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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 March 31, 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 April 30, 2007 was 56,935,982.



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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 March 31, 2007 and December 31, 2006 (unaudited)                   |  | 3     
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006 (unaudited) |  | 4     
|                              |  |                                                                                                               
|                              |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (unaudited) |  | 5     
|                              |  |                                                                                                               
|                              |  | Notes to Condensed Consolidated Financial Statements (unaudited)                                               |  | 6 -10 
|                              |  |                                                                                                               
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 11 -17
|                              |  |                                                                                                               
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 18    
|                              |  |                                                                                                               
|Item 4.                       |  | Controls and Procedures                                                                                        |  | 18    
|                              | 
|PART II. Other Information    |  |                                                                                                               
|                              |  |                                                                                                               
|Item 1A.                      |  | Risk Factors                                                                                                   |  | 19 -37
|                              |  |                                                                                                               
|Item 6.                       |  | Exhibits                                                                                                       |  | 38    
|                              | 
|Signatures                    |  | 39                                                                                                            
|                              | 
|Exhibit Index                 |  | 40                                                                                                            



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

(unaudited)



|                                                                          |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                          |  | March 31,2007 |          |   | December 31,2006 |  
|ASSETS                                                                    |  |               |          |   |                  |   |          |  
|Current assets:                                                           |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                 |  | $             | 9,841    |   |                  | $ | 58,486   |  
|Short-term investments                                                    |  |               | 5,818    |   |                  |   | 23,473   |  
|Marketable securities                                                     |  |               | 69,014   |   |                  |   | 82,434   |  
|                                                                          |  |               |          |   |                  |   |          |  
|Cash and investments                                                      |  |               | 84,673   |   |                  |   | 164,393  |  
|Income taxes receivable                                                   |  |               | 294      |   |                  |   | 543      |  
|Accounts receivable                                                       |  |               |         |   |                  |   | 926      |  
|Prepaid expenses                                                          |  |               | 2,730    |   |                  |   | 2,595    |  
|Assets held for sale                                                      |  |               | 32,165   |   |                  |   | 34,881   |  
|                                                                          |  |               |          |   |                  |   |          |  
|Total current assets                                                      |  |               | 119,862  |   |                  |   | 203,338  |  
|                                                                          |  |               |          |   |                  |   |          |  
|Property and equipment, net                                               |  |               | 10,938   |   |                  |   | 12,214   |  
|Intangible and other assets, net                                          |  |               | 11,557   |   |                  |   | 11,742   |  
|                                                                          |  |               |          |   |                  |   |          |  
|Total assets                                                              |  | $             | 142,357  |   |                  | $ | 227,294  |  
|                                                                          |  |               |          |   |                  |   |          |  
|                                                                          |  |              
|LIABILITIES AND STOCKHOLDERS' EQUITY                                      |  |               |          |   |                  |   |          |  
|Current liabilities:                                                      |  |               |          |   |                  |   |          |  
|Accounts payable                                                          |  | $             | 1,233    |   |                  | $ | 321      |  
|Accrued expenses                                                          |  |               | 4,430    |   |                  |   | 3,289    |  
|Accrued payroll and related items                                         |  |               | 869      |   |                  |   | 1,810    |  
|Interest payable                                                          |  |               | 550      |   |                  |   | 3,306    |  
|Current portion of deferred revenue                                       |  |               | 89       |   |                  |   | 89       |  
|Other current liabilities                                                 |  |               | 1,486    |   |                  |   | 1,575    |  
|Current portion of convertible subordinated debt                          |  |               |         |   |                  |   | 66,228   |  
|Liabilities held for sale                                                 |  |               | 28,896   |   |                  |   | 30,735   |  
|                                                                          |  |               |          |   |                  |   |          |  
|Total current liabilities                                                 |  |               | 37,553   |   |                  |   | 107,353  |  
|                                                                          |  |               |          |   |                  |   |          |  
|Long-term liabilities:                                                    |  |               |          |   |                  |   |          |  
|Convertible subordinated debt, net of current portion                     |  |               | 110,000  |   |                  |   | 110,000  |  
|Deferred revenue, net of current portion                                  |  |               | 1,152    |   |                  |   | 1,174    |  
|                                                                          |  |               |          |   |                  |   |          |  
|Total long-term liabilities                                               |  |               | 111,152  |   |                  |   | 111,174  |  
|                                                                          |  |               |          |   |                  |   |          |  
|Commitments and contingencies                                             |  |               |          |   |                  |   |          |  
|Stockholders' equity:                                                     |  |               |          |   |                  |   |          |  
|Common Stock; $.01 par value, issued and outstanding 56,926,327 shares at |  |               |          |   |                  |   |          |  
|March 31, 2007, and 56,390,682 shares at December 31, 2006                |  |               | 569      |   |                  |   | 564      |  
|Additional paid-in capital                                                |  |               | 520,397  |   |                  |   | 518,827  |  
|Accumulated other comprehensive income                                    |  |               | 2,705    |   |                  |   | 2,348    |  
|Accumulated deficit                                                       |  |               | (530,019 | ) |                  |   | (512,972 | )
|                                                                          |  |               |          |   |                  |   |          |  
|Total stockholders' (deficit) equity                                      |  |               | (6,348   | ) |                  |   | 8,767    |  
|                                                                          |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders' equity                                |  | $             | 142,357  |   |                  | $ | 227,294  |  
|                                                                          |  |               |          |   |                  |   |          |  

See accompanying notes to condensed consolidated financial statements



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)



|                                                                                         |  |                             |         |   |      |    |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | -- | ------- | -
|                                                                                         |  | Three Months EndedMarch 31, |        
|                                                                                         |  | 2007                        |         |   | 2006 |   
|Revenue:                                                                                 |  |                             |         |   |      |    |         |  
|Collaboration revenue                                                                    |  | $                           | 22      |   |      | $  | 1,418   |  
|                                                                                         |  |                             |         |   |      |    |         |  
|Total revenue                                                                            |  |                             | 22      |   |      |    | 1,418   |  
|                                                                                         |  |                             |         |   |      |    |         |  
|Operating expenses:                                                                      |  |                             |         |   |      |    |         |  
|Research and development expenses                                                        |  |                             | 11,502  |   |      |    | 11,113  |  
|General and administrative expenses                                                      |  |                             | 4,014   |   |      |    | 3,660   |  
|                                                                                         |  |                             |         |   |      |    |         |  
|Total operating expenses                                                                 |  |                             | 15,516  |   |      |    | 14,773  |  
|                                                                                         |  |                             |         |   |      |    |         |  
|Loss from operations                                                                     |  |                             | (15,494 | ) |      |    | (13,355 | )
|Interest income                                                                          |  |                             | 1,153   |   |      |    | 1,840   |  
|Interest expense                                                                         |  |                             | (1,628  | ) |      |    | (2,348  | )
|                                                                                         |  |                             |         |   |      |    |         |  
|Loss from continuing operations before income tax benefit                                |  |                             | (15,969 | ) |      |    | (13,863 | )
|Income tax benefit                                                                       |  |                             | 60      |   |      |    | 54      |  
|                                                                                         |  |                             |         |   |      |    |         |  
|Loss from continuing operations                                                          |  |                             | (15,909 | ) |      |    | (13,809 | )
|Loss from discontinued operations                                                        |  |                             | (1,138  | ) |      |    | (55     | )
|                                                                                         |  |                             |         |   |      |    |         |  
|Net loss                                                                                 |  | ($                          | 17,047  | ) |      | ($ | 13,864  | )
|                                                                                         |  |                             |         |   |      |    |         |  
|Basic and diluted loss per share from continuing operations                              |  | $                           | (0.29   | ) |      | $  | (0.25   | )
|Basic and diluted loss per share from discontinued operations                            |  |                             | (0.02   | ) |      |    | (0.00   | )
|                                                                                         |  |                             |         |   |      |    |         |  
|Basic and diluted net loss per share                                                     |  | $                           | (0.31   | ) |      | $  | (0.25   | )
|                                                                                         |  |                             |         |   |      |    |         |  
|Weighted average number of shares used in computing basic and diluted net loss per share |  |                             | 55,413  |   |      |    | 54,619  |  
|                                                                                         |  |                             |         |   |      |    |         |  

See accompanying notes to condensed consolidated financial statements



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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                                   |  |                             |         |   |      |    |         |  
|-------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | -- | ------- | -
|                                                                                                   |  | Three Months EndedMarch 31, |        
|                                                                                                   |  | 2007                        |         |   | 2006 |   
|Cash flows from operating activities:                                                              |  |                             |         |   |      |    |         |  
|Loss from continuing operations                                                                    |  | ($                          | 15,909  | ) |      | ($ | 13,809  | )
|Adjustments to reconcile loss from continuing operations to net cash used in operating activities: |  |                             |         |   |      |    |         |  
|Depreciation and amortization                                                                      |  |                             | 1,595   |   |      |    | 1,930   |  
|Stock-based compensation                                                                           |  |                             | 957     |   |      |    | 1,155   |  
|Stock-based 401(k) plan employer match                                                             |  |                             | 155     |   |      |    | 107     |  
|Non-cash interest income                                                                           |  |                             | 117     |   |      |    | 216     |  
|Changes in assets and liabilities:                                                                 |  |                             |         |   |      |    |         |  
|Income taxes receivable                                                                            |  |                             | 249     |   |      |    | 346     |  
|Accrued interest receivable - cash and investments                                                 |  |                             | 463     |   |      |    | (94     | )
|Accounts receivable                                                                                |  |                             | 926     |   |      |    | 10      |  
|Prepaid expenses                                                                                   |  |                             | (4      | ) |      |    | 918     |  
|Intangible and other assets, net                                                                   |  |                             | 20      |   |      |    | (31     | )
|Accounts payable                                                                                   |  |                             | 912     |   |      |    | 373     |  
|Accrued expenses                                                                                   |  |                             | 1,141   |   |      |    | 1,742   |  
|Accrued payroll and related items                                                                  |  |                             | (940    | ) |      |    | (146    | )
|Interest payable                                                                                   |  |                             | (2,756  | ) |      |    | (2,093  | )
|Current portion of deferred revenue                                                                |  |                             |        |   |      |    | (2,068  | )
|Other current liabilities                                                                          |  |                             | (91     | ) |      |    | (18     | )
|Deferred revenue, net of current portion                                                           |  |                             | (22     | ) |      |    |        |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Net cash used in operating activities                                                              |  |                             | (13,187 | ) |      |    | (11,462 | )
|                                                                                                   |  |                             |         |   |      |    |         |  
|Cash flows from investing activities:                                                              |  |                             |         |   |      |    |         |  
|Acquisitions of property and equipment                                                             |  |                             | (155    | ) |      |    | (95     | )
|Proceeds from sale of fixed assets                                                                 |  |                             |        |   |      |    | 92      |  
|Purchases of short-term investments                                                                |  |                             |        |   |      |    | (8,955  | )
|Proceeds from sales of short-term investments                                                      |  |                             | 1,401   |   |      |    | 2,600   |  
|Proceeds from maturities of short-term investments                                                 |  |                             | 15,900  |   |      |    |        |  
|Purchases of marketable securities                                                                 |  |                             |        |   |      |    | (4,290  | )
|Proceeds from sales of marketable securities                                                       |  |                             | 12,002  |   |      |    | 4,199   |  
|Proceeds from maturities of marketable securities                                                  |  |                             | 1,550   |   |      |    | 15,800  |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Net cash provided by investing activities                                                          |  |                             | 30,698  |   |      |    | 9,351   |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Cash flows from financing activities:                                                              |  |                             |         |   |      |    |         |  
|Proceeds from exercise of stock options                                                            |  |                             | 72      |   |      |    | 10      |  
|Repayment of convertible debt                                                                      |  |                             | (66,228 | ) |      |    |        |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Net cash (used in) provided by financing activities                                                |  |                             | (66,156 | ) |      |    | 10      |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Cash flows from discontinued operations:                                                           |  |                             |         |   |      |    |         |  
|Net operating cash flows provided by (used in) discontinued operations                             |  |                             | 1,443   |   |      |    | (3,336  | )
|Net investing cash flows provided by discontinued operations                                       |  |                             | 313     |   |      |    | 1,474   |  
|Net financing cash flows (used in) provided by discontinued operations                             |  |                             | (11     | ) |      |    | 311     |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Net cash provided by (used in) discontinued operations                                             |  |                             | 1,745   |   |      |    | (1,551  | )
|                                                                                                   |  |                             |         |   |      |    |         |  
|Net (decrease) increase in cash and cash equivalents of subsidiary held for sale                   |  |                             | (1,745  | ) |      |    | 1,551   |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Net decrease in cash and cash equivalents                                                          |  |                             | (48,645 | ) |      |    | (2,101  | )
|Cash and cash equivalents, beginning of period                                                     |  |                             | 58,486  |   |      |    | 17,697  |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Cash and cash equivalents, end of period                                                           |  | $                           | 9,841   |   |      | $  | 15,596  |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Supplemental cash flow information:                                                                |  |                             |         |   |      |    |         |  
|Interest paid                                                                                      |  | $                           | 4,222   |   |      | $  | 4,225   |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Income tax benefit payments received                                                               |  | $                           | 407     |   |      | $  | 1,114   |  
|                                                                                                   |  |                             |         |   |      |    |         |  
|Acquisition/construction of property, plant and equipment, unpaid at end of period                 |  | $                           | 9       |   |      | $  | 1       |  
|                                                                                                   |  |                             |         |   |      |    |         |  

See accompanying notes to condensed consolidated financial statements



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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 only 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 majority-owned subsidiary, 454 Life Sciences Corporation (454), and accordingly, all material intercompany balances and transactions have
been eliminated. CuraGen has reclassified its prior financial statements to present the 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 Notes 4 and 5).

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
|-- | ------------------

The accumulated
balance of other comprehensive loss 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 is as
follows:



|                                                            |  |                             |        |   |      |    |        |  
|----------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | -- | ------ | -
|                                                            |  | Three Months EndedMarch 31, |       
|                                                            |  | 2007                        |        |   | 2006 |   
|Net loss                                                    |  | ($                          | 17,047 | ) |      | ($ | 13,864 | )
|                                                            |  |                             |        |   |      |    |        |  
|Other comprehensive loss:                                   |  |                             |        |   |      |    |        |  
|Unrealized gains on securities:                             |  |                             |        |   |      |    |        |  
|Unrealized holding gains arising during period              |  |                             | 337    |   |      |    | 135    |  
|Reclassification adjustment for losses included in net loss |  |                             | 19     |   |      |    | 5      |  
|                                                            |  |                             |        |   |      |    |        |  
|Net unrealized gains on securities                          |  |                             | 356    |   |      |    | 140    |  
|                                                            |  |                             |        |   |      |    |        |  
|Total comprehensive loss                                    |  | ($                          | 16,691 | ) |      | ($ | 13,724 | )
|                                                            |  |                             |        |   |      |    |        |  

The Company periodically reviews its investment portfolios and its investment in
TopoTarget A/S (TopoTarget), a publicly-traded company on the Copenhagen Stock Exchange, to determine if there is an impairment that is other than temporary and, as of the balance sheet date, March 31, 2007, has not experienced any
impairments in its investments that were other than temporary.

The Companys investment in TopoTarget is classified as
an available-for-sale, long-term marketable security and is included in Intangible and other assets, net, on the March 31, 2007 balance sheet at a fair value of $9,161 which includes an unrealized gain of $3,874.



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

As of
December 31, 2006, the Company had two reportable segments, CuraGen and 454. As of March 31, 2007, 454 is classified as a discontinued operation as a result of the Merger Agreement. Accordingly, as of March 31, 2007, and for the three
month periods ended March 31, 2007 and 2006, respectively, the Company operated as one segment excluding discontinued operations (see Notes 4 and 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. and 13 Acquisitions,
Inc. are affiliates of Roche, a global research-based healthcare company. Under the Merger Agreement, 13 Acquisitions, Inc. will be 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, 454s shareholders will receive up to $154,900 in cash, of which Roche Holdings, Inc. will pay $140,000 in cash and up to approximately
$14,900 will be received from the exercise of 454 stock options following the signing of the Merger Agreement and prior to the closing of the Merger. Of the $140,000 to be received from Roche Holdings, Inc., $25,000 will be placed in escrow for a
period of 15 months to provide for certain post-closing adjustments based on 454s net working capital and net debt on the date of closing and to secure the indemnification rights of Roche Holdings, Inc. On a fully-diluted basis, presuming
exercise of all outstanding 454 stock options prior to the closing, CuraGen expects to receive approximately $85,000 before fees, expenses and transaction costs relating to the Merger, which will be paid prior to payment of merger consideration to
454 stockholders. Of the amount receivable by CuraGen pursuant to the Merger Agreement, approximately $14,000 will be held in escrow.

454 has made customary representations and warranties and covenants in the Merger Agreement, including covenants relating to obtaining the requisite approval of 454s stockholders, 454s conduct of its
business between the date of the signing of the Merger Agreement and the closing of the Merger, and 454s agreement not to solicit, enter into discussions regarding, or provide information in connection with, alternative transactions.

The Merger Agreement has been approved by 454s board of directors, a special committee of CuraGens board of
directors, and the holders of approximately 83% of the outstanding shares of capital stock of 454. The obligation of the parties to consummate the Merger is conditioned on, among other things, the termination or expiration of the waiting period
under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, compliance with the applicable requirements of the antitrust laws of Germany and Italy, written termination of the review or clearance of the Merger pursuant to Sec. 721 of
Title VII of the Defense Production Act of 1950, as amended, and entry by CuraGen, 454 and the Buyer into certain ancillary agreements. Assuming the satisfaction or waiver of all closing conditions, the Merger is expected to close in the second
quarter of 2007.



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

The Merger
Agreement (see Note 4) has been accounted for in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), and accordingly, at
March 31, 2007 and 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 months ended March 31, 2007 and 2006.

The following table summarizes the financial information for the discontinued operations of 454 for the three months ended
March 31, 2007 and 2006 (in thousands):



|                                                                                    |  |                                  |        |   |                                  |   |       |  
|----------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | -------------------------------- | - | ----- | -
|                                                                                    |  | Three monthsended March 31, 2007 |        |   | Three monthsended March 31, 2006 |  
|Revenue:                                                                            |  |                                  |        |   |                                  |   |       |  
|Product revenue                                                                     |  | $                                | 8,377  |   |                                  | $ | 4,495 |  
|Sequencing service revenue                                                          |  |                                  | 2,568  |   |                                  |   | 2,447 |  
|Collaboration revenue                                                               |  |                                  | 375    |   |                                  |   | 375   |  
|Grant revenue                                                                       |  |                                  |        |   |                                  |   | 484   |  
|Milestone revenue                                                                   |  |                                  | 1,534  |   |                                  |   | 950   |  
|                                                                                    |  |                                  |        |   |                                  |   |       |  
|Total revenue                                                                       |  | $                                | 12,854 |   |                                  | $ | 8,751 |  
|                                                                                    |  |                                  |        |   |                                  |   |       |  
|Operating Expenses:                                                                 |  |                                  |        |   |                                  |   |       |  
|Cost of product revenue                                                             |  | $                                | 5,468  |   |                                  | $ | 2,627 |  
|Cost of sequencing service revenue                                                  |  |                                  | 1,146  |   |                                  |   | 990   |  
|Grant research expenses                                                             |  |                                  |       |   |                                  |   | 399   |  
|Research and development expenses                                                   |  |                                  | 4,403  |   |                                  |   | 3,293 |  
|General and administrative expenses                                                 |  |                                  | 3,069  |   |                                  |   | 1,725 |  
|                                                                                    |  |                                  |        |   |                                  |   |       |  
|Total operating expenses                                                            |  | $                                | 14,086 |   |                                  | $ | 9,034 |  
|                                                                                    |  |                                  |        |   |                                  |   |       |  
|Loss from discontinued operations before minority interest, net of tax of $8 and $0 |  | $                                | 1,200  |   |                                  | $ | 147   |  
|Minority interest in loss of discontinued consolidated subsidiary                   |  |                                  | (62    | ) |                                  |   | (92   | )
|                                                                                    |  |                                  |        |   |                                  |   |       |  
|Loss from discontinued operations                                                   |  | $                                | 1,138  |   |                                  | $ | 55    |  
|                                                                                    |  |                                  |        |   |                                  |   |       |  



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During the third quarter 2006, the cumulative losses applicable to the minority interest
in subsidiary exceeded the minority interest in the equity capital of 454, therefore, going forward, all future losses applicable to the minority interest will be charged to CuraGen, until such time as 454 has future income and/or financing from the
minority interest.

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 March 31, 2007 and December 31, 2006 (in thousands):



|                                |  |                |        |                   |   |       
|------------------------------- |  | -------------- | ------ | ----------------- | - | ------
|                                |  | March 31, 2007 |        | December 31, 2006
|Cash and cash equivalents       |  | $              | 5,910  |                   | $ | 4,164 
|Short-term investments          |  |                | 1,144  |                   |   | 1,507 
|Marketable securities           |  |                | 28     |                   |   | 90    
|Accounts and royalty receivable |  |                | 5,947  |                   |   | 10,850
|Inventory                       |  |                | 11,285 |                   |   | 9,855 
|Property and equipment, net     |  |                | 3,894  |                   |   | 3,945 
|Licensing fees, net             |  |                | 3,100  |                   |   | 3,281 
|Other assets                    |  |                | 857    |                   |   | 1,189 
|                                |  |                |        |                   |   |       
|Assets held for sale            |  | $              | 32,165 |                   | $ | 34,881
|                                |  |                |        |                   |   |       
|                                |  |               
|                                |  | March 31, 2007 |        | December 31, 2006
|Accounts payable                |  | $              | 1,839  |                   | $ | 841   
|Accrued expenses                |  |                | 2,016  |                   |   | 1,458 
|Deferred revenue                |  |                | 24,121 |                   |   | 27,539
|Other liabilities               |  |                | 920    |                   |   | 897   
|                                |  |                |        |                   |   |       
|Liabilities held for sale       |  | $              | 28,896 |                   | $ | 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 months ended March 31, 2007 and 2006, the Company recognized
compensation expense of $401 and $467, respectively, in the condensed consolidated statements of operations with respect to employee stock options. During the three months ended March 31, 2007 and 2006, the Company also recognized compensation
expense of $604 and $736, respectively, in the condensed consolidated statements of operations with respect to restricted stock grants. Due to the Companys net loss position, no tax benefit was recorded during the periods.

For the three months ended March 31, 2007, the adoption of SFAS 123R had the effect of increasing net loss by $401, or a $0.01
increase in basic and diluted net loss per share, on amounts that would have been reported using the intrinsic value method under APB 25. For the three months ended March 31, 2006, the adoption of SFAS 123R had the effect of increasing net
loss by $467, or a $0.01 increase in basic and diluted net loss per share, on amounts that would have been reported with respect to employee stock options using the intrinsic value method under APB 25.



8



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##### Table of Contents

The fair value of options granted during the three months ended March 31, 2007 and
2006 were estimated as of the grant date using the Black-Scholes option valuation model with the following assumptions:



|                                |  |                              |   |  |      |  
|------------------------------- |  | ---------------------------- | - |  | ---- | -
|                                |  | Three Months Ended March 31, |  
|                                |  | 2007                         |   |  | 2006 |  
|Expected stock price volatility |  | 71                           | % |  | 79   | %
|Risk-free interest rate         |  | 4.74                         | % |  | 4.23 | %
|Expected option term in years   |  | 6.25                         |   |  | 6.25 |  
|Expected dividend yield         |  | 0                            | % |  | 0    | %

The weighted-average grant date fair values using the Black-Scholes option
valuation model of all stock options granted during the three months ended March 31, 2007 and 2006 were $2.88 and $2.91, respectively.

A summary of the stock option activity under the 1997 Employee, Director and Consultant Stock Plan (1997 Stock Plan) as of March 31, 2007, and changes during the three months ended March 31,
2007, are as follows:



|                            |  |                   |   |  |                                 |       |                                                      |      |                         |   |   
|--------------------------- |  | ----------------- | - |  | ------------------------------- | ----- | ---------------------------------------------------- | ---- | ----------------------- | - | --
|                            |  | Number of Options |   |  | Weighted Average Exercise Price |       | Weighted AverageRemainingContractual Life (in years) |      | AggregateIntrinsicValue
|Outstanding January 1, 2007 |  | 6,237,624         |   |  | $                               | 9.37  |                                                      |      |                         |   |   
|Granted                     |  | 104,080           |   |  |                                 | 4.25  |                                                      |      |                         |   |   
|Exercised                   |  | (7,000            | ) |  |                                 | 3.84  |                                                      |      |                         |   |   
|Canceled or lapsed          |  | (93,916           | ) |  |                                 | 8.21  |                                                      |      |                         |   |   
|                            |  |                   |   |  |                                 |       |                                                      |      |                         |   |   
|Outstanding March 31, 2007  |  | 6,240,788         |   |  |                                 | 9.31  |                                                      | 6.20 |                         | $ | 40
|                            |  |                   |   |  |                                 |       |                                                      |      |                         |   |   
|Exercisable March 31, 2007  |  | 4,149,396         |   |  |                                 | 11.58 |                                                      | 5.13 |                         | $ | 16
|                            |  |                   |   |  |                                 |       |                                                      |      |                         |   |   

The total intrinsic value of options exercised under the 1997 Stock Plan during the
three months ended March 31, 2007 and 2006 was $1 and $4, respectively.

There was no significant activity under the
1993 Stock Option and Incentive Award Plan (1993 Stock Plan) during either the three months ended March 31, 2007 or 2006.

As of March 31, 2007 there was $2,816 of total unrecognized compensation expense related to unvested stock option grants under the 1993 Stock Plan and the 1997 Stock Plan, and this expense is expected to be
recognized over a weighted-average period of 1.20 years.

A summary of all restricted stock activity under the 1997 Stock
Plan as of March 31, 2007, and changes during the three months ended March 31, 2007, are as follows:



|                                      |  |                                      |   |  |                                        |     
|------------------------------------- |  | ------------------------------------ | - |  | -------------------------------------- | ----
|                                      |  | Number of Shares of Restricted Stock |   |  | Weighted Average Grant Date Fair Value
|Outstanding January 1, 2007           |  | 1,006,625                            |   |  | $                                      | 4.08
|Granted                               |  | 487,020                              |   |  |                                        | 4.39
|Restrictions lapsed                   |  | (100,000                             | ) |  |                                        | 4.73
|Repurchased upon employee termination |  | (7,320                               | ) |  |                                        | 4.69
|                                      |  |                                      |   |  |                                        |     
|Outstanding March 31, 2007            |  | 1,386,325                            |   |  |                                        | 4.14
|                                      |  |                                      |   |  |                                        |     

The total fair value of restricted shares vested during the three months ended
March 31, 2007 and 2006 was $384 and $32, respectively.

As of March 31, 2007, there was $3,501 of total
unrecognized compensation expense related to unvested restricted stock grants under the 1997 Stock Plan, and this expense is expected to be recognized over a weighted-average period of 1.44 years.



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As a result of the Merger Agreement discussed in Note 4 above, 454s operating
results are being reported as discontinued operations on the March 31, 2007 and 2006 condensed consolidated financial statements. During the three months ended March 31, 2007 and 2006, 454 recognized compensation expense of $320 and $140,
respectively, with respect to employee stock option awards. During the three months ended March 31, 2007, 454 recorded a charge of $182, which is included in the three months ended March 31, 2007 expense, related to a reduction in estimate
of forfeitures for prior years grants in anticipation of the upcoming merger.



|7. | Loss Per Share
|-- | --------------

Basic loss per
share (LPS) is computed by dividing net loss by the weighted average number of shares of common stock outstanding for the period, excluding unvested restricted stock. Diluted LPS 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 under CuraGens stock option plans but not yet exercised and unvested restricted stock are
anti-dilutive and therefore not considered for the diluted LPS calculations. Anti-dilutive potential common shares, consisting of convertible subordinated debt, outstanding stock options and unvested restricted stock were 20,543,821 and 20,236,558
as of March 31, 2007 and 2006, respectively.



|8. | Repayment of 6% Convertible Subordinated Debentures
|-- | ---------------------------------------------------

On February 2, 2007, the Company repaid the remaining $66,228 balance outstanding on the 6% convertible subordinated debentures plus accrued interest of $1,986.



|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 March 31, 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 income. 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 statute of limitations remain open for all years since 1992
with no years currently under examination by the Internal Revenue Service, and the Connecticut statute of limitations remain open for all years since 2000 with no years currently under examination by the Department of Revenue Services.



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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 protein, antibody and small molecule therapeutics for the treatment of cancer and cancer supportive care. We have taken a systematic approach to identifying and
validating the most promising therapeutic targets from our past research into the human genome and our efforts are now focused on developing and advancing three potential therapeutics: velafermin, belinostat (PXD101) and CR011-vcMMAE, through
clinical development, and towards commercialization.

CuraGen Clinical Oncology Pipeline

We are currently focusing our resources on the development of the following clinical oncology therapeutics in the areas of cancer supportive care and the
treatment of cancer:



| |  |  | Velaferminis a protein therapeutic that we are investigating for the prevention of oral mucositis, or OM, a debilitating side effect experienced by
many cancer patients receiving treatment with chemotherapy, radiotherapy, or a combination thereof. To confirm the activity of a single intravenous infusion of 30 mcg/kg of velafermin, we are conducting a second Phase II trial, which began enrolling
patients in May 2006. This study will evaluate the efficacy of 30 mcg/kg velafermin compared to placebo for the prevention of OM, and also evaluate the activity of a single dose of 10 mcg/kg velafermin or 60 mcg/kg velafermin compared to placebo.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Belinostat (PXD101)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 (PXD101) for:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                   |  |       |  |                                                  |  |                                  |  |                                                                      
|---------------------------------- |  | ----- |  | ------------------------------------------------ |  | -------------------------------- |  | ---------------------------------------------------------------------
|Indication                         |  | Phase |  | Regimen                                          |  | Initiation of Patient Enrollment |  | Milestone                                                            
|Multiple myeloma (MM)            |  | II    |  | Monotherapy or in combination with dexamethasone |  | January 2005                     |  | Enrollment completed October 2006; Results presented in December 2006
|                                   |  |       |  |                                                 
|Solid tumors and colorectal cancer |  | Ib    |  | Combination with 5-fluorouracil (5-FU)         |  | September 2005                   |  | Preliminary interim results expected June 2007                       
|                                   |  |       |  |                                                 
|Solid tumors and ovarian cancer    |  | Ib    |  | Combination with paclitaxel and/or carboplatin   |  | September 2005                   |  | Preliminary interim results expected June 2007                       
|                                   |  |       |  |                                                 
|T-cell lymphoma                    |  | II    |  | Monotherapy                                      |  | January 2006                     |  | Preliminary interim results expected June 2007                       
|                                   |  |       |  |                                                 
|Advanced solid tumors              |  | I     |  | Oral belinostat (PXD101) monotherapy             |  | August 2006                      |  | Preliminary interim results expected Q4 2007                         
|                                   |  |       |  |                                                 
|Multiple myeloma                   |  | II    |  | Combination with Velcade®                        |  | March 2007                       |  | Preliminary interim results expected Q4 2007                         



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Under a Clinical Trials Agreement we signed with the National Cancer Institute, or NCI, in August 2005,
the NCI is also conducting clinical trials evaluating intravenous belinostat (PXD101), both alone and in combination, for other cancer indications including:



|                                   |  |       |  |                                    |  |                                 
|---------------------------------- |  | ----- |  | ---------------------------------- |  | --------------------------------
|Indication                         |  | Phase |  | Regimen                            |  | Initiation of Patient Enrollment
|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                   



| |  |  | 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. In June 2006, we announced that the investigational new drug application for CR011-vcMMAE was cleared by the FDA and dosing of patients in a Phase I/II clinical trial
had begun. The open-label, multi-center, dose escalation study will evaluate the safety, tolerability and pharmacokinetics of CR011-vcMMAE for patients with Stage III or Stage IV melanoma who have failed no more than one prior line of cytotoxic
therapy. The first part of the trial will evaluate cohorts of patients receiving increasing doses of CR011-vcMMAE to determine the maximum tolerated dose, or MTD. After determination of the MTD, up to approximately 30 additional patients will be
enrolled and treated at the MTD to further define safety and efficacy in this Phase I trial.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

454 Life Sciences Corporation

454 Life Sciences Corporation, or 454, is our 65% majority-owned subsidiary that has commercialized advanced technologies for
high-throughput sequencing of DNA. 454s current products perform rapid and comprehensive whole genome sequencing, or the determination of the nucleotide sequence of entire genomes, ultra-deep sequencing, or the accurate
detection of mutations in target genes of interest, and ultra-broad sequencing, or the surveying and characterization of large numbers of DNA molecules from a complex mixture.

In March 2007, we announced that 454 and Roche Holdings, Inc., or Roche Holdings, had signed a definitive merger agreement under which Roche will acquire
454. Under the terms of the agreement, 454s shareholders will receive up to $154.9 million in cash, of which Roche Holdings will pay $140 million in cash and up to approximately $14.9 million will be received from the exercise of 454 stock
options following the signing of the agreement and prior to the closing of the merger. Of the $140 million from Roche Holdings, $25 million will be placed in escrow for a period of 15 months to provide for certain post-closing adjustments based on
454s net working capital and net debt on the date of closing and to secure Roche Holdings indemnification rights. On a fully diluted basis, presuming exercise of all outstanding 454 stock options prior to the closing, CuraGen expects to
receive approximately $85 million before fees and expenses and transaction costs relating to the merger, which will be paid prior to payment of merger consideration to 454 stockholders. Of the amount receivable by CuraGen pursuant to the agreement,
approximately $14 million will be held in escrow. This transaction, which is subject to certain closing conditions, including regulatory approvals, is currently expected to close in the second quarter of 2007. A more detailed discussion of the
merger and the agreement can be found in Note 4 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

Summary

We seek to generate value for our shareholders by developing novel therapeutics for the treatment of cancer and
cancer supportive care. 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



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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 therapeutic
protein, antibody and small molecule product candidates; 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, 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.

Results of Operations

The following table sets forth a comparison of the components of our net loss for the three months ended March 31, 2007 and 2006 (in millions):



|                                    |  |                              |      |      |   |          |  |   |          |   |  |      |   
|----------------------------------- |  | ---------------------------- | ---- | ---- | - | -------- |  | - | -------- | - |  | ---- | --
|                                    |  | Three months ended March 31, |     
|                                    |  | 2007                         |      | 2006 |   | $ Change |  |   | % Change |  
|Collaboration revenue               |  | $                            |     |      | $ | 1.4      |  | $ | (1.4     | ) |  | (100 | )%
|Research and development expenses   |  |                              | 11.5 |      |   | 11.1     |  |   | 0.4      |   |  | 4    | % 
|General and administrative expenses |  |                              | 4.0  |      |   | 3.7      |  |   | 0.3      |   |  | 8    | % 
|Interest income                     |  |                              | 1.1  |      |   | 1.8      |  |   | (0.7     | ) |  | (39  | )%
|Interest expense                    |  |                              | 1.6  |      |   | 2.3      |  |   | (0.7     | ) |  | (30  | )%
|Income tax benefit                  |  |                              | 0.1  |      |   | 0.1      |  |   |         |   |  |     |   
|Loss from discontinued operations   |  |                              | 1.1  |      |   | 0.1      |  |   | 1.0      |   |  | 1000 | % 
|                                    |  |                              |      |      |   |          |  |   |          |   |  |      |   
|Net loss                            |  | $                            | 17.0 |      | $ | 13.9     |  |   |          |   |  |      |   
|                                    |  |                              |      |      |   |          |  |   |          |   |  |      |   

Collaboration revenue.The decrease in our collaboration revenue for three months
ended March 31, 2007, as compared to the three months ended March 31, 2006 was due to the completion of work under the Bayer AG Pharmacogemomics 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.

Research and development expenses.Research and development expenses consist primarily of: contractual and manufacturing costs; salary and
benefits; perpetual license fees; supplies and reagents; depreciation and amortization; and allocated facility costs. Historically, our research and development efforts have been concentrated on three major



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project areas: clinical trials; preclinical drug candidates; and collaborations. However, upon completion of our work on the Bayer AG Pharmacogemomics
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 three lead oncology drug development programs, our
research and development efforts are now being concentrated 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 and/or
our technology platform.

Below is a summary that reconciles our total research and development expenses for the three months ended
March 31, 2007 and 2006 (in millions):



|                                              |  |                              |      |      |   |          |  |   |          |   |  |     |   
|--------------------------------------------- |  | ---------------------------- | ---- | ---- | - | -------- |  | - | -------- | - |  | --- | --
|                                              |  | Three months ended March 31, |     
|                                              |  | 2007                         |      | 2006 |   | $ Change |  |   | % Change |  
|Contractual and manufacturing costs           |  | $                            | 6.0  |      | $ | 4.8      |  | $ | 1.2      |   |  | 25  | % 
|Salary and benefits                           |  |                              | 2.9  |      |   | 2.9      |  |   |         |   |  |    |   
|Supplies and reagents                         |  |                              | 0.2  |      |   | 0.6      |  |   | (0.4     | ) |  | (67 | )%
|Perpetual license fees and milestone payments |  |                              | 0.1  |      |   |         |  |   | 0.1      |   |  | 100 | % 
|Depreciation and amortization                 |  |                              | 0.6  |      |   | 0.8      |  |   | (0.2     | ) |  | (25 | )%
|Allocated facility costs                      |  |                              | 1.7  |      |   | 2.0      |  |   | (0.3     | ) |  | (15 | )%
|                                              |  |                              |      |      |   |          |  |   |          |   |  |     |   
|Total research and development expenses       |  | $                            | 11.5 |      | $ | 11.1     |  |   |          |   |  |     |   
|                                              |  |                              |      |      |   |          |  |   |          |   |  |     |   

The increase in our research and development expenses for the three months ended March 31,
2007, as compared to the three months ended March 31, 2006, was primarily due to an increase in contractual and manufacturing costs offset by a decrease in supplies and reagents. We anticipate our research and development expenses for the
remainder of 2007 will remain relatively constant on a quarterly basis as compared to the first quarter of 2007.

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 March 31, 2007, as well as the current direct research and development expenses for the three months ended March 31, 2007 and 2006 which were incurred on or after we started conducting a Phase I clinical trial for a clinical candidate
(in millions):



|                                        |  |                         |  |                                                                   |      |                               |   |                               |  |            |     |             |                     |  |           
|--------------------------------------- |  | ----------------------- |  | ----------------------------------------------------------------- | ---- | ----------------------------- | - | ----------------------------- |  | ---------- | --- | ----------- | ------------------- |  | ----------
|                                        |  |                         |  | Clinical Development Costs                                        |      |                               |   |                              
|Therapeutic Area and Clinical Candidate |  | Class                   |  | Cumulative as ofMarch 31, 2007(sincecommencementof Phase I trial) |      | ThreeMonthsEndedMarch 31,2007 |   | ThreeMonthsEndedMarch 31,2006 |  | Indication |     | TrialStatus
|Cancer Supportive Care                  |  |                         |  |                                                                   |      |                               |   |                               |  |            |     |             |                     |  |           
|Velafermin                              |  | Protein                 |  | $                                                                 | 40.7 |                               | $ | 3.6                           |  | $          | 2.3 |             | Oral Mucositis      |  | Phase II  
|Oncology                                |  |                         |  |                                                                   |      |                               |   |                               |  |            |     |             |                     |  |           
|Belinostat (PXD101)                     |  | Small Molecule          |  | $                                                                 | 33.0 |                               | $ | 2.6                           |  | $          | 2.3 |             | Various Cancers     |  | Phase II  
|CR011-vcMMAE                            |  | Antibody-Drug Conjugate |  | $                                                                 | 5.0  |                               | $ | 0.6                           |  |            |    |             | Metastatic Melanoma |  | Phase I/II
|Kidney Inflammation                     |  |                         |  |                                                                   |      |                               |   |                               |  |            |     |             |                     |  |           
|CR002                                   |  | Antibody                |  | $                                                                 | 1.8  |                               |   |                              |  |            |    |             | Kidney Inflammation |  | Phase I   

We expect that the direct research and development expenses incurred in connection with our
development of velafermin to be consistent in 2007 as compared to 2006 due to the ongoing enrollment of patients in the Phase II trial. We expect that the direct research and development expenses incurred in connection with our development of
belinostat (PXD101) 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/II trials, and the initiation of activities to support a potential Phase III
program that we expect to initiate in 2008 pending positive data from the ongoing Phase I/II trials. We expect the CR011 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.



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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 velafermin, belinostat
(PXD101), 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 most 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, velafermin, belinostat (PXD101), CR011-vcMMAE and CR002, may have a significant impact on our capital
requirements.

General and administrative expenses.The slight increase in our general and administrative expenses for the
three months ended March 31, 2007, as compared to the three months ended March 31, 2006, was primarily a result of consulting and legal fees incurred in connection with the proposed sale of our shares of 454. Our general and administrative
expenses are expected to decrease slightly on a quarterly basis for the remainder of 2007 as compared to the first quarter of 2007.

Interest income. Interest income for the three months ended March 31, 2007 decreased as compared to the three months ended March 31, 2006, primarily due to lower cash and investment balances, partially offset by
higher yields on our investment portfolio. We earned an average yield of 4.1% during the first quarter of 2007 as compared to 3.7% in the first quarter of 2006. We anticipate interest income to approximate $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, as well as the repayment of $66.2 million of our 6% convertible subordinated debentures which occurred upon their
maturity in February 2007, offset by the assumed receipt of proceeds from the sale of 454 discussed above. We also expect the yields in our investment portfolio to decrease during the remainder of 2007 as compared to the first quarter of 2007.

Interest expense. Interest expense for the three months ended March 31, 2007 decreased compared to the same period 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 approximate $5 million for the full year 2007.

Income tax benefit. We recorded an income tax benefit of
$0.1 million during the three months ended March 31, 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 consistent with 2006 (before adjustment to reflect statute of limitations expirations).



15



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Loss from discontinued operations. Due to the anticipated disposition of 454 in the
second quarter of 2007, the results of 454s operations have been reclassified as discontinued operation for all periods presented. The increase in the loss from discontinued operations for the three months ended March 31, 2007 as compared
to the three months ended March 31, 2006 was due to an increase in 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 Roche. These increases in expenses were partially offset by an increase in the profit margin 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 future losses applicable to the minority interest are being charged to us, except when 454
receives additional financing from the minority interest and/or has future income. While we anticipate recognizing the majority of 454s net loss during the second quarter of 2007 as additional loss from discontinued operations prior to the
completion of the sale, we do not anticipate the amount to be material.

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.

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 three month periods ended March 31, 2007 and 2006, using the direct cash flow method (in millions):



|                                                                           |  |                              |       |   |      |   |       |  
|-------------------------------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                                                           |  | Three months ended March 31, |      
|                                                                           |  | 2007                         |       |   | 2006 |  
|Cash received from collaborators                                           |  | $                            | 1.0   |   |      | $ | 2.2   |  
|Cash paid to suppliers and employees                                       |  |                              | (12.0 | ) |      |   | (11.7 | )
|Restructuring and related charges paid                                     |  |                              | (0.2  | ) |      |   | (0.7  | )
|Interest income received                                                   |  |                              | 1.2   |   |      |   | 1.8   |  
|Interest expense paid                                                      |  |                              | (4.2  | ) |      |   | (4.2  | )
|Income tax benefit received                                                |  |                              | 0.4   |   |      |   | 1.1   |  
|                                                                           |  |                              |       |   |      |   |       |  
|Net cash and investments used in operating activities                      |  |                              | (13.8 | ) |      |   | (11.5 | )
|                                                                           |  |                              |       |   |      |   |       |  
|Cash paid to acquire property and equipment                                |  |                              | (0.2  | ) |      |   | (0.1  | )
|Proceeds from sale of fixed assets                                         |  |                              |      |   |      |   | 0.1   |  
|                                                                           |  |                              |       |   |      |   |       |  
|Net cash and investments used in investing activities                      |  |                              | (0.2  | ) |      |   |      |  
|                                                                           |  |                              |       |   |      |   |       |  
|Cash received from employee stock option exercises                         |  |                              | 0.1   |   |      |   |      |  
|Cash paid for extinguishment of debt                                       |  |                              | (66.2 | ) |      |   |      |  
|                                                                           |  |                              |       |   |      |   |       |  
|Net cash and investments used in financing activities                      |  |                              | (66.1 | ) |      |   |      |  
|                                                                           |  |                              |       |   |      |   |       |  
|Unrealized gain (loss) on short-term investments and marketable securities |  |                              | 0.4   |   |      |   | (0.4  | )
|                                                                           |  |                              |       |   |      |   |       |  
|Net decrease in cash and investments                                       |  |                              | (79.7 | ) |      |   | (11.9 | )
|Cash and investments, beginning of period                                  |  |                              | 164.4 |   |      |   | 211.2 |  
|                                                                           |  |                              |       |   |      |   |       |  
|Cash and investments, end of period                                        |  | $                            | 84.7  |   |      | $ | 199.3 |  
|                                                                           |  |                              |       |   |      |   |       |  

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. We expect to continue to fund our operations through a combination of the following sources: cash and investment balances; collaboration revenue; interest income; potential public securities offerings; and/or private
strategic-driven transactions. During the second quarter of 2007, subject to customary closing conditions, including certain regulatory approvals, we expect the acquisition by Roche Holdings of 454 to close, resulting in anticipated gross proceeds
of approximately $85 million to us. Of the amount receivable by us pursuant to the merger



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agreement, approximately $14 million will be held in escrow for a period of 15 months after closing of the merger, and accordingly we expect to receive
approximately $71 million in merger proceeds in 2007, before fees and expenses. We plan to use the anticipated proceeds to continue generating important clinical trial results from our three late stage oncology programs, velafermin, belinostat
(PXD101) and CR011-vcMMAE, which will potentially enable us to bring one or more of those products into Phase III in 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. During 2007, we plan to continue making substantial investments to advance our clinical drug 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; supplies and reagents; potential milestone payments; and payments of interest to the holders of our
convertible subordinated debt due in 2011.

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, excluding the anticipated proceeds from 454, will be sufficient to meet our requirements through the middle of 2008. 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 $110.0 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; 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, 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 March 31, 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 is being presented as a discontinued operation as a result of the Merger
Agreement.

Some of the figures 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                |  | $                                    | 110.0 |      | $ |     |  | $    |    |      | $ |     |  | $ |    |  | $ | 110.0
|Interest on convertible subordinated debt |  |                                      | 17.6  |      |   | 2.2  |  |      | 4.4 |      |   | 4.4  |  |   | 4.4 |  |   | 2.2  
|Operating leases                          |  |                                      | 2.6   |      |   | 1.6  |  |      | 0.9 |      |   | 0.1  |  |   |    |  |   |     
|Purchase commitments                      |  |                                      | 13.3  |      |   | 8.6  |  |      | 4.4 |      |   | 0.3  |  |   |    |  |   |     
|                                          |  |                                      |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |      
|Total                                     |  | $                                    | 143.5 |      | $ | 12.4 |  | $    | 9.7 |      | $ | 4.8  |  | $ | 4.4 |  | $ | 112.2
|                                          |  |                                      |       |      |   |      |  |      |     |      |   |      |  |   |     |  |   |      



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

Our outstanding long-term liabilities as of March 31, 2007 include $110.0 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 March 31, 2007, the market value of our $110.0 million 4% convertible subordinated notes due 2011, based on quoted market prices, was approximately $88.6 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 March 31, 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 March 31, 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 March 31, 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 four new risk factors, located at the beginning of Item 1A, that address risks to our business resulting from the entry by 454 into an Agreement and Plan of Merger with Roche
Holdings and a wholly owned subsidiary of Roche Holdings. A detailed discussion of the merger and merger agreement can be found in Note 4 to our condensed consolidated financial statements included in this Form 10-Q that have been revised to reflect
developments subsequent to the discussion of risk factors included in our most recent Annual Report on Form 10-K.

Risks Related to Our
Business

Substantially all of our gross consolidated revenue for the year ended December 31, 2006 and earlier was derived from sales by 454.
If the merger is completed, 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. Assuming the merger is completed, our revenue sources are likely to consist primarily of limited
amounts of collaboration revenue related to the LEO Pharma/TopoTarget licensing agreement. Accordingly, if the merger is completed, we will have no meaningful source of recurring revenue for the short term.

If the proceeds we receive from the merger are less than anticipated due to higher than expected transaction costs or post-closing adjustments to, or 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, these proceeds are subject to adjustment as set forth in the merger
agreement. If transaction costs relating to the merger are higher than we currently expect, the proceeds available at the closing of the merger for payment to us and other 454 stockholders will be reduced. If post-closing adjustments based upon
454s working capital and net debt at the time of the closing result in a reduction to the total merger consideration payable by Roche Holdings, or if Roche Holdings makes successful claims against the escrow as a result of a breach of
representations, warranties or covenants made by 454 in the merger agreement, the amount of the escrow fund that is available for distribution to us and other 454 stockholders at the end of the 15-month escrow period will be reduced.

If our proceeds from the sale of 454 are less than expected, we may need to explore alternative sources of funding sooner than planned, and we cannot be
certain that such funding will be available to us in the timeframe we require on favorable terms, or at all.



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If the merger agreement is terminated or if the merger is otherwise not completed, we may not be able to sell our
stake in 454 on comparable terms, or at all, and we will need to explore alternative options for CuraGens stake in 454 and we may need to explore other financing sources to fund the operations of CuraGen.

If the merger agreement is terminated or if the merger is otherwise not completed, our ability to sell our interest in 454 in order to fund our clinical
and preclinical pipeline may be impaired. The abandonment of the proposed merger may discourage other potential buyers or investors from entering into a business combination with 454 on equivalent or substantially similar terms, or at all. In
addition, the abandonment of the proposed merger could result in the incurrence of substantial transaction expenses, a decrease in 454s revenues and disruption to 454s business.

If we are unable to successfully monetize our investment in 454 or if 454s business is harmed due to the factors listed above, we may need to
explore other financing alternatives in order to continue to fund our operations. These other alternatives may not be available to us in the timeframe we require on favorable terms, or at all, and our ability to advance our clinical and preclinical
pipeline may be hindered or terminated as a result.

If the market perception of the merger is negative, our stock price may decline and/or become more
volatile.

If the public trading markets perceive that the merger will be detrimental to our business and future prospects, or that the
merger consideration received by us and other 454 stockholders is inadequate relative to comparable transactions, our stock price may decline and/or become more volatile, regardless of whether the merger is completed.

We have a history of operating losses and expect to incur 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 December 31, 2006 had an accumulated deficit of $513.0 million. We anticipate incurring additional losses as we focus our resources on prioritizing, selecting, and advancing our most
promising drug candidates. We may never be profitable 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, excluding the anticipated proceeds from 454, will be sufficient to meet our requirements through the middle of 2008. We consider our operating and capital expenditures to be crucial to our future success, and by continuing to
make strategic investments in our preclinical and 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: whether the anticipated acquisition of 454 by Roche Holdings is completed as expected; 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; 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 velafermin, which is currently in a Phase II clinical trial, belinostat (PXD101), which is in multiple



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Phase I and Phase II clinical trials, CR011-vcMMAE, which is currently in a Phase I/II clinical trial, and CR002, which completed a Phase I clinical
trial in July 2005. Our other drug candidates are in various stages of preclinical development, and our investment in these 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. 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 velafermin, belinostat (PXD101), 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 velafermin, belinostat (PXD101), 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;
| | - |  | ---------------------------------------------------



| |  |  | 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



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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.
| | - |  | -------------------------------------------------------

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



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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.

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 velafermin, belinostat (PXD101), CR011-vcMMAE, CR002, BAY 76-7171 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.
| | - |  | -----------------------------------------------



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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.
| | - |  | -----------------------------------------

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



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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.

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.



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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 preclinical and 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 preclinical and 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, 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
preclinical and clinical supplies of our protein, 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



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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 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, including Frank M. Armstrong, M.D., President and Chief Executive Officer; David M. Wurzer, Executive Vice President, Chief Financial Officer and Treasurer; Timothy M. Shannon, M.D., Executive
Vice President and Chief Medical Officer; Paul M. Finigan, Senior Vice President and General Counsel; Elizabeth A. Whayland, Senior Vice President and Corporate Secretary; and Christopher K. McLeod, President and Chief Executive Officer of 454. 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.



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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
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 (PXD101), 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 to compete in the case of belinostat, 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.

We expect that our fibroblast growth factor,
velafermin, will compete with Kepivance, a keratinocyte growth factor, marketed by Amgen, Inc. for the prevention of severe OM in patients undergoing HSCT. We expect to compete in the case of velafermin, on the basis of efficacy, mechanism of
action, ease of administration, and potentially 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;
| | - |  | -----------------------------------------------------------------------------------------------------------



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| |  |  | 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 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



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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 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.

The following risk factors relate to 454 Life Sciences Corporation, our majority-owned subsidiary. If the proposed merger of 454 and Roche Holdings is
completed, these risk factors will no longer be applicable to our ongoing business. Please see Note 4 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a more detailed discussion of the proposed
merger.

454s Sequencing System and reagent kits have been offered commercially for only a short period of time and its technology platform is
based on new and relatively unproven technologies and methods. Our future success depends on market acceptance of our current products and our continued research, development and commercialization efforts relating to the future versions of our
sequencing systems.

454 began marketing, selling and distributing its 454 Sequencing system in 2005 as the GS20 and the next version
of the 454 Sequencing system, the GS FLX, is in the early stages of commercialization and future iterations



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of the technology are in development. As of December 31, 2006, 454 had a cumulative installed base of more than 60 Genome Sequencer systems. Compared to
well-known technologies, 454s DNA sequencing system has not yet been widely adopted or accepted. Accordingly, to be successful, 454s current and future sequencing systems, and the technologies underlying those products, must be accepted
by 454s target markets. This market acceptance and the success of 454s products will depend on numerous factors, including:



| |  |  | the ability to use 454s products for large-scale applications of DNA sequencing in a cost effective and dependable manner;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | whether customers adopt 454s DNA sequencing systems, as opposed to the products and technologies offered by 454s competitors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | the willingness and ability of more researchers to invest in DNA sequencing technology than have already done so to date;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the willingness and ability of customers to adopt new technologies requiring additional capital investment; and
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | 454s ability to manufacture, market, sell and distribute its DNA sequencing systems and reagent kits on a competitive cost basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

454 is subject to competition from organizations that have developed or are developing technologies and products to service
454s potential customers.

We believe that the future success of 454 will depend in large part on our ability to maintain a
competitive position in instruments for the high throughput nucleic acid sequencing field. Before we recover development expenses for 454s products or technologies, such products or technologies may become obsolete as a result of technological
developments by us or others. 454s products could also be made obsolete by new technologies which are less expensive or more effective. 454 may not be able to make the enhancements to its technology necessary to compete successfully with newly
emerging technologies. The market for high throughput nucleic acid sequencing may not be sufficient to generate revenues significant enough for 454 to achieve profitability.

The current market for DNA sequencing instruments and reagents is supplied almost entirely by ABI. According to Strategic Directions International, Inc.,
ABI supplies approximately 68% of this market. ABI offers a range of sequencing instruments from low to high throughput. A large portion of the balance of the market is supplied by Amersham Biosciences, part of GE Healthcare.

Another group of competitors, including Affymetrix and Illumina, utilize hybridization arrays. These two companies together lead the gene expression and
SNP genotyping markets where researchers are focused on the investigation of known mutations and not de novo sequencing of DNA. An alternative hybridization approach for re-sequencing known genomes is being pursued by Agencourt, based on the work of
Professor George Church at Harvard University.

There are several companies that are attempting to develop alternative sequencing by
synthesis technologies, including Illumina, Helicos, Visigen and Pacific Biosciences. With the exception of Illumina which recently began shipping its Genome Analyzer, we believe that none of these companies currently has a product for sale or a
sequencing service using their technology. Sequencing by measuring voltage change as DNA molecules pass through nanopores is an alternative technology being pursued by several academic labs and funded by the US government. This technology is still
in its earliest investigation phase and is not yet commercially available.

454 has a limited history of manufacturing instrument systems and consumable
products, and its success, in part, depends on its ability to provide commercially successful products to Roche.

454 has limited
experience manufacturing products and consumable reagents in significant volumes. 454 has only recently begun manufacturing products on a commercial scale and may be unable to provide products in the volumes required, or to complete projects at its
facility. 454 may encounter previously unknown manufacturing difficulties that could significantly reduce production or the ability to manufacture its systems and products economically.

454 has a limited history of managing inventory levels. Reagents are subject to obsolescence. If inventory of consumables is not managed appropriately,
this could result in 454 having to write-off expired products, potentially impacting its ability to provide products and services.



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For the foreseeable future, 454 will rely on a single distributor, Roche, to generate product revenue for 454s
products. If Roche is unable to sell 454s products effectively, it could materially and adversely affect the results of our operations.

454 has granted Roche the right to be its exclusive, worldwide sales and marketing distributor for 454s high-throughput instrument systems, proprietary kits and reagents. As a result, 454 is dependent on Roche and its ability to
effectively market 454s current products. If Roche is unable to sell 454s products effectively, 454 will not have the ability to seek other customers for 454s products at least until such time as satisfactory arrangements are made
with Roche.

454 obtains key components from single source or a limited group of suppliers, and the partial or complete loss of one of these suppliers
could cause significant production delays, an inability to meet customer demand and a substantial loss in revenues.

454 depends on
single-source suppliers or a limited group of suppliers for some of the key components used in the 454 Sequencing system. 454s dependence on this limited selection of suppliers of product components exposes it to several risks, including
disruptions in supply, price increases, late deliveries or an inability to meet customer demand. This could lead to customer dissatisfaction, damage to 454s reputation or cause customers to switch to competitors products.

Finding alternative sources for the components provided by single-source or a limited group of suppliers would be difficult in many cases and may entail
a significant amount of time and disrupt 454s business. In some cases, 454 would need to change the components of its products if it changed suppliers. This, in turn, could require a redesign of the 454 Sequencing System, thereby causing
further costs and disruption to its business.

A portion of 454s sales are to international customers and international sales are subject to
risks.

454s instrument systems and reagents will be sold internationally by Roche. 454 also offers sequencing services to
clients worldwide and intends to expand its international presence. International sales entail a variety of risks, including:



| |  |  | currency exchange fluctuations;
| | - |  | -------------------------------



| |  |  | unexpected changes in legislative or regulatory requirements of foreign countries into which products are imported;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | difficulties in obtaining export licenses or other trade barriers and restrictions resulting in delivery delays; and
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | significant taxes or other burdens of complying with a variety of foreign laws.
| | - |  | -------------------------------------------------------------------------------

In addition, sales to international customers typically result in longer payment cycles and greater difficulty in accounts receivable collection. 454 is
also subject to general geopolitical risks, such as political, social and economic instability and changes in diplomatic and trade relations. One or more of these factors could have a material adverse effect on 454s business, financial
condition and operating results.

Patents may not provide sufficient protection for the 454 technology.

454s products and services are based on the combination of several complex technologies. 454 has developed some of these technologies internally
and has pursued patent protection in the U.S. and other countries for certain developments, improvements, and inventions it has developed that are incorporated into 454s products or that fall within its fields of interest. Other of the
technologies utilized by 454 are owned by third parties and are used by 454 under license. There are relatively few decided court cases interpreting the scope of patent claims in these technologies, and 454 believes that its products and services do
not infringe upon the technology covered by valid and enforceable patents. This belief could be successfully challenged by third parties. 454s patent applications may not protect its products, processes and technologies because of the
following reasons:



| |  |  | there is no guarantee that any of 454s pending patent applications will result in additional issued patents;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | 454 may develop additional proprietary technologies that are not patentable;
| | - |  | ----------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to 454 or its collaborative customers will provide a basis for commercially viable products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | there is no guarantee that any patents issued to 454 or its collaborative customers will provide 454 with any competitive advantages;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | there is no guarantee that any patents issued to 454 or its 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 454s ability to do business.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

If 454 infringes or is alleged to infringe intellectual property rights of third parties, it will adversely affect its business.

454s research, development and commercialization activities, as well as products resulting from these activities, may infringe or be claimed to
infringe patents or patent applications under which it does not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties could bring claims against 454
or its collaborators that would cause 454 to incur substantial expenses and, if successful, could cause 454 to pay substantial damages. Further, if a patent infringement suit were brought against 454 or its collaborators, 454 or they could be forced
to stop or delay research, development, manufacturing or sales of the product or product candidate that is the subject of the suit.

Infringement and other intellectual property claims and proceedings brought against 454, whether successful or not, could result in substantial costs and harm to its reputation. Such claims and proceedings can also distract and divert
management and key personnel from other tasks important to the success of the business. In addition, intellectual property litigation or claims could force 454 to do one or more of the following:



| |  |  | cease selling or using any of its products that incorporate the asserted intellectual property, which would adversely affect revenues;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pay substantial damages for past use of the asserted intellectual property;
| | - |  | ---------------------------------------------------------------------------



| |  |  | obtain a license from the holder of the asserted intellectual property, which license may not be available on reasonable terms, if at all, and which could reduce
its profitability; or
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign or rename, in the case of trademark claims, 454 products to avoid infringing the intellectual property rights of third parties, which may be impossible,
impracticable and/or costly and time-consuming.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As a result of patent infringement claims, or to avoid potential claims,
454 or its current or future collaborators may choose or be required to seek a license from the third party and be required to pay license fees, royalties or both. These licenses may not be available on acceptable terms, or at all. Even if 454 or
its collaborators were able to obtain a license, the rights may be nonexclusive, which could result in 454s competitors gaining access to the same intellectual property. Ultimately, 454 could be prevented from commercializing a product, or be
forced to cease some aspect of its business operations, if, as a result of actual or threatened patent infringement claims, 454 or its collaborators are unable to enter into licenses on acceptable terms. This could harm 454s business
significantly.

454 has recently introduced changes to its 454 Sequencing System technology. The recent 454 Sequencing System modification or future
modifications may not be acceptable to 454s customers, which could adversely and permanently affect its reputation with its current and potential customers and adversely affect our business.

454 continually makes changes to its products to improve performance and, in some cases, to lessen risk of third party patent infringement. 454s
current and future commercial success depends upon acceptance by its existing and potential customers of the 454 Sequencing System technology as recently modified and as may be modified in the future. Introducing modified products to 454s
current customers is time consuming and expensive, and could result in dissatisfied customers, harm to its reputation and a reduced ability to attract new customers. While 454 has successfully tested recent updates to its technology in its
laboratories, successful customer implementation in the field and market acceptance of the modified 454 Sequencing System will not be known until after 454s updated products have been commercially launched and assimilated into the marketplace.
If the changes made to the 454 Sequencing technology do not prove effective in the market, or if such changes prompt claims of patent infringement, current and potential customers may not accept 454s products, and 454 may be required to
undertake further changes to its product design. If for these or other reasons 454s current or potential customers do not accept recent or future modifications to its 454 Sequencing technology, the demand for 454 products could be diminished,
and its reputation and our business could be adversely affected.



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Changes in the level of government funding for life sciences research could affect the adoption of 454s products
and services and the level of 454s future product and services sales.

454s current customer base, and the customer base
454 anticipates in the near term, consists primarily of large genome centers and large academic research facilities, many of which rely heavily on government grants to finance their research programs and the acquisition of sequencing products and
services. In both the United States and abroad, political support for government funding of life sciences research, and DNA sequencing in particular, is subject to varying degrees of approval and opposition, and 454 cannot predict whether future
government funding or grants will be available for researchers to purchase its products and services. In the event further government funding and grants are reduced, its business could be adversely affected.

It is uncertain whether 454 will be able to successfully develop and commercialize new products, including the GS FLX, or to what extent 454 can increase its revenues
or become profitable.

Although we, through 454, have developed and commercialized DNA sequencing instrument systems and provide DNA
sequencing services, we cannot be certain that 454 can successfully develop any new commercially acceptable products, increase its revenues or become profitable. Therefore we may not be able to recover our investment in 454.

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 March 31, 2007, we had total consolidated debt of $110.0 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 March 31, 2007, the remaining aggregate amount of our interest payments due in each of the years listed (in
millions):



|      |  |                    |     
|----- |  | ------------------ | ----
|Year  |  | Aggregate Interest
|2007  |  | $                  | 2.2 
|2008  |  |                    | 4.4 
|2009  |  |                    | 4.4 
|2010  |  |                    | 4.4 
|2011  |  |                    | 2.2 
|      |  |                    |     
|Total |  | $                  | 17.6
|      |  |                    |     

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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



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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 through the middle of 2008. 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;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | 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; and
| | - |  | -----------------------------------------------------------------------------------------------------------



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

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.

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:



| |  |  | changes in the demand for our services;
| | - |  | ---------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------



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



| |  |  | regulatory developments or changes in public perceptions relating to the use of genetic information and the diagnosis and treatment of disease based on genetic
information;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| | - |  | ---------------------------------------------------------------



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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 $31.2 million at March 31, 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
fiscal year 2006, the sale price of our stock ranged from a high of $5.41 per share to a low of $2.73 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 technological innovations, clinical results, 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 sales 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. As a result of this indebtedness of $110.0 million, 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.

Our convertible debt is an unsecured obligation and is not guaranteed by any of our subsidiaries. Accordingly, it is effectively
subordinated to all of our current and future secured indebtedness to the extent of the assets securing the indebtedness. Furthermore, our right to receive any distribution of assets of any subsidiary upon that subsidiarys liquidation,
reorganization, or otherwise, is subject to the prior claims of creditors of that subsidiary, except to the extent we also are recognized as a creditor of that subsidiary. As a result, our convertible debt is effectively subordinated to the claims
of such creditors.

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.

Our convertible debt is the exclusive obligation of CuraGen Corporation. Our subsidiaries are separate and distinct legal entities
and have no obligation to pay any amounts due under the convertible debt or to provide us with



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funds for our payment obligations, whether by dividends, distributions, loans or other payments. In addition, any payment of dividends, distributions, loans,
or advances by our subsidiaries to us could be subject to statutory or contractual restrictions. Payments to us by our subsidiaries will also be contingent upon our subsidiaries earnings and business considerations.

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 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.



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



|             |  |                                                                                                                                                               
|------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 10.1 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Frank M. Armstrong, M.D.                       
|             | 
|Exhibit 10.2 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Paul M. Finigan                                
|             | 
|Exhibit 10.3 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Timothy M. Shannon, M.D.                       
|             | 
|Exhibit 10.4 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Elizabeth A. Whayland                          
|             | 
|Exhibit 10.5 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and David M. Wurzer                                
|             | 
|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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##### Table of Contents

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: May 9, 2007 |  |  |  | CuraGen Corporation
|                   |  |  | 
|                   |  |  |  | By:                 |  | /s/ Frank M. Armstrong, M.D.                                                                                                  
|                   |  |  |  |                     |  | Frank M. Armstrong, M.D.                                                                                                      
|                   |  |  |  |                     |  | Chief Executive Officer and President                                                                                         
|                   |  |  |  |                     |  | (principal executive officer of the registrant)                                                                               
|                   |  |  | 
|Dated: May 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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##### Table of Contents

CURAGEN CORPORATION

EXHIBIT INDEX



|             |  |                                                                                                                                                                              
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.          |  |                                                                                                                                                                              
|Exhibit 10.1 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Frank M. Armstrong, M.D.                                      
|             | 
|Exhibit 10.2 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Paul M. Finigan                                               
|             | 
|Exhibit 10.3 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Timothy M. Shannon, M.D.                                      
|             | 
|Exhibit 10.4 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and Elizabeth A. Whayland                                         
|             | 
|Exhibit 10.5 |  | Amendment dated January 24, 2007, to Employment Agreement, dated September 1, 2006, between the Registrant and David M. Wurzer                                               
|             | 
|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.



40