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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended September 30, 2007

OR



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

For the transition period from  to

Commission File Number 000-23223



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CURAGEN CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 06-1331400                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                            |  |           
|------------------------------------------- |  | ----------
|322 East Main Street, Branford, Connecticut |  | 06405     
|(Address of principal executive offices)    |  | (Zip Code)

Registrants telephone number, including area code: (203) 481-1104



---

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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

The number of shares outstanding of the registrants common stock as of November 1, 2007 was 58,050,556.



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

FORM 10-Q

INDEX



|              |  |                       |  |                                                                                                                             |  |       
|------------- |  | --------------------- |  | --------------------------------------------------------------------------------------------------------------------------- |  | ------
|              |  |                       |  |                                                                                                                             |  | Page  
|PART I.       |  | Financial Information |  |                                                                                                                            
|              |  |                       | 
|              |  | Item 1.               |  | Financial Statements                                                                                                        |  |       
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)                            |  | 3     
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2007 and 2006 (unaudited) |  | 4     
|              |  |                       | 
|              |  |                       |  | Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited)           |  | 5     
|              |  |                       | 
|              |  |                       |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                                            |  | 6 -12 
|              |  |                       | 
|              |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                       |  | 13 -24
|              |  |                       | 
|              |  | Item 3.               |  | Quantitative and Qualitative Disclosures About Market Risk                                                                  |  | 25    
|              |  |                       | 
|              |  | Item 4.               |  | Controls and Procedures                                                                                                     |  | 25    
|              |  |                      
|PARTII.       |  | Other Information     |  |                                                                                                                            
|              |  |                       | 
|              |  | Item 1A.              |  | Risk Factors                                                                                                                |  | 26 -40
|              |  |                       | 
|              |  | Item 6.               |  | Exhibits                                                                                                                    |  | 41    
|              | 
|Signatures    |  | 42                   
|              | 
|Exhibit Index |  | 43                   



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

(unaudited)



|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                         |  | September 30, 2007 |          |   | December 31, 2006 |  
|                                                                                                                                         | 
|ASSETS                                                                                                                                   |  |                    |          |   |                   |   |          |  
|Current assets:                                                                                                                          |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                |  | $                  | 68,580   |   |                   | $ | 58,486   |  
|Restricted cash                                                                                                                          |  |                    | 14,366   |   |                   |   |         |  
|Short-term investments                                                                                                                   |  |                    | 13,707   |   |                   |   | 23,473   |  
|Marketable securities                                                                                                                    |  |                    | 56,930   |   |                   |   | 82,434   |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Cash and investments                                                                                                                     |  |                    | 153,583  |   |                   |   | 164,393  |  
|Income taxes receivable                                                                                                                  |  |                    | 394      |   |                   |   | 543      |  
|Accounts receivable                                                                                                                      |  |                    |         |   |                   |   | 926      |  
|Prepaid expenses                                                                                                                         |  |                    | 1,531    |   |                   |   | 2,595    |  
|Assets held for sale                                                                                                                     |  |                    | 442      |   |                   |   | 34,881   |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                     |  |                    | 155,950  |   |                   |   | 203,338  |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Property and equipment, net                                                                                                              |  |                    | 556      |   |                   |   | 12,214   |  
|Intangible and other assets, net                                                                                                         |  |                    | 1,991    |   |                   |   | 11,742   |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Total assets                                                                                                                             |  | $                  | 158,497  |   |                   | $ | 227,294  |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                     |  |                    |          |   |                   |   |          |  
|Current liabilities:                                                                                                                     |  |                    |          |   |                   |   |          |  
|Accounts payable                                                                                                                         |  | $                  | 448      |   |                   | $ | 321      |  
|Accrued expenses                                                                                                                         |  |                    | 3,913    |   |                   |   | 3,289    |  
|Accrued payroll and related items                                                                                                        |  |                    | 1,417    |   |                   |   | 1,810    |  
|Interest payable                                                                                                                         |  |                    | 547      |   |                   |   | 3,306    |  
|Current portion of deferred revenue                                                                                                      |  |                    | 89       |   |                   |   | 89       |  
|Other current liabilities                                                                                                                |  |                    | 1,906    |   |                   |   | 1,575    |  
|Current portion of convertible subordinated debt                                                                                         |  |                    |         |   |                   |   | 66,228   |  
|Liabilities held for sale                                                                                                                |  |                    |         |   |                   |   | 30,735   |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                |  |                    | 8,320    |   |                   |   | 107,353  |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Long-term liabilities:                                                                                                                   |  |                    |          |   |                   |   |          |  
|Convertible subordinated debt, net of current portion                                                                                    |  |                    | 109,391  |   |                   |   | 110,000  |  
|Deferred revenue, net of current portion                                                                                                 |  |                    | 1,108    |   |                   |   | 1,174    |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Total long-term liabilities                                                                                                              |  |                    | 110,499  |   |                   |   | 111,174  |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Commitments and contingencies                                                                                                            |  |                    |          |   |                   |   |          |  
|                                                                                                                                         |  |                   
|Stockholders' equity:                                                                                                                    |  |                    |          |   |                   |   |          |  
|Common Stock; $.01 par value, issued and outstanding 58,040,464 shares at September 30, 2007, and 56,390,682 shares at December 31,
2006 |  |                    | 580      |   |                   |   | 564      |  
|Additional paid-in capital                                                                                                               |  |                    | 524,951  |   |                   |   | 518,827  |  
|Accumulated other comprehensive (loss) income                                                                                            |  |                    | (850     | ) |                   |   | 2,348    |  
|Accumulated deficit                                                                                                                      |  |                    | (485,003 | ) |                   |   | (512,972 | )
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Total stockholders' equity                                                                                                               |  |                    | 39,678   |   |                   |   | 8,767    |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  
|Total liabilities and stockholders' equity                                                                                               |  | $                  | 158,497  |   |                   | $ | 227,294  |  
|                                                                                                                                         |  |                    |          |   |                   |   |          |  

See accompanying notes to condensed consolidated financial statements



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                  |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                                                  |  | 2007                            |         |   | 2006                           |   |         | 2007 |  |   | 2006    |  
|Collaboration revenue                                                                             |  | $                               | 22      |   |                                | $ |        |      |  | $ | 66      |   |  | $ | 2,284   |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating expenses:                                                                               |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Research and development                                                                          |  |                                 | 8,074   |   |                                |   | 10,692  |      |  |   | 30,480  |   |  |   | 33,139  |  
|General and administrative                                                                        |  |                                 | 2,568   |   |                                |   | 3,556   |      |  |   | 9,631   |   |  |   | 10,287  |  
|Restructuring charges                                                                             |  |                                 | 1,058   |   |                                |   |        |      |  |   | 8,537   |   |  |   |        |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                          |  |                                 | 11,700  |   |                                |   | 14,248  |      |  |   | 48,648  |   |  |   | 43,426  |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from operations                                                                              |  |                                 | (11,678 | ) |                                |   | (14,248 | )    |  |   | (48,582 | ) |  |   | (41,142 | )
|Interest income                                                                                   |  |                                 | 1,861   |   |                                |   | 1,742   |      |  |   | 4,060   |   |  |   | 5,452   |  
|Interest expense                                                                                  |  |                                 | (1,273  | ) |                                |   | (2,334  | )    |  |   | (4,172  | ) |  |   | (7,019  | )
|Gain on extinguishment of debt                                                                    |  |                                 | 169     |   |                                |   |        |      |  |   | 169     |   |  |   |        |  
|Gain on sale of long-term marketable securities                                                   |  |                                 | 973     |   |                                |   |        |      |  |   | 973     |   |  |   |        |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from continuing operations before income tax benefit                                         |  |                                 | (9,948  | ) |                                |   | (14,840 | )    |  |   | (47,552 | ) |  |   | (42,709 | )
|Income tax benefit                                                                                |  |                                 | 50      |   |                                |   | 52      |      |  |   | 160     |   |  |   | 161     |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from continuing operations                                                                   |  |                                 | (9,898  | ) |                                |   | (14,788 | )    |  |   | (47,392 | ) |  |   | (42,548 | )
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Discontinued operations:                                                                          |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Loss from discontinued operations                                                                 |  |                                 |        |   |                                |   | (1,092  | )    |  |   | (2,991  | ) |  |   | (1,495  | )
|Gain on sale of subsidiary                                                                        |  |                                 |        |   |                                |   |        |      |  |   | 78,352  |   |  |   |        |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|(Loss) income from discontinued operations                                                        |  |                                 |        |   |                                |   | (1,092  | )    |  |   | 75,361  |   |  |   | (1,495  | )
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Net (loss) income                                                                                 |  | $                               | (9,898  | ) |                                | $ | (15,880 | )    |  | $ | 27,969  |   |  | $ | (44,043 | )
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted loss per share from continuing operations                                       |  | $                               | (0.18   | ) |                                | $ | (0.27   | )    |  | $ | (0.85   | ) |  | $ | (0.77   | )
|Basic and diluted (loss) income per share from discontinued operations                            |  |                                 |        |   |                                |   | (0.02   | )    |  |   | 1.35    |   |  |   | (0.03   | )
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net (loss) income per share                                                     |  | $                               | (0.18   | ) |                                | $ | (0.29   | )    |  | $ | 0.50    |   |  | $ | (0.80   | )
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Weighted average number of shares used in computing basic and diluted net (loss) income per share |  |                                 | 55,965  |   |                                |   | 54,932  |      |  |   | 55,699  |   |  |   | 54,784  |  
|                                                                                                  |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  

See accompanying notes to condensed consolidated financial statements



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                     |  |                                |         |   |      |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                                     |  | Nine Months EndedSeptember 30, |        
|                                                                                     |  | 2007                           |         |   | 2006 |  
|Cash flows from operating activities:                                                |  |                                |         |   |      |   |         |  
|Net income (loss)                                                                    |  | $                              | 27,969  |   |      | $ | (44,043 | )
|(Income) loss from discontinued operations                                           |  |                                | (75,361 | ) |      |   | 1,495   |  
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                |         |   |      |   |         |  
|Deferred revenue, net of current portion                                             |  |                                | (66     | ) |      |   |        |  
|Depreciation and amortization                                                        |  |                                | 3,304   |   |      |   | 5,671   |  
|Impairment of long lived assets held for sale                                        |  |                                | 6,273   |   |      |   |        |  
|Stock-based compensation                                                             |  |                                | 3,030   |   |      |   | 4,075   |  
|Stock-based 401(k) plan employer match                                               |  |                                | 332     |   |      |   | 268     |  
|Non-cash interest income                                                             |  |                                | 345     |   |      |   | 659     |  
|Non-cash interest income - Restricted cash                                           |  |                                | (237    | ) |      |   |        |  
|Gain on extinguishment of debt                                                       |  |                                | (169    | ) |      |   |        |  
|Gain on sale of long-term marketable securities                                      |  |                                | (973    | ) |      |   |        |  
|Changes in assets and liabilities:                                                   |  |                                |         |   |      |   |         |  
|Income taxes receivable                                                              |  |                                | 149     |   |      |   | 239     |  
|Accrued interest receivable                                                          |  |                                | 587     |   |      |   | 214     |  
|Accounts receivable                                                                  |  |                                | 926     |   |      |   | 42      |  
|Prepaid expenses                                                                     |  |                                | 1,254   |   |      |   | (460    | )
|Intangible and other assets, net                                                     |  |                                | 141     |   |      |   | (138    | )
|Accounts payable                                                                     |  |                                | 136     |   |      |   | 119     |  
|Accrued expenses                                                                     |  |                                | 191     |   |      |   | 561     |  
|Accrued payroll and related items                                                    |  |                                | (393    | ) |      |   | 408     |  
|Interest payable                                                                     |  |                                | (2,759  | ) |      |   | (2,093  | )
|Deferred revenue                                                                     |  |                                |        |   |      |   | (2,901  | )
|Other current liabilities                                                            |  |                                | 331     |   |      |   | (559    | )
|                                                                                     |  |                                |         |   |      |   |         |  
|Net cash used in operating activities                                                |  |                                | (34,990 | ) |      |   | (36,443 | )
|                                                                                     |  |                                |         |   |      |   |         |  
|Cash flows from investing activities:                                                |  |                                |         |   |      |   |         |  
|Acquisitions of property and equipment                                               |  |                                | (174    | ) |      |   | (380    | )
|Proceeds from sale of fixed assets                                                   |  |                                | 29      |   |      |   | 134     |  
|Payments for intangible assets                                                       |  |                                |        |   |      |   | (7      | )
|Purchases of short-term investments                                                  |  |                                | (7,966  | ) |      |   | (29,167 | )
|Proceeds from sales of short-term investments                                        |  |                                | 1,401   |   |      |   | 3,118   |  
|Proceeds from maturities of short-term investments                                   |  |                                | 15,900  |   |      |   | 8,562   |  
|Purchases of marketable securities                                                   |  |                                | (5,694  | ) |      |   | (11,710 | )
|Proceeds from sales of marketable securities                                         |  |                                | 26,543  |   |      |   | 38,619  |  
|Proceeds from maturities of marketable securities                                    |  |                                | 11,090  |   |      |   | 43,300  |  
|Proceeds from disposal of assets of discontinued operations                          |  |                                | 82,023  |   |      |   |        |  
|Proceeds from sale of held for sale assets                                           |  |                                | 2,217   |   |      |   |        |  
|Restricted cash                                                                      |  |                                | (14,129 | ) |      |   |        |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Net cash provided by investing activities                                            |  |                                | 111,240 |   |      |   | 52,469  |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Cash flows from financing activities:                                                |  |                                |         |   |      |   |         |  
|Proceeds from exercise of stock options                                              |  |                                | 72      |   |      |   | 375     |  
|Repayment of convertible debt                                                        |  |                                | (66,228 | ) |      |   |        |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                                  |  |                                | (66,156 | ) |      |   | 375     |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Cash flows from discontinued operations:                                             |  |                                |         |   |      |   |         |  
|Net operating cash flows used in discontinued operations                             |  |                                | (379    | ) |      |   | (7,804  | )
|Net investing cash flows (used in) provided by discontinued operations               |  |                                | (74     | ) |      |   | 8,438   |  
|Net financing cash flows provided by discontinued operations                         |  |                                | 23      |   |      |   | 338     |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Net cash (used in) provided by discontinued operations                               |  |                                | (430    | ) |      |   | 972     |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents of subsidiary held for sale     |  |                                | 430     |   |      |   | (972    | )
|                                                                                     |  |                                |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                            |  |                                | 10,094  |   |      |   | 16,401  |  
|Cash and cash equivalents, beginning of period                                       |  |                                | 58,486  |   |      |   | 17,697  |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                             |  | $                              | 68,580  |   |      | $ | 34,098  |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Supplemental cash flow information:                                                  |  |                                |         |   |      |   |         |  
|Interest paid                                                                        |  | $                              | 6,499   |   |      | $ | 8,463   |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Income tax benefit payments received, net of payments made                           |  | $                              | 407     |   |      | $ | 1,114   |  
|                                                                                     |  |                                |         |   |      |   |         |  
|Acquisition of property and equipment, unpaid at end of period                       |  | $                              |        |   |      | $ | 11      |  
|                                                                                     |  |                                |         |   |      |   |         |  

See accompanying notes to condensed consolidated financial statements



5



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##### Table of Contents

CURAGEN CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)



|1. | Basis of Presentation and Discontinued Operations
|-- | -------------------------------------------------

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete
financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly our consolidated financial
position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements of CuraGen Corporation and subsidiary
(collectively, the Company) include CuraGen Corporation (CuraGen) and its former majority-owned subsidiary, 454 Life Sciences Corporation (454), and accordingly, all material intercompany balances and transactions
have been eliminated. CuraGen reclassified its prior financial statements to present the assets and liabilities and operating results of 454 as held for sale on the condensed consolidated Balance Sheets and as a discontinued operation on the
condensed consolidated Statements of Operations as a result of the Agreement and Plan of Merger (the Merger Agreement) signed by 454 on March 28, 2007 with Roche Holdings, Inc., and 13 Acquisitions, Inc., an indirect wholly-owned
subsidiary of Roche Holdings, Inc., each affiliates of F. Hoffman-La Roche Ltd (Roche) (see Note 4). The Merger Agreement was subsequently assigned by Roche Holdings, Inc. to its affiliate Roche Diagnostics Operations, Inc.
(RDO), which is also an affiliate of Roche. The sale of 454 to RDO pursuant to the Merger Agreement closed on May 25, 2007.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2006. All dollar amounts herein are shown in thousands, except par value and per share data.



|2. | Comprehensive (Loss) Income
|-- | ---------------------------

The
accumulated balance of other comprehensive (loss) income is disclosed as a separate component of stockholders equity and consists of unrealized gains and losses on short-term investments and marketable securities. A summary of total
comprehensive (loss) income is as follows:



|                                                                             |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                             |  | Three Months EndedSeptember 30, |         |   | Nine Months EndedSeptember 30, |  
|                                                                             |  | 2007                            |         |   | 2006                           |   |         | 2007 |  |   | 2006   |  
|Net (loss) income                                                            |  | $                               | (9,898  | ) |                                | $ | (15,880 | )    |  | $ | 27,969 |   |  | $ | (44,043 | )
|                                                                             |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Other comprehensive loss:                                                    |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Unrealized gains (losses) on securities:                                     |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Unrealized holding (losses) gains arising during period                      |  |                                 | (1,195  | ) |                                |   | 612     |      |  |   | (2,271 | ) |  |   | 3,497   |  
|Reclassification adjustment for (gains) losses included in net (loss) income |  |                                 | (968    | ) |                                |   | 128     |      |  |   | (928   | ) |  |   | 141     |  
|                                                                             |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Net unrealized (losses) gains on securities                                  |  |                                 | (2,163  | ) |                                |   | 740     |      |  |   | (3,199 | ) |  |   | 3,638   |  
|                                                                             |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  
|Total comprehensive (loss) income                                            |  | $                               | (12,061 | ) |                                | $ | (15,140 | )    |  | $ | 24,770 |   |  | $ | (40,405 | )
|                                                                             |  |                                 |         |   |                                |   |         |      |  |   |        |   |  |   |         |  

The Company periodically reviews its investment portfolios to determine if there
is an impairment that is other than temporary. As of September 30, 2007, the Company has reviewed its investment portfolio and determined that no other than temporary impairment of its investment portfolio existed.

During the three months ended September 30, 2007, the Company sold its investment in TopoTarget for proceeds of $6,260 and realized
a gain of $973.



6



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##### Table of Contents

|3. | Segment Reporting
|-- | -----------------

As of
December 31, 2006, the Company had two reportable segments, CuraGen and 454. As of March 31, 2007, 454 was classified as a discontinued operation as a result of the Merger Agreement. Accordingly, as of September 30, 2007, and for the
three and nine month periods ended September 30, 2007 and 2006, respectively, the Company operated as one segment excluding discontinued operations (see Note 5).



|4. | 454 Life Sciences/Roche Holdings, Inc. Merger
|-- | ---------------------------------------------

On March 28, 2007, 454 entered into the Merger Agreement with Roche Holdings, Inc. and 13 Acquisitions, Inc., an indirect wholly-owned subsidiary of Roche Holdings, Inc. Roche Holdings, Inc. subsequently assigned
the Merger Agreement to its affiliate RDO. Roche Holdings, Inc. and RDO are affiliates of Roche, a global research-based healthcare company. Under the Merger Agreement, 13 Acquisitions, Inc. was merged with and into 454 (the Merger),
with 454 continuing after the Merger as the surviving corporation and an indirect wholly-owned subsidiary of Roche Holdings, Inc.

Under the terms of the Merger Agreement, upon the closing of the sale of 454 to RDO on May 25, 2007, the purchase price before transaction costs was $152,019, of which RDO paid $140,000 in cash and $12,019 was received from the
exercise of 454 stock options following the signing of the Merger Agreement and prior to the closing of the sale. Of the $140,000 received from RDO, $25,000 was placed in escrow for a period of 15 months, or until August 25, 2008, to provide
for certain post-closing adjustments based on 454s net working capital and net debt on May 25, 2007, and to secure the indemnification rights of RDO and its affiliates. The Company believes it will receive its share of the escrow fund, or
$14,129, after expiration of the escrow term and has included such amount in the determination of the gain on sale in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Interest earned on the
Companys portion of restricted cash is being accrued on a quarterly basis and accordingly, $237 was accrued for the period from May 25, 2007 through September 30, 2007. As a result, $14,366 is classified as restricted cash and is
included in current assets on the accompanying condensed consolidated Balance Sheets, due to its short-term nature as of September 30, 2007.

Following the closing, as required by the Merger Agreement, 454 prepared a closing balance sheet and calculated its net working capital and net debt as of the closing date. Based upon the closing balance sheet and net
working capital and net debt calculations, RDO paid an additional $1,030 in merger consideration to 454 shareholders. In July 2007, CuraGen received $582, its portion of this additional amount, which was included in the calculation of the gain on
sale of subsidiary reported in the second quarter of 2007.



|5. | Discontinued Operations
|-- | -----------------------

The sale
of 454 (see Note 4) on May 25, 2007 has been accounted for in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, and accordingly, at
September 30, 2006, 454s assets and liabilities have been classified as held for sale. In addition, 454s operating results are reported as a discontinued operation for the three and nine months ended September 30, 2006 and for
the periods April 1, 2007 to May 25, 2007 and January 1, 2007 to May 25, 2007.

The following table
summarizes the financial information for the discontinued operations of 454 for the three and nine months ended September 30, 2006, and for the period January 1, 2007 to May 25, 2007:



|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ------------------ | - | ------ | ------------------------------- |  | - | ------ | -
|                                                                                               |  | Three monthsended September 30, |        |   | January 1toMay 25, |   |        | Nine months ended September 30, | 
|                                                                                               |  | 2006                            |        |   | 2007               |   |        | 2006                            | 
|Revenue:                                                                                       |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Product revenue                                                                                |  | $                               | 4,806  |   |                    | $ | 14,210 |                                 |  | $ | 14,654 |  
|Sequencing service revenue                                                                     |  |                                 | 2,777  |   |                    |   | 3,825  |                                 |  |   | 7,479  |  
|Collaboration revenue                                                                          |  |                                 | 375    |   |                    |   | 1,350  |                                 |  |   | 1,125  |  
|Grant revenue                                                                                  |  |                                 | 949    |   |                    |   | 444    |                                 |  |   | 2,296  |  
|Milestone revenue                                                                              |  |                                 | 950    |   |                    |   | 3,707  |                                 |  |   | 2,850  |  
|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Total revenue                                                                                  |  | $                               | 9,857  |   |                    | $ | 23,536 |                                 |  | $ | 28,404 |  
|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Operating Expenses:                                                                            |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Cost of product revenue                                                                        |  | $                               | 2,949  |   |                    | $ | 9,015  |                                 |  | $ | 8,890  |  
|Cost of sequencing service revenue                                                             |  |                                 | 1,062  |   |                    |   | 2,207  |                                 |  |   | 3,102  |  
|Grant research expenses                                                                        |  |                                 | 898    |   |                    |   | 425    |                                 |  |   | 2,095  |  
|Research and development expenses                                                              |  |                                 | 3,472  |   |                    |   | 7,908  |                                 |  |   | 10,222 |  
|General and administrative expenses                                                            |  |                                 | 3,088  |   |                    |   | 7,075  |                                 |  |   | 6,682  |  
|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Total operating expenses                                                                       |  | $                               | 11,469 |   |                    | $ | 26,630 |                                 |  | $ | 30,991 |  
|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Loss from discontinued operations before minority interest, net of tax of $18, $0, $26, and $0 |  | $                               | (1,576 | ) |                    | $ | (3,053 | )                               |  | $ | (2,319 | )
|Minority interest in loss of discontinued consolidated subsidiary                              |  |                                 | 484    |   |                    |   | 62     |                                 |  |   | 824    |  
|Gain on sale of subsidiary                                                                     |  |                                 |       |   |                    |   | 78,352 |                                 |  |   |       |  
|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  
|Income (loss) from discontinued operations                                                     |  | $                               | (1,092 | ) |                    | $ | 75,361 |                                 |  | $ | (1,495 | )
|                                                                                               |  |                                 |        |   |                    |   |        |                                 |  |   |        |  



7



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##### Table of Contents

During the third quarter of 2006, the cumulative losses applicable to the minority
interest in subsidiary exceeded the minority interest in the equity capital of 454, therefore, the majority of losses applicable to the minority interest from the third quarter of 2006 through the closing of the sale of 454 were charged to CuraGen.

The following tables set forth the components of 454s assets and liabilities classified as held for sale on the
condensed consolidated Balance Sheets at December 31, 2006 (in thousands):



|                                        |  |                  |       
|--------------------------------------- |  | ---------------- | ------
|                                        |  | December 31,2006
|Cash and cash equivalents               |  | $                | 4,164 
|Short-term investments                  |  |                  | 1,507 
|Marketable securities                   |  |                  | 90    
|Accounts, grants and royalty receivable |  |                  | 10,850
|Inventory                               |  |                  | 9,855 
|Property and equipment, net             |  |                  | 3,945 
|Licensing fees, net                     |  |                  | 3,281 
|Other assets                            |  |                  | 1,189 
|                                        |  |                  |       
|Assets held for sale                    |  | $                | 34,881
|                                        |  |                  |       



|                          |  |                  |       
|------------------------- |  | ---------------- | ------
|                          |  | December 31,2006
|Accounts payable          |  | $                | 841   
|Accrued expenses          |  |                  | 1,458 
|Deferred revenue          |  |                  | 27,539
|Other liabilities         |  |                  | 897   
|                          |  |                  |       
|Liabilities held for sale |  | $                | 30,735
|                          |  |                  |       



|6. | Stock-Based Compensation
|-- | ------------------------

The
Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), effective January 1, 2006. SFAS 123R requires recognition of the fair value of stock-based
compensation in net earnings.

During the three and nine months ended September 30, 2007 and 2006, the Company
recognized compensation expense in total operating expenses on the condensed consolidated statements of operations with respect to employee stock options and restricted stock grants as follows:



|                                                             |  |                                 |     |                                |   |      |  |      |       |  |   |      
|------------------------------------------------------------ |  | ------------------------------- | --- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                                             |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                                                             |  | 2007                            |     | 2006                           |   | 2007 |  | 2006
|Compensation expense with respect to employee stock options  |  | $                               | 417 |                                | $ | 879  |  | $    | 1,204 |  | $ | 2,126
|Compensation expense with respect to restricted stock grants |  | $                               | 755 |                                | $ | 716  |  | $    | 2,031 |  | $ | 2,017

Due to the Companys net loss position, no tax benefit was recorded during the
periods presented above.



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##### Table of Contents

For the three and nine months ended September 30, 2007 and 2006, the adoption of
SFAS 123R had the effect of increasing the loss from continuing operations and basic and diluted loss per share from continuing operations, over amounts that would have been reported using the intrinsic value method under APB 25, as follows:



|                                                                        |  |                                 |      |                                |   |      |  |      |       |  |   |      
|----------------------------------------------------------------------- |  | ------------------------------- | ---- | ------------------------------ | - | ---- |  | ---- | ----- |  | - | -----
|                                                                        |  | Three Months EndedSeptember 30, |      | Nine Months EndedSeptember 30,
|                                                                        |  | 2007                            |      | 2006                           |   | 2007 |  | 2006
|Increase in loss from continuing operations                             |  | $                               | 417  |                                | $ | 879  |  | $    | 1,204 |  | $ | 2,126
|Increase in basic and diluted loss per share from continuing operations |  | $                               | 0.01 |                                | $ | 0.02 |  | $    | 0.02  |  | $ | 0.04 

The fair value of options granted during the three months ended September 30,
2007 and 2006 were estimated as of the grant date using the Black-Scholes option valuation model with the following assumptions:



|                                |  |                                 |   |  |      |  
|------------------------------- |  | ------------------------------- | - |  | ---- | -
|                                |  | Three Months EndedSeptember 30, |  
|                                |  | 2007                            |   |  | 2006 |  
|Expected stock price volatility |  | 65                              | % |  | 78   | %
|Risk-free interest rate         |  | 4.81                            | % |  | 4.49 | %
|Expected option term in years   |  | 6.25                            |   |  | 6.25 |  
|Expected dividend yield         |  | 0                               | % |  | 0    | %

The approximate weighted-average grant date fair values using the Black-Scholes
option valuation model of all stock options granted during the three and nine months ended September 30, 2007 and 2006 were as follows:



|                                 |  |                                 |      |      |   |      |  |   |     
|-------------------------------- |  | ------------------------------- | ---- | ---- | - | ---- |  | - | ----
|Three Months Ended September 30, |  | Nine Months Ended September 30,
|2007                             |  | 2006                            |      | 2007 |   | 2006
|$0.89                            |  | $                               | 2.15 |      | $ | 1.27 |  | $ | 2.78

The 2007 Stock Incentive Plan (2007 Stock Plan) was approved by the
Companys stockholders as of May 2, 2007. The 2007 Stock Plan provides for the issuance of stock options and stock grants to employees, directors and consultants of CuraGen. A total of 3,000,000 shares of common stock were reserved for
issuance under the 2007 Stock Plan. A summary of the stock option activity under the 2007 Stock Plan, as of September 30, 2007, and changes during the three months ended September 30, 2007, are as follows:



|                               |  |                   |  |                               |      |                                                     |      |                         |   |   
|------------------------------ |  | ----------------- |  | ----------------------------- | ---- | --------------------------------------------------- | ---- | ----------------------- | - | --
|                               |  | Number of Options |  | WeightedAverageExercise Price |      | Weighted AverageRemainingContractual Life(in years) |      | AggregateIntrinsicValue
|Outstanding July 1, 2007       |  | 109,500           |  | $                             | 2.73 |                                                     |      |                         |   |   
|Granted                        |  | 615,056           |  |                               | 1.39 |                                                     |      |                         |   |   
|Exercised                      |  |                  |  |                               |      |                                                     |      |                         |   |   
|Canceled or lapsed             |  |                  |  |                               |      |                                                     |      |                         |   |   
|                               |  |                   |  |                               |      |                                                     |      |                         |   |   
|Outstanding September 30, 2007 |  | 724,556           |  |                               | 1.59 |                                                     | 9.91 |                         | $ | 21
|                               |  |                   |  |                               |      |                                                     |      |                         |   |   
|Exercisable September 30, 2007 |  | 107,500           |  |                               | 2.73 |                                                     | 9.59 |                         | $ | 0 
|                               |  |                   |  |                               |      |                                                     |      |                         |   |   

There were no options exercised under the 2007 Stock Plan during the three months
ended September 30, 2007.

A summary of the stock option activity under the 1997 Employee, Director and Consultant
Stock Plan (1997 Stock Plan) as of September 30, 2007, and changes during the three months ended September 30, 2007, are as follows:



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##### Table of Contents

|                               |  |                   |   |  |                               |       |                                                      |      |                         |   |  
|------------------------------ |  | ----------------- | - |  | ----------------------------- | ----- | ---------------------------------------------------- | ---- | ----------------------- | - | -
|                               |  | Number of Options |   |  | WeightedAverageExercise Price |       | Weighted AverageRemainingContractual Life (in years) |      | AggregateIntrinsicValue
|Outstanding July 1, 2007       |  | 5,988,843         |   |  | $                             | 9.42  |                                                      |      |                         |   |  
|Granted                        |  |                  |   |  |                               |       |                                                      |      |                         |   |  
|Exercised                      |  |                  |   |  |                               |       |                                                      |      |                         |   |  
|Canceled or lapsed             |  | (1,558,428        | ) |  |                               | 17.07 |                                                      |      |                         |   |  
|                               |  |                   |   |  |                               |       |                                                      |      |                         |   |  
|Outstanding September 30, 2007 |  | 4,430,415         |   |  |                               | 6.78  |                                                      | 5.56 |                         | $ | 0
|                               |  |                   |   |  |                               |       |                                                      |      |                         |   |  
|Exercisable September 30, 2007 |  | 3,117,337         |   |  |                               | 7.69  |                                                      | 4.52 |                         | $ | 0
|                               |  |                   |   |  |                               |       |                                                      |      |                         |   |  

The total intrinsic value of options exercised under the 1997 Stock Plan during
the three months ended September 30, 2006 was $2. There were no options exercised under the 1997 Stock Plan during the three months ended September 30, 2007.

There was no significant activity in the 1993 Stock Option and Incentive Award Plan (1993 Stock Plan) during either the three
months ended September 30, 2007 or 2006.

As of September 30, 2007 there was $2,075 of total unrecognized
compensation expense related to unvested stock option grants under the 1993 Stock Plan, 1997 Stock Plan and 2007 Stock Plan, and this expense is expected to be recognized over a weighted-average period of 1.68 years.

A summary of all restricted stock activity under the 2007 Stock Plan as of September 30, 2007, and changes during the three months
ended September 30, 2007, are as follows:



|                                      |  |                                     |  |                                        |     
|------------------------------------- |  | ----------------------------------- |  | -------------------------------------- | ----
|                                      |  | Number of Sharesof Restricted Stock |  | Weighted Average Grant Date Fair Value
|Outstanding July 1, 2007              |  | 975,000                             |  | $                                      | 1.25
|Granted                               |  | 75,000                              |  |                                        | 1.66
|Restrictions lapsed                   |  |                                    |  |                                        |     
|Repurchased upon employee termination |  |                                    |  |                                        |     
|                                      |  |                                     |  |                                        |     
|Outstanding September 30, 2007        |  | 1,050,000                           |  |                                        | 1.28
|                                      |  |                                     |  |                                        |     

On May 25, 2007, the Compensation Committee of the Company approved the
issuance of an aggregate of 975,000 shares of restricted common stock to five executive officers, which will vest and become free from forfeiture on December 31, 2008, if the closing price of the common stock on the Nasdaq Global Market has
equaled or exceeded $5.00 per share over a period of 20 consecutive trading days for any period ending on or before December 31, 2008. In each case, the shares of common stock described above will only vest if the executive is an employee of
the Company as of December 31, 2008. Therefore, pursuant to SFAS 123R, these restricted stock awards are deemed to contain a market condition which is reflected in the grant-date fair value of the awards, based on a valuation technique which
considered all the possible outcomes of such market condition. Compensation cost is required to be recognized over the requisite service period for an award with a market condition provided that the requisite service is rendered, regardless of when,
if ever, the market condition is satisfied. Accordingly, the Company will reverse previously recognized compensation cost for the above awards only if the requisite service is not rendered.

There were no restricted shares vested under the 2007 Stock Plan during the three months ended September 30, 2007.

A summary of all restricted stock activity under the 1997 Stock Plan as of September 30, 2007, and changes during the three months
ended September 30, 2007, are as follows:



|                                      |  |                                     |   |  |                                        |     
|------------------------------------- |  | ----------------------------------- | - |  | -------------------------------------- | ----
|                                      |  | Number of Sharesof Restricted Stock |   |  | Weighted Average Grant Date Fair Value
|Outstanding July 1, 2007              |  | 1,079,265                           |   |  | $                                      | 4.33
|Granted                               |  |                                    |   |  |                                        |     
|Restrictions lapsed                   |  | (321,075                            | ) |  |                                        | 4.48
|Repurchased upon employee termination |  | (19,970                             | ) |  |                                        | 4.46
|                                      |  |                                     |   |  |                                        |     
|Outstanding September 30, 2007        |  | 738,220                             |   |  |                                        | 4.26
|                                      |  |                                     |   |  |                                        |     



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##### Table of Contents

The total intrinsic value of restricted shares vested under the 1997 Stock Plan during
the three months ended September 30, 2007 and 2006 was $398 and $292, respectively.

As of September 30, 2007,
there was $2,291 of total unrecognized compensation expense related to unvested restricted stock grants under the 1997 Stock Plan and 2007 Stock Plan, and this expense is expected to be recognized over a weighted-average period of 1.07 years.

As a result of the sale of 454 discussed in Note 4 above, 454s operating results are being reported as discontinued
operations for the three and nine months ended September 30, 2006 and for the period January 1, 2007 to May 25, 2007. During the three and nine months ended September 30, 2006, 454 recognized compensation expense of $149 and
$338, respectively, with respect to employee stock option awards which is included in loss from discontinued operations.



|7. | Income (Loss) Per Share
|-- | -----------------------

Basic
income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding for the period, excluding unvested restricted stock. Diluted income (loss) per share reflects the potential
dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. Convertible subordinated debt, stock options granted but not yet exercised under CuraGens stock option plans and
unvested restricted stock are anti-dilutive and therefore not considered for the diluted income (loss) per share calculations. Anti-dilutive potential common shares, consisting of convertible subordinated debt, outstanding stock options and unvested
restricted stock were 18,237,035 and 21,599,705 as of September 30, 2007 and 2006, respectively.



|8. | Restructuring Charge
|-- | --------------------

During June
and September 2007, the Company underwent corporate restructurings to reduce operating costs and to focus resources on the advancement of its therapeutic pipeline through clinical development, resulting in estimated full year 2007 restructuring
charges of $10,527. During the second and third quarters of 2007, the Company recorded total restructuring charges of $8,537. This amount includes an asset impairment charge of $6,273 (associated with the closure of its pilot manufacturing plant,
also known as the Biopharmaceutical Sciences Process facility, or BPS, on July 27, 2007), $1,838 related to employee separation costs paid in cash, $168 of non-cash employee separation costs and $258 of other asset write-offs. Pursuant to the
terms of restricted stock agreements held by various employees being terminated in connection with the restructurings, the individuals ownership of such restricted shares shall become immediately vested if the Company terminates the
individuals employment or service by way of an involuntary termination.

The following table details the
charges, cash payments and balance of the restructuring reserves as of and for the nine months ended September 30, 2007:



|                                 |  |         |       |                     |   |                             |  |   |    
|-------------------------------- |  | ------- | ----- | ------------------- | - | --------------------------- |  | - | ---
|                                 |  | Charges |       | CashPaymentsin 2007 |   | Reserve atSeptember 30,2007
|Employee separation costs:       |  |         |       |                     |   |                             |  |   |    
|Cash                             |  | $       | 1,838 |                     | $ | 991                         |  | $ | 847
|Non-cash                         |  |         | 168   |                     |   |                             |  |   |    
|                                 |  |         |       |                     |   |                             |  |   |    
|Total employee separation costs  |  |         | 2,006 |                     |   |                             |  |   |    
|                                 |  |         |       |                     |   |                             |  |   |    
|Impairment of assets:            |  |         |       |                     |   |                             |  |   |    
|Assets to be disposed of by sale |  |         | 6,531 |                     |   |                             |  |   |    
|                                 |  |         |       |                     |   |                             |  |   |    
|Total restructuring activity     |  | $       | 8,537 |                     |   |                             |  |   |    
|                                 |  |         |       |                     |   |                             |  |   |    

Additional restructuring charges for severance and related benefits of
approximately $1,905 and non-cash restructuring charges related to the accelerated vesting of restricted stock grants of approximately $85 will be recorded during the fourth quarter of 2007, as they relate to services to be performed by those
affected employees who will be completing ongoing projects through the end of 2007.



11



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|9. | Accounting for Uncertainty in Income Taxes
|-- | ------------------------------------------

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty
in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109 Accounting for Income Taxes. This interpretation prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on derecognition, classification, interest and penalties, accounting for taxes in interim periods and
disclosure requirements. The provisions of FIN 48 are to be applied to all tax positions upon initial adoption of this standard. Only tax positions that meet the more-likely-than-not recognition threshold at the effective date may be recognized or
continue to be recognized upon adoption of FIN 48. Unrecognized tax benefits are tax benefits claimed in our tax returns that do not meet these recognition and measurement standards. The cumulative effect of applying the provisions of FIN 48 should
be reported as an adjustment to the opening balance of retained earnings for that fiscal year. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006. For the Company, this interpretation was effective
beginning January 1, 2007.

As a result of the implementation of FIN 48, the Company recorded no adjustments in its
unrecognized income tax benefits. As of January 1, 2007 and September 30, 2007, the Company had unrecognized income tax benefits totaling $0.8 million and $0.9 million, respectively. If recognized, all of the unrecognized tax benefits
would be recorded as a benefit to income tax expense on the condensed consolidated statements of operations. The Company does not currently anticipate significant changes in the amount of unrecognized income tax benefits over the next year.

To the extent penalties and interest would be assessed on any underpayment of income tax, the Companys policy is that
such amounts would be accrued and classified as a component of income tax expense in the financial statements. To date the Company has not accrued any interest or penalties as they would be immaterial.

As a result of net operating loss carryforwards, the Companys federal tax returns since 1992 remain open to examination with no
years currently under examination by the Internal Revenue Service, and the Companys Connecticut tax returns remain open to examination for all years since 2000 with no years currently under examination by the Department of Revenue Services.



|10. | Extinguishment of Debt
|--- | ----------------------

Effective
September 28, 2007, the Company repurchased a total of $609 of its 4% convertible subordinated debentures due February 2011, for total consideration of $430, plus accrued interest of $3 to the date of repurchase. As a result of the transaction,
in the third quarter of 2007 the Company recorded a gain of $169 in Gain on extinguishment of debt, which is net of the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt. The
transaction closed on October 2, 2007. Accordingly, the amount payable at closing of $433 is included in accrued expenses in the accompanying condensed consolidated balance sheet as of September 30, 2007.

See Note 11 which describes the Companys repurchase of an additional $13,251 of its 4% convertible subordinated debentures due
February 2011, during October 2007.



|11. | Subsequent Event
|--- | ----------------

During October
2007, the Company repurchased $13,251 of its 4% convertible subordinated debentures due February 2011, for total consideration of $9,463, plus accrued interest of $87 to the date of repurchase. As a result of the transaction, in the fourth quarter
of 2007, the Company will record a gain of $3,571 in Gain on extinguishment of debt, which is offset by the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt.



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CURAGEN CORPORATION AND SUBSIDIARY



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Our managements discussion and analysis of our financial condition and results of operations include the identification of certain trends and other
statements that may predict or anticipate future business or financial results. There are important factors that could cause our actual results to differ materially from those indicated. See Part II, Item 1A., Risk Factors.

Overview

We are a biopharmaceutical
development company dedicated to improving the lives of patients by developing novel therapeutics for the treatment of cancer. We have taken a systematic approach to identifying and validating promising therapeutic targets and our efforts are
currently focused on developing and advancing two potential therapeutics, belinostat (PXD101) and CR011-vcMMAE through clinical development, and towards commercialization.

Corporate Restructuring

During June and September 2007, we underwent corporate restructurings to
reduce operating costs and to focus resources on the advancement of our therapeutic pipeline through clinical development, resulting in estimated full year 2007 restructuring charges of $10.5 million. During the second and third quarters of 2007, we
recorded total restructuring charges of $8.5 million. This amount includes an asset impairment charge of $6.3 million associated with the closure of our pilot manufacturing plant, also known as the Biopharmaceutical Sciences Process facility, or
BPS, on July 27, 2007. The BPS facility is a 29,000 square foot, leased facility that was used by us for pilot scale production of proteins and antibodies. The BPS primarily supported early-stage pipeline development and non-GMP manufacturing
efforts. In addition, $1.8 million related to employee separation costs paid in cash, $0.2 million of non-cash employee separation costs and $0.2 million of other asset write-offs were included in the total restructuring charges of $8.5 million. We
also announced a reduction in workforce of approximately 55 employees, primarily composed of preclinical and manufacturing researchers, and additional support staff from within the organization. Affected employees will be eligible for a severance
package that includes severance pay, continuation of benefits and outplacement services. The restructuring actions are expected to be substantially completed by the end of 2007.

Additional restructuring charges for severance and related benefits of approximately $1.9 million and non-cash restructuring charges related to the
accelerated vesting of restricted stock grants of approximately $0.1 million will be recorded during the fourth quarter of 2007, as they relate to services to be performed by those affected employees who will be completing ongoing projects through
the end of 2007.

Completion of 454 Acquisition

On May 25, 2007, the acquisition of 454 Life Sciences Corporation, a Delaware corporation and our majority-owned subsidiary, or 454, by Roche Diagnostics Operations, Inc., or RDO, was completed. The acquisition was accomplished through
the merger of 13 Acquisitions, Inc., a Delaware corporation and a direct wholly-owned subsidiary of RDO, with and into 454, or the Merger, with 454 continuing after the Merger as the surviving corporation as a direct wholly-owned subsidiary of RDO,
all in accordance with an Agreement and Plan of Merger dated March 28, 2007 by and among Roche Holdings, Inc., 454 and 13 Acquisitions, or the Merger Agreement. Roche Holdings, Inc. subsequently assigned its rights and obligations under the
Merger Agreement to RDO, an indirect wholly-owned subsidiary of Roche Holdings, Inc., prior to the closing of the Merger. Roche Holdings, Inc. and RDO are affiliates of F. Hoffman-La Roche Ltd.

The purchase price paid for 454 by RDO was $152.0 million in cash, of which RDO paid $140.0 million in cash and $12.0 million of which was received from
the exercise of 454 stock options following the signing of the Merger Agreement. Of the $140.0 million received from RDO, $25.0 million was placed in escrow for a period of 15 months from the date of closing, or until August 25, 2008, to secure
the indemnification rights of RDO and its affiliates. Our portion of the escrow amounted to $14.1 million and is included in the net proceeds of $82.0 million received during the second quarter of 2007. Interest earned on our portion of restricted
cash is being accrued on a quarterly basis and accordingly, $0.2 million was accrued for the period from May 25, 2007 through September 30, 2007. Accordingly, $14.3 million is classified as restricted cash and included in current assets on
the accompanying condensed consolidated balance sheet as of September 30, 2007.



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Following the closing, as required by the Merger Agreement, 454 prepared a closing balance sheet and
calculated its net working capital and net debt as of the closing date. Based upon the closing balance sheet and net working capital and net debt calculations, RDO paid an additional $1.0 million in merger consideration to 454 shareholders. In July
2007, we received $0.6 million, our portion of this additional amount, which is included in the calculation of the gain on sale of subsidiary on the accompanying condensed consolidated statement of operations for the nine months ended
September 30, 2007.

Termination of velafermin development program

On October 11, 2007, we announced that our Phase II dose-confirmatory clinical trial on velafermin, designated CLN-12, did not meet its primary
endpoint. Based on these trial results, we have discontinued the development of velafermin although patients from this study will need to be followed for approximately one year post treatment for protocol specified safety monitoring. Therefore, the
study will not be clinically complete until approximately September 2008. No new obligations will be initiated with this program. The complete clinical trial results from CLN-12 will be presented in December at the American Society of Hematology, or
ASH, 2007 Annual Meeting in Atlanta, GA.

CuraGen Clinical Oncology Pipeline; Recent Developments

We are currently focusing our resources on the development of the following clinical oncology therapeutics for the treatment of cancer:

Belinostatis a small molecule therapeutic that inhibits the activity of the enzyme histone deacetylase, or HDAC, and is being evaluated for
the treatment of solid and hematologic cancers either alone or in combination with other active chemotherapeutic drugs and newer targeted agents. We are conducting clinical trials evaluating intravenous and oral belinostat for:



|                      |  |       |  |                                                |  |                                |  |                                                           
|--------------------- |  | ----- |  | ---------------------------------------------- |  | ------------------------------ |  | ----------------------------------------------------------
|Indication            |  | Phase |  | Regimen                                        |  | Initiation ofPatientEnrollment |  | Milestone                                                 
|Solid tumors          |  | Ib    |  | Combination with 5-fluorouracil (5-FU)       |  | September 2005                 |  | Results presented June 2007                               
|                      |  |       |  |                                               
|Solid tumors          |  | Ib    |  | Combination with paclitaxel and/or carboplatin |  | September 2005                 |  | Results presented June 2007                               
|                      |  |       |  |                                               
|T-cell lymphoma       |  | II    |  | Monotherapy                                    |  | January 2006                   |  | Updated preliminary results anticipated in December 2007  
|                      |  |       |  |                                               
|Advanced solid tumors |  | I     |  | Oral belinostat monotherapy                    |  | August 2006                    |  | Results presented October 2007                            
|                      |  |       |  |                                               
|Ovarian cancer        |  | II    |  | Combination with paclitaxel and/or carboplatin |  | November 2006                  |  | Results presented October 2007                            
|                      |  |       |  |                                               
|Bladder cancer        |  | II    |  | Combination with paclitaxel and/or carboplatin |  | June 2007                      |  | Preliminary results anticipated in the second half of 2008

On October 25, 2007, we provided an update on clinical trial results that were presented on
intravenous and oral belinostat at the 2007 AACR-NCI-EORTC International Conference on Molecular Targets and Cancer Therapeutics. Phase II results from our Phase II open-label trial evaluating a dose regimen consisting of belinostat in combination
with carboplatin and paclitaxel, referred to as BelCaP, were reported on 23 patients including efficacy data for 16 patients who had available pre- and post-baseline assessments of tumor. During the Phase Ib dose-escalation of this trial, BelCaP was
previously shown at the 2007 American Society of Clinical Oncology, or ASCO, Annual Meeting to be generally well tolerated. Safety results from the ongoing Phase II portion of this trial also suggest that BelCaP is generally well tolerated on
patients with relapsed ovarian cancer. Reduction in tumor size was seen in 15 of 16 patients by radiologic assessment. As of the date of presentation, objective responses were observed in 8 patients, including 2 partial responses confirmed by RECIST
and 6 additional responses that were pending radiologic confirmation. Thirteen additional patients had treatment ongoing with continued radiologic assessment of tumor to determine best response. The target enrollment of 34 patients for the trial was
met.



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##### Table of Contents

We also reported on October 25, 2007 that initial results from an ongoing Phase I open-label,
multi-center dose-escalation trial evaluating oral belinostat were presented at the 2007 AACR-NCI-EORTC conference. The goal of the study is to establish the maximum tolerated dose, or MTD, for oral belinostat administered once or twice daily in one
of two regimens (either continuous daily dosing or dosing days one through 14 in a 21-day cycle). At the time of the presentation, data were available on 60 patients enrolled into the dose-escalation study with 46 patients on the continuous daily
regimen and 14 patients dosed days one through 14 in a 21-day cycle. The most frequent adverse events reported were fatigue, anorexia and nausea. More than 2,400 ECGs were collected in this trial, with no grade 3 or 4 QTc changes noted. During the
study, 15 patients (25%) achieved stable disease, or SD, for greater than or equal to 12 weeks, with no RECIST-defined objective responses currently reported. Dose-escalation performed with 250 mg capsules of oral belinostat resulted in a
presumptive continuous dosing MTD of 250 mg twice daily. The MTD for dosing of oral belinostat on days one through 14 in a 21-day cycle has not yet been reached.

On August 6, 2007, we announced that we will not enroll additional patients into a Phase II
open-label clinical trial evaluating intravenous belinostat in combination with Velcade® (bortezomib) for Injection in patients with advanced, refractory multiple myeloma, or MM. Two out of
four patients enrolled in the study developed acute renal insufficiency, or ARI, in the first cycle of treatment with the combination. Three similar events of ARI were previously reported from studies evaluating belinostat monotherapy in patients
with MM. To date, no ARI has been observed in any other indication for which intravenous or oral belinostat is being evaluated.

On
August 6, 2007, we also announced we are preparing to initiate a Phase I/II clinical trial evaluating belinostat in combination with the idarubicin for the treatment of acute myelogenous leukemia, or AML. The study will be conducted at multiple
sites in the European Union. Up to 70 patients will be enrolled and receive intravenous treatment in one of two regimens. Patients will either receive intravenous belinostat administered once daily for five days in combination with idarubicin or a
continuous infusion of belinostat with or without idarubicin. Enrollment into the treatment arms will occur in parallel to define the MTD, for each treatment regimen.

On June 12, 2007, we presented an update on the clinical development program for belinostat and reported preliminary clinical trial results suggesting clinical activity of belinostat against cutaneous T-cell
lymphoma, or CTCL, and peripheral T-cell lymphoma, or PTCL. We reported interim results from our Phase II trial evaluating belinostat as a single agent on 14 patients with CTCL and 11 evaluable patients with PTCL. In the CTCL arm, patients had
received a median of six prior lines of therapy. Four of 14 patients achieved an objective response after receiving belinostat for an objective response rate of 29%, including one complete response and three partial responses. Time to response
ranged from 8 to 57 days. As demonstrated by a decrease in severity weighted assessment tool, or SWAT, scores, 77% of evaluable patients showed an improvement in skin burden of CTCL. As previously announced in December 2006, the CTCL arm was
expanded to enroll up to 34 patients to further refine the magnitude of the objective response rate. In the PTCL arm, two of 11 evaluable patients achieved an objective response including one complete response and one partial response, with best
responses not yet determined in 2 patients whose treatment is ongoing. We announced that based on a recent review of this data internally and with the study investigators, the degree of activity observed in the first phase of this study meets the
predefined criteria to expand enrollment of the PTCL arm to a total of 34 patients.

Also in June 2007, we reported that Phase Ib dose-escalation results on 25 patients with advanced solid tumors were presented at ASCO and indicated that the combination of intravenous belinostat plus 5-FU is generally well tolerated. Two
dose limiting toxicities, including one Grade 3 stomatitis and one Grade 3 angina were reported in the highest dose group evaluating 1000 mg/m 2 /day belinostat plus 1000 mg/2m2/day 5-FU. All patients received extensive pre- and post-treatment ECG monitoring with no Grade 3 QTc prolongation noted.

Of the 23 evaluable patients, a total of seven patients achieved SD (range 2  8 cycles),
with two patients on treatment as of June 2007, and no objective responses noted. No consistent effect was seen on the expression of thymidylate synthase, or TS, in peripheral blood mononuclear cells from this population. As of June 12, 2007,
enrollment of patients is continuing into the 1000 mg/m2/day belinostat and 500 mg/m2/day 5-FU dose cohort. Six additional patients are planned to be enrolled at this dose to determine whether there is any effect on the expression of TS in tissue samples, although further development of this
indication is not planned at this time.

In addition to the clinical trials being sponsored by us, the National Cancer
Institute, or NCI, is also conducting clinical trials evaluating intravenous belinostat, both alone and in combination, for other cancer indications under a Clinical Trials Agreement we signed with the NCI in August 2005:



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|                                   |  |       |  |                                    |  |                                
|---------------------------------- |  | ----- |  | ---------------------------------- |  | -------------------------------
|Indication                         |  | Phase |  | Regimen                            |  | Initiation of PatientEnrollment
|Advanced solid tumors or lymphomas |  | Ib    |  | Combination with Velcade ®         |  | March 2006                     
|                                   |  |       | 
|Acute Myelogenous Leukemia         |  | II    |  | Monotherapy                        |  | June 2006                      
|                                   |  |       | 
|Advanced solid tumors              |  | Ib    |  | Combination with cis-retinoic acid |  | June 2006                      
|                                   |  |       | 
|Mesothelioma                       |  | II    |  | Monotherapy                        |  | June 2006                      
|                                   |  |       | 
|Hepatocellular carcinoma           |  | I/II  |  | Monotherapy                        |  | July 2006                      
|                                   |  |       | 
|Advanced hematologic malignancies  |  | I     |  | Combination with azacitidine       |  | August 2006                    
|                                   |  |       | 
|B-cell lymphomas                   |  | II    |  | Monotherapy                        |  | August 2006                    
|                                   |  |       | 
|Ovarian                            |  | II    |  | Monotherapy                        |  | November 2006                  
|                                   |  |       | 
|Myelodysplastic Syndrome           |  | II    |  | Monotherapy                        |  | November 2006                  

During the 2007 AACR-NCI-EORTC
International Conference in October 2007, results from two NCI-sponsored clinical trials evaluating intravenous belinostat as either monotherapy for the treatment of ovarian cancer or in combination with Velcade®, or bortezomib, for advanced solid tumors or lymphomas were presented.

Data from an ongoing Phase II
open-label trial evaluating intravenous belinostat monotherapy on patients with either refractory or relapsed platinum resistant epithelial ovarian cancer, or EOC, or patients with micropapillary/borderline, or LMP, ovarian tumors were reported.
Tumor response was assessed by RECIST and CA-125 criteria every two cycles. During the presentation it was reported that belinostat was safe and generally well-tolerated in these two ovarian cancer populations. A total of patients with LMP tumors
received a median of 4 treatment cycles (range 1 to 13), with one LMP patient achieving a partial response, or PR, one patient having a CA-125 response, nine SD, and two not evaluable. Six patients remain on study. Objective responses to belinostat
monotherapy were not observed in a heavily pre-treated well-defined platinum-resistant population of patients with EOC.

A presentation of
data on 17 patients, of which 14 were evaluable, were reported from an ongoing Phase I open-label, dose-escalation study evaluating intravenous belinostat in combination with bortezomib for the treatment of advanced solid tumors or lymphomas was
also made during the 2007 AACR-NCI-EORTC International Conference. Belinostat in combination with bortezomib were well tolerated at doses up to 600 mg/m2 belinostat and 1.3 mg/m2 bortezomib, with ongoing enrollment of patients into this dosing
cohort. Activity of the combination reported included one patient with Ewings Sarcoma that has maintained SD for 4 cycles, and two patients, one with peritoneal and one with appendiceal carcinoma, that have maintained SD for 3 cycles. Adverse
events were generally grades 1-2 and reversible. No grade 4 non-hematologic toxicities were reported.

CR011-vcMMAEis a
fully-human monoclonal antibody resulting from our collaboration with Amgen Fremont and utilizes antibody-drug conjugate, or ADC, technology licensed from Seattle Genetics to attach MMAE to yield CR011-vcMMAE.

On October 24, 2007, we announced initial Phase I results with CR011-vcMMAE that were presented at the 2007 AACR-NCI-EORTC International Conference.
The open-label, multi-center, dose escalation study is evaluating the safety, tolerability and pharmacokinetics of CR011-vcMMAE for patients with unresectable Stage III or Stage IV melanoma who have failed no more than one prior line of cytotoxic
therapy. The first part of the trial has been evaluating cohorts of patients receiving increasing doses of CR011-vcMMAE to determine the MTD. The trial has treated 25 patients with doses of up to 2.63 mg/kg CR011-vcMMAE administered intravenously
once every three weeks. CR011-vcMMAE has been generally well-tolerated with no dose limiting toxicities observed to date. Dose escalation is ongoing until the MTD has been reached. Clinical activity consisting of stable disease in six patients
lasting four cycles or longer has been reported with four patients achieving reductions in tumor size of up to 20%.

After determination of
the MTD, up to approximately 32 additional patients are expected to be enrolled and treated at the MTD to further define safety and efficacy in this trial.



16



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##### Table of Contents

Summary

We seek to generate value for our shareholders by developing novel therapeutics for the treatment of cancer. We seek to become profitable by commercializing a subset of therapeutics stemming from our development pipeline, and establishing
partnerships with pharmaceutical and biotechnology companies for the development and commercialization of other therapeutics from our development pipeline. Our failure to successfully develop pharmaceutical products that we can commercialize would
materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated from commercial sales of therapeutic products developed through the application of our technologies and expertise are not
expected for several years, if at all.

We expect to continue incurring substantial research and development expenses relating to clinical
trials required for the development of novel therapeutics and external programs that we identify as being promising and synergistic with our products and expertise. Conducting clinical trials is a lengthy, time-consuming and expensive process. As a
result, we expect to incur continued losses over the next several years.

While we will continue to explore alternative sources for
financing our business activities, including the possibility of public securities offerings and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources will be available when needed or that our
actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including the sale of certain assets, contributions by others to joint ventures, and other
collaborative or licensing arrangements for the development and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to
meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products, and may be unable to continue operations. This result could cause our shareholders to lose all or a substantial portion
of their investment.

Critical Accounting Policies and Use of Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amount of
assets and liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates, including those related to revenue recognition and accrued expenses. We base our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended
December 31, 2006.



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##### Table of Contents

Results of Operations

The following table sets forth a comparison of the components of our net loss for the three months ended September 30, 2007 and 2006 (in millions):



|                                                |  |                                  |      |   |      |   |       |          |  |   |          |   |  |      |   
|----------------------------------------------- |  | -------------------------------- | ---- | - | ---- | - | ----- | -------- |  | - | -------- | - |  | ---- | --
|                                                |  | Three months ended September 30, |     
|                                                |  | 2007                             |      |   | 2006 |   |       | $ Change |  |   | % Change |  
|Collaboration revenue                           |  | $                                |     |   |      | $ |      |          |  | $ |         |   |  | 0    | % 
|Research and development expenses               |  |                                  | 8.1  |   |      |   | 10.7  |          |  |   | (2.6     | ) |  | (24  | )%
|General and administrative expenses             |  |                                  | 2.6  |   |      |   | 3.6   |          |  |   | (1.0     | ) |  | (28  | )%
|Restructuring charges                           |  |                                  | 1.1  |   |      |   |      |          |  |   | 1.1      |   |  | 100  | % 
|Interest income                                 |  |                                  | 1.9  |   |      |   | 1.7   |          |  |   | 0.2      |   |  | 12   | % 
|Interest expense                                |  |                                  | 1.3  |   |      |   | 2.3   |          |  |   | (1.0     | ) |  | (43  | )%
|Gain on extinguishment of debt                  |  |                                  | 0.2  |   |      |   |      |          |  |   | 0.2      |   |  | 100  | % 
|Gain on sale of long-term marketable securities |  |                                  | 1.0  |   |      |   |      |          |  |   | 1.0      |   |  | 100  | % 
|Income tax benefit                              |  |                                  | 0.1  |   |      |   | 0.1   |          |  |   |         |   |  | 0    | % 
|Loss from discontinued operations               |  |                                  |     |   |      |   | 1.1   |          |  |   | (1.1     | ) |  | (100 | )%
|                                                |  |                                  |      |   |      |   |       |          |  |   |          |   |  |      |   
|Net loss                                        |  | $                                | (9.9 | ) |      | $ | (15.9 | )        |  |   |          |   |  |      |   
|                                                |  |                                  |      |   |      |   |       |          |  |   |          |   |  |      |   

The following table sets forth a comparison of the components of our net income (loss) for the
nine months ended September 30, 2007 and 2006 (in millions):



|                                                |  |                                 |      |      |   |       |          |  |   |          |   |  |      |   
|----------------------------------------------- |  | ------------------------------- | ---- | ---- | - | ----- | -------- |  | - | -------- | - |  | ---- | --
|                                                |  | Nine months ended September 30, |     
|                                                |  | 2007                            |      | 2006 |   |       | $ Change |  |   | % Change |  
|Collaboration revenue                           |  | $                               |     |      | $ | 2.3   |          |  | $ | (2.3     | ) |  | (100 | )%
|Research and development expenses               |  |                                 | 30.5 |      |   | 33.2  |          |  |   | (2.7     | ) |  | (8.1 | )%
|General and administrative expenses             |  |                                 | 9.6  |      |   | 10.3  |          |  |   | (0.7     | ) |  | (7   | )%
|Restructuring charges                           |  |                                 | 8.5  |      |   |      |          |  |   | 8.5      |   |  | 100  | % 
|Interest income                                 |  |                                 | 4.0  |      |   | 5.5   |          |  |   | (1.5     | ) |  | (27  | )%
|Interest expense                                |  |                                 | 4.2  |      |   | 7.0   |          |  |   | (2.8     | ) |  | (40  | )%
|Gain on extinguishment of debt                  |  |                                 | 0.2  |      |   |      |          |  |   | 0.2      |   |  | 100  | % 
|Gain on sale of long-term marketable securities |  |                                 | 1.0  |      |   |      |          |  |   | 1.0      |   |  | 100  | % 
|Income tax benefit                              |  |                                 | 0.2  |      |   | 0.2   |          |  |   |         |   |  | 0    | % 
|Loss from discontinued operations               |  |                                 | 3.0  |      |   | 1.5   |          |  |   | 1.5      |   |  | 100  | % 
|Gain on sale of subsidiary                      |  |                                 | 78.4 |      |   |      |          |  |   | 78.4     |   |  | 100  | % 
|                                                |  |                                 |      |      |   |       |          |  |   |          |   |  |      |   
|Net income (loss)                               |  | $                               | 28.0 |      | $ | (44.0 | )        |  |   |          |   |  |      |   
|                                                |  |                                 |      |      |   |       |          |  |   |          |   |  |      |   

Collaboration revenue.The decrease in our collaboration revenue for the nine month
period ended September 30, 2007, as compared to the nine month period ended September 30, 2006 was due to the completion of work under the Bayer AG Pharmacogenomics Agreement during the second quarter of 2006. We do not expect to recognize
additional collaboration revenue during 2007, with the exception of immaterial amounts of collaboration revenue related to the amortization of the $1.3 million received during 2006 from the LEO Pharma/TopoTarget licensing agreement. We had no
material collaboration revenue for either of the three month periods ending September 30, 2006 or 2007.

Research and
development expenses.Research and development expenses consist primarily of: contractual and manufacturing costs; salary and benefits; supplies and reagents; perpetual license fees; depreciation and amortization; and allocated facility
costs. Historically, our research and development efforts have been concentrated on three major project areas: clinical trials; preclinical drug candidates; and collaborations. However, upon completion of our work on the Bayer AG Pharmacogenomics
Agreement during the second quarter of 2006, and subsequent to our decision in the first quarter of 2007 to focus our resources during 2007 exclusively on generating clinical trial results from our lead oncology drug development programs, our
research and development efforts are now being concentrated solely on clinical trials. We budget and monitor our research and development costs by expense category, rather than by specific project, because these costs often benefit multiple
projects.



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##### Table of Contents

Below is a summary that reconciles our total research and development expenses for the three and nine
month periods ended September 30, 2007 and 2006 (in millions):



|                                        |  |                                  |     |      |   |          |  |   |          |   |  |      |   
|--------------------------------------- |  | -------------------------------- | --- | ---- | - | -------- |  | - | -------- | - |  | ---- | --
|                                        |  | Three months ended September 30, |    
|                                        |  | 2007                             |     | 2006 |   | $ Change |  |   | % Change |  
|Contractual and manufacturing costs     |  | $                                | 5.0 |      | $ | 4.7      |  | $ | 0.3      |   |  | 6    | % 
|Salary and benefits                     |  |                                  | 2.2 |      |   | 3.0      |  |   | (0.8     | ) |  | (27  | )%
|Supplies and reagents                   |  |                                  |    |      |   | 0.4      |  |   | (0.4     | ) |  | (100 | )%
|Depreciation and amortization           |  |                                  |    |      |   | 0.5      |  |   | (0.5     | ) |  | (100 | )%
|Allocated facility costs                |  |                                  | 0.9 |      |   | 2.1      |  |   | (1.2     | ) |  | (57  | )%
|                                        |  |                                  |     |      |   |          |  |   |          |   |  |      |   
|Total research and development expenses |  | $                                | 8.1 |      | $ | 10.7     |  |   |          |   |  |      |   
|                                        |  |                                  |     |      |   |          |  |   |          |   |  |      |   



|                                              |  |                                 |      |      |   |          |  |   |          |   |  |     |   
|--------------------------------------------- |  | ------------------------------- | ---- | ---- | - | -------- |  | - | -------- | - |  | --- | --
|                                              |  | Nine months ended September 30, |     
|                                              |  | 2007                            |      | 2006 |   | $ Change |  |   | % Change |  
|Contractual and manufacturing costs           |  | $                               | 16.7 |      | $ | 14.0     |  | $ | 2.7      |   |  | 19  | % 
|Salary and benefits                           |  |                                 | 7.6  |      |   | 8.5      |  |   | (0.9     | ) |  | (11 | )%
|Supplies and reagents                         |  |                                 | 0.6  |      |   | 1.4      |  |   | (0.8     | ) |  | (57 | )%
|Perpetual license fees and milestone payments |  |                                 | 0.1  |      |   | 1.3      |  |   | (1.2     | ) |  | (92 | )%
|Depreciation and amortization                 |  |                                 | 1.1  |      |   | 2.1      |  |   | (1.0     | ) |  | (48 | )%
|Allocated facility costs                      |  |                                 | 4.4  |      |   | 5.9      |  |   | (1.5     | ) |  | (25 | )%
|                                              |  |                                 |      |      |   |          |  |   |          |   |  |     |   
|Total research and development expenses       |  | $                               | 30.5 |      | $ | 33.2     |  |   |          |   |  |     |   
|                                              |  |                                 |      |      |   |          |  |   |          |   |  |     |   

The decrease in our research and development expenses for the three month period ended
September 30, 2007, as compared to the three month period ended September 30, 2006, was primarily due to our decision in the first quarter of 2007 to focus our resources during 2007 exclusively on generating clinical trial results from our
lead oncology drug development programs, as well as the second quarter 2007 restructuring, which included the closing of our BPS. The decrease in our research and development expenses for the nine month period ended September 30, 2007, as
compared to the nine month period ended September 30, 2006, was due to a decrease in license fees and milestone payments (related to our collaboration with Seattle Genetics) offset by an increase in contractual and manufacturing costs. The
decrease was also due to our decision in the first quarter of 2007 to focus our resources during 2007 exclusively on generating clinical trial results from our lead oncology drug development programs as well as the second quarter 2007 restructuring
which included the closing of our BPS. We anticipate our research and development expenses for the remainder of 2007 will decrease due to the second and third quarter 2007 restructurings, which included the closing of our BPS.

As soon as we advance a potential clinical candidate into clinical trials, we begin to track the direct research and development expenses
associated with that potential clinical candidate. The following table shows the cumulative direct research and development expenses as of September 30, 2007, as well as the current direct research and development expenses for the three and
nine month periods ended September 30, 2007 and 2006 which were incurred on or after we started conducting a Phase I clinical trial for a clinical candidate (in millions):



|                                        |  |                         |  |                                                                  |      |            |                     |              |                                    
|--------------------------------------- |  | ----------------------- |  | ---------------------------------------------------------------- | ---- | ---------- | ------------------- | ------------ | -----------------------------------
|Therapeutic Area and Clinical Candidate |  | Class                   |  | Cumulative as of September 30,2007
(sincecommencementof Phase I) |      | Indication |                     | Trial Status
|Cancer Supportive Care                  |  |                         |  |                                                                  |      |            |                     |              |                                    
|                                        |  |                         |  |                                                                 
|Velafermin                              |  | Protein                 |  | $                                                                | 48.6 |            | Oral Mucositis      |              | CLN-12 safety surveillance on-going
|                                        |  |                         |  |                                                                 
|Oncology                                |  |                         |  |                                                                  |      |            |                     |              |                                    
|                                        |  |                         |  |                                                                 
|Belinostat                              |  | Small Molecule          |  | $                                                                | 41.1 |            | Various Cancers     |              | Phase II                           
|                                        |  |                         |  |                                                                 
|CR011-vcMMAE                            |  | Antibody-Drug Conjugate |  | $                                                                | 6.3  |            | Metastatic Melanoma |              | Phase I                            
|                                        |  |                         |  |                                                                 
|Kidney Inflammation                     |  |                         |  |                                                                  |      |            |                     |              |                                    
|                                        |  |                         |  |                                                                 
|CR002                                   |  | Antibody                |  | $                                                                | 1.8  |            | Kidney Inflammation |              | Phase I                            



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|                                        |  |                    |     |                   |   |                   |  |                   |      |  |   |    
|--------------------------------------- |  | ------------------ | --- | ----------------- | - | ----------------- |  | ----------------- | ---- |  | - | ---
|                                        |  | Three Months Ended |     | Nine Months Ended
|Therapeutic Area and Clinical Candidate |  | September 30,2007  |     | September 30,2006 |   | September 30,2007 |  | September 30,2006
|Cancer Supportive Care                  |  |                    |     |                   |   |                   |  |                   |      |  |   |    
|                                        |  |                    |     |                  
|Velafermin                              |  | $                  | 3.6 |                   | $ | 3.4               |  | $                 | 11.5 |  | $ | 7.9
|                                        |  |                    |     |                  
|Oncology                                |  |                    |     |                   |   |                   |  |                   |      |  |   |    
|                                        |  |                    |     |                  
|Belinostat                              |  | $                  | 4.1 |                   | $ | 2.6               |  | $                 | 10.7 |  | $ | 7.6
|                                        |  |                    |     |                  
|CR011-vcMMAE                            |  | $                  | 0.5 |                   | $ | 1.0               |  | $                 | 1.9  |  | $ | 3.8
|                                        |  |                    |     |                  
|Kidney Inflammation                     |  |                    |     |                   |   |                   |  |                   |      |  |   |    
|                                        |  |                    |     |                  
|CR002                                   |  | $                  | 0.1 |                   | $ | 0.1               |  | $                 | 0.1  |  | $ | 0.2

We expect that the full year 2007 direct research and development expenses incurred in connection with our
development of velafermin will increase as compared to full year 2006. Although we completed enrollment in our Phase II trial in August 2007 pursuant to our decision to discontinue our velafermin program, additional costs associated with planned
safety follow up visits and other trial close out activities will be incurred through the third quarter of 2008. We expect that the direct research and development expenses incurred in connection with our development of belinostat will increase in
2007 as compared to 2006. The expected increase during 2007 is related to higher enrollment of patients into our ongoing Phase I and Phase II clinical trials. We expect the CR011-vcMMAE expenses to decrease in 2007 as compared to 2006 due to the
completion of manufacturing activities during 2006. We expect no material costs related to CR002 in 2007; we are seeking to license CR002 to a partner with the necessary resources and expertise required for developing this potential therapeutic.

Currently, our potential pharmaceutical products require significant research and development efforts, and will require extensive
evaluation in clinical trials prior to submitting an application to regulatory agencies for their commercial use. Although we are conducting, or have conducted, human studies with respect to belinostat, CR011-vcMMAE, and CR002, we may not be
successful in developing or commercializing these or other products. Our product candidates are subject to the risks of failure inherent in the development and commercialization of pharmaceutical products and we cannot currently provide reliable
estimates as to when, if ever, our product candidates will generate revenue and cash flows.

Completion of research and development,
preclinical testing and clinical trials may take many years. Estimates of completion periods for any of our major research and development projects are highly speculative and variable, and dependent on the nature of the disease indication, how
common the disease is among the general populace, and the results of the research. For example, preclinical testing and clinical trials can often go on for an indeterminate period of time since the results of tests are continually monitored, with
each test considered complete only when sufficient data has been accumulated to assess whether the next phases of clinical trials are warranted or whether the effort should be abandoned. Typically, Phase I clinical trials are expected to
last between 12 and 24 months, Phase II clinical trials are expected to last between 24 and 36 months and Phase III clinical trials are expected to last between 24 and 60 months. The most significant time and costs associated with clinical
development are the Phase III trials as they tend to be the longest and largest comprehensive studies conducted during the drug development process.

In addition, many factors may delay the commencement and speed of completion of clinical trials, including, but not limited to, the number of patients participating in the trial, the duration of patient follow-up
required, the number of clinical sites at which the trials are conducted, other products that are either approved or are in clinical trials that compete for the same population of patients, and the length of time required to locate and enroll
suitable patient subjects. The successful completion of our development programs and the successful development of our product candidates are highly uncertain and are subject to numerous challenges and risks. Therefore, we cannot presently estimate
anticipated completion dates for any of our projects.

Due to the variability in the length of time necessary to develop a product
candidate, the uncertainties related to the cost of projects and the need to obtain governmental approval for commercialization, accurate and meaningful estimates of the ultimate costs to bring our product candidates to market are not available. If
our major research and development projects are delayed, then we can expect to incur additional costs in conducting our clinical trials, and a longer period of time before we might achieve profitability from our operating activities. Accordingly,
the timing of the potential market approvals for our existing product candidates, including belinostat and CR011-vcMMAE, may have a significant impact on our capital requirements.



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General and administrative expenses.The decrease in our general and administrative
expenses for the three month period ended September 30, 2007 as compared to the three month period ended September 30, 2006 was primarily due to the second quarter 2007 restructuring. General and administrative expenses for the nine month
period ended September 30, 2007 as compared to the nine month period ended September 30, 2006 decreased slightly primarily due to the second quarter 2007 restructuring, offset by consulting and legal fees incurred in the first quarter 2007
in connection with the sale of our shares of 454. We anticipate our general and administrative expenses for the remainder of 2007 to remain consistent with the third quarter of 2007.

Restructuring charge.During June and September 2007, we underwent corporate restructurings to reduce operating costs and to focus
resources on the advancement of our therapeutic pipeline through clinical development, resulting in estimated full year 2007 restructuring charges of $10.5 million. During the second and third quarters of 2007, we recorded total restructuring
charges of $8.5 million. This amount includes an asset impairment charge of $6.3 million associated with the closure of our BPS, $1.8 million related to employee separation costs paid in cash, $0.2 million of non-cash employee separation costs and
$0.2 million of other asset write-offs. Pursuant to the terms of restricted stock agreements held by various employees being terminated in connection with the restructurings, the individuals ownership of such restricted shares shall become
immediately vested if we terminate the individuals employment or service by way of an involuntary termination.

Additional restructuring charges for severance and related benefits of approximately $1.9 million and non-cash restructuring charges related to the accelerated vesting of restricted stock grants of approximately $0.1 million will be
recorded during the fourth quarter of 2007, as they relate to services to be performed by those affected employees who will be completing ongoing projects through the end of 2007.

Interest income. The increase in interest income for the three month period ended September 30, 2007 as compared to the three month
period ended September 30, 2006 was primarily due to higher average quarterly cash and investment balances due to the sale of 454 to RDO as well as higher yields on our investment portfolio. Interest income for the nine month period ended
September 30, 2007 decreased as compared to the nine month period ended September 30, 2006, primarily due to lower average quarterly cash and investment balances in the first half of 2007, partially offset by higher average cash and
investment balances in the third quarter of 2007 due to the sale of 454 to RDO, as well as higher yields on our investment portfolio. We earned an average yield of 4.7% during the third quarter of 2007 as compared to 4.2% in the third quarter of
2006, and earned an average yield of 4.3% during the first nine months of 2007 as compared to 3.8% during the same period in 2006. We anticipate interest income to be approximately $5.5 million for the full year 2007 due to anticipated lower cash
balances resulting from the utilization of cash and investment balances in the normal course of operations. The repayment of $66.2 million of our 6% convertible subordinated debentures which occurred upon their maturity in February 2007 and the
third and fourth quarter 2007 repurchases of $0.6 million and $13.3 million, respectively, of our 4% convertible subordinated debentures due 2011, offset by the receipt of $82.0 million of proceeds from the sale of 454 (assuming full payment to us
of our share of the proceeds currently being held in escrow to secure the indemnification rights of RDO and its affiliates) are also expected to contribute to the decrease. We also expect the yields in our investment portfolio to increase during the
remainder of 2007.

Interest expense. Interest expense for the three and nine month periods ended September 30, 2007
decreased as compared to the same periods in 2006 due to the repayment of $66.2 million of our 6% convertible subordinated debentures which occurred upon their maturity in February 2007. We expect interest expense, including interest paid to debt
holders, as well as amortization of deferred financing costs, to decrease during the remainder of 2007 as compared to the third quarter of 2007. The anticipated decrease is related to the repayment of $66.2 million of our 6% convertible subordinated
debentures which occurred upon their maturity in February 2007, the third and fourth quarter 2007 repurchases of $0.6 million and $13.3 million, respectively, of our 4% convertible subordinated debentures due 2011 as well as anticipation of
additional debt repurchases in the fourth quarter of 2007.

Gain on extinguishment of debt.On September 28,
2007, we repurchased a total of $0.6 million of our 4% convertible subordinated debentures due February 2011, for total consideration of $0.4 million, plus accrued interest to the date of repurchase. As a result of the transaction, in the third
quarter of 2007, we recorded a gain of $0.2 million in Gain on extinguishment of debt, which is net of the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt. We anticipate
recording additional gains on repurchases of debt in the fourth quarter of 2007.



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Gain on sale of long-term marketable securities.During the three months ended
September 30, 2007, we sold our Investment in TopoTarget for proceeds of $6.3 million and realized a gain of $1.0.

Income tax
benefit. We recorded an income tax benefit during the three and nine month periods ended September 30, 2007 and 2006 as a result of Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at
a rate of 65% of their annual research and development expense credit, in exchange for forgoing carryforward of the research and development credit. We expect the 2007 income tax benefit to be less than 2006 (before adjustment to reflect statute of
limitations expirations) due to an anticipated decrease in research and development expenses for the full year 2007 as compared to the full year 2006.

Loss from discontinued operations. Due to the disposition of 454 in the second quarter of 2007, the results of 454s operations have been reclassified as discontinued operations for all
periods presented. The loss from discontinued operations for the three month period ended September 30, 2007 as compared to the same period in 2006 was due to the sale of 454 to RDO during the second quarter of 2007. As a result, no losses from
discontinued operations were recorded during the third quarter of 2007. The increase in the loss from discontinued operations for the nine month period ended September 30, 2007 as compared to the same period in 2006 was due to an increase in
454s SFAS 123R compensation expense for the accelerated vesting of stock options in connection with the Merger, 454s research and development expenses associated with additional personnel and lab supplies and an increase
in general and administrative expenses primarily due to consulting and legal fees incurred in connection with the sale of 454 to RDO. The increase in expenses were partially offset by an increase in the profit 454 earned on product, grant and
milestone revenue. During the third quarter of 2006, the cumulative losses applicable to the minority interest in subsidiary exceeded the minority interest in the equity capital of 454, therefore all losses applicable to the minority interest from
the third quarter of 2006 through the closing of the sale of 454 to RDO on May 25, 2007 were charged to us.

Gain on sale of
subsidiary.During May 2007, the sale of 454 to RDO closed and as a result we recognized a gain on the sale of our ownership in 454 of approximately $78.4 million.

Liquidity and Capital Resources

Since our inception, we have financed our operations and met our
capital expenditure requirements primarily through: private placements of equity securities; convertible subordinated debt offerings; public equity offerings; and revenues received under our collaborative research agreements. Since inception, we
have not had any off-balance sheet arrangements. To date, inflation has not had a material effect on our business.

During the third
quarter of 2007, we repurchased a total of $0.6 million of our 4% convertible subordinated debentures due February 2011, for total consideration of $0.4 million, plus accrued interest to the date of repurchase. As a result of the transaction,
in the third quarter of 2007, we recorded a gain of $0.2 million in Gain on extinguishment of debt, which is net of the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt.

During October 2007, we repurchased an additional $13.3 million of our 4% convertible subordinated debentures due February 2011, for total
consideration of $9.5 million, plus accrued interest of $0.1 million to the date of repurchase. As a result of the transaction, in the fourth quarter of 2007, the Company will record a gain of $3.6 million in Gain on extinguishment of
debt, which is offset by the write-off of the ratable portion of unamortized deferred financing costs relating to the repurchased debt.

During September 2007, we sold our Investment in TopoTarget for proceeds of $6.3 million and a realized gain of $1.0 million.

During June and September 2007, we underwent corporate restructurings to reduce operating costs and to focus resources on the advancement of our therapeutic pipeline through clinical development, resulting in estimated full year 2007
restructuring charges of $10.5 million. During the second and third quarters of 2007, we recorded total restructuring charges of $8.5 million. This amount includes an asset impairment charge of $6.3 million associated with the closure of our pilot
manufacturing plant, $1.8 million related to employee separation costs paid in cash, $0.2 million of non-cash employee separation costs and $0.2 million of other asset write-offs. Pursuant to the terms of restricted stock agreements held by various
employees being terminated in connection with the restructurings, the individuals ownership of such restricted shares shall become immediately vested if we terminate the individuals employment or service by way of an involuntary
termination.



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Additional restructuring charges for severance and related benefits of approximately $1.9 million and
non-cash restructuring charges related to the accelerated vesting of restricted stock grants of approximately $0.1 million will be recorded during the fourth quarter of 2007, as they relate to services to be performed by those affected employees who
will be completing ongoing projects through the end of 2007.

During May 2007, the sale of 454 to RDO closed and as a result we received
net proceeds of $82.0 million, which included $14.1 million to be held in escrow for a period of 15 months after closing of the sale, or until August 25, 2008, to secure the indemnification rights of RDO and its affiliates. If RDO makes
successful claims for indemnification, the amount held in escrow will be reduced in whole or in part. We intend to use the proceeds from this transaction to continue funding our business and the clinical trials being conducted on belinostat, and
CR011-vcMMAE. In July 2007, we received $0.6 million, our portion of 454s net working capital and net debt adjustment as of the closing date.

On February 2, 2007, we repaid at maturity the remaining $66.2 million balance of the 6% convertible subordinated debentures, plus accrued interest of $2.0 million.

Cash and investments.The following table depicts the components of our operating, investing and financing activities for the nine month
periods ended September 30, 2007 and 2006, using the direct cash flow method (in millions):



|                                                                    |  |                                 |       |   |      |   |       |  
|------------------------------------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                                                                    |  | Nine months ended September 30, |      
|                                                                    |  | 2007                            |       |   | 2006 |  
|Cash received from collaborators                                    |  | $                               | 0.9   |   |      | $ | 0.5   |  
|Cash paid to suppliers and employees                                |  |                                 | (33.0 | ) |      |   | (34.6 | )
|Restructuring and related charges paid                              |  |                                 | (1.6  | ) |      |   | (1.3  | )
|Interest income received                                            |  |                                 | 4.1   |   |      |   | 5.5   |  
|Interest expense paid                                               |  |                                 | (6.5  | ) |      |   | (8.5  | )
|Income tax benefit received                                         |  |                                 | 0.4   |   |      |   | 1.1   |  
|                                                                    |  |                                 |       |   |      |   |       |  
|Net cash and investments used in operating activities               |  |                                 | (35.7 | ) |      |   | (37.3 | )
|                                                                    |  |                                 |       |   |      |   |       |  
|Cash paid to acquire property and equipment                         |  |                                 | (0.1  | ) |      |   | (0.4  | )
|Proceeds from sale of fixed assets                                  |  |                                 |      |   |      |   | 0.1   |  
|Proceeds from disposal of assets of discontinued operations         |  |                                 | 82.0  |   |      |   |      |  
|Proceeds from sale of held for sale assets                          |  |                                 | 2.2   |   |      |   |      |  
|Proceeds from sale of long-term marketable securities               |  |                                 | 6.2   |   |      |   |      |  
|                                                                    |  |                                 |       |   |      |   |       |  
|Net cash and investments provided by (used in) investing activities |  |                                 | 90.3  |   |      |   | (0.3  | )
|                                                                    |  |                                 |       |   |      |   |       |  
|Cash received from employee stock option exercises                  |  |                                 | 0.1   |   |      |   | 0.4   |  
|Cash paid for extinguishment of debt                                |  |                                 | (66.2 | ) |      |   |      |  
|                                                                    |  |                                 |       |   |      |   |       |  
|Net cash and investments (used in) provided by financing activities |  |                                 | (66.1 | ) |      |   | 0.4   |  
|                                                                    |  |                                 |       |   |      |   |       |  
|Unrealized gain on short-term investments and marketable securities |  |                                 | 0.7   |   |      |   | 0.9   |  
|                                                                    |  |                                 |       |   |      |   |       |  
|Net decrease in cash and investments                                |  |                                 | (10.8 | ) |      |   | (36.3 | )
|Cash and investments, beginning of period                           |  |                                 | 164.4 |   |      |   | 211.2 |  
|                                                                    |  |                                 |       |   |      |   |       |  
|Cash and investments, end of period                                 |  | $                               | 153.6 |   |      | $ | 174.9 |  
|                                                                    |  |                                 |       |   |      |   |       |  

In accordance with our investment policy, we are utilizing the following investment objectives for
cash and investments: (1) investment decisions are made with the expectation of minimum risk of principal loss, even with a modest penalty in yield; (2) appropriate cash balances and related short-term funds are maintained for immediate
liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum yield is achieved.

Future
Liquidity. During the next 24 months we expect to continue to fund our operations through a combination of the following sources: cash and investment balances; interest income; potential public securities offerings; and/or private
strategic-driven transactions. At September 30, 2007, approximately $0.5 million of proceeds from the sale of assets under the June 2007 restructuring are expected to be received during the fourth quarter of 2007. During May 2007, the sale of
454 to RDO closed and we received net proceeds of $82.0 million, which included $14.1 million to be held in escrow for a period of 15 months after closing of the merger. We plan to use the proceeds to continue generating clinical trial results from
our two late stage oncology programs, belinostat and CR011-vcMMAE, which will potentially enable us to bring one or more of these products into registrational or Phase III trials during 2008. On February 2, 2007, we repaid the remaining $66.2
million balance of the 6% convertible subordinated debentures plus accrued interest of $2.0 million. We plan to continue making substantial investments to advance our clinical drug



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pipeline. We do not anticipate any material capital expenditures in the near future. Accordingly, we foresee the following as significant uses of liquidity:
contractual services related to clinical trials and manufacturing; salary and benefits; perpetual license fees; potential milestone payments; and payments of interest to the holders of our convertible subordinated debt due in 2011.

We will continue to evaluate options to repurchase or refinance a portion of our outstanding 4% convertible debentures that mature on February 15,
2011. Any repurchases might occur through cash purchases and/or exchange for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market
conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. We may use sources of liquidity for working capital, and for
general corporate purposes and potentially for future acquisitions of complementary businesses or products or technologies. The amounts and timing of our actual expenditures will depend upon numerous factors, including the amount and extent of our
acquisitions, our product development activities, and our investments in technology and the amount of cash generated by our operations. Actual expenditures may vary substantially from our estimates. Our failure to use sources of liquidity
effectively could have a material adverse effect on our business, results of operations and financial condition.

We believe that our
existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements for the next 24 months. We consider our operating and capital expenditures to be crucial to our future success, and by continuing to
make strategic investments in our clinical drug pipeline, we believe that we are building substantial value for our shareholders. The adequacy of our available funds to meet our future operating and capital requirements, including the repayment of
the $109.4 million of 4% convertible subordinated notes due February 15, 2011, will depend on many factors. These factors include: the number, breadth, progress and results of our research, product development and clinical programs; the costs
and timing of obtaining regulatory approvals for any of our products; in-licensing and out-licensing of pharmaceutical products; costs incurred in enforcing and defending our patent claims; other intellectual property rights; and the extent to which
RDO makes successful claims for indemnification under the Merger Agreement relating to the sale of 454.

While we will continue to explore
alternative sources for financing our business activities, including the possibility of public securities offerings and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be
available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other
collaborative or licensing arrangements for the development and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to
meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products, and may be unable to continue operations. This result could cause our shareholders to lose all or a substantial portion
of their investment.

Contractual Obligations

In the table below, we set forth our enforceable and legally binding obligations, along with future commitments related to all contracts that we are likely to continue, regardless of the fact that they are cancelable
as of September 30, 2007. As compared to the Contractual Obligations disclosure in our Annual Report on Form 10-K for the year ended December 31, 2006, this table no longer includes 454, which was sold in May 2007. In addition, the figure
shown below for 2008 purchase commitments includes $1.8 million in costs associated with planned safety follow up visits in the velafermin clinical trial and other trial close out activities.

Some of the amounts we include in this table under purchase commitments are based on managements estimates and assumptions about these obligations,
including their duration, anticipated actions by third parties, progress of our clinical programs and other factors.



|                                          |  |                                      |       |      |   |      |  |      |      |      |   |      |  |   |     |  |   |      
|----------------------------------------- |  | ------------------------------------ | ----- | ---- | - | ---- |  | ---- | ---- | ---- | - | ---- |  | - | --- |  | - | -----
|                                          |  | Payments Due Year Ended December 31,
|                                          |  | Total                                |       | 2007 |   | 2008 |  | 2009 |      | 2010 |   | 2011
|Long-term debt obligations                |  | $                                    | 109.4 |      | $ |     |  | $    |     |      | $ |     |  | $ |    |  | $ | 109.4
|Interest on convertible subordinated debt |  |                                      | 15.4  |      |   |     |  |      | 4.4  |      |   | 4.4  |  |   | 4.4 |  |   | 2.2  
|Operating leases                          |  |                                      | 1.2   |      |   | 0.5  |  |      | 0.7  |      |   |     |  |   |    |  |   |     
|Purchase commitments                      |  |                                      | 8.1   |      |   | 2.6  |  |      | 5.0  |      |   | 0.5  |  |   |    |  |   |     
|                                          |  |                                      |       |      |   |      |  |      |      |      |   |      |  |   |     |  |   |      
|Total                                     |  | $                                    | 134.1 |      | $ | 3.1  |  | $    | 10.1 |      | $ | 4.9  |  | $ | 4.4 |  | $ | 111.6
|                                          |  |                                      |       |      |   |      |  |      |      |      |   |      |  |   |     |  |   |      



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|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

Our outstanding long-term liabilities as of September 30, 2007 include $109.4 million of our 4% convertible subordinated notes due February 15, 2011. As the debentures and notes bear interest at a fixed rate, our results of
operations are not affected by interest rate changes. As of September 30, 2007, the market value of our $109.4 million 4% convertible subordinated notes due 2011, based on quoted market prices, was approximately $76.7 million. Although future
borrowings may bear interest at a floating rate, and would therefore be affected by interest rate changes, at this point we do not anticipate any significant future borrowings at floating interest rates, and therefore do not believe that a change of
100 basis points in interest rates would have a material effect on our financial condition.

There have been no other significant changes
in our market risk compared to the disclosures in Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2006.



|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 of September 30, 2007. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, means controls
and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or
submits under the Exchange Act of 1934 is accumulated and communicated to the companys management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Our
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2007, our chief executive officer and chief financial officer concluded that, as of such date, our
disclosure controls and procedures were effective at the reasonable assurance level.

(b) Changes in Internal Controls

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during
the fiscal quarter ended September 30, 2007 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 1A. | Risk Factors
|-------- | ------------

Statements contained or
incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Exchange Act. These forward-looking statements regarding future events and our future results are based on current expectations, estimates, forecasts, and projections and the beliefs
and assumptions of our management including, without limitation, our expectations regarding results of operations, selling, general and administrative expenses, research and development expenses, the sufficiency of our cash for future operations,
and the success of our preclinical, clinical and development programs. Forward-looking statements may be identified by the use of forward-looking terminology such as may, could, will, expect,
estimate, anticipate, continue, or similar terms, variations of such terms or the negative of those terms.

We cannot assure investors that our assumptions and expectations will prove to have been correct. Important factors could cause our actual results to differ materially from those indicated or implied by forward-looking statements. Such
factors that could cause or contribute to such differences include those factors discussed below. We undertake no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or
otherwise. If any of the following risks actually occur, our business, financial condition, results of operations or liquidity would likely suffer.

The following discussion includes revised risk factors that reflect developments subsequent to the discussion of risk factors included in our most recent Annual Report on Form 10-K, including the closing of the sale
of our stake in 454 to RDO on May 25, 2007. Due to the completion of the sale of 454 to RDO, we have excluded the risk factors related to 454s business and added two risk factors addressing risks to us associated with the sale of 454. A
detailed discussion of the 454 sale can be found in Note 4 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Risks Related to Our Business

Substantially all of our gross consolidated revenue for the year ended
December 31, 2006 was derived from sales by 454. As a result of the acquisition of 454 by RDO, we will have no meaningful source of recurring revenue in the near future.

In fiscal year 2006, approximately 94% of our gross consolidated revenues were derived from product, sequencing service, collaboration, grant and
milestone revenue from 454. As a result of the acquisition of 454 by RDO, our revenue sources now consist of limited amounts of collaboration revenue related to the LEO Pharma/TopoTarget licensing agreement. Accordingly, we have no meaningful source
of recurring revenue for the short term.

We have a history of operating losses and expect to incur operating losses in the future.

We have incurred losses since inception, principally as a result of research and development and general and administrative expenses in support of our
operations. We experienced net losses of $59.8 million in 2006, $73.2 million in 2005 and $90.4 million in 2004, and as of September 30, 2007 had an accumulated deficit of $485.0 million. During the nine months ended September 30, 2007, we
reported net income of $28.0 million, as a result of the gain on the sale of our stake in 454. We anticipate incurring additional losses as we focus our resources on prioritizing, selecting, and advancing our most promising drug candidates. We may
never have operating income or achieve significant revenues.

We can not ensure that our existing cash and investment balances will be sufficient to
meet our requirements for the future.

We believe that our existing cash and investment balances and other sources of liquidity, will
be sufficient to meet our requirements for the next 24 months. We consider our operating and capital expenditures to be crucial to our future success, and by continuing to make strategic investments in our clinical drug pipeline, we believe that we
are building substantial value for our stockholders. The adequacy of our available funds to meet our future operating and capital requirements will depend on many factors. These factors include: the number, breadth,



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progress and results of our research, product development and clinical programs; the costs and timing of obtaining regulatory approvals for any of our
products; in-licensing and out-licensing of pharmaceutical products; and costs incurred in enforcing and defending our patent claims and other intellectual property rights.

While we will continue to explore alternative sources for financing our business activities, including the possibility of public securities offerings
and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate
strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development. However,
should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market
pharmaceutical products, and may be unable to continue operations. This result could cause our stockholders to lose all or a substantial portion of their investment.

All of our drug candidates are still in the early stages of development and remain subject to clinical testing and regulatory approval. If we are unable to successfully develop and test our drug candidates, we will
not be successful.

To date, we have not marketed, distributed or sold any drug candidates. The success of our business depends
primarily upon our ability to develop and commercialize our drug candidates successfully. Our most advanced drug candidates are belinostat, which is in multiple Phase I and Phase II clinical trials, and CR011-vcMMAE, which is currently in a
Phase I/II clinical trial. Further development of our other preclinical candidates will be limited in the foreseeable future due to our decision to focus our resources on the development of our clinical oncology therapeutics. Our drug candidates
must satisfy rigorous standards of safety and efficacy before they can be approved for sale. To satisfy these standards, we must engage in expensive and lengthy testing and obtain regulatory approval of our drug candidates. Despite our efforts, our
drug candidates may not:



| |  |  | offer therapeutic or other improvement over existing comparable drugs;
| | - |  | ----------------------------------------------------------------------



| |  |  | be proven safe and effective in clinical trials;
| | - |  | ------------------------------------------------



| |  |  | meet applicable regulatory standards;
| | - |  | -------------------------------------



| |  |  | be capable of being produced in commercial quantities at acceptable costs; or
| | - |  | -----------------------------------------------------------------------------



| |  |  | be successfully commercialized.
| | - |  | -------------------------------

Positive results in preclinical studies of a drug candidate may not be predictive of similar results in humans during clinical trials, and promising results from early clinical trials of a drug candidate may not be replicated in later
clinical trials. For example, we recently decided to discontinue the development of velafermin after reviewing and evaluating the results of Phase II clinical trials. A number of companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in late stage clinical trials even after achieving promising results in early stage development. Accordingly, the results from the completed preclinical studies and clinical trials and ongoing clinical trials for
belinostat, CR011-vcMMAE and our other drug candidates may not be predictive of the safety, efficacy or dosing results we may obtain in later stage trials. We do not expect any of our drug candidates to be commercially available for at least several
years.

If we are unable to obtain U.S. and/or foreign regulatory approval, we will be unable to commercialize our drug candidates.

Our drug candidates are subject to extensive governmental regulations relating to development, clinical trials, manufacturing and commercialization.
Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of our drug candidates. Satisfaction of these and other
regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we are developing will obtain marketing approval. In connection with the clinical trials for
belinostat, CR011-vcMMAE and any other drug candidate we may seek to develop in the future, we face risks that:



| |  |  | the drug candidate may not prove to be efficacious;
| | - |  | ---------------------------------------------------



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| |  |  | the drug may not prove to be safe;
| | - |  | ----------------------------------



| |  |  | the results may not confirm the positive results from earlier preclinical studies or clinical trials; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the results may not meet the level of statistical significance required by the FDA or other regulatory authorities.
| | - |  | -------------------------------------------------------------------------------------------------------------------

We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The
time required to complete clinical trials and for the FDA and other countries regulatory review processes is uncertain and typically takes many years. Our analysis of data obtained from preclinical and clinical activities is subject to
confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

Any delay in
obtaining, or failure to obtain, required approvals could materially adversely affect our ability to generate revenues from the particular drug candidate. Furthermore, 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 limit the size of the market for the product. We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and
marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks attributable to the satisfaction of foreign requirements.
Approval by the FDA does not ensure approval by regulatory authorities outside the United States. Foreign jurisdictions may have different approval procedures than those required by the FDA and may impose additional testing requirements for our drug
candidates.

If clinical trials for our drug candidates are prolonged or delayed, we may be unable to commercialize our drug candidates on a timely
basis, which would require us to incur additional costs and delay our receipt of any product revenue.

We cannot predict whether we
will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend clinical trials, or delay the analysis of data from our completed or ongoing clinical trials. Any
of the following could delay the clinical development of our drug candidates:



| |  |  | ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in receiving or the inability to obtain required approvals from institutional review boards or other reviewing entities at clinical sites selected for
participation in our clinical trials;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in enrolling volunteers and patients into clinical trials;
| | - |  | -----------------------------------------------------------------



| |  |  | a lower than anticipated retention rate of volunteers and patients in clinical trials;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the need to repeat clinical trials as a result of inconclusive or negative results or unforeseen complications in testing;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | inadequate supply or deficient quality of drug candidate materials or other materials necessary for the conduct of our clinical trials;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unfavorable FDA inspection and review of a clinical trial site or records of any clinical or preclinical investigation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | serious and unexpected drug-related side effects experienced by participants in our clinical trials; or
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the placement by the FDA of a clinical hold on a trial.
| | - |  | -------------------------------------------------------



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Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis will be
subject to a number of factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for
the clinical trial. Delays in patient enrollment may result in increased costs and longer development times. In addition, subjects may withdraw from our clinical trials, and thereby impair the validity or statistical significance of the trials.

We, the FDA or other applicable regulatory authorities may suspend clinical trials of a drug candidate at any time if we or they believe
the subjects or patients participating in such clinical trials are being exposed to unacceptable health risks or for other reasons.

We
cannot predict whether any of our drug candidates will encounter problems during clinical trials which will cause us or regulatory authorities to delay or suspend these trials, or which will delay the analysis of data from these trials. In addition,
it is impossible to predict whether legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed, or what the impact of such changes, if any, may be. If we experience any such problems, we may not have
the financial resources to continue development of the drug candidate that is affected or the development of any of our other drug candidates.

Even if
we obtain regulatory approvals, our drug candidates will be subject to ongoing regulatory review. If we fail to comply with continuing U.S. and applicable foreign regulations, we could lose those approvals, and our business would be seriously
harmed.

Even if we receive regulatory approval of any drugs we may develop, we will be subject to continuing regulatory review,
including the review of clinical results which are reported after our drug candidates become commercially available approved drugs. Since drugs are more widely used by patients once approval has been obtained, side effects and other problems may be
observed after approval that were not seen or anticipated during pre-approval clinical trials. In addition, the manufacturer, and the manufacturing facilities we use to make any of our drug candidates, will also be subject to periodic review and
inspection by the FDA. The subsequent discovery of previously unknown problems with the drug, manufacturer or facility may result in restrictions on the drug, manufacturer or facility, including withdrawal of the drug from the market. If we fail to
comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approval, product recalls and seizures, operating restrictions and criminal prosecutions.

Our business has a substantial risk of product liability claims. If we are unable to obtain appropriate levels of insurance, a product liability claim could adversely
affect our business.

Our business exposes us to significant potential product liability risks that are inherent in the development,
manufacturing and sales and marketing of human therapeutic products. Although we do not currently commercialize any products, claims could be made against us based on the use of our drug candidates in clinical trials. We currently have clinical
trial insurance and will seek to obtain product liability insurance prior to the sales and marketing of any of our drug candidates. However, our insurance may not provide adequate coverage against potential liabilities. Furthermore, clinical trial
and product liability insurance is becoming increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that
could have a material adverse effect on us. If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against us.
Furthermore, whether or not we are ultimately successful in defending any such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result.

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our drug candidates, we may not generate
product revenue.

We have no commercial products and we do not currently have an organization for the sales and marketing of
pharmaceutical products. In order to successfully commercialize any drugs that may be approved in the future by the FDA or comparable foreign regulatory authorities, we must build our sales and marketing capabilities or make arrangements with third
parties to perform these services. There are risks involved with establishing our own sales and marketing capabilities, as well as entering into arrangements with third parties to perform these services. For example, developing a sales force is
expensive and time consuming and could delay any product launch. In addition, to the extent that we enter into arrangements with third parties to perform sales, marketing and distribution services, we will have less control over sales of our
products, and our future revenues would depend heavily on the success of the efforts of these third parties. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may
not be able to generate product revenue and may not become profitable.



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If physicians, patients and third-party payors do not accept our future drugs, we may be unable to generate
significant revenue, if any.

Even if belinostat, CR011-vcMMAE or any other drug candidates we may develop or acquire in the future
obtain regulatory approval, they may not gain market acceptance among physicians, patients and health care payors. Physicians may elect not to recommend these drugs for a variety of reasons including:



| |  |  | timing of market introduction of competitive drugs;
| | - |  | ---------------------------------------------------



| |  |  | lower demonstrated clinical safety and efficacy compared to other drugs;
| | - |  | ------------------------------------------------------------------------



| |  |  | lack of cost-effectiveness;
| | - |  | ---------------------------



| |  |  | lack of availability of reimbursement from third-party payors;
| | - |  | --------------------------------------------------------------



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



| |  |  | prevalence and severity of adverse side effects;
| | - |  | ------------------------------------------------



| |  |  | other potential advantages of alternative treatment methods; and
| | - |  | ----------------------------------------------------------------



| |  |  | ineffective marketing and distribution support.
| | - |  | -----------------------------------------------

If our approved drugs fail to achieve market acceptance, we would not be able to generate sufficient revenue from product sales to maintain or grow our business.

If third-party payors do not adequately reimburse customers for any of our product candidates that are approved for marketing, they might not be purchased or used,
and our revenues and profits will not develop or increase.

Our revenues and profits will depend heavily upon the availability of
adequate reimbursement for the use of our approved product candidates from governmental and other third-party payors, both in the United States and in foreign markets. Reimbursement by a third-party payor may depend upon a number of factors,
including the third-party payors determination that use of a product is:



| |  |  | a covered benefit under its health plan;
| | - |  | ----------------------------------------



| |  |  | safe, effective and medically necessary;
| | - |  | ----------------------------------------



| |  |  | appropriate for the specific patient;
| | - |  | -------------------------------------



| |  |  | cost-effective; and
| | - |  | -------------------



| |  |  | neither experimental nor investigational.
| | - |  | -----------------------------------------



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Obtaining reimbursement approval for a product from each government or other third-party payor is a
time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payor. We may not be able to provide data sufficient to gain acceptance with respect
to reimbursement. There is substantial uncertainty whether any particular payor will reimburse the use of any drug products incorporating new technology. Even when a payor determines that a product is eligible for reimbursement, the payor may impose
coverage limitations that preclude payment for some uses that are approved by the FDA or comparable authority. Moreover, eligibility for coverage does not imply that any product will be reimbursed in all cases or at a rate that allows us to make a
profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of the product and the clinical setting
in which it is used, may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary constraints and/or imperfections in
Medicare, Medicaid or other data used to calculate these rates. Net prices for products may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws that restrict imports of certain
medical products from countries where they may be sold at lower prices than in the United States.

There have been, and we expect that
there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect payments for our products. The Centers for Medicare and Medicaid Services, or CMS, frequently change product
descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and both CMS and
other third-party payors may have sufficient market power to demand significant price reductions. Due in part to actions by third-party payors, the health care industry is experiencing a trend toward containing or reducing costs through various
means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products.

Our inability to promptly obtain coverage and profitable reimbursement rates from government-funded and private payors for our products could have a material adverse effect on our operating results and our overall
financial condition.

We may not be able to execute our business strategy if we are unable to enter into alliances with other companies that can provide
capabilities and funds for the development and commercialization of our drug candidates. If we are unsuccessful in forming or maintaining these alliances on favorable terms, our business may not succeed.

We have entered into collaboration arrangements with several companies for the research, development and commercialization of our drug candidates, and we
may enter into additional collaborative arrangements in the future. For example, we may enter into alliances with major biotechnology or pharmaceutical companies to jointly develop specific drug candidates and to jointly commercialize them if they
are approved. We may not be successful in entering into any such alliances on favorable terms. Even if we do succeed in securing such alliances, we may not be able to maintain them if, for example, development or approval of a drug candidate is
delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering into collaboration agreements could delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the
market. Any such delay related to our collaborations could adversely affect our business.

In addition to relying on a third party for its
capabilities, we may depend on our alliances with other companies to provide substantial additional funding for development and potential commercialization of our drug candidates. We may not be able to obtain funding on favorable terms from these
alliances, and if we are not successful in doing so, we may not have sufficient funds to develop a particular drug candidate internally, or to bring drug candidates to market. Failure to bring our drug candidates to market will prevent us from
generating sales revenues, and this may substantially harm our business.

If a collaborative partner terminates or fails to perform its obligations
under agreements with us, the development and commercialization of our drug candidates could be delayed or terminated.

If any current
or future collaborative partner does not devote sufficient time and resources to collaboration arrangements with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In
addition, if any existing or future collaboration partner were to breach or terminate its arrangements with us, the development and commercialization of the affected drug candidate could be delayed, curtailed or terminated because we may not have
sufficient financial resources or capabilities to continue development and commercialization of the drug candidate on our own.



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Much of the potential revenue from our existing and future collaborations will consist of contingent
payments, such as payments for achieving development milestones and royalties payable on sales of drugs developed using our technologies. The milestone and royalty revenues that we may receive under these collaborations will depend upon our
collaborators ability to successfully develop, introduce, market and sell new products. In addition, our collaborators may decide to enter into arrangements with third parties to commercialize products developed under our existing or future
collaborations using our technologies, which could reduce the milestone and royalty revenue that we may receive, if any. In many cases we will not be involved in these processes and accordingly will depend entirely on our collaborators. Our
collaboration partners may fail to develop or effectively commercialize products using our products or technologies because they:



| |  |  | decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited cash resources
or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | do not have sufficient resources necessary to carry the drug candidate through clinical development, regulatory approval and commercialization;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | decide to pursue a competitive drug candidate developed outside of the collaboration; or
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | cannot obtain the necessary regulatory approvals.
| | - |  | -------------------------------------------------

If our collaboration partners fail to develop or effectively commercialize drug candidates or drugs for any of these reasons, we may not be able to replace the collaboration partner with another partner to develop and
commercialize a drug candidate or drugs under the terms of the collaboration. We may also be unable to obtain a license from such collaboration partner on terms acceptable to us, or at all.

We rely on third parties to conduct our clinical trials and provide other services, and those third parties may not perform satisfactorily, including failing to meet
established deadlines for the completion of such services.

We do not have the ability to independently conduct some preclinical
studies and the clinical trials for our drug candidates, and we rely on third parties such as contract laboratories, contract research organizations, medical institutions and clinical investigators to design and conduct these studies and our
clinical trials. Our reliance on these third parties reduces our control over these activities. Accordingly, these third-party contractors may not complete activities on schedule, or may not conduct the studies or our clinical trials in accordance
with regulatory requirements or our trial design. To date, we believe our contract research organizations and other similar entities with which we are working have performed well. However, if these third parties do not successfully carry out their
contractual duties or meet expected deadlines, we may be required to replace them. Although we believe that there are a number of other third-party contractors we could engage to continue these activities, it may result in delays. Accordingly, our
efforts to obtain regulatory approvals for and commercialize our drug candidates may be delayed.

In addition, our ability to bring our
future products to market depends on the quality and integrity of the data we present to regulatory authorities in order to obtain marketing authorizations. We cannot guarantee the authenticity or accuracy of such data, nor can we be certain that
such data has not been fraudulently generated. The failure of these third parties to carry out their obligations would materially adversely affect our ability to develop and market new products and implement our strategies.

We currently depend on third-party manufacturers to produce our clinical drug supplies and intend to rely upon third-party manufacturers to produce commercial
supplies of any approved drug candidates. If in the future we manufacture any of our drug candidates, we will be required to incur significant costs and devote significant efforts to establish and maintain these capabilities.

We have relied upon third parties to produce material for clinical testing purposes and intend to continue to do so in the future. Although we believe
that we will not have any material supply issues, we cannot be certain that we will be able to obtain long-term supplies of those materials on acceptable terms, if at all. We also expect to rely upon third parties to produce materials required for
the commercial production of our drug candidates if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete
development of our drug candidates or market them. Reliance on third-party manufacturers entails risks to which we would not be subject if we manufactured drug candidates ourselves, including reliance on the third party for regulatory compliance and
quality assurance, the possibility of breach of the manufacturing agreement by the third party because of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business
priorities,



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at a time that is costly or damaging to us. In addition, the FDA and other regulatory authorities require that our drug candidates be manufactured according
to current Good Manufacturing Practices, or cGMP, regulations. Any failure by us or our third-party manufacturers to comply with cGMP and/or our failure to scale up our manufacturing processes could lead to a delay in, or failure to obtain,
regulatory approval of any of our drug candidates. In addition, such failure could be the basis for action by the FDA to withdraw approvals for drug candidates previously granted to us and for other regulatory action.

We currently rely on a single manufacturer for the clinical supplies of our antibody, and ADC drug candidates and do not currently have relationships for
redundant supply or a second source for any of these drug candidates.To date, our third-party manufacturers have met our manufacturing requirements, but we cannot assure that they will continue to do so. Any performance failure on the part
of our existing or future manufacturers could delay clinical development or regulatory approval of our drug candidates or commercialization of any approved products. If for some reason our current contract manufacturers cannot perform as agreed, we
may be required to replace them. Although we believe there are a number of potential replacements as our manufacturing processes are not manufacturer specific, we may incur added costs and delays in identifying and qualifying any such replacements.
Furthermore, although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a drug candidate to complete the trial, any significant delay in the supply of a drug candidate for an ongoing trial due to the need to
replace a third-party manufacturer could delay completion of the trial.

We may in the future elect to manufacture certain of our drug
candidates in our own manufacturing facilities. If we do so, we will require substantial additional funds and need to recruit qualified personnel in order to build or lease and operate any manufacturing facilities.

Because we have limited experience in developing, commercializing and marketing products, we may be unsuccessful in our efforts to do so.

Our products in development will require significant research and development and preclinical and clinical testing prior to our submitting any regulatory
application for their commercial use. These activities, even if undertaken without the collaboration of others, will require us to expend significant funds and will be subject to the risks of failure inherent in the development of pharmaceutical
products. We have limited experience conducting clinical trials. Even if we complete such studies, our ability to commercialize products will depend on our ability to:



| |  |  | obtain and maintain necessary intellectual property rights to our products;
| | - |  | ---------------------------------------------------------------------------



| |  |  | enter into arrangements with third parties to manufacture our products on our behalf; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | deploy sales and marketing resources effectively or enter into arrangements with third parties to provide these services.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

As a result of these possibilities, we may not be able to develop any commercially viable products. In addition, should we choose to develop
pharmaceutical products internally, we will have to make significant investments in pharmaceutical product development, marketing, sales, and regulatory compliance resources, and we will have to establish or contract for the manufacture of products
under the FDA cGMPs. Any potential products developed by our licensees will be subject to the same risks.

We do not currently have any
marketed products. If we develop products that can be marketed, we intend to market the products either independently or together with collaborators or strategic partners. If we decide to market any products independently, we will incur significant
additional expenditures and commit significant additional management resources to establish a sales force. For any products that we market together with partners, we will rely, in whole or in part, on the marketing capabilities of those parties. We
may also contract with other third parties to market certain of our products. Ultimately, we and our partners may not be successful in marketing our products.

Because neither we nor any of our collaborative partners have received marketing approval for any product resulting from our research and development efforts, and may never be able to obtain any such approval, we may not be able to
generate any product revenue.

All of the products being developed by our collaborative partners will require additional research and
development, extensive preclinical studies and clinical trials, and regulatory approval prior to any commercial sales. In some cases, the length of time that it takes for our collaborative partners to achieve various regulatory approval milestones
may affect the payments that we are eligible to receive under our collaboration agreements. We and our collaborative partners may need to address a number of technical challenges successfully in order to complete



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development of our drug candidates. Moreover, these drug candidates may not be effective in treating any disease or may prove to have undesirable or
unintended side effects, toxicities, or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.

We rely significantly on our collaborative partners to gain access to specified technologies and our business could be harmed if we are unable to maintain strategic alliances.

As part of our business strategy, we have strategic research and development alliances with companies to gain access to specific technologies. These
alliances with other pharmaceutical and biotechnology companies may provide us with access to unique technologies, access to capital, near-term revenues, milestone and/or royalty payments, and potential profit sharing arrangements. In return, we
provide access to unique technologies, expertise in genomics, and information on the molecular basis of disease, drug targets, and drug candidates. We currently have significant strategic alliances with Amgen Fremont, TopoTarget, Seattle Genetics,
and Bayer in addition to numerous smaller agreements to facilitate these efforts. In these strategic alliances, either party can terminate the agreement at any time the alliance permits them to or if either party materially breaches the contract. We
may not be able to maintain or expand existing alliances or establish any additional alliances. If any of our existing collaborators were to breach or terminate their agreements with us or otherwise fail to conduct activities successfully and in a
timely manner, the preclinical or clinical development or commercialization of product candidates or research programs may be delayed or terminated, which may materially and adversely affect our business, financial condition, and results of
operations.

We depend on attracting and retaining key employees.

We are highly dependent on the principal members of our senior management and scientific staff. Our future success will depend in part on the continued services of our key management and scientific personnel. The loss
of services of any of these personnel could materially adversely affect our business, financial condition, and results of operations. We have entered into employment agreements with all of the principal members of our senior management team. Our
future success will also depend in part on our ability to attract, hire, and retain additional personnel. There is intense competition for qualified personnel and there can be no assurance that we will be able to continue to attract and retain such
personnel. Failure to attract and retain key personnel could materially, adversely affect our business, financial condition, and results of operations.

We depend on academic collaborators, consultants, and scientific advisors.

We have relationships with collaborators,
consultants, and scientific advisors at academic and other institutions that conduct research or provide consulting services at our request. These collaborators, consultants, and scientific advisors are not our employees. Substantially all of our
collaborators, consultants, and scientific advisors are employed by employers other than us and may have commitments to, or collaboration, consulting, or advisory contracts with, other entities that may limit their availability to us. As a result,
we have limited control over their activities and, except as otherwise required by our collaboration, consulting agreements, and advisory agreements, can expect only limited amounts of their time to be dedicated to our activities. Our ability to
explore and validate biological activity of therapeutic candidates and commercialize products based on these discoveries may depend, in part, on continued collaborations with researchers at academic and other institutions. We may not be able to
negotiate additional acceptable collaborations with collaborators, consultants, or scientific advisors at academic and other institutions.

Our academic collaborators, consultants, and scientific advisors may have relationships with other commercial entities, some of which could compete with us. Our academic collaborators, consultants and scientific advisors sign agreements
which provide for confidentiality of our proprietary information and of the results of studies. We may not be able to maintain the confidentiality of our technology and other confidential information in connection with every academic collaboration,
consulting, or advisory arrangement, and any unauthorized dissemination of our confidential information could materially adversely affect our business, financial condition, and results of operations. Further, any such collaborator, consultant or
advisor may enter into an employment agreement or consulting arrangement with one of our competitors.

Competition in our field is intense and likely to
increase.

We are subject to significant competition in the development and commercialization of new drugs from organizations that are
pursuing strategies, approaches, technologies and products that are similar to our own. Many



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of the organizations competing with us have greater capital resources, research and development staffs and facilities and marketing capabilities. We face
competition from a number of biotechnology and pharmaceutical companies with products in preclinical development, clinical trials, or approved for conditions identical or similar to the ones we are pursuing.

We are aware of specific companies that are developing HDAC inhibitors for use in the treatment of cancer that may be competitive with ours. With respect
to our HDAC inhibitor, belinostat, Merck & Co., Inc. recently received FDA approval to market Zolinza, or vorinostat, the first HDAC inhibitor approved for use in the U.S., for the treatment of cutaneous T-cell lymphoma. Bayer Schering
Pharma AG, Gloucester Pharmaceuticals, Inc., Methylgene, Inc., and Novartis Pharma AG are also currently evaluating HDAC inhibitors in clinical trials for the treatment of cancers, and in combinations with other chemotherapies, that are similar to
approaches and indications we are pursuing. In addition, many other pharmaceutical and biotechnology companies are engaged in research and development for the treatment of cancer from which we may face intense competition. We expect belinostat to
compete on the basis of efficacy, routes of administration, and potentially safety and economic value compared to drugs used in current practice or currently being developed.

If we do not obtain adequate intellectual property protection, we may not be able to prevent our competitors from commercializing our discoveries.

Our business and competitive position depends on our ability to protect our products and processes, including obtaining patent protection on genes and
proteins for which we or our collaborators discover utility, and on products, methods and services based on such discoveries.

The patent
positions of pharmaceutical, biopharmaceutical, and biotechnology companies, including us, are generally uncertain and involve complex legal and factual questions. The law relating to the scope of patent claims in the technology fields in which we
operate is evolving, and the degree of future protection for our proprietary rights is uncertain. Furthermore, even if patents are issued to us, there can be no assurance that others will not develop alternative technologies or design around the
patented technologies developed by us. Therefore, our patent applications may not protect our products, processes, and technologies for at least the following reasons:



| |  |  | there is no guarantee that any of our pending patent applications will result in additional issued patents;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to us or our collaborative customers will provide a basis for commercially viable products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to us or our collaborative customers will provide us with any competitive advantages;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to us or our collaborative customers will not be challenged or circumvented or invalidated by third parties; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to others will not have an adverse effect on our ability to do business.
| | - |  | ----------------------------------------------------------------------------------------------------------------------

The issuance of a patent is not conclusive as to its validity or enforceability, nor does it provide the patent holder with freedom to operate without
infringing the patent rights of others. A patent could be challenged by litigation and, if the outcome of such litigation were adverse to the patent holder, competitors could be free to use the subject matter covered by the patent. The invalidation
of key patents owned by or licensed to us or the non-approval of pending patent applications could increase competition and materially adversely affect our business, financial condition, and results of operations.

Litigation, which could result in substantial cost to us, also may be necessary to enforce our patent and proprietary rights and/or to determine the
scope and validity of others proprietary rights. We may participate in interference proceedings that may in the future be declared by the USPTO to determine priority of invention, which could result in substantial cost to us. The outcome of
any such litigation or interference proceeding might not be favorable to us, and we might not be able to obtain licenses to technology that we require or, even if obtainable, such technology may not be available at a reasonable cost.

If we infringe on the intellectual property rights of others, we may be required to obtain a license, pay damages, and/or cease the commercialization of our
technology.

We believe that there may be significant litigation in the industry regarding patent and other intellectual property
rights. It is possible that the commercialization of our technology could infringe the patents or other



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intellectual property rights of others. In addition, others may have filed, and in the future are likely to file, patent applications covering genes or gene
products or antibodies against the gene products that are similar or identical to our products. Any such patent applications may have priority over our patent applications, and may result in the issuance of patents to others that could be infringed
by our products or processes.

A number of competitors are producing proteins from genes and claiming both the proteins as potential
therapeutics as well as the antibodies against these proteins. In many cases, generic antibody claims are being issued by the USPTO even though competitors have not actually made antibodies against the protein of interest, or do not have cellular,
animal, or human data to support the use of these antibodies as therapeutics. These claims to proteins as therapeutics, to all antibodies against a protein, and to methods of use in broad human indications are being filed at a rapid rate, and
patents including such claims have issued and may continue to issue. Such patents may prevent us from commercializing some products or processes or, if licenses under the patents are made available, may make the royalty burden on these products and
processes so high as to prevent commercial success.

In addition, we have sought and intend to continue to seek patent protection for novel
uses for genes and proteins and therapeutic antibodies that may have been patented by third parties. In such cases, we would need a license from the holder of the patent with respect to such gene or protein in order to make, use, or sell such gene
or protein for such use. We may not be able to acquire such licenses on commercially reasonable terms, if at all.

Certain third parties
have indicated to us that they believe we may be required to obtain a license in order to perform certain processes that we use in the conduct of our business or in order to market potential drugs we have in development.

Any legal action against us or our collaborators for patent infringement relating to our products and processes could, in addition to subjecting us to
potential liability for damages, require us or our collaborators to obtain a license in order to continue to manufacture or market the affected products and processes, or could enjoin us from continuing to manufacture or market the affected products
and processes. There can be no assurance that we or our collaborators would prevail in any such action or that any license required under any such patent would be made available on commercially acceptable terms, if at all. If we become involved in
such litigation, it could consume a substantial portion of our managerial and financial resources.

We cannot be certain that our security measures will
protect our confidential information and proprietary technologies.

We rely upon trade secret protection for some of our confidential
and proprietary information that is not the subject matter for which patent protection is being sought. We have taken security measures to protect our proprietary technologies, processes, information systems, and data and continue to explore
ways to enhance such security. Such measures, however, may not provide adequate protection for our trade secrets or other proprietary information. While we require employees, academic collaborators, consultants, and scientific advisors to enter into
confidentiality and/or non-disclosure agreements where appropriate, any of the following could still occur:



| |  |  | proprietary information could be disclosed;
| | - |  | -------------------------------------------



| |  |  | others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets, technology, or
disclose such information; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not be able to meaningfully protect our trade secrets.
| | - |  | -------------------------------------------------------------

If the security of our confidential information is breached, our business could be materially adversely affected.

We
depend upon our ability to license technologies.

We may have to acquire or license certain components of our technologies or products
from third parties. We may not be able to acquire from third parties or develop new technologies, either alone or with others. We may not be able to acquire licenses on commercially reasonable terms, if at all. Failure to license or otherwise
acquire necessary technologies could materially adversely affect our business, financial condition, and results of operations.

If we do not comply with
laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our research
and development efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of these



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materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot
be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory
procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Although we maintain workers compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these
materials, this insurance may not provide adequate coverage against potential liabilities. Due to the small amount of hazardous materials that we generate, we do not currently maintain any environmental liability or toxic tort claim insurance
coverage to cover pollution conditions or other extraordinary or unanticipated events relating to our use and disposal of hazardous materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the
future. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or regulations.

Risks Related to Our Financial Results

We have a large amount of debt and our debt service obligations may prevent us from taking
actions that we would otherwise consider to be in our best interests.

As of September 30, 2007, we had total consolidated debt of
$109.4 million which is due in February 2011; and for the year ended December 31, 2006, we had a deficiency of earnings available to cover fixed charges of $61.3 million. A variety of uncertainties and contingencies will affect our future
performance, many of which are beyond our control. We may not generate sufficient cash flow in the future to enable us to meet our anticipated fixed charges, including our debt service requirements with respect to our debt that we sold in 2004. The
following table shows, as of September 30, 2007, the remaining aggregate amount of our interest payments due in each of the years listed (in millions):



|      |  |                    |     
|----- |  | ------------------ | ----
|Year  |  | Aggregate Interest
|2008  |  | $                  | 4.4 
|2009  |  |                    | 4.4 
|2010  |  |                    | 4.4 
|2011  |  |                    | 2.2 
|      |  |                    |     
|Total |  | $                  | 15.4
|      |  |                    |     

Our substantial leverage could have significant negative consequences for our future operations,
including:



| |  |  | increasing our vulnerability to general adverse economic and industry conditions;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | limiting our ability to obtain additional financing;
| | - |  | ----------------------------------------------------



| |  |  | requiring the dedication of a substantial portion of our expected cash flow to service our indebtedness, thereby reducing the amount of our expected cash flow
available for other purposes, including working capital and capital expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | placing us at a possible competitive disadvantage compared to less leveraged competitors and competitors that have better access to capital resources.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

We will likely need to raise additional funding, which may not be available on favorable terms, if at all.

We believe that we have sufficient capital to satisfy our funding requirements for the next 24 months. However, our future funding requirements will
depend on many factors and we anticipate that we will likely need to raise additional capital to fund our business plan and research and development efforts on a going-forward basis. To the extent that we need to obtain additional funding, the
amount of additional capital we would need to raise would depend on many factors, including:



| |  |  | the number, breadth, and progress of our research, product development, and clinical programs;
| | - |  | ----------------------------------------------------------------------------------------------



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



| |  |  | the progress of our collaborators;
| | - |  | ----------------------------------



| |  |  | our costs incurred in enforcing and defending our patent claims and other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of obtaining regulatory approvals for any of our products; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the extent to which RDO makes successful claims for indemnification under the Merger Agreement relating to the sale of 454.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------

We expect that we would raise any additional capital we require through public or private equity offerings, debt financings, or additional collaborations
and licensing arrangements. We cannot be certain that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek
financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development. If we raise additional capital by issuing
equity securities, the issuance of such securities would result in ownership dilution to our stockholders. If we raise additional funds through collaborations and licensing arrangements, we may be required to relinquish rights to certain of our
technologies or product candidates, or to grant licenses on unfavorable terms. The relinquishing of rights or granting of licenses on unfavorable terms could materially adversely affect our business, financial condition, and results of operations.
If adequate funds are not available, our business, financial condition, and results of operations would be materially adversely affected. However, should we be unable to obtain future financing either through the methods described above or through
other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products. If we require additional capital at a time when investment in biotechnology companies
such as ours, or in the marketplace in general, is limited due to the then prevailing market or other conditions, we may not be able to raise such funds at the time that we desire or any time thereafter.

If the proceeds we receive from the sale of our stake in 454 are less than anticipated due to indemnification claims against the escrow account, our liquidity may be
impaired, and we may be forced to seek alternative sources of financing sooner than anticipated.

We expect to use the proceeds we
receive from the sale of our stake in 454 to make further investments in our clinical drug pipeline; however, as described in Note 4 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, $25 million of
the total sale proceeds to 454 stockholders has been placed in an escrow account in order to secure certain indemnification rights of RDO and its affiliates. Our portion of the $25 million escrow fund totals $14.1 million. Under the Merger
Agreement, Roche is entitled to indemnification for damages incurred by RDO, 454 and certain other RDO affiliates as a result of the following: breaches of representations, warranties or covenants made by 454 in the Merger Agreement; costs incurred
by the indemnified parties in connection with demands by 454 stockholders under Delaware law for appraisal, or payment of the fair value of their 454 shares as determined by the Delaware Court of Chancery, or compliance with certain environmental
laws; and costs incurred by the indemnified parties in connection with the sale of 454 that were not previously taken into account in determining the price paid by RDO for 454. If RDO makes a successful claim for indemnification due to one or more
of these reasons, the amount of the escrow account that is available for distribution to us and other 454 stockholders at the end of the 15-month escrow period will be reduced or eliminated.

Our quarterly operating results have fluctuated greatly and may continue to do so.

Our operating results have fluctuated on a quarterly basis. We expect that losses will continue to fluctuate from quarter to quarter and that these fluctuations may be substantial. Our results of operations are
difficult to predict and may fluctuate significantly from period to period, which may cause our stock price to decline and result in losses to investors. Some of the factors that could cause our operating results to fluctuate include:



| |  |  | the nature, pricing, and timing of products and services provided to our collaborators and customers;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | our ability to compete effectively in our therapeutic discovery and development efforts against competitors that have greater financial or other resources or drug
candidates that are in further stages of development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | acquisition, licensing, and other costs related to the expansion of our operations;
| | - |  | -----------------------------------------------------------------------------------



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| |  |  | losses and expenses related to our investments;
| | - |  | -----------------------------------------------



| |  |  | regulatory developments;
| | - |  | ------------------------



| |  |  | regulatory actions and changes related to the development of drugs;
| | - |  | -------------------------------------------------------------------



| |  |  | changes in intellectual property laws that affect our patent rights;
| | - |  | --------------------------------------------------------------------



| |  |  | payments of milestones, license fees, or research payments under the terms of our external alliances and collaborations and our ability to monitor and enforce such
payments; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of intellectual property licenses that we may enter.
| | - |  | ---------------------------------------------------------------

We believe that quarterly comparisons of our financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. In addition, fluctuations in quarterly results could
affect the market price of our common stock in a manner unrelated to our long-term operating performance.

Our debt investments are impacted by the
financial viability of the underlying companies.

We have a diversified portfolio of investments of which $22.3 million at
September 30, 2007 were invested in U.S. Treasuries and debt investments that are sponsored by the U.S. Government. Our corporate fixed-rate debt investments comply with our policy of investing in only investment-grade debt instruments. The
ability for the debt to be repaid upon maturity or to have a viable resale market is dependent, in part, on the financial success of the underlying company. Should the underlying company suffer significant financial difficulty, the debt instrument
could either be downgraded or, in the worst case, our investment could be worthless. This would result in our losing the cash value of the investment and incurring a charge to our statement of operations.

The market price of our common stock is highly volatile.

The market price of our common stock has fluctuated widely and may continue to do so. For example, during the first nine months of 2007, the closing price of our stock ranged from a high of $4.80 per share to a low of $1.14 per share. Many
factors could cause the market price of our common stock to rise and fall. These factors include:



| |  |  | variations in our quarterly operating results;
| | - |  | ----------------------------------------------



| |  |  | announcements of clinical results, technological innovations, or new products by us or our competitors;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | introduction of new products or new pricing policies by us or our competitors;
| | - |  | ------------------------------------------------------------------------------



| |  |  | acquisitions or strategic alliances by us or others in our industry;
| | - |  | --------------------------------------------------------------------



| |  |  | announcement by the government or other agencies regarding the economic health of the United States and the rest of the world;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the hiring or departure of key personnel;
| | - |  | -----------------------------------------



| |  |  | changes in market valuations of companies within the biotechnology industry; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | changes in estimates of our performance or recommendations by financial analysts.
| | - |  | ---------------------------------------------------------------------------------

We have significant leverage as a result of the sale of our debt in 2004.

In February 2004, in
connection with the sale of our 4% convertible subordinated notes due 2011, we incurred $100.0 million of indebtedness. In addition, in March 2004, the initial purchasers exercised their option to purchase an additional $10.0 million of 4%
convertible subordinated notes due in 2011. During September 2007, we repurchased $0.6 million of these debentures, for total consideration of $0.4 million, plus accrued interest to the date of repurchase. As a result of the remaining indebtedness,
our interest payment obligations amount to $4.4 million per year.

The degree to which we are leveraged could adversely affect our ability
to obtain further financing for working capital, acquisitions, or other purposes and could make us more vulnerable to industry downturns and competitive pressures. Our ability to meet our debt service obligations will depend upon our future
performance, which may be subject to the financial, business, and other factors affecting our operations, many of which are beyond our control.

There
are no restrictive covenants in our indentures relating to our ability to incur future indebtedness.

The indentures governing our
convertible debt due in 2011 do not contain any financial or operating covenants or restrictions on the payment of dividends, the incurrence of indebtedness, transactions with affiliates, incurrence of liens, or the issuance or repurchase of
securities by us or any of our subsidiaries. We may therefore incur additional debt, including secured indebtedness senior to these notes.



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Our debt service obligations may adversely affect our cash flow.

A higher level of indebtedness increases the risk that we may default on our debt obligations. We cannot be certain that we will be able to generate
sufficient cash flow to pay the interest on our debt or that future working capital, borrowings, or equity financing will be available to pay or refinance such debt. If we are unable to generate sufficient cash flow to pay the interest on our debt,
we may have to delay or curtail our research and development programs. The level of our indebtedness among other things, could:



| |  |  | make it difficult for us to make payments on our notes;
| | - |  | -------------------------------------------------------



| |  |  | make it difficult for us to obtain any necessary financing in the future for working capital, capital expenditures, debt service requirements, or other purposes;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | make us more vulnerable in the event of a downturn in our business.
| | - |  | -------------------------------------------------------------------

Our ability to repurchase notes, if required, with cash upon a change in control or fundamental change may be limited.

In certain circumstances involving a change of control or fundamental change, we may be required to repurchase some or all of the notes due 2011. We cannot be certain that we will have sufficient financial resources
at such time or would be able to arrange financing to pay the repurchase price of the notes. Our ability to repurchase the notes in such event may be limited by law, by the indenture, and by such indebtedness and agreements as may be entered into,
replaced, supplemented, or amended from time to time.

Securities we issue to fund our operations could cause dilution to our stockholders
ownership.

We may decide to raise additional funds through a public or private debt or equity financing to fund our operations. If we
raise funds by issuing equity securities, the percentage ownership of current stockholders will be reduced, and the new equity securities may have rights with priority over our common stock. We may not be able to obtain sufficient financing on terms
that are favorable to us or our existing stockholders, if at all.

Any conversion of our convertible debt into shares of common stock will
dilute the ownership interest of our current stockholders. The conversion price of our convertible debt due in February 2011 is approximately $9.69 per share.

We may effect future repurchases of our 4% convertible debentures due in February 2011, which may adversely affect our liquidity.

We may from time to time seek to repurchase or refinance a portion of our outstanding 4% convertible debentures that mature on February 15, 2011. Any repurchases might occur through cash purchases, privately negotiated transactions or
otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transaction, individually or in the aggregate,
may be material.



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|Item 6. | Exhibits
|------- | --------



|             |  |                                                                                                                                                                                                                                         
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Transition and Severance Agreement, dated September 19, 2007, between the Registrant and Frank M. Armstrong, M.D.                                                                                                                       
|             | 
|Exhibit 10.2 |  | Amended and Restated Employment Agreement, dated September 19, 2007, between the Registrant and Timothy M. Shannon, M.D.                                                                                                                
|             | 
|Exhibit 10.3 |  | Nonstatutory Stock Option Agreement granted under 2007 Stock Incentive Plan, dated September 25, 2007, between the Registrant and Timothy M. Shannon, M.D.                                                                              
|             | 
|Exhibit 10.4 |  | Assignment and Assumption of Lease with Landlords Consent and Release, dated August 1, 2007, between ZFI Group, LLC, 454 Life Sciences Corporation and the Registrant                                                                  
|             | 
|Exhibit 10.5 |  | Indemnity Agreement dated August 1, 2007, between 454 Life Sciences Corporation and the Registrant                                                                                                                                      
|             | 
|Exhibit 10.6 |  | Form of Restricted Stock Agreement for restricted stock awards granted on May 25, 2007 to each of Frank M. Armstrong, Paul M. Finigan, Timothy M. Shannon, Elizabeth A. Whayland and David M.
Wurzer under the 2007 Stock Incentive Plan
|             | 
|Exhibit 31.1 |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                      
|             | 
|Exhibit 31.2 |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                      
|             | 
|Exhibit 32   |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)                                                                           



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SIGNATURES

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



|                        |  |                     |  |                                                                                                                               
|----------------------- |  | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|Dated: November 9, 2007 |  | CuraGen Corporation
|                        |  |                    
|                        |  | By:                 |  | /s/ Timothy M. Shannon, M.D.                                                                                                  
|                        |  |                     |  | Timothy M. Shannon, M.D.                                                                                                      
|                        |  |                     |  | Chief Executive Officer and President                                                                                         
|                        |  |                     |  | (principal executive officer of the registrant)                                                                               
|                        |  |                    
|Dated: November 9, 2007 |  | By:                 |  | /s/ David M. Wurzer                                                                                                           
|                        |  |                     |  | David M. Wurzer                                                                                                               
|                        |  |                     |  | Executive Vice-President, Chief Financial Officer and Treasurer (principal financial and accounting officer of the registrant)



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CURAGEN CORPORATION

EXHIBIT INDEX

No.



|             |  |                                                                                                                                                                                                                                         
|------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Transition and Severance Agreement, dated September 19, 2007, between the Registrant and Frank M. Armstrong, M.D.                                                                                                                       
|             | 
|Exhibit 10.2 |  | Amended and Restated Employment Agreement, dated September 19, 2007, between the Registrant and Timothy M. Shannon, M.D.                                                                                                                
|             | 
|Exhibit 10.3 |  | Nonstatutory Stock Option Agreement granted under the 2007 Stock Incentive Plan dated September 25, 2007, between the Registrant and Timothy M. Shannon, M.D.                                                                           
|             | 
|Exhibit 10.4 |  | Assignment and Assumption of Lease with Landlords Consent and Release, dated August 1, 2007, between ZFI Group, LLC, 454 Life Sciences Corporation and the Registrant                                                                  
|             | 
|Exhibit 10.5 |  | Indemnity Agreement dated August 1, 2007, between 454 Life Sciences Corporation and the Registrant                                                                                                                                      
|             | 
|Exhibit 10.6 |  | Form of Restricted Stock Agreement for restricted stock awards granted on May 25, 2007 to each of Frank M. Armstrong, Paul M. Finigan, Timothy M. Shannon, Elizabeth A. Whayland and David M.
Wurzer under the 2007 Stock Incentive Plan
|             | 
|Exhibit 31.1 |  | Certification by Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                             
|             | 
|Exhibit 31.2 |  | Certification by Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                                                             
|             | 
|Exhibit 32   |  | Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                            



43