-- | ---------------------



The accompanying consolidated financial statements of the Company have been prepared in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. These statements, however, are condensed and do not include all disclosures required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction
with the Companys Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission on March 1, 2004.



In the opinion of the Company, the unaudited financial statements contain all adjustments (all of which were considered normal and
recurring) necessary to present fairly the Companys financial position at March 31, 2004 and the results of operations and cash flows for the three-month periods ended March 31, 2004 and 2003. The preparation of the Companys consolidated
financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at the
balance sheet date. Such estimates include the carrying value of property and equipment and intangible assets and the value of certain liabilities. Actual results may differ from such estimates.



These interim results are not necessarily indicative of
results to be expected for a full year or subsequent interim periods.



|3. | Financial Statement Reclassifications
|-- | -------------------------------------



The Company has reclassified $174,000 for legal costs associated with its patents for the three months ended March 31, 2003 from
Research and development expenses to General and administrative expenses in the Companys Costs and Expenses section of its Consolidated Statement of Operations and Comprehensive Loss.



|4. | Wyeth Pharmaceuticals Collaboration
|-- | -----------------------------------



On January 12, 2004, the Company licensed its Hedgehog proteins and small molecule Hedgehog pathway agonists to Wyeth Pharmaceuticals for
therapeutic applications in the treatment of neurological and other disorders. Under the terms of the agreement, Wyeth paid the Company a $1,500,000 license fee and $1,500,000 to purchase 315,524 shares of the Companys common stock at a
purchase price of $4.754 per share. The common stock purchase price was calculated as the 15-day trailing average of the closing price of the Companys common stock. The $1,500,000 license fee is being recognized as revenue over the estimated
development period of the collaboration, which the Company estimates to be five years.



6



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CURIS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)



In addition to these initial payments, Wyeth is obligated to provide financial
support of the Companys research under the collaboration for a period of two years based on the number of full-time equivalent researchers performing services under the collaboration. Wyeth can, at its option, elect to extend its financial
support of the Companys research in one-year increments.During the three-month period ended March 31, 2004, the Company recorded revenue of $280,000 related to the support of eight full-time equivalent researchers (from the February 9,
2004, effective date until March 31, 2004). In addition, the Company recorded $20,000 as revenue related to expenses incurred on behalf of Wyeth that were paid by the Company and for which Wyeth is obligated to reimburse the Company. The Company
will continue to recognize revenue for funded research and expense reimbursement as such research is performed or reimbursable expense is incurred, as applicable.



Wyeth is also obligated to make additional cash payments if the licensed programs successfully achieve
development and drug approval milestones and to pay the Company a royalty on net product sales, if any, that escalates with increasing sales volume.



As part of the agreement, the Company has retained development and licensing options for certain therapeutic applications of the Hedgehog
agonist technologies, including those applications that qualify as orphan drug indications, topical applications for hair growth, local delivery applications for treatment of cardiovascular disease and use of the technology with stem cells as part
of an ex vivo therapy. Wyeth has a right of first negotiation to obtain an exclusive license to the orphan drug indications and the cardiovascular applications. The Company is under no obligation to license the technology to Wyeth if the Company
secures a license with another collaborator with terms that are more beneficial to the Company.



|5. | Other Intangible Assets
|-- | -----------------------



Other intangible assets consisted of the following as of March 31, 2004, and December 31, 2003:



|                               |  |                |          |   |                   |   |          |  
|------------------------------ |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                               |  | March 31, 2004 |          |   | December 31, 2003 |  
|Patents                        |  | $              | 612,000  |   |                   | $ | 612,000  |  
|Less: accumulated amortization |  |                | (454,000 | ) |                   |   | (435,000 | )
|                               |  |                |          |   |                   |   |          |  
|                               |  | $              | 158,000  |   |                   | $ | 177,000  |  
|                               |  |                |          |   |                   |   |          |  



|6. | Long-Term Debt and Capital Lease Obligations
|-- | --------------------------------------------



Long-term debt and capital lease obligations consisted of the following at March 31, 2004 and December 31, 2003:



|                                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                            |  | March 31,2004 |           |   | December 31,2003 |  
|Obligations under capital leases, net of $2,000 and $12,000 discount at March 31, 2004 and December 31, 2003, respectively                                                                                  |  | $             | 13,000    |   |                  | $ | 323,000   |  
|Convertible subordinated note payable to Becton Dickinson, net of $120,000 and $133,000 discount, including $387,000 and $352,000 of accrued
interest at March 31, 2004 and December 31, 2003, respectively |  |               | 2,267,000 |   |                  |   | 2,219,000 |  
|Convertible promissory note payable to Elan Pharma International, Ltd., including $161,000 and $115,000 of accrued interest at March 31, 2004
and December 31, 2003, respectively                           |  |               | 3,161,000 |   |                  |   | 3,115,000 |  
|                                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                            |  |               | 5,441,000 |   |                  |   | 5,657,000 |  
|Less current portion                                                                                                                                                                                        |  |               | (13,000   | ) |                  |   | (323,000  | )
|                                                                                                                                                                                                            |  |               |           |   |                  |   |           |  
|Total long-term debt                                                                                                                                                                                        |  | $             | 5,428,000 |   |                  | $ | 5,334,000 |  
|                                                                                                                                                                                                            |  |               |           |   |                  |   |           |  



7



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CURIS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)(continued)



Effective January 20, 2004, the Company entered into a loan agreement with the Boston
Private Bank & Trust Company to finance up to $1,250,000 in purchases of equipment and facility leasehold improvements during the period from December 1, 2003 until January 20, 2005. Under the terms of the loan agreement, the Company will
request periodic loans for qualifying purchases of equipment and leasehold improvements through January 20, 2005. Until January 20, 2005, the Company will pay interest on any borrowings on a monthly basis in arrears. On January 20, 2005, the Company
will convert the then outstanding balance into a 36-month term note that bears interest at either a variable rate (5.00% as of March 31, 2004) or a fixed rate (5.94% as of March 31, 2004) for the repayment period. The loan will be secured by any
equipment and leasehold improvements financed thereunder. As of March 31, 2004, the Company has not drawn any amounts under the loan agreement.



|7. | Accounting for Stock-Based Compensation
|-- | ---------------------------------------



The Company has two stock option plans. The Company applies APB Opinion No. 25, Accounting for Stock Issued to Employees and
related interpretations, in accounting for qualifying options granted to its employees and directors under its plans and applies Statement of Financial Accounting Standards No. 123, Accounting for Stock Issued to Employees (SFAS
123), for disclosure purposes only. The SFAS 123 disclosures include pro forma net loss and net loss per share as if the fair value method of accounting had been used. Stock issued to non-employees is accounted for in accordance with SFAS 123
and related interpretations.



The following
are the pro forma net loss and net loss per share, as if compensation expense for the option plans had been determined based on the fair value at the date of grant, consistent with SFAS 123:



|                                                                                                               |  |                              |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                                               |  | Three months ended March 31, |           
|                                                                                                               |  | 2004                         |            |   | 2003 |  
|Net loss applicable to common stockholders, as reported                                                        |  | $                            | (4,038,000 | ) |      | $ | (4,470,000 | )
|Add back: stock-based compensation included in net loss applicable to common stockholders, as reported         |  |                              | 302,000    |   |      |   | 264,000    |  
|Less: total stock-based employee compensation expense determined under fair value based methods for all awards |  |                              | (2,045,000 | ) |      |   | (1,857,000 | )
|                                                                                                               |  |                              |            |   |      |   |            |  
|Pro forma net loss                                                                                             |  | $                            | (5,781,000 | ) |      | $ | (6,063,000 | )
|Net loss per common share (basic and diluted)                                                                 |  |                              |            |   |      |   |            |  
|As reported                                                                                                    |  | $                            | (0.10      | ) |      | $ | (0.14      | )
|Pro forma                                                                                                      |  | $                            | (0.14      | ) |      | $ | (0.19      | )



The
effects on three months ended March 31, 2004 and 2003 pro forma net loss and net loss per share of the estimated fair value of stock options and shares are not necessarily representative of the effects on the results of operations in the future. In
addition, the estimates made utilize a pricing model developed for traded options with relatively short lives; the Companys option grants typically have a life of up to ten years and are generally not transferable. Therefore, the actual fair
value of a stock option grant may be different from these estimates. The Company believes that its estimates incorporate all relevant information and represent a reasonable approximation in light of the difficulties involved in valuing non-traded
stock options.



8



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Item 2.    M
ANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS



The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial statements and the related notes appearing elsewhere in this report.



Overview



Curis, Inc. (we, our or us) is a therapeutic drug development company principally focused on the discovery,
development and future commercialization of products that modulate key regulatory signaling pathways controlling the repair and regeneration of human tissues and organs. Our product development approach involves using small molecules, proteins or
antibodies to modulate these regulatory signaling pathways. We have successfully developed several promising preclinical product candidates in the fields of kidney disease, cancer, neurological disorders, cardiovascular disease and hair growth
regulation.



Since our inception, we have funded our operations
primarily through license fees, research and development funding from our collaborative partners, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights. We have never been
profitable and have incurred an accumulated deficit of $653,106,000 as of March 31, 2004. We expect to incur significant operating losses for the next several years as we devote substantially all of our resources to research and development of our
product candidates. We will need to generate significant revenues to achieve profitability and do not expect to achieve profitability in the foreseeable future, if at all.



We currently have strategic collaborations with Ortho Biotech, Genentech and Wyeth. Our strategic collaborations generally
provide for our research, development and commercialization programs to be funded by our collaborators and provide us with the opportunity to receive additional payments if specified milestones are achieved, as well as royalty payments upon the
successful commercialization of any products based upon the collaboration. In some cases, we have retained development and commercialization rights in areas where we believe we can attain the greatest potential long-term value through the
application of our own internal resources. In the future, we plan to continue to seek corporate partners for the further development and commercialization of some of our technologies. Even though we are seeking partners to help develop some of our
technologies, we expect to select at least one program that we will develop further on our own.



Financial Operations Overview



General.    Our future operating results will depend largely on the magnitude of payments from our current and potential future corporate partners and the progress of other product candidates currently in our
research and development pipeline. The results of our operations will vary significantly from year to year and quarter to quarter and depend on, among other factors, the timing of our entry into new collaborations, the timing of the receipt of
payments from collaborators and the cost and outcome of clinical trials. We believe that our existing capital resources should enable us to maintain current and planned operations into the second half of 2006.



Revenue.    Other than royalty revenue from
Stryker Corporations sales of OP-1, a bone-inducing protein, we have not generated any revenue from product sales since our inception and do not expect to generate any revenue from the sale of products for several years, if ever. In late 2002,
Stryker paid us $14,000,000 in exchange for the termination of its future OP-1 royalty obligations. Accordingly, we will receive no future royalties on sales by Stryker of OP-1. Other than revenues from our agreements with Stryker, substantially all
of our revenue to date has been derived from license fees and research and development payments that we have received from our strategic collaborators, such as Ortho Biotech, Genentech and Wyeth. In the future, we will seek to generate revenue from
a combination of license fees, research and development funding and milestone payments in connection with strategic collaborations, and royalties resulting from the sale of products which incorporate our intellectual property. We expect that any
revenue we generate will fluctuate from quarter to quarter as a result of



9



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the timing and amount of payments received under our strategic collaborations, and the amount and timing of payments we receive upon the sale of our
products, to the extent that any are successfully commercialized.



Research and Development.    Research and development expenses consist of costs incurred to discover, research and develop product candidates. These expenses consist primarily of salaries and related expenses for
personnel, outside service costs including medicinal chemistry, consulting and sponsored research collaborations and occupancy and depreciation charges. We expense research and development costs as incurred.



The following table summarizes our primary research and development programs,
including the current development status of each program. In the table below, the term early preclinical means we are seeking to obtain initial demonstrations of therapeutic efficacy in preclinical models of human disease, mid preclinical means we
are seeking to obtain multiple demonstrations of efficacy in preclinical models of human disease, and late preclinical means we are seeking to obtain both multiple demonstrations of efficacy in preclinical models of human disease and relevant
toxicology and safety data required for an investigational new drug application filing with the FDA seeking to commence a phase I clinical trial to assess safety in humans. We have set forth below under Results of Operations the expenses
incurred with respect to each product candidate for the three months ended March 31, 2004 and 2003.



|                             |  |                                     |  |                        |  |                  
|---------------------------- |  | ----------------------------------- |  | ---------------------- |  | -----------------
|Product Candidate            |  | Primary Indication                  |  | Partner/Licensee       |  | Status           
|BMP-7 protein                |  | Kidney disease                      |  | Ortho Biotech          |  | Late preclinical 
|Hh small molecule antagonist |  | Basal cell carcinoma                |  | Genentech              |  | Late preclinical 
|Hh small molecule antagonist |  | Cancer                              |  | Genentech              |  | Mid preclinical  
|Hh antibody antagonist       |  | Cancer                              |  | Genentech              |  | Mid preclinical  
|Hh small molecule agonist    |  | Central nervous system disorders    |  | Wyeth                  |  | Mid preclinical  
|Hh small molecule agonist    |  | Peripheral nervous system disorders |  | Wyeth                  |  | Mid preclinical  
|Hh small molecule agonist    |  | Hair loss                           |  | Internal development   |  | Late preclinical 
|Hh agonist/protein/gene      |  | Cardiovascular disease              |  | Internal development   |  | Mid preclinical  
|Hh small molecule antagonist |  | Hair growth inhibition              |  | Internal development   |  | Early preclinical
|PYY peptide                  |  | Obesity                             |  | Amylin Pharmaceuticals |  | IND filed        



There is a risk that
any drug discovery and development program may not produce products or revenue. Moreover, because of uncertainties inherent in drug discovery and development, including those factors described below under Risk Factors That May Affect
Results, we and our collaborative partners may not be able to successfully develop and commercialize any of the product candidates included in the table above.



Because substantially all of our product development initiatives are in various stages of preclinical testing, the
successful development of our product candidates is highly uncertain. We cannot reasonably estimate or know the nature, timing and estimated costs of the efforts necessary to complete the development of, or the period in which material net cash
inflows are expected to 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 cost of clinical trials and other research and development activities undertaken by us or our collaborative partners;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | future clinical trials results;
| | - |  | -------------------------------



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



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



| |  |  | the cost and timing of establishing sales, marketing and distribution capabilities;
| | - |  | -----------------------------------------------------------------------------------



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



10



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



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



Any failure to complete the development of our product candidates in a timely
manner could have a material adverse effect on our operations, financial position and liquidity. A discussion of risks and uncertainties associated with completing our projects on schedule, or at all, and some consequences of failing to do so, are
set forth below in Risk Factors That May Affect Results.



General and Administrative.    General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, business development, legal, information
technology, corporate communications and human resource functions. Other costs include facility costs not otherwise included in research and development expense and professional fees for legal, patent and accounting services.



Strategic Alliances and License
Agreements.    Since inception, substantially all of our revenue has been derived from collaborations and other research and development arrangements with third parties. Our current strategic alliances and key license
agreements are as follows:



Ortho Biotech
Collaboration.    In November 2002, we licensed our broad BMP technology portfolio to Ortho Biotech on an exclusive, worldwide royalty-bearing basis, for all non-orthopedic and non-dental therapeutic applications in exchange
for a $3,500,000 fee, a series of cash milestones if specified clinical research objectives and regulatory approvals are achieved, including a $30,000,000 milestone payment upon U.S. regulatory approval of a product for the treatment of kidney
disease, and a royalty on potential future product sales. Ortho Biotech has assumed all future costs and responsibility for BMP-based product development and has sole responsibility for deciding if and when human clinical trials of BMP-based product
candidates will begin.



Genentech, Inc.
Collaboration.    In June 2003, we licensed our small molecule and antibody antagonists of the Hedgehog signaling pathway to Genentech on an exclusive, worldwide royalty-bearing basis with the primary focus of the research
plan to develop applications in cancer therapy. Under the terms of the agreement, Genentech paid us a license fee of $5,000,000, purchased 1,323,835 shares of our common stock at a price of $2.644 per share for aggregate proceeds of $3,500,000, and
is obligated to pay us a total of $4,000,000 in maintenance fees by July 2005. Genentech is also obligated to make cash payments to us upon the successful achievement of clinical development and drug approval milestones. In addition, Genentech will
pay a royalty on potential future net product sales, which increases with increasing sales volume. We have retained the right to co-develop products in the field of basal cell carcinoma, in which event we will share in any profits related to the
basal cell carcinoma program in a percentage that is equal to our co-development cost sharing contribution.



In March 2004, Genentech announced that it had added a new small molecule antagonist of the Hedgehog signaling pathway covered under our collaboration to
its product candidate pipeline. This small molecule is under development for the treatment of basal cell carcinoma. Genentech has stated that it expects to file an investigational new drug application on this small molecule later this year or early
in 2005. Under our agreement with Genentech, we have retained the right to co-develop products in the field of basal cell carcinoma. In the event we choose to co-develop such products, we will share in any profits related to the commercialization of
basal cell carcinoma products in a percentage that is equal to our co-development cost contribution. Under the terms of our agreement, Genentech is required to present a co-development plan and budget to us for the small molecule at which point we
will have 30 days to decide if we will participate in the co-development of the basal cell carcinoma product candidate. If we elect to participate, we and Genentech will determine the applicable cost-sharing percentages. In the event that we elect
not to participate in the co-development of the basal cell carcinoma product candidate, we will receive milestones and royalties on future sales, if any. We expect to receive the co-development plan and budget to make a decision in 2004.



11



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Wyeth Pharmaceuticals Collaboration.    Effective February 2004, we licensed
our Hedgehog proteins and small molecule Hedgehog pathway agonists to Wyeth Pharmaceuticals on an exclusive worldwide, royalty-bearing basis for the development and commercialization of pharmaceutical products for therapeutic applications in the
treatment of diseases and disorders in humans with the primary focus of the research program on the treatment of neurological disorders, including neurodegenerative diseases and neuropathies. Under the terms of the agreement, Wyeth paid us a license
fee of $1,500,000 and purchased 315,524 shares of our common stock at a price of $4.754 per share for an aggregate purchase price of $1,500,000. Wyeth will provide us with research funding for a minimum of two years. In addition, Wyeth is obligated
to make cash payments to us upon the successful achievement of development and drug approval milestones and is obligated to pay a royalty on net product sales, if any, that escalates with increasing sales volume.



Amylin Pharmaceuticals License.    In December
2002, we granted Amylin Pharmaceuticals an exclusive, worldwide royalty-bearing license to our PYY patent applications for use in the research, development and commercialization of products in exchange for a license fee, milestone payments upon the
achievement of specified development and product sales objectives, and royalties on potential future product sales, if any. PYY is a gut peptide that has been shown in animals and humans to suppress appetite and reduce food intake. Amylin has
exclusive responsibility for expenses related to further development of the PYY compound.



In December 2003, Amylin filed an investigational new drug application with the U.S. Food and Drug Administration to initiate clinical studies with a PYY compound for the potential treatment of obesity. The acceptance
of this investigational new drug application occurred during the first quarter of 2004 and resulted in a $50,000 milestone payment to us. This milestone payment is included in the Revenues section of our consolidated statement of
operations.



Critical Accounting Policies



We believe the following accounting policies to be critical to understanding
the judgments and estimates we use in preparing our financial statements:



Long-Lived Assets.    Long-lived assets consist of goodwill, long-term receivables, equity securities held in Micromet, ES Cell International and Aegera Therapeutics, capitalized patent
costs and long-term deposits. We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, we perform a goodwill
impairment test annually. If it were determined that the carrying value of intangible or long-lived assets might not be recoverable based upon the existence of one or more indicators of impairment, we would measure any impairment based on a
projected cash flow method.



As a result of the adoption of
SFAS No. 142, effective January 1, 2002, we ceased amortization of goodwill and performed an initial assessment of impairment of our goodwill in the first quarter of 2002. SFAS No. 142 also requires us to perform an impairment assessment annually or
whenever events or changes in circumstances indicate that our goodwill may be impaired. We completed our annual goodwill impairment test in December 2003, and determined that as of that date our fair value exceeded the carrying value of our net
assets. Accordingly, no goodwill impairment was recognized in 2003.



Revenue recognition.    Revenue is a key component of our results of operations. We follow the provisions of the Securities and Exchange Commissions Staff Accounting Bulletin No. 104 (SAB No. 104),
Revenue Recognition, and EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables. In accordance with SAB No. 104, we recognize revenue related to research activities as they are performed, so long as there is
persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the related receivable is probable.



We analyze our multiple element arrangements to determine whether the elements can be separated and accounted for individually as separate units of
accounting in accordance with EITF No. 00-21.We recognize



12



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license payments as revenue if the license has stand-alone value and the fair value of the undelivered items can be determined. If the license is considered
to have stand-alone value but the fair value on any of the undelivered items cannot be determined, the license payments are recognized as revenue over the period of performance for such undelivered items or services. Our estimate of the period of
performance involves management judgment.



Amounts received for
license fees are deferred and recognized as services are performed over the performance period of the contract. Amounts received for milestones are recognized upon achievement of the milestone, as long as the milestone is deemed to be substantive
and we have no other performance obligations. In the event that we have remaining performance obligations, the portion of the milestone payment equal to the lesser of the non-refundable cash received or the percentage of the services performed
through that date multiplied by the total milestone payment would be recognized as revenue.



We recognized $463,000 and $343,000, respectively, in revenue related to our collaborations with Genentech and Wyeth for the three months ended March 31, 2004. These amounts consist of revenue of $310,000 recognized
under the amortization of a $5,000,000 license fee received from Genentech in July 2003 and future maintenance fees totaling $4,000,000 that will be paid over the first two years of the collaboration, and revenue of $42,000 recognized under the
amortization of a $1,500,000 license fee payment received from Wyeth in February 2004. The remainder of the license fees will be recognized proportionately as the remaining services are performed. In addition, we recognized $153,000 and $301,000,
respectively, of revenues relating to research and development services performed under these collaboration agreements with Genentech and Wyeth for the three-month period ended March 31, 2004. No revenue related to Genentech or Wyeth was recognized
in the first quarter of 2003.



For the three-month period ended
March 31, 2003, we recognized $435,000 of revenues relating to our corporate collaboration agreement with ES Cell.



Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying balance sheets, as
further described below as one of our critical accounting estimates. Amounts that we expect will not be recognized prior to March 31, 2005 are classified as long-term deferred revenue. As of March 31, 2004, we have recorded short- and long-term
deferred revenue of $1,541,000 and $7,936,000, respectively, which are related to our collaborations with Genentech and Wyeth.



The above list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting principles, with no need for managements judgment in their application. There are also areas in which managements judgment in selecting any available alternative would
not produce a materially different result.



Critical Accounting Estimates



The preparation of our consolidated financial statements
in conformity with accounting principles generally accepted in the United States requires that we make estimates and assumptions that affect the reported amounts and disclosure of certain assets and liabilities at our balance sheet date. Such
estimates include the collectibility of receivables, the carrying value of property and equipment and intangible assets and the value of certain liabilities. Actual results may differ from such estimates. Examples of some of our significant
estimates are as follows:



Valuation of investments in
privately-held companies.    We have investments in Aegera, Micromet and ES Cell International with carrying values of $167,000, $400,000 and $150,000, respectively. These investments are included in the Deposits and
other assets category of our consolidated balance sheets. At each balance sheet date, we review these investments to determine whether the fair value of these investments is less than the carrying value and, if so, whether we should write-down
the investment. These companies are not publicly-traded and, therefore, determining the fair value of our investments in these companies involves significant judgment.



13



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We consider available information in estimating the fair value of these investments and, as of March 31, 2004, believe that the fair value of our investments
is not less than their carrying value.



In January 2004,
Micromet announced that it terminated one-third of its workforce as the result of a contract dispute with a co-development partner that resulted in a significant decrease of previously budgeted cash inflows in 2004. Accordingly, we concluded that
the carrying value of our investment in Micromet common stock had been impaired as of December 31, 2003, and we reduced the then-carrying value of $686,000 to the estimated fair value of $400,000. As of March 31, 2004, we believe our investment in
Micromet has not been further impaired. If the financial condition or results of Aegera or ES Cell decline significantly or if Micromets financial condition continues to decline, the fair value of these investments would likely decline and, as
a result, we may have to record an impairment charge to the extent such impairment is deemed other than temporary.



Timing of deferred revenue recognition.    We have recorded short-term deferred revenue of $1,541,000 and long-term deferred
revenue of $7,936,000 as of March 31, 2004. Short-term deferred revenue consists of amounts that are expected to be recognized as revenue by March 31, 2005. However, this estimate is based on our current operating plan as of March 31, 2004. If our
operating plan should change in the future, we may recognize a different amount of deferred revenue over the twelve-month period from April 1, 2004, through March 31, 2005.



We follow detailed guidelines in measuring revenue, however, certain judgments affect the application of our revenue policy.
For example, in connection with our collaboration agreements with Genentech and Wyeth, we have recorded on our balance sheet short- and long-term deferred revenue based on our best estimate of when such revenue will be recognized. The estimate of
deferred revenue reflects managements estimate of the period of our involvement with the collaboration. Our period of involvement is largely determined by the time to commercialize clinical candidates that we may co-develop with Genentech.
Since the timing of clinical development is difficult to estimate, our estimates may change in the future. Such changes to estimates would result in a change in revenue recognition rates.



Results of Operations



Quarters Ended March 31, 2004 and March 31, 2003



Revenues.    Revenues increased $421,000, or 97%, to $856,000 for the three-month period ended March 31, 2004 as compared to
$435,000 for the three-month period ended March 31, 2003. Revenues for the three-month period ended March 31, 2004 were derived from revenue recognized on the license fees from Genentech and Wyeth of $310,000 and $42,000, respectively, and revenue
of $153,000 and $301,000 was recognized related to reimbursable collaboration costs from Genentech and Wyeth, respectively. In addition, we achieved a $50,000 milestone payment under the Amylin license agreement in the period ended March 31, 2004,
which we recognized as revenue. Revenues for the three-month period ended March 31, 2003 were derived solely from our collaboration with ES Cell.



14



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Research and Development Expenses.    Research and development expenses are
summarized as follows:



|                                          |  |                                    |  |                                     |           |                               |   |           |  |         |   
|----------------------------------------- |  | ---------------------------------- |  | ----------------------------------- | --------- | ----------------------------- | - | --------- |  | ------- | --
|                                          |  |                                    |  | For the Three Months EndedMarch 31, |           | PercentageIncrease/(Decrease) |  
|Research and Development Program          |  | Primary Indication                 |  | 2004                                |           | 2003                          |  
|Hh small molecule antagonist              |  | Basal cell carcinoma               |  | $                                   | 48,000    |                               | $ | 3,000     |  | 1,500.0 | % 
|Hh small molecule and antibody antagonist |  | Cancer                             |  |                                     | 996,000   |                               |   | 520,000   |  | 91.5    | % 
|Hh small molecule agonist                 |  | Central nervous system disorders   |  |                                     | 954,000   |                               |   | 1,050,000 |  | (9.1    | %)
|Hh small molecule agonist                 |  | Peripheral nervous systemdisorders |  |                                     | 249,000   |                               |   | 525,000   |  | (52.6   | %)
|Hh small molecule agonist                 |  | Hair loss                          |  |                                     | 182,000   |                               |   |          |  | 100.0   | % 
|Stem cells                                |  | Researchadult-derived stem cells  |  |                                     | 317,000   |                               |   | 416,000   |  | (23.8   | %)
|Other programs                            |  |                                    |  |                                     | 62,000    |                               |   | 226,000   |  | (72.6   | %)
|                                          |  |                                    |  |                                     |           |                               |   |           |  |         |   
|Total research and development expense    |  |                                    |  | $                                   | 2,808,000 |                               | $ | 2,740,000 |  | 2.5     | % 
|                                          |  |                                    |  |                                     |           |                               |   |           |  |         |   



The increase in
research and development expenses in the three months ended March 31, 2004 was primarily due to an increase in spending of $476,000, or 92%, on our Hedgehog small molecule and antibody antagonist program, which is under collaboration with Genentech.
The increased spending under our collaboration with Genentech was primarily attributable to a $358,000 increase in chemistry expenses related to potential small molecule antagonist product candidates for the treatment of various cancers. Genentech
is obligated to reimburse us a portion of the $358,000 increase in chemistry costs. Reduced spending in other programs, particularly decreases of $276,000 and $164,000 in our Hedgehog small molecule agonist peripheral neuropathy and other programs,
respectively, offset this increase.



General and
Administrative Expenses.    General and administrative expenses are summarized as follows:



|                                          |  |                                     |           |                               |   |           |  |       |   
|----------------------------------------- |  | ----------------------------------- | --------- | ----------------------------- | - | --------- |  | ----- | --
|                                          |  | For the Three Months EndedMarch 31, |           | PercentageIncrease/(Decrease) |  
|                                          |  | 2004                                |           | 2003                          |  
|Personnel                                 |  | $                                   | 804,000   |                               | $ | 676,000   |  | 18.9  | % 
|Occupancy and depreciation                |  |                                     | 191,000   |                               |   | 157,000   |  | 21.7  | % 
|Legal and professional services           |  |                                     | 411,000   |                               |   | 420,000   |  | (2.1  | %)
|Consulting services                       |  |                                     | 161,000   |                               |   | 58,000    |  | 177.6 | % 
|Insurance costs                           |  |                                     | 134,000   |                               |   | 137,000   |  | (2.2  | %)
|Other general and administrative expenses |  |                                     | 214,000   |                               |   | 260,000   |  | (17.7 | %)
|                                          |  |                                     |           |                               |   |           |  |       |   
|Total general and administrative expenses |  | $                                   | 1,915,000 |                               | $ | 1,708,000 |  | 12.1  | % 
|                                          |  |                                     |           |                               |   |           |  |       |   



The increase in the
three months ended March 31, 2004, was primarily due to an increase in personnel costs of $128,000 and consulting services of $103,000. These increases were partially offset by reduced spending on legal and professional services and other
administrative costs.



Stock-based
Compensation.    Stock-based compensation for the three-month period ended March 31, 2004 was $302,000 as compared to $264,000 for the three-month period ended March 31, 2003, an increase of $38,000, or 14%. The increase was
primarily attributable to $47,000 in compensation expense recorded on options held by non-employees during the three month-period ended March 31, 2004.



Amortization of Intangibles.    Amortization of intangible assets was $19,000 for each of the three-month periods ended March
31, 2004 and 2003.



15



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Interest Income.    Interest income was $107,000 for each of the three-month
periods ended March 31, 2004 and 2003.



Other
Income.    Other income for the three-month period ended March 31, 2004 was $154,000 as compared to $128,000 for the three-month period ended March 31, 2003, an increase of $26,000, or 20%. For the quarter ended March 31,
2004, other income primarily consisted of an adjustment to an estimate of an amount payable to a former collaborator. For the three-month period ended March 31, 2003, other income consisted of a gain recognized on currency rate fluctuations on a
euro-denominated note receivable from a former collaborator.



Interest Expense.    Interest expense for the three-month period ended March 31, 2004 was $111,000 as compared to $229,000 for the three-month period ended March 31, 2003, a decrease of $118,000, or 52%. The
decrease in interest expense was attributable to a decrease in interest expense accrued under our convertible note payable to Elan Pharma International Limited, EPIL, an affiliate of Elan Corporation, and lower interest expense on capital lease and
debt obligations. We recorded $46,000 and $93,000, respectively, for the three-month periods ended March 31, 2004 and 2003 under the convertible note payable to EPIL. The average outstanding balance of this convertible note payable was $3,318,000
for the three-month period ended March 31, 2004 as compared to $4,907,000 for the three-month period ended March 31, 2003. We recorded $17,000 and $88,000, respectively, for the three-month periods ended March 31, 2004 and 2003 under our capital
lease and debt obligations. The average outstanding balance of the capital leases was $168,000 for the three-month period ended March 31, 2004 as compared to $1,169,000 for the three-month period ended March 31, 2003. At March 31, 2003, we had
outstanding debt of $4,004,000 under a loan agreement with Boston Private Bank & Trust Company that was fully repaid in December 2003.



Accretion on Series A Convertible Exchangeable Preferred Stock.    We recorded no accretion of preferred stock dividend for the
three-month period ended March 31, 2004 as compared to $180,000 for the three-month period ended March 31, 2003. This charge relates to the accretion of a mandatory 6% dividend on shares of convertible exchangeable preferred stock issued to an
affiliate of Elan Corporation. As part of our termination agreement with Elan Corporation, the preferred stock was cancelled on May 16, 2003. The $180,000 accretion of preferred stock is included in the net loss applicable to common stockholders for
three-month period ended March 31, 2003.



Net Loss
Applicable to Common Stockholders.    As a result of the foregoing, we incurred a net loss applicable to common stockholders of $4,038,000 for the three-month period ended March 31, 2004 as compared to a net loss applicable
to common stockholders of $4,470,000 for the three-month period ended March 31, 2003.



Liquidity and Capital Resources



At March 31,
2004, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities of $33,563,000. We have financed our operations primarily through license fees, research and development funding from our collaborative partners,
the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.



Cash used in operating activities was $1,480,000 for the three-month period ended March 31, 2004 as compared to $3,816,000 for the three-month period
ended March 31, 2003. Cash used in operating activities during the three-month period ended March 31, 2004 was primarily the result of our net loss for the period partially offset by non-cash charges including stock-based compensation, depreciation
and non-cash interest expense. In addition, increases in operating cash as a result of changes in certain current assets and liabilities during the three-month period ended March 31, 2004, including a $1,500,000 up-front payment received for a
licensing agreement with Wyeth, further offset our net loss. Cash used in operating activities during the three-month period ended March 31, 2003 was primarily the result of our net loss for the period partially offset by non-cash charges including
stock-based compensation, depreciation and non-cash interest expense. The effect of these non-cash charges was partially offset by a decrease in operating cash as a result of changes in certain current assets and liabilities.



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Investing activities used cash of $8,741,000 for the three-month period ended March 31, 2004 as compared
to $1,684,000 used in the three-month period ended March 31, 2003. Cash used results principally from $8,656,000 and $1,900,000 in net investment purchases for the quarters ended March 31, 2004 and 2003, respectively.



Financing activities provided approximately $2,196,000 of cash for the
three-month period ended March 31, 2004, resulting primarily from the sale of $2,516,000 of our common stock, including $1,500,000 from the sale of 315,524 shares to Wyeth and $1,016,000 in proceeds received upon stock option exercises. This
increase was offset by $320,000 in repayments of obligations under capital leases. Financing activities used approximately $505,000 of cash for the three-month period ended March 31, 2003, resulting primarily from $483,000 in repayments of
obligations under capital lease and debt arrangements.



Effective February 2004, we licensed our Hedgehog proteins and small molecule Hedgehog pathway agonists to Wyeth for therapeutic applications in the treatment of diseases and disorders in humans with the primary focus of the research
program on the treatment of neurological and other disorders pursuant to the terms of a collaboration, research, and license agreement. The collaboration agreement provides for cash payments from Wyeth, including a license fee of $1,500,000 which
was received in February 2004, and milestone payments at various intervals during the regulatory approval process of Hedgehog proteins and small molecule Hedgehog pathway agonist candidates, assuming specified research objectives are met. Wyeth is
also obligated to pay us a royalty on potential future product sales. Under the terms of the collaboration agreement, Wyeth is obligated to provide financial support of the Companys research under the collaboration for a minimum of two years.
We are recognizing revenue related to the $1,500,000 license fee over our estimated period of involvement related to the collaboration of five years. Under our current operating plan, we expect to recognize approximately $225,000 for the remainder
of 2004 related to the license fee payment. In addition, as partial consideration for the rights and licenses granted under the collaboration agreement, with respect to certain types of licensed compounds, we sold 315,524 shares of our common stock
to Wyeth at a purchase price of $4.754 per share for aggregate proceeds of $1,500,000, pursuant to the terms of a stock purchase agreement. We also entered into a registration rights agreement with Wyeth covering the registration of the shares of
common stock for resale under specified conditions.



In June
2003, we licensed our small molecule and antibody Hedghog pathway antagonists to Genentech for human therapeutic use with the primary focus of the research plan to develop applications in cancer therapy. The collaborative research, development and
license agreement provides for cash payments from Genentech, including an up-front payment of $5,000,000, maintenance fee payments totaling $4,000,000 over the first two years of the collaboration, none of which has been received, and milestone
payments at various intervals during the regulatory approval process of small molecule and antibody product candidates, assuming specified clinical development objectives are met. Genentech is also obligated to pay us a royalty on potential future
product sales, if any. Under the terms of the collaboration agreement, we are required to commit eight employees to the small molecule and/or antibody Hedgehog pathway antagonist programs for a period of two years. We are recognizing revenue related
to the $5,000,000 up-front payment and the $4,000,000 maintenance fee payments receivable over our estimated period of involvement related to the collaboration of seven and a quarter years. Under our current operating plan, we expect to recognize
approximately $930,000 for the remainder of 2004 related to these payments.



Effective January 20, 2004, we entered into a loan agreement with the Boston Private Bank & Trust Company to finance up to $1,250,000 in purchases of equipment and facility leasehold improvements from December 1,
2003, until January 20, 2005. Under the terms of the loan agreement, we will request periodic financings for qualifying purchases of equipment and leaseholds through January 20, 2005. Until January 20, 2005, we will pay interest on any borrowings on
a monthly basis in arrears. On January 20, 2005, the Company will convert the then outstanding balance into a 36-month term note that bears interest at either a variable rate (5.00% as of March 31, 2004) or a fixed rate (5.94% as of March 31, 2004)
for the repayment period. The note will be secured by any equipment and leasehold improvements. We have not drawn any amounts under the loan agreement.



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On May 16, 2003, we and affiliates of Elan Corporation entered into a termination agreement to conclude
the joint venture that was originally formed in July 2001. The purpose of the joint venture, called Curis Newco, was to research and develop molecules that agonize the Hedgehog signaling pathway in order to develop therapeutics in the field of
neurology, including disease targets such as Parkinsons Disease and diabetic neuropathy. As part of the joint venture arrangement, we had entered into an $8,010,000 convertible note agreement with EPIL. As part of the termination, we entered
into an amended and restated convertible note payable with EPIL with the principal amount of $3,000,000. The terms of the amended and restated note were substantially the same as those under the July 2001 note, except that the interest rate was
reduced from 8% to 6% and the conversion rate was increased from $8.63 to $10.00. As of March 31, 2004, there was approximately $3,161,000, including approximately $161,000 in accrued interest, outstanding under this convertible note payable.



On June 26, 2001, we received $2,000,000 from Becton Dickinson
under a convertible subordinated note payable in connection with the exercise by Becton Dickinson of an option to negotiate a collaboration agreement. The note is repayable at any time up to its maturity date of June 26, 2006 by us, at our
discretion, in either cash or upon issuance to Becton Dickinson of shares of our common stock. The note bears interest at 7%. As of March 31, 2004, there was approximately $2,387,000, including approximately $387,000 in accrued interest, outstanding
under the note agreement.



As of March 31, 2004, we have one
outstanding capital lease obligation. Monthly payments on this lease are $1,880 and it matures July 2004. The initial term of the lease is 48 months and bears interest at 13.1%. As of March 31, 2004, approximately $13,000 was outstanding under this
agreement, including a buyout obligation of approximately $5,000, and we were in compliance with all covenants under the agreement.



As of March 31, 2004 we had future payments required under contractual obligations and other commitments as follows:



|                                           |  |                    |       |      |   |      |  |      |       |      |   |       |  |       |   |  |   |   |  |   |       
|------------------------------------------ |  | ------------------ | ----- | ---- | - | ---- |  | ---- | ----- | ---- | - | ----- |  | ----- | - |  | - | - |  | - | ------
|                                           |  | (amounts in 000s)
|                                           |  | Remainderof 2004   |       | 2005 |   | 2006 |  | 2007 |       | 2008 |   | 2009  |  | Total
|Convertible subordinated long-term debt(1) |  | $                  |      |      | $ |     |  | $    | 2,805 |      | $ | 3,812 |  | $     |  |  | $ |  |  | $ | 6,617 
|Capital lease obligations                  |  |                    | 15    |      |   |     |  |      |      |      |   |      |  |       |  |  |   |  |  |   | 15    
|Operating lease obligations                |  |                    | 616   |      |   | 822  |  |      | 1,433 |      |   | 518   |  |       |  |  |   |  |  |   | 3,389 
|Outside service obligations                |  |                    | 1,085 |      |   |     |  |      |      |      |   |      |  |       |  |  |   |  |  |   | 1,085 
|Licensing obligations                      |  |                    | 125   |      |   |     |  |      |      |      |   |      |  |       |  |  |   |  |  |   | 125   
|                                           |  |                    |       |      |   |      |  |      |       |      |   |       |  |       |   |  |   |   |  |   |       
|Total future obligations                   |  | $                  | 1,841 |      | $ | 822  |  | $    | 4,238 |      | $ | 4,330 |  | $     |  |  | $ |  |  | $ | 11,231
|                                           |  |                    |       |      |   |      |  |      |       |      |   |       |  |       |   |  |   |   |  |   |       

---

|(1) |  | Convertible subordinated debt is convertible into either shares of our common stock or cash at our option.
|--- |  | ----------------------------------------------------------------------------------------------------------



We anticipate that existing capital resources should enable us to maintain
current and planned operations into the second half of 2006. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials for the foreseeable future. Our
ability to continue funding planned operations beyond the second half of 2006 is dependent upon the success of our collaborations, our ability to maintain or reduce our cash burn rate and our ability to raise additional funds through equity or debt
financings, or from other sources of financing. Our ability to generate sufficient cash flows depends on a number of factors, including the ability of either us or our collaborators to obtain regulatory approval to market and commercialize products
to treat indications in major commercial markets. We are seeking additional collaborative arrangements and also expect to raise funds through one or more financing transactions, if conditions permit. Due to our significant long-term capital
requirements, we intend to seek to raise funds through the sale of debt or equity securities when conditions are favorable, even if we do not have an immediate need for additional capital at such time. Additional financing may not be available or,
if available, it may not be available on favorable terms. In addition, the sale of additional debt or equity securities could result in dilution to our



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stockholders. If substantial additional funding is not available, our ability to fund research and development and other operations will be significantly
affected and, accordingly, our business will be materially and adversely affected.



We have no off-balance sheet arrangements as of March 31, 2004.



Risk Factors That May Affect Results



This Quarterly Report on Form 10-Q and certain other communications made by us contain forward-looking statements, including statements about our future operating results, discovery and development of products and
current and potential strategic alliances. For this purpose, any statement that is not a statement of historical fact should be considered a forward-looking statement. We often use the words believe, anticipate,
plan, expect, intend and similar expressions to help identify forward-looking statements.



There are a number of important factors that could cause our actual results to differ materially from those indicated or implied by forward-looking
statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed elsewhere in this Form 10-Q. We disclaim any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.



RISKS RELATING TO OUR FINANCIAL RESULTS AND NEED FOR FINANCING



We have incurred substantial losses, we expect to continue to incur substantial losses and we may never achieve profitability.



We expect to incur substantial operating losses for the foreseeable future, and we have no current sources of material ongoing revenue. As of March 31,
2004, we had an accumulated deficit of approximately $653.1 million. It is uncertain when, if ever, we will develop significant sources of ongoing revenue or achieve profitability, even if we are able to develop and commercialize products.



Even if our collaboration agreements provide funding for a
portion of our research and development expenses for some of our programs, we expect to spend significant capital to fund our internal research and development programs for the foreseeable future. As a result, we will need to generate significant
revenues in order to achieve profitability. We cannot be certain whether or when this will occur because of the significant uncertainties that affect our business. Our failure to become and remain profitable may depress the market price of our
common stock and could impair our ability to raise capital, expand our business, diversify our product offerings or continue our operations.



We are likely to require additional financing, which may be difficult to obtain and may dilute your ownership interest in us.



We will require substantial funds to continue our research and development
programs. We believe that our existing cash and working capital should be sufficient to fund our operations until the second half of 2006. However, our future capital requirements may vary from what we expect and will depend on numerous factors,
many of which are outside our control, including the following:



| |  |  | continued progress in our research and development programs, as well as the magnitude of these programs;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the cost of additional facilities requirements, if any;
| | - |  | -------------------------------------------------------



| |  |  | our ability to establish and maintain collaborative arrangements;
| | - |  | -----------------------------------------------------------------



| |  |  | the timing, receipt and amount of research funding and milestone, license, royalty and other payments, if any, from collaborative partners;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the timing, payment and amount of research funding and milestone, license, royalty and other payments due to licensors of patent rights and technology used to make, use and sell our
product candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing, receipt and amount of sales revenues and associated royalties to us, if any, from our product candidates in the market;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost of manufacturing and commercialization activities, if any; and
| | - |  | -----------------------------------------------------------------------



| |  |  | the costs of preparing, filing, prosecuting, maintaining and enforcing patent claims and other patent-related costs, including litigation costs and technology license fees.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We expect to seek additional funding through
collaborative arrangements with strategic partners and may seek additional funding through public or private financings. However, the biotechnology market in general, and the market for our common stock, in particular, is highly volatile. Due to
market conditions and the status of our development pipeline, additional funding may not be available to us on acceptable terms, if at all. If we fail to obtain such additional financing on a timely basis, our ability to continue all of our
research, development, commercialization, manufacturing and marketing activities will be adversely affected.



If we raise additional funds by issuing equity securities, dilution to our stockholders will result. In addition, the terms of such a financing may
adversely affect other rights of our stockholders. We also could elect to seek funds through arrangements with collaborative partners or others that may require us to relinquish rights to certain technologies, product candidates or products.



If the estimates we make and the assumptions on which we rely in preparing
our financial statements prove inaccurate, our actual results may vary significantly.



Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments
that affect the reported amounts of our assets, liabilities, revenues and expenses, the amounts of charges taken by us and related disclosure. We base our estimates on historical experience and on various other assumptions that we believe to be
reasonable under the circumstances. There can be no assurance, however, that our estimates, or the assumptions underlying them, will be correct. Our actual financial results may vary significantly from the estimates contained in our financial
statements.



RISKS RELATING TO OUR COLLABORATIONS



We are dependent on collaborative partners for the development and
commercialization of many of our product candidates. If we lose any of these partners, of if they fail or delay in developing or commercializing our product candidates, our anticipated product pipeline and operating results would suffer.



The success of our strategy for development and
commercialization of product candidates depends upon our ability to form and maintain productive strategic collaborations. We currently have strategic collaborations with Genentech, Ortho Biotech Products, and Wyeth. We expect to enter into
additional collaborations in the future. Our existing and any future alliances may not be scientifically or commercially successful.



The risks that we face in connection with these alliances include the following:



| |  |  | Each of our collaborators has significant discretion in determining the efforts and resources that they will apply to the collaboration. The timing and amount of any future royalty
and milestone revenue that we may receive under such collaborative arrangements will depend on, among other things, such collaborators efforts and allocation of resources.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | All of our strategic alliance agreements are for fixed terms and are subject to termination under various circumstances, including in some cases, on short notice
without cause. If any collaborative partner were to terminate an agreement, we may be required to undertake product development, manufacturing and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | commercialization and we may not have the funds or capability to do this, which could result in a discontinuation of such program.
| | ----------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Our collaborators may change the focus of their development and commercialization efforts. Pharmaceutical and biotechnology companies historically have re-evaluated their priorities
following mergers and consolidations, which have been common in recent years in these industries. The ability of certain of our product candidates to reach their potential could be limited if our collaborators decrease or fail to increase spending
related to such product candidates.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



As an integral part of our ongoing research and development efforts, we periodically review opportunities to establish new collaborations, joint ventures
and strategic alliances for the development and commercialization of products in our development pipeline. We face significant competition in seeking appropriate collaborators and the negotiation process is time-consuming and complex. We may not be
successful in our efforts to establish additional strategic alliances or other alternative arrangements. Even if we are successful in our efforts to establish an alliance or agreement, the terms that we establish may not be favorable to us. Finally,
such strategic alliances or other arrangements may not result in successful products and associated revenue.



RISKS RELATED TO OUR BUSINESS, INDUSTRY, STRATEGY AND OPERATIONS



Other than OP-1, which we and Stryker commercialized under our former collaboration, we have not commercialized any products to date, either alone or with a
collaborator. If we are not able to commercialize any products, we will not be profitable.



Most of our product opportunities are in various stages of preclinical development. Because our product opportunities have several years of development
prior to reaching commercialization, there is a substantial risk that none of our current product opportunities will ever be commercialized. If none of our product opportunities are commercialized, we will not be profitable.



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



Our product candidates face competition with existing and new products being developed by biotechnology, medical device and pharmaceutical companies, as well as universities and other research institutions. For
example, research in the fields of regulatory signaling pathways and functional genomics, which includes our work in cancer, with Genentech and renal disease, with Ortho Biotech, is highly competitive. A number of entities are seeking to identify
and patent randomly sequenced genes and gene fragments, typically without specific knowledge of the function that such genes or gene fragments perform. Our competitors may discover, characterize and develop important inducing molecules or genes in
advance of us. We also face competition from these and other entities in gaining access to DNA samples used in our research and development projects. Many of our competitors have substantially greater capital resources, research and development
staffs and facilities than we have. Efforts by other biotechnology, medical device and pharmaceutical companies could render our programs or products uneconomical or result in therapies superior to those that we develop alone or with a collaboration
partner. For those programs that we have selected for further internal development, we face competition from companies that are more experienced in product development and commercialization, obtaining regulatory approvals and product manufacturing.
As a result, they may develop competing products more rapidly and at a lower cost. For those programs that are subject to a collaboration agreement, competitors may discover, develop and commercialize products which render our products
non-competitive or obsolete. We



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expect competition to intensify in genomics research and regulatory signaling pathways as technical advances in the field are made and become more widely
known.



Since our technologies have many potential applications and we have
limited resources, our election to focus on a particular application may result in our failure to capitalize on other potentially profitable applications of our technologies.



We have limited financial and managerial resources. These limitations require us to focus on a select group of product
candidates in specific therapeutic areas and to forego the exploration of other product opportunities. While our technologies may permit us to work in multiple areas, resource commitments may require trade-offs resulting in delays in the development
of certain programs or research areas, which may place us at a competitive disadvantage. Our decisions as to resource allocation may not lead to the development of viable commercial products and may divert resources away from other market
opportunities which ultimately prove to be more profitable.



If we or our
collaborators fail to achieve market acceptance for our products under development, our future revenue and ability to achieve profitability may be adversely affected.



If any of our product opportunities ever receive regulatory approval, the commercial success of these products will depend
upon their acceptance by patients, the medical community and third-party payors. Our future products, if any are successfully developed, may not gain commercial acceptance among physicians, patients and third-party payors, even if necessary
marketing approvals have been obtained. We believe that recommendations and endorsements by physicians will be essential for market acceptance of our products. If we are not able to obtain a positive reception for our products, our expected revenues
from sales of these products would be adversely affected.



We could be
exposed to significant risk from liability claims if we are unable to obtain insurance at acceptable costs or otherwise protect ourselves against potential product liability claims.



We may be subjected to product liability claims arising from the testing, manufacturing, marketing and sale of human health
care products. Product liability claims, inherent in the process of researching and developing human health care products, could expose us to significant liabilities and prevent or interfere with the development or commercialization of our product
candidates. Product liability claims would require us to spend significant time, money and other resources to defend such claims and could ultimately lead to our having to pay a significant damage award. Product liability insurance is expensive to
procure for biopharmaceutical companies such as ours. Although we maintain product liability insurance coverage for the clinical trials of our products under development, it is possible that we will not be able to obtain additional product liability
insurance on acceptable terms, if at all, and that our product liability insurance coverage will not prove to be adequate to protect us from all potential claims.



Our growth could be limited if we are unable to attract and retain key personnel and consultants.



Our success depends on the ability to attract, train and retain qualified
scientific and technical personnel to further our research and development efforts. The loss of services of one or more of our key employees or consultants could have a negative impact on our business and operating results. Locating candidates with
the appropriate qualifications can be difficult. Although we expect to be able to attract and retain sufficient numbers of highly skilled employees for the foreseeable future, we may not be able to do so.



Any growth and expansion into areas and activities that may require
additional human resources or expertise, such as regulatory affairs and compliance, would require us to either hire new key personnel or obtain such services via an outsourcing arrangement. The pool of personnel with the skills that we require is
limited. We may not be able to hire or contract such additional personnel.



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RISKS RELATING TO CLINICAL AND REGULATORY MATTERS



We expect to rely heavily on third parties for the conduct of clinical trials of our
product candidates. If these clinical trials are not successful, or if we or our collaborators are not able to obtain the necessary regulatory approvals, we will not be able to commercialize our product candidates.



In order to obtain regulatory approval for the commercial sale of our
product candidates, we and our collaborators will be required to complete extensive preclinical studies as well as clinical trials in humans to demonstrate to the FDA and foreign regulatory authorities that our product candidates are safe and
effective. We have limited experience in conducting clinical trials and expect to rely primarily on contract research organizations and collaborative partners for their performance and management of clinical trials of our product candidates.



Clinical development, including preclinical testing, is a
long, expensive and uncertain process. Accordingly, clinical trials, if any, of our product candidates under development may not be successful. We and our collaborators could experience delays in preclinical or clinical trials of any of our product
candidates, obtain unfavorable results in a development program, or fail to obtain regulatory approval for the commercialization of a product. Furthermore, the timing and completion of clinical trials, if any, of our product candidates depend on,
among other factors, the number of patients required for approval and the rate at which those patients are enrolled. Any increase in the required number of patients or decrease in recruitment rates may result in increased costs, program delays or
both. Also, our products under development may not be effective in treating any of our targeted disorders or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may prevent or limit their commercial
use. Any of these events would adversely affect our ability to market a product candidate.



The development process necessary to obtain regulatory approval is lengthy, complex and expensive. If we and our collaborative partners do not obtain necessary regulatory approvals, then our business will be
unsuccessful and the market price of our common stock will substantially decline.



To the extent that we are able to advance an internal program through the clinic, we will be required to obtain regulatory approval for any product we develop in such program. In instances where our product candidates
are being developed by our collaborators, our partners will be required to obtain regulatory approval for marketing and selling efforts.



The process of obtaining FDA and other required regulatory approvals is expensive. The time required for FDA and other approvals is uncertain and
typically takes a number of years, depending on the complexity and novelty of the product. The process of obtaining FDA and other required regulatory approvals for many of our products under development is further complicated because some of these
products use non-traditional or novel materials in non-traditional or novel ways, and the regulatory officials have little precedent to follow. To date, we have limited experience in filing and prosecuting applications to obtain marketing approval.



Any regulatory approval to market a product may be subject to
limitations on the indicated uses for which we may market the product. These limitations may restrict the size of the market for the product and affect reimbursement by third-party payors. In addition, regulatory agencies may not grant approvals on
a timely basis or may revoke or significantly modify previously granted approvals.



We also are subject to numerous foreign regulatory requirements governing the manufacturing and marketing of our potential future products outside of the United States. The approval procedure varies among countries,
and the time required to obtain foreign approvals often differs from that required to obtain FDA approvals. Moreover, approval by the FDA does not ensure approval by regulatory authorities in other countries, and vice versa.



As a result of these factors, we or our collaborators may not successfully
begin or complete clinical trials in the time periods estimated, if at all. Moreover, if we or our collaborators incur costs and delays in development



23



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programs or fail to successfully develop and commercialize products based upon our technologies, our stock price could decline.



Even if marketing approval is obtained, internally developed or licensed products will be
subject to ongoing regulatory oversight which may affect the successful commercialization of our products.



Even if regulatory approval of a product candidate is obtained by us or our collaborators, the approval may be subject to limitations on the indicated
uses for which the product is marketed or require costly post-marketing follow-up studies. After marketing approval for any product is obtained, the manufacturer and the manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory agencies. The subsequent discovery of previously unknown problems with the product, or with the manufacturer or facility, may result in restrictions on the product or manufacturer, including
withdrawal of the product from the market.



If there is a
failure to comply with applicable regulatory requirements, we or our collaborator may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions, and criminal prosecution.



We are subject to governmental regulations other than those imposed by the
FDA. We may not be able to comply with these regulations, which could subject us to penalties and otherwise result in the limitation of our operations.



In addition to regulations imposed by the FDA, we are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection
Act, the Toxic Substances Control Act, the Research Conservation and Recovery Act, as well as regulations administered by the Nuclear Regulatory Commission, national restrictions on technology transfer, import, export and customs regulations and
certain other local, state or federal regulations. From time to time, other federal agencies and congressional committees have indicated an interest in implementing further regulation of biotechnology applications. We are not able to predict whether
any such regulations will be adopted or whether, if adopted, such regulations will apply to our business, or whether we would be able to comply with any applicable regulations.



Our research and development activities involve the controlled use of hazardous materials and chemicals. Although we believe
that our safety procedures for handling and disposing of such materials comply with all applicable laws and regulations, we cannot completely eliminate the risk of accidental contamination or injury caused by these materials.



RISKS RELATING TO PRODUCT MANUFACTURING AND SALES



We will depend on our collaborators and third-party manufacturers to produce most, if not
all, of our products under development, and if these third parties do not successfully manufacture these products our business will be harmed.



We have no manufacturing experience or manufacturing capabilities. In order to continue to develop products, apply for regulatory approvals, and
commercialize our products, we or our collaborators must be able to manufacture products in commercial quantities, in compliance with regulatory requirements, at acceptable costs and in a timely manner. The manufacture of our product candidates may
be complex, difficult to accomplish and difficult to scale-up when large-scale production is required. Manufacture may be subject to delays, inefficiencies and poor or low yields of quality products. The cost of manufacturing some of our products
may make them prohibitively expensive. If supplies of any of our product candidates or related materials become unavailable on a timely basis or at all or are contaminated or otherwise lost, clinical trials by us and our collaborators could be
seriously delayed. This is due to the fact that such materials are time-consuming to manufacture and cannot be readily obtained from third-party sources.



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To the extent that we or our collaborators seek to enter into manufacturing arrangements with third
parties, there will be a dependency upon these third parties to perform their obligations in a timely and effective manner and in accordance with government regulations. If third-party manufacturers fail to perform their obligations, our competitive
position and ability to generate revenue may be adversely affected in a number of ways, including;



| |  |  | we and our collaborators may not be able to initiate or continue clinical trials of products that are under development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | we and our collaborators may be delayed in submitting applications for regulatory approvals for our product candidates; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | we and our collaborators may not be able to meet commercial demands for any approved products.
| | - |  | ----------------------------------------------------------------------------------------------



We have no sales or marketing experience and, as such, will depend significantly on third parties who may not successfully sell our
products.



We have no sales, marketing or product
distribution experience. If we receive required regulatory approvals, we plan to rely primarily on sales, marketing and distribution arrangements with third parties, including our collaborative partners. For example, as part of our agreements with
Genentech, Ortho Biotech and Wyeth, we have granted our collaborators exclusive rights to distribute certain products resulting from such collaborations, if any are ever successfully developed. We may have to enter into additional marketing
arrangements in the future and we may not be able to enter into these additional arrangements on terms which are favorable to us, if at all. In addition, we may have limited or no control over the sales, marketing and distribution activities of
these third parties and sales through these third parties could be less profitable to us than direct sales. These third parties could sell competing products and may devote insufficient sales efforts to our products. Our future revenues will be
materially dependent upon the success of the efforts of these third parties.



We may seek to independently market products that are not already subject to marketing agreements with other parties. If we determine to perform sales, marketing and distribution functions ourselves, we could face a
number of additional risks, including:



| |  |  | we may not be able to attract and build a significant and skilled marketing staff or sales force;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the cost of establishing a marketing staff or sales force may not be justifiable in light of the revenues generated by any particular product; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our direct sales and marketing efforts may not be successful.
| | - |  | -------------------------------------------------------------



RISKS RELATING TO INTELLECTUAL PROPERTY



If we breach any of the agreements under which we license or have acquired intellectual property from others, we could lose intellectual property rights that are
important to our business.



We are a party to intellectual
property licenses and agreements that are important to our business and expect to enter into similar licenses and agreements in the future. These licenses and agreements impose various research, development, commercialization, sublicensing, royalty,
indemnification, insurance and other obligations on us. If we or our collaborators fail to perform under these agreements or otherwise breach obligations thereunder, we could lose intellectual property rights that are important to our business.



We may not be able to obtain patent protection for our discoveries and our
technologies may be found to infringe patent rights of third parties.



The patent positions of pharmaceutical and biotechnology companies, including ours, are generally uncertain and involve complex legal, scientific and factual questions.





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The long-term success of our enterprise depends in significant part on our ability to:



| |  |  | obtain patents to protect our discoveries;
| | - |  | ------------------------------------------



| |  |  | protect trade secrets from disclosure to third-party competitors;
| | - |  | -----------------------------------------------------------------



| |  |  | operate without infringing upon the proprietary rights of others; and
| | - |  | ---------------------------------------------------------------------



| |  |  | prevent others from infringing on our proprietary rights.
| | - |  | ---------------------------------------------------------



Patents may not issue from any of the patent applications that we own or license. If patents do issue, the allowed claims may not be sufficiently broad to
protect our technology from exploitation by our competitors. In addition, issued patents that we own or license may be challenged, invalidated or circumvented. Our patents also may not afford us protection against competitors with similar
technology. Because patent applications in the United States are maintained in secrecy until 18 months after filing, it is possible that third parties have filed or maintained patent applications for technology used by us or covered by our pending
patent applications without our knowledge.



We may not have
rights under patents which may cover one or more of our product candidates. In some cases, these patents may be owned or controlled by third party competitors and may impair our ability to exploit our technology. As a result, we or our collaborative
partners may be required to obtain licenses under third-party patents to develop and commercialize some of our product candidates. If we are unable to secure licenses to such patented technology on acceptable terms, we or our collaborative partners
will not be able to develop and commercialize the affected product candidate or candidates.



If we are unable to keep our trade secrets confidential, our technology and information may be used by others to compete against us.



We also rely significantly upon proprietary technology, information, processes and know-how that is not subject to patent
protection. We seek to protect this information through confidentiality agreements with our employees, consultants and other third-party contractors as well as through other security measures. These confidentiality agreements may be breached, and we
may not have adequate remedies for such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.



We may become involved in expensive patent litigation or other intellectual property proceedings which could result in liability for damages or stop our development
and commercialization efforts.



There has been substantial
litigation and other proceedings regarding patent and other intellectual property rights in the pharmaceutical and biotechnology industries. We may become a party to patent litigation or other proceedings regarding intellectual property rights.



Situations which may give rise to patent litigation or other
disputes over the use of our intellectual property include:



| |  |  | initiation of litigation or other proceedings against third parties to enforce our patent rights;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | initiation of litigation or other proceedings against third parties to seek to invalidate the patents held by these third parties or to obtain a judgment that our product candidates
or proposed services do not infringe the third parties patents;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | participation in interference or opposition proceedings to determine the priority of invention if our competitors file patent applications that claim technology also claimed by us;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | initiation of litigation by third parties claiming that our processes or product candidates or the intended use of our product candidates infringe their patent or other intellectual
property rights; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | initiation of litigation by us or third parties seeking to enforce contract rights relating to intellectual property which may be important to our business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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The costs associated with any patent litigation or other proceeding, even if resolved favorably, likely
would be substantial. Some of our competitors may be able to sustain the cost of such litigation or other proceedings more effectively than we can because of their substantially greater financial resources. If a patent litigation or other
intellectual property proceeding is resolved unfavorably, we or our collaborative partners may be enjoined from manufacturing or selling our products and services without a license from the other party and be held liable for significant damages.
Moreover, we may not be able to obtain required licenses on commercially acceptable terms or any terms at all. In addition, we could be held liable for lost profits if we are found to have infringed a valid patent, or liable for treble damages if we
are found to have willfully infringed a valid patent. Litigation results are highly unpredictable and we or our collaborative partners may not prevail in any patent litigation or other proceeding in which we may become involved.



Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could damage our ability to compete in the marketplace. Patent litigation and other proceedings may also absorb significant management time and expense.



If licensees or assignees of our intellectual property rights breach any of the agreements under which we have licensed or assigned our
intellectual property to them, we could be deprived of important intellectual property rights and future revenue.



We are a party to intellectual property out-licenses, collaborations and agreements that are important to our business and expect to enter into similar
agreements with third parties in the future. Under these agreements, we license or transfer intellectual property to third parties and impose various research, development, commercialization, sublicensing, royalty, indemnification, insurance, and
other obligations on them. If a third party fails to comply with these requirements, we generally retain the right to terminate the agreement, and to bring a legal action in court or in arbitration. In the event of breach, we may need to enforce our
rights under these agreements by resorting to arbitration or litigation. During the period of arbitration or litigation, we may be unable to effectively use, assign or license the relevant intellectual property rights and may be deprived of current
or future revenues that are associated with such intellectual property.



RISKS RELATED TO OUR COMMON STOCK



We expect that our stock
price will fluctuate significantly and the market price of our common stock could drop below the price you paid.



The trading price of our common stock has been volatile and may continue to be volatile in the future. For example, our stock has traded as high as $6.59
and as low as $0.65 per share for the period January 1, 2003 through March 31, 2004. The stock market, particularly in recent years, has experienced significant volatility with respect to biopharmaceutical- and biotechnology-based company stocks.
The volatility of biopharmaceutical- and biotechnology-based company stocks often does not relate to the operating performance of the companies represented by the stock. Prices for our stock will be determined in the market place and may be
influenced by many factors, including:



| |  |  | announcements regarding new technologies by us or our competitors;
| | - |  | ------------------------------------------------------------------



| |  |  | market conditions in the biotechnology and pharmaceutical sectors;
| | - |  | ------------------------------------------------------------------



| |  |  | rumors relating to us or our competitors;
| | - |  | -----------------------------------------



| |  |  | litigation or public concern about the safety of our potential products;
| | - |  | ------------------------------------------------------------------------



| |  |  | actual or anticipated variations in our quarterly operating results;
| | - |  | --------------------------------------------------------------------



| |  |  | deviations in our operating results from the estimates of securities analysts;
| | - |  | ------------------------------------------------------------------------------



| |  |  | adverse results or delays in clinical trials;
| | - |  | ---------------------------------------------





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| |  |  | any intellectual property lawsuits involving us;
| | - |  | ------------------------------------------------



| |  |  | sales of large blocks of our common stock;
| | - |  | ------------------------------------------



| |  |  | sales of our common stock by our executive officers, directors or significant stockholders;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | the loss of any of our key scientific or management personnel;
| | - |  | --------------------------------------------------------------



| |  |  | FDA or international regulatory actions; and
| | - |  | --------------------------------------------



| |  |  | general market conditions.
| | - |  | --------------------------



While we cannot predict the individual effect that these factors may have on the price of our common stock, these factors, either individually or in the
aggregate, could result in significant variations in price during any given period of time. Moreover, in the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price.
This type of litigation could result in substantial costs and divert our managements attention and resources.



Substantially all 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 March 31, 2004, we had outstanding approximately 41.4 million shares of common stock. Substantially all of these shares may also be resold in the public market at any time. In addition, we have a significant number of shares that
are subject to outstanding options. The exercise of these options and the subsequent sale of the underlying common stock could cause a further decline in our stock price. These sales also might make it difficult for us to sell equity securities in
the future at a time and at a price that we deem appropriate.



We have
anti-takeover defenses that could delay or prevent an acquisition that our stockholders may consider favorable and the market price of our common stock may be lower as a result.



Provisions of our certificate of incorporation, our bylaws and Delaware law may have the effect of deterring unsolicited
takeovers or delaying or preventing changes in control of our management, including transactions in which our stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit
the ability of stockholders to approve transactions that they may deem to be in their best interest. For example, we have divided our board of directors into three classes that serve staggered three-year terms, we may issue shares of our authorized
blank check preferred stock and our stockholders are limited in their ability to call special stockholder meetings.



In addition, we are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate
acquisitions. These provisions could discourage potential acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our class A common
stock. These provisions may also prevent changes in our management.



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Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We invest cash balances in excess of operating requirements in cash equivalents and short-term marketable securities, generally money market funds,
corporate debt and government securities with an average maturity of less than one year. All marketable securities are considered available for sale. The primary objective of our cash investment activities is to preserve principal while at the same
time maximizing the income we receive from our invested cash without significantly increasing risk of loss. Our marketable securities are subject to interest rate risk and will fall in value if market interest rates increase. However, because of the
short-term nature of the marketable securities, we do not believe that interest rate fluctuations would materially impair the principal amount of our investments. Our investments are investment grade securities and deposits are with investment grade
financial institutions. We believe that the realization of losses due to changes in credit spreads is unlikely as we expect to hold our investments to maturity. We do not use derivative financial instruments in our investment portfolio. We have
operated primarily in the United States. Accordingly, we do not have any material exposure to foreign currency rate fluctuations.



Item 4.    CONTROLS AND PROCEDURES



| | (a) |  | Evaluation of 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 defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2004. Based on this evaluation, our chief executive officer and chief financial officer
concluded that, as of March 31, 2004, our disclosure controls and procedures were (1) designed to ensure that material information relating to us, including our consolidated subsidiaries, is made known to our chief executive officer and chief
financial officer by others within those entities, particularly during the period in which this report was being prepared and (2) effective, in that they provide reasonable assurance 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.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Changes in internal controls.    No change in our internal control over financial reporting (as defined in the Securities Exchange Act of 1934, Rules
13a-15(f) and 15d-15(f)) occurred during the fiscal quarter ended March 31, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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PART IIOTHER INFORMATION



Item 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS.



On February 19, 2004, we sold to Wyeth Pharmaceuticals, a division of Wyeth, 315,524 unregistered shares of our common stock at a purchase price of $4.754
per share for aggregate proceeds of $1,500,000, pursuant to the terms of a stock purchase agreement dated January 9, 2004. The sale was in partial consideration for the rights and licenses granted by us to Wyeth pursuant to the terms of a
collaboration, research and license agreement dated January 12, 2004. We also entered into a registration rights agreement with Wyeth covering the registration of the shares of common stock for resale under specified conditions. The exemption
claimed for this issuance is Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder. Wyeth represented, in connection with the purchase of the shares, that it was an accredited
investor as defined in Regulation D of the Securities Act.



Item 6.    EXHIBITS AND REPORTS ON FORM 8-K



(a) Exhibits.



|               |  |                                                                                                                       
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                           
|               | 
|31.1           |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act                           
|               | 
|31.2           |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act                           
|               | 
|32.1           |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350
|               | 
|32.2           |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and 18 U.S.C. Section 1350



(b)  Reports
on Form 8-K.



| |  |                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 
| |  | (1)    On February 6, 2004, we furnished a Current Report on Form 8-K to report under Item 12 (Results of Operations
and Financial Condition) that we had issued a press release announcing our financial results for the three- and twelve-month periods ended December 31, 2003.



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SIGNATURE



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



|                      |  |  |  |             |  |                        |  |                                                                                                                   
|--------------------- |  |  |  | ----------- |  | ---------------------- |  | ------------------------------------------------------------------------------------------------------------------
|                      |  |  |  | CURIS, INC.
|                      |  |  | 
|Dated: April 28, 2004 |  |  |  | By:         |  | /s/    MICHAEL P. GRAY
|                      |  |  |  |             |  |                        | 
|                      |  |  |  |             |  |                        |  | Michael P. Gray Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting
Officer)



31