UNITED STATESSECURITIES AND EXCHANGE
   COMMISSIONWashington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 or
   15(d) OF THE SECURITIES
 
 EXCHANGE ACT OF 1934

For the fiscal year ended
   December 31, 1999

OR

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

For the transition
     period from       toCommission File Number
     0-23223






|CURAGEN CORPORATION(Exact name of
     registrant as specified in its charter)
|------------------------------------------------------------------------------
|                                                                              
|Delaware                                                                      
|(State or other jurisdiction of                                               
|incorporation or organization)                                                
|                                                                              
|                                                                              
|555 Long Wharf Drive, 11th Floor, New Haven,
     Connecticut                 
|(Address of principal executive
     offices)                                 

Registrant's telephone
   number, including area code: (203) 401-3330

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

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

Common Stock, $0.01 par
   value(Title of Class)

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

The aggregate market value of voting common
   stock and non-voting common stock held by non-affiliates of the registrant,
   (without admitting that any person whose shares are not included in
   determining such value is an affiliate) on February 29, 2000 was
   approximately $2,268,202,243.

The number of shares outstanding of the
   Registrant's voting common stock and non-voting common stock as of February
   29, 2000 was 17,272,432 and 977,636, respectively.

|Documents Incorporated by Reference
|-----------------------------------

The registrant intends to file a definitive
   proxy statement pursuant to Regulation 14A within 120 days of the end of the
   fiscal year ended December 31, 1999. Portions of such proxy statement are
   incorporated by reference into Part III of this report.



CURAGEN CORPORATIONFORM 10-KINDEX



|           | PART
     I                                                                                       | Page#
|---------- | ------------------------------------------------------------------------------------------------- | -----
|ITEM 1.    | BUSINESS                                                                                          | 1    
|ITEM 2.    | PROPERTIES                                                                                        | 11   
|ITEM 3.    | LEGAL PROCEEDINGS                                                                                 | 11   
|ITEM 4.    | SUBMISSION OF MATTERS TO A
     VOTE OF SECURITY HOLDERS                                          | 12   
|           |                                                                                                   |      
|           | PART
     II                                                                                      |      
|           |                                                                                                   |      
|ITEM 5.    | MARKET FOR REGISTRANT'S
     COMMON EQUITY AND RELATEDSTOCKHOLDER MATTERS                         | 13   
|ITEM 6.    | SELECTED FINANCIAL
     DATA                                                                      | 14   
|ITEM 7.    | MANAGEMENT'S
     DISCUSSION AND ANALYSIS OF FINANCIAL
   
   CONDITION AND RESULTS OF OPERATIONS | 15   
|ITEM 7A.   | QUANTITATIVE AND
     QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                   | 19   
|ITEM 8.    | FINANCIAL
     STATEMENTS AND SUPPLEMENTARY DATA                                                  | 19   
|ITEM 9.    | CHANGES IN AND
     DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL
     DISCLOSURES    | 38   
|           |                                                                                                   |      
|           | PART
     III                                                                                     |      
|           |                                                                                                   |      
|ITEM 10.   | DIRECTORS AND EXECUTIVE
     OFFICERS OF THE REGISTRANT                                           | 38   
|ITEM 11.   | EXECUTIVE
     COMPENSATION                                                                       | 38   
|ITEM 12.   | SECURITY OWNERSHIP OF
     CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                               | 38   
|ITEM 13.   | CERTAIN RELATIONSHIPS AND
     RELATED TRANSACTIONS                                               | 38   
|           |                                                                                                   |      
|           | PART
     IV                                                                                      |      
|           |                                                                                                   |      
|ITEM 14.   | EXHIBITS, FINANCIAL
     STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                              | 38   
|SIGNATURES |                                                                                                   |      



PART I

ITEM 1. BUSINESS

The following Business Section contains
   forward-looking statements which involve risks and uncertainties. The
   Registrant's actual results could differ materially from those anticipated
   in these forward-looking statements as a result of certain factors. See
   "Management's Discussion and Analysis of Financial Condition and
   Results of OperationsCertain Factors That May Affect Results of
   Operations."

BUSINESS

General

We are a genomics based drug discovery and
   development company. We research, develop and use technologies based on the
   discovery of genes and our understanding of their functions and
   relationships, which we refer to as ''genomics technologies'', to accelerate
   the discovery and development of products to improve human and animal health
   and the vitality of agriculture, in collaboration with other companies and
   through our own internal programs.

Our Internet-enabled genomics technologies,
   processes and information systems are fully integrated with one another and
   rapidly generate comprehensive information about the following:



Our genomics technology and information
   systems platform has three primary systems (each consisting of proprietary
   technologies, automated processes, related databases and bioinformatics
   analysis tools), each of which is fully operational and has been
   commercialized:



In addition to accelerating the discovery of
   new drug candidates, we are also using our GeneCalling technology, automated
   process and related databases and bioinformatics analysis tools to predict
   the efficacy and safety of drug candidates currently in pharmaceutical
   development pipelines, and to review the performance and side effects of
   drugs already being marketed. This approach, referred to as
   pharmacogenomics, is aiding in the development of more effective, safer
   drugs. Pharmacogenomics can also potentially be utilized to identify more
   appropriate patient populations for use in clinical drug studies.

Our SeqCalling system generates comprehensive
   sequence databases of expressed genes from any species and is used to
   identify human genetic variations known as Single Nucleotide Polymorphisms (
   "SNPs"). This system is also biased towards identifying SNPs,
   which are located within the coding regions of genes. SNPs are of increasing
   value in research because they are believed to be useful markers in the
   identification of disease genes and genetic differences, which may
   predispose a patient to disease or determine the response of a patient to a
   specific drug treatment.



We have unified our SeqCalling, GeneCalling
   and PathCalling technologies, processes and databases under a computer
   program we refer to as GeneScape, which tracks and analyzes data and
   integrates all aspects of process management, data analysis and
   visualization. GeneScape is also a web-based portal that provides
   simultaneous, real-time access to our technologies, systems, databases and
   bioinformatics to researchers at multiple sites, allowing them to work
   together on discovery and development projects. We plan to continue
   enhancing and building additional technologies on our GeneScape platform.

We market our genomics technologies and
   information to pharmaceutical, biotechnology, agricultural and animal health
   companies through research collaborations. These research collaborations
   involve the application of our SeqCalling, GeneCalling and PathCalling
   technologies, systems and databases to collaborative research projects, and
   include support services required to characterize gene and target
   discoveries. These collaborations typically provide current revenues, but
   also include milestone payments for successful projects, and royalty-based
   revenues from products emerging from the drug development programs of our
   partners. We currently have research collaborations with Abgenix, Inc. (
   "Abgenix"), Biogen, Inc. ("Biogen"), COR Therapeutics,
   Inc. ("COR"), Genentech, Inc. ("Genentech"),
   Glaxo-Wellcome, Inc. ("Glaxo"), Hoffmann-La Roche Inc. (
   "Roche Pharma") and its affiliate, Roche Vitamins, Inc. (
   "Roche Vitamins") and Pioneer Hi-Bred International, Inc. (
   "Pioneer Hi-Bred").

We are also applying our suite of genomics
   technologies on our own behalf to a broad portfolio of research programs
   that encompass drug discovery, drug development and pharmacogenomics. We
   have established internal programs to develop products to treat metabolic
   diseases, cancer, autoimmune diseases and disorders of the central nervous
   system. During the next five years, our objective is to analyze
   systematically the genetic basis of many common diseases as well as the
   mechanisms of action and adverse side effects of many commonly prescribed
   drugs. We are focusing our efforts on programs that address unmet medical
   needs and that we believe have the potential to yield products that can be
   commercialized in a relatively short time. In particular, we select human
   diseases and animal models of human diseases based on their potential to
   yield protein drugs, antibody drugs or novel small molecule drug targets for
   common diseases that lack effective treatments or to aid rational
   development or marketing of existing drugs. At each stage, we plan to
   reevaluate the relative merits of continuing such programs solely through
   internal efforts or through research collaborations.

The goal of our drug development programs is
   to advance promising therapeutic candidates into the clinic. We believe that
   we are leveraging the entire human genome to do this more systematically
   than ever possible before. We are focusing on two broad classes of
   therapeutics, secreted proteins and fully human monoclonal antibodies raised
   against membrane-bound or secreted proteins. In order to determine the
   therapeutic potential of genes encoding secreted proteins, we have
   implemented high-throughput protocols for the production, purification and
   testing of these proteins. We have established high-throughput cell-based
   assays for characterizing the therapeutic potential of secreted proteins. We
   are currently evaluating the efficacy of a number of secreted proteins as
   potential human therapeutics using animal models. We are also employing a
   genomics based approach for the development of monoclonal antibody
   therapeutics. These proteins will be used to make fully human monoclonal
   antibodies. Antibodies are naturally occurring proteins used by the body's
   immune system to combat many diseases. As therapeutic products, antibodies
   have several potential advantages over other therapies. The highly specific
   interaction between an antibody and its target may, for example, reduce
   unwanted side effects that may occur with other therapies. Fully human
   antibodies are desirable because they avoid the risk of rejection present
   with mouse or partial mouse antibodies.

Our business and competitive position are
   dependent upon our ability to protect our genomics technologies, gene
   sequences, products, information systems and proprietary databases, software
   and other methods and technology. We have filed patent applications for our
   proprietary methods and devices for sequencing, gene expression analysis,
   for discovery of biological pathways and for drug screening and development.
   As of the date of this report, we had approximately 190 patent applications
   pending covering our technology, discoveries and products with the United
   States Patent and Trademark Office (PTO), and had filed numerous
   corresponding international and foreign patent applications. As of the date
   of this report, we have been issued nine patents with respect to aspects of
   our technologies, discoveries and products.

On December 27, 1999, the PTO issued Revised Interim Utility Guidelines and
   Revised Interim Written Description Guidelines reflecting the Office's
   current understanding regarding statutory written description and utility
   requirements for patentability. Should the PTO finalize these guidelines and
   make them effective, the implementation of these guidelines may impact the
   issuance of our pending U.S. patent applications.





Overview

Complex diseases often arise through a
   combination of genetic and environmental factors. The successful treatment
   of such diseases often depends upon an understanding of how the body uses
   its genetic information, how disruptions in this information can lead to
   disease and, in turn, how drugs can arrest or reverse disease progression.
   Metabolic diseases, cancer, autoimmune diseases and disorders of the central
   nervous system are examples of such complex diseases. As scientific advances
   improve our understanding of the genetic basis of many diseases, we believe
   that the methods the pharmaceutical industry uses to develop new drugs will
   undergo a fundamental transformation. We believe that if we can develop and
   apply new genomics technologies to address this transformation, we will have
   a unique opportunity to develop the next generation of therapeutic products
   for important complex diseases.

In recent years, scientists have begun to
   analyze large portions of the genetic information contained within the human
   genome, which is a complete set of human genetic information. The most
   prominent of these projects being the publicly funded Human Genome Project.
   This discipline is termed genomics. Through genomics, scientists seek to
   understand the genetic basis of disease and to develop more effective
   treatments. However, to date, the pharmaceutical, animal health and
   agricultural industries have not used genomics extensively to develop new
   product opportunities primarily because:



The treatment of complex diseases remains a
   major technological challenge and will require an integrated set of genomics
   technologies, processes and information systems. We believe that increased
   information about gene sequences, variations in gene sequences, gene
   expression, biological pathways and the proteins affecting these pathways,
   and about their interplay with drugs and the environment, coupled with
   information systems that enable the comprehensive understanding of this
   information, will accelerate drug discovery and development. We have
   developed our technologies, processes and information systems to generate
   this information and enable this understanding.

We were incorporated in Delaware in November
   1991. Our principal executive offices are located at 555 Long Wharf Drive,
   11th Floor, New Haven, Connecticut 06511. Our telephone number is (203)
   401-3330. We maintain a web site on the Internet athttp://www.curagen.com.

GeneScape®, GeneCalling®, Niagara
   ®, QEA®, OGI®, SeqCalling, PathCalling, HitCalling, GeneTools, CuraShop,mNiagara, MicroNiagara, NanoNiagara, CuraGen, CuraMode, CuraTools, CuraMap, CuraSelect, CuraToxTand GeneScape Portaland other trademarks of CuraGen Corporation
   mentioned in this report are the property of CuraGen Corporation. All other
   trademarks or trade names referred to herein are the property of their
   respective owners.

Our Approach to Genomic Based Drug
   Discovery

Our integrated genomics technologies,
   processes and information systems are designed to overcome significant
   technological limitations present in existing gene-based drug discovery and
   development methods. Our technology platform rapidly generates comprehensive
   information about gene sequences, variations in gene sequences, gene
   expression, biological pathways and the proteins affecting these pathways,
   and about their interplay with drugs and the environment. Our technology
   platform has been used by our collaborators and ourselves to analyze many
   diseases and has led to the discovery of a number of disease-related genes,
   drug targets and potential drugs.

Gene Discovery (Our SeqCalling and
   GeneCalling Technologies)

Our SeqCalling technology generates
   comprehensive sequence databases of expressed genes from any species. Our
   GeneCalling technology measures substantially all of the differences in gene
   expression levels between biological samples in order to discover
   disease-related genes. Specifically, we designed our GeneCalling
   technologies to:







The combination of these traits enables us
   rapidly to generate large databases of gene expression profiles. These
   technologies also permit us to pursue research programs for many disease
   systems and process many samples in parallel. As a result, we are able to
   discover and seek patent protection for many commercially valuable
   disease-related genes and gene products.

Target Identification (Our GeneCalling and
   PathCalling Technologies)

We have developed our proprietary PathCalling
   technologies to reduce the time and cost associated with the identification
   and functional understanding of targets for therapeutic intervention. Our
   PathCalling system is an automated, high-throughput process that tests for
   interactions between combinations of proteins and assembles these
   protein-protein interactions into our PathCalling database. By identifying
   such protein-protein interactions and comparing them with known pathways
   within the PathCalling database, we can determine the role of these proteins
   within a given biological pathway. We have designed our PathCalling
   technologies to permit disease-related genes to be linked rapidly to
   specific biological pathways, providing valuable information which can lead
   to the discovery of new genes and additional targets for therapeutic
   intervention.

Pharmacogenomics (Our SeqCalling,
   GeneCalling and PathCalling Technologies)

Our SeqCalling, GeneCalling and PathCalling
   technologies can also be used in preclinical and clinical trials to predict
   which drugs are more likely to be effective by analyzing gene expression
   changes induced by drug treatment in humans and animal models. We have
   generated our GeneCalling databases for numerous drugs already on the market
   to accelerate the development of an improved generation of drugs with fewer
   side effects and to assist in the selection of appropriate patient
   populations. By correlating gene expression levels and the activities of
   biological pathways following treatment with specific drugs, we may be able
   to minimize the side effects of drugs, to identify appropriate patient
   populations for existing drugs and to aid in the development of safer, more
   effective drugs. In addition we use our SeqCalling database to identify
   variations SNPs in genes that respond to drugs, and can use these variations
   for identifying the most appropriate patients for a specific drug treatment.

Technology Integration and Information
   Systems (Our GeneScape Platform)

We have integrated our SeqCalling,
   GeneCalling, and PathCalling technologies under a single bioinformatics
   operating system we refer to as our GeneScape platform. This system unifies
   all aspects of process management, data analysis and visualization used in
   our technologies. Our goal is to establish our fully integrated technologies
   and GeneScape operating system as the preferred platform for genomics, as
   well as drug discovery, drug development and pharmacogenomics.

We designed GeneScape to meet the needs of
   researchers for a single operating system which integrates research
   requests, project management, database access and data analysis and
   visualization. GeneScape provides the user with a web-based standardized
   interface to our processes and databases, operating over the Internet on any
   computer platform that supports a standard web browser. By providing
   simultaneous, real-time access to our technologies, systems and databases to
   researchers at multiple sites, GeneScape is a powerful tool that permits
   researchers to work together on discovery and development projects. As
   GeneScape is modular and may be expanded to incorporate other technologies,
   systems and databases, we intend to continually enhance this technology
   platform.

Products and Services

We are marketing our genomics technologies and
   genetic information derived from our technologies by establishing research
   collaborations with pharmaceutical, biotechnology, agricultural, animal
   health and other life science companies. Our research collaborations involve
   the application of our SeqCalling, GeneCalling, and PathCalling technologies
   to a collaborator's projects. These technologies can be used in discovery
   efforts as well as preclinical and clinical trials to predict which drugs
   are more likely to succeed by analyzing gene expression changes induced by
   drug treatment in humans and animal models. We may also provide certain
   support services necessary to characterize gene and target discoveries,
   subscriptions to our databases and integration with a collaborator's
   existing development pipeline of products. We use our GeneScape software
   platform in such collaborations to manage our processes and provide access
   to our databases.



SeqCalling and GeneCalling Systems: Gene
   Sequencing and Gene Expression Services and Databases

We developed our proprietary SeqCalling and
   GeneCalling technologies to overcome significant limitations of competing
   gene and gene sequence discovery methods currently in use. Our GeneCalling
   system generates and analyzes gene expression profiles and stores
   differences in gene expression profiles to identify disease-related genes.
   The system permits sensitive detection of genes that can control biological
   pathways when expressed at very low levels. Unlike methods that use
   expressed-sequence tags, known as EST's, our GeneCalling system does not
   require repetitive sequencing to measure gene expression. Our technology is
   comprehensive in detecting genes with novel sequences and is therefore
   applicable universally to humans, animals, plants, and pathogens. In
   comparison, hybridization-based methods are primarily limited to known genes
   and do not readily discriminate between the many genes that share closely
   related DNA sequences.

Our SeqCalling system generates comprehensive
   sequence databases of expressed genes from any species and is used to
   identify new genes and human genetic variations known as SNPs. This system
   may also be used to identify SNPs, which are located within the coding
   regions of genes. SNPs are of increasing value in research because they are
   believed to be useful markers in the identification of disease genes and
   genetic differences, which may determine the response of a patient to
   disease and to drug treatment. Our GeneCalling system measures expression
   levels and determines gene expression differences between biological samples
   (such as diseased and normal human tissues) and enhances the ability to
   discover disease-related genes. Samples are usually processed within a month
   of receipt, and profiles of gene expression levels are available immediately
   thereafter for inspection and analysis.

PathCalling Systems: Pathway Analysis
   Services and Database

Once genes involved in a disease have been
   identified using our SeqCalling and GeneCalling systems, it is important to
   be able to determine how the proteins that these genes encode interact in
   the complex biological pathways involved in the disease. A particular
   disease-related protein might not always be the best candidate for treatment
   or as a target for drug development. However, increased knowledge of the
   other proteins in the same pathway may lead to promising protein drug or
   target candidates. Our PathCalling technologies were developed to provide a
   link between disease-related proteins and their biological pathways to aid
   in the identification and validation of appropriate targets following the
   discovery of a disease-related gene.

Our PathCalling system consists of proprietary
   automated, high-throughput biological operations that simultaneously test
   for interactions between pairs of proteins. Our PathCalling system then
   assembles discovered protein-protein interactions into connected biological
   pathways, including pathways discovered previously by us or previously
   described in the scientific literature. Our objective is to continue to
   build our PathCalling database to contain protein-protein interactions that
   constitute the pathways that are relevant to disease. Our PathCalling
   bioinformatics tools permit the graphical display of all pathways contained
   in the database involving any particular protein and allow these pathways to
   be queried for information in much the same way gene sequence databases are
   queried today. We believe that this will allow disease-related genes to be
   linked to specific biological pathways. We believe the linkage will provide
   for crucial biological context for gene discoveries, which may lead to the
   identification of potential targets for therapeutic intervention.

We seek patent protection on the utility of
   specific proteins or protein-protein interactions as drug targets based on
   information provided by PathCalling, in addition to composition of matter
   claims based on the sequences of novel and non-obvious proteins and the
   genes encoding them.

CuraShop

We also offer services to our collaborators
   that will complement our proprietary SeqCalling, GeneCalling, and
   PathCalling technologies. Our CuraShop technologies can provide
   high-throughput, efficient and essential research services, including
   confirmation of gene expression differences, gene sequencing, delivery of
   full-length clones of genes, gene mapping and mutation detection. These
   services and materials can all be requested, for a fee, directly through our
   GeneScape software platform.



Our GeneScape Bioinformatics Platform

We designed GeneScape to meet the needs of
   researchers for a single operating system which integrates research
   requests, project management, database access and data analysis and
   visualization. GeneScape provides the user with a web-based standardized
   interface to our processes and databases, operating over the Internet on any
   computer platform that supports a standard web browser. GeneScape is modular
   and may be expanded to incorporate other processes. GeneScape currently
   consists of three components: Discovery, Study Management and CuraTools.

Discovery. The Discovery component of
   our GeneScape system manages queries to our SeqCalling, GeneCalling, and
   PathCalling databases. GeneScape provides data analysis and visualization
   through a flexible, easy-to-use point-and-click interface organized in three
   sections corresponding to the SeqCalling, GeneCalling, and PathCalling
   databases. The GeneScape system provides the answers to queries in visual
   format, organized according to the following preferences set by the end
   user:



Study Management. Our collaborators can
   manage processes and resources over the Internet to meet their individual
   research needs. Separate links on the Study Management page of our GeneScape
   software platform provide direct, up-to-the-minute status reports for
   projects, individual processes within projects, and resource allocation
   among projects and processes. The Study Management component of the
   GeneScape software platform automates the operation of every station in the
   SeqCalling, GeneCalling, and PathCalling systems and monitors quality
   control at each processing step.

CuraTools.GeneScape also includes
   CuraTools, an easy-to-use, unified bioinformatics software package which
   provides the following information:



CuraTools also provides users with access to
   publicly available sequence, mapping and expression databases that we have
   imported, assembled, and annotated for enhanced value. In addition, we have
   assembled proprietary sequence and mapping databases for portions of the
   corn, mouse, rat and human genomes. Collaborators can elect to have us link
   their own proprietary or third party sequence databases into GeneScape and
   CuraTools for their own exclusive use.



GeneScape Portal

GeneScape is also the name of our Internet
   portal that makes available a subset of our bioinformatics analysis tools
   (known as CuraTools) and non-proprietary gene sequence and expression data
   to non-collaborators, primarily the academic research community. We believe
   the GeneScape Portal enhances our standing among this influential group,
   aiding our employee recruitment effort and generating referrals for future
   collaborations. The GeneScape Portal also serves as a vehicle to aggregate
   all the public information on the Human Genome Project with our internal
   efforts. In addition, we will use the GeneScape Portal to release selected
   additional information on genes, sequence variations, and biological
   pathways to current and future users.

Research Collaborations

As part of our business strategy, we establish
   research collaborations with pharmaceutical, biotechnology, agricultural,
   animal health and other life science companies. Our collaborations generally
   provide revenues in the form of fees for work performed by our employees in
   the generation of gene sequences, gene expression, or biological pathway
   data from samples provided by a collaborator. The collaborator has the
   ability to control how resources are allocated to generate SeqCalling,
   GeneCalling and PathCalling databases and to perform additional research
   services through our CuraShop technologies, including the sequencing of gene
   fragments and the generation of full-length clones. Collaborators typically
   have the right to license, for an up-front fee, discoveries arising from a
   collaboration, including rights to novel genes, novel uses of previously
   identified genes, protein drugs, antibody targets, small molecule drug
   targets, as well as markers for prioritizing drugs and markers for selecting
   patient populations. Collaborations typically include possible milestone
   payments to us based on objectives achieved and potential royalty payments
   to us on sales of products developed using discoveries made through the use
   of our technology.

We also seek to enter into research
   collaborations that provide us access to complementary technologies to
   accelerate our own internal discovery and development projects. To date, we
   have entered into significant collaborations with Abgenix, Biogen, COR,
   Genentech, Glaxo, Pioneer Hi-Bred, Roche Pharma and its affiliate, Roche
   Vitamins.

Genentech

In June 1996, we entered into a pilot research
   services and evaluation agreement with Genentech. The pilot collaboration
   was superseded by the evaluation agreement, signed and effective December
   1996, pursuant to which we performed additional research services during
   1997. We completed the research within four months of the receipt of tissue
   samples from Genentech as required by the evaluation agreement. In
   connection with the execution of the evaluation agreement, Genentech made a
   $1,800,000 equity investment in us.

In November 1997, we entered into a research
   collaboration and database subscription arrangement with Genentech to
   discover novel genes and therapeutics across a range of Genentech-specified
   disease programs. Genentech has the right to terminate the research
   collaboration, upon a breach by us of any material obligation under the
   Genentech Agreement or on or after November 2000, on one month's prior
   notice. Genentech has an option to acquire licenses to certain discoveries
   arising from the collaboration. Pursuant to the agreement, Genentech also
   purchased $5,000,000 of our common stock in a private placement concurrent
   with our initial public offering at the initial public offering price of
   $11.50 per share. Genentech also agreed to provide us with an
   interest-bearing loan facility. On October 15, 1999, we made a drawdown of
   $16,000,000 under this facility and simultaneously converted the loan into
   977,636 shares of our non-voting common stock, par value $.01 per share. The
   nonvoting common stock is convertible into common stock (a) at any time, at
   Genentech's option or (b) automatically upon the sale or transfer of the
   nonvoting common stock to a non-affiliated party.

Pioneer Hi-Bred

Effective in June 1997, we entered into a
   collaborative research and license agreement with Pioneer Hi-Bred whereby we
   agreed to perform research funded by Pioneer Hi-Bred for the selection,
   identification and development of improved crops. In conjunction with the
   execution of this agreement, Pioneer Hi-Bred made a $7,500,000 equity
   investment in us. Under the terms of the agreement, we receive research
   funding and royalty payments if any products emerge from this collaboration.
   Pioneer Hi-Bred has the right to terminate the research program at any time
   upon a breach by us and at any time after May 2000 on three months' written
   notice.



Biogen

In June 1997, we entered into a stock purchase
   agreement with Biogen, pursuant to which Biogen made a $1,000,000 equity
   investment in us in anticipation of evaluating the application of our
   technology to a particular program of interest to Biogen.

In October 1997, we entered into a research
   collaboration and database subscription arrangement with Biogen to discover
   novel genes and therapeutics across a range of Biogen-specified disease
   programs. We also expect to conduct pharmacogenomic analysis of selected
   products and product candidates in Biogen's portfolio. The collaboration,
   which calls for payments by Biogen for up to five years, provides Biogen
   with access to our proprietary genomics technologies, including the
   GeneScape bioinformatics software platform in order to generate GeneCalling
   and PathCalling databases from Biogen-specified disease systems. Biogen has
   an option to acquire exclusive licenses to certain discoveries arising from
   the collaboration. Biogen has the right to terminate the research
   collaboration upon any breach by us of any material obligation under the
   Biogen agreement or at any time after October 1999, on 30 days' written
   notice. Work performed and work that will be performed through June 30, 2000
   for Biogen under the arrangement has been and will be recognized as revenue
   on a per employee basis. Beginning July 1, 2000, work performed for Biogen
   by us under the arrangement will be recognized on a per project basis. In
   addition, pursuant to the agreement, Biogen purchased $5,000,000 of our
   common stock in a private placement concurrent with our initial public
   offering at the initial public offering price of $11.50 per share, and
   agreed to provide a $10,000,000 interest-bearing loan facility. On October
   15, 1999, we made a draw of $10,000,000 under this facility and
   simultaneously converted the loan into 611,022 shares of our common stock.

Glaxo

In November 1998, we entered into a drug
   discovery collaboration with Glaxo to use our integrated genomics processes
   for the study and selection of Glaxo compounds for clinical development.
   This discovery and pharmacogenomics collaboration, up to five years in
   duration, is intended to enable Glaxo to select drug candidates with the
   highest likelihood of success in clinical trials. Specifically, we evaluate
   numerous compounds across Glaxo therapeutic programs, identifying gene
   responses associated with compound efficacy and toxicity. Under the terms of
   the agreement, we receive research funding and may receive additional
   milestone and royalty payments if any drugs emerge from this collaboration.
   Either party may terminate the collaboration without cause at its sole
   discretion upon three months prior written notice to the other party,
   however neither party may terminate the collaboration prior to fifteen
   months after the effective date of the agreement.

Roche Pharma and Roche Vitamins

In March 1999, we signed a life sciences
   target discovery and pharmacogenomics collaboration retroactively effective
   as of January 1, 1999 with F. Hoffmann-La Roche Ltd., Roche Pharma and Roche
   Vitamins. This agreement outlines strategic partnerships with F. Hoffmann-La
   Roche Ltd. and its affiliates and is designed to discover new drug targets,
   evaluate existing product candidates and facilitate the development of drugs
   and diagnostic tests for the purposes of improving human and animal health.
   Under the terms of this agreement, we receive research funding and may
   receive additional milestone and royalty payments if any products emerge
   from this collaboration. The agreement is for an initial term of two years
   and includes an option to extend for three additional one-year terms.

COR

In May 1999, we signed a product discovery and
   pharmacogenomics agreement with COR. Under the terms of this agreement, we
   apply our SeqCalling, GeneCalling, and PathCalling technologies, related
   services, and pharmacogenomics expertise to identify new drug targets and
   develop novel cardiovascular drugs. This collaboration is for an initial
   term of eighteen months with an option to extend the collaboration for three
   additional 12-month terms. We receive research funding, and may receive
   milestone payments and royalty payments for products developed by COR as a
   result of this collaboration.

Abgenix

In December 1999, we entered into a
   collaboration agreement with Abgenix to develop and commercialize
   genomics-based antibody drugs using Abgenix' XenoMouseTMtechnology. This five-year alliance was
   established to identify up to 120 fully human antibody drug candidates
   intended for treating a broad range of complex diseases including cancer and
   autoimmune disorders. Antibodies determined to have commercial product
   potential will be allocated between the parties for further development.
   Abgenix and we will receive reciprocating milestone
 payments and royalty payments for products resulting from this drug
   development alliance. In addition, under the agreement Abgenix purchased
   418,995 shares of our common stock for $15,000,021.

CuraGen Internal Programs

We also use our integrated genomics
   technologies on our own behalf to pursue a broad portfolio of research
   programs that encompass drug discovery, pharmacogenomics and drug
   development. During the next five years, our objective is to analyze
   systematically the genetic basis of many common diseases as well as the
   mechanisms of action and adverse side effects of many commonly prescribed
   drugs. We are focusing our efforts on programs that address unmet medical
   needs and programs that we believe have the potential to yield products that
   can be commercialized in a relatively short time. In particular, we select
   human diseases and animal models of human diseases based on their potential
   to yield protein drugs and antibody drugs, to identify novel small molecule
   drugs for common diseases that lack effective treatments or to aid rational
   development or marketing of existing drugs.

We have also developed an innovative approach
   to discover genes associated with inherited diseases we call positional
   expression cloning. We combine our proprietary analyses concerning gene
   expression with existing gene mapping techniques to identify candidate genes
   that both show altered expression and can be ''mapped'' to the chromosomal
   locations known to contain underlying disease genes. Our positional
   expression cloning approach is particularly effective in identifying and
   characterizing genes indicating susceptibility to and genes providing
   protection against many common complex diseases. In addition, we use
   systematic studies of existing drugs and our large-scale databases of
   sequences, sequence variation, gene expression profiles, and pathways to
   identify disease-related targets.

We use our technologies to pursue research
   programs for many disease systems in parallel. Each of these programs has
   the potential to rapidly identify a large number of commercially valuable
   disease-related genes and potential drug targets. As part of our internal
   programs, we also seek patent protection for newly discovered
   disease-related genes and proteins, as well as for novel uses of known genes
   and the proteins they encode.

Drug Discovery Programs

Our internal programs apply our integrated
   genomics technology platform to drug discovery and drug development. The
   discovery programs focus on human diseases that have the potential to yield
   protein therapeutics, monoclonal antibodies and small molecule targets and
   seek to uncover variations of genes that may predispose or protect
   individuals from susceptibility, onset or progression of disease.
   Pharmacogenomics studies are also used to find additional drug targets, to
   understand how current drugs work, and to prioritize the development of our
   own drugs.

Metabolic Diseases.Within the field of
   metabolic diseases, we are analyzing a variety of primary human disease
   tissues and genetic and cell-based models relating to specific metabolic
   diseases, including obesity, adult onset diabetes, and hypertension. We
   believe that our technology platform is well suited to identifying the genes
   and pathways involved in these diseases, which are known to involve errors
   in signal transduction and the regulation of metabolic pathways. To date, we
   have used SeqCalling and GeneCalling to discover genes associated with these
   diseases and have used PathCalling to identify disease-related pathways and
   additional targets for drug discovery.

Cancer.Cancer encompasses disease
   processes of almost every organ system and involves the loss of control of
   multiple, diverse mechanisms of signal transduction and pathway regulation.
   We are applying SeqCalling, GeneCalling and PathCalling to identify the
   genes and pathways involved in the early development of cancer and its
   step-wise progression to metastatic disease. We have analyzed a number of
   models of cancer and have identified pathways incorporating proteins common
   to many of the models. Genes specifically upregulated in cancerous tissue
   may be excellent targets for the development of monoclonal antibody drugs.

Auto-Immune and Inflammatory Diseases.Although diseases of the immune system, such as systemic lupus
   erythematosus and rheumatoid arthritis, are among the most common and
   chronic, existing drugs for autoimmune diseases have exhibited limited
   efficacy and debilitating side effects. We have filed for patent protection
   related to potential drug targets in this area.

Disorders of the Central Nervous System.We are currently examining both psychiatric and neurological disorders
   in order to identify potential targets in these areas. Our efforts combine
   the understanding of currently marketed drugs with the best human and animal
   models of the disease. To date we have studied over 40 drugs with
 specific action in the central nervous system and uncovered a number of novel
   genes, pathways and potential targets.

Pharmacogenomics

Using our GeneCalling technologies, the
   tissues targeted by a drug, as well as the organs that might exhibit side
   effects, including heart, liver and kidney, can be studied in animal models
   thought to be indicative of human response. We believe that this information
   may help pharmaceutical companies select and optimize drug candidates based
   on improved efficacy and reduced side effects. We further believe that this
   information will help the pharmaceutical industry to significantly reduce
   the time and cost of drug development.

In addition to reducing the time and cost of
   developing drugs, we believe that the understanding generated by our
   technologies may strengthen FDA applications. For drugs already on the
   market, an understanding of the mechanism of action through pharmacogenomics
   can help identify appropriate patient populations and lead to an improved
   second generation of drugs.

We have analyzed drugs whose commercial
   viability or clinical indications are threatened either by a lack of
   understanding of mechanism of action or by severe side effects. Our goal is
   to continue to generate databases (CuraTox and CuraMode) to provide
   pharmacology and toxicology information, to understand the mechanism of drug
   action, to identify patient populations that are likely to respond favorably
   to a particular medication and, potentially, to identify new indications or
   more optimal targets.

Using this approach, we have identified
   candidate genes predictive of drug efficacy and toxicity in model systems.
   Currently, we are studying over 140 marketed drugs, preclinical candidates
   and non-pharmaceutical toxins to identify putative predictive markers of
   drug efficacy and toxicity that can be prospectively used by us and our
   pharmaceutical collaborators to effectively and efficiently triage novel
   drugs.

In addition to understanding the genes that
   respond to drug treatment we are linking these genes to our database of over
   120,000 SNPs. The discovery of SNPs predicting efficacy or toxicity may be
   of tremendous value in personalizing medicine at the genetic level:
   expediting compounds through clinical trials, reducing toxicity by
   segmenting patient populations, and giving the right drug to the right
   patient. To date we have identified over 5,000 SNPs in potential drug
   targets, and drug response genes.

Drug Development Programs

The goal of our drug development programs is
   to advance promising therapeutic candidates into the clinic. We are focusing
   on two broad classes of therapeutics, secreted proteins and fully human
   monoclonal antibodies raised against membrane-bound or secreted proteins.
   The therapeutic candidates that show superior efficacy will be further
   evaluated with our pharmacogenomics technology.

Therapeutic Proteins. In order to
   determine the therapeutic potential of genes encoding secreted proteins, we
   have implemented high-throughput protocols for the production, purification
   and testing of these proteins. We have established high-throughput
   cell-based assays for characterizing the therapeutic potential of secreted
   proteins. We are currently evaluating the efficacy of a number of secreted
   proteins as potential human therapeutics using animal models. Protein
   candidates that have excellent efficacy and favorable toxicity profiles will
   be selected as clinical candidates.

Therapeutic Antibodies.We are also
   employing a genomics based approach for the development of monoclonal
   antibody therapeutics. We have identified genes that make suitable targets
   for monoclonal antibody therapy, may be associated with disease, and on
   which we potentially have a good intellectual property position. These
   proteins will be used to make fully human monoclonal antibodies. Antibodies
   are naturally occurring proteins used by the body's immune system to combat
   many diseases. As therapeutic products, antibodies have several potential
   advantages over other therapies. The highly specific interaction between an
   antibody and its target may, for example, reduce unwanted side effects that
   may occur with other therapies. Fully human antibodies are desirable because
   they avoid the risk of rejection present with mouse or partial mouse
   antibodies. The scale of our efforts in human monoclonal antibodies is
   unprecedented. We will be systematically testing human monoclonal antibodies
   for efficacy in human cell and animal models of disease. Monoclonal
   antibodies that demonstrate excellent efficacy combined with a favorable
   toxicity profile will be selected as clinical candidates for the treatment
   of disorders.

Competition

We face, and will continue to face, intense competition from one or more of
   the following entities:

> . pharmaceutical companies;
>  . biotechnology companies;
>  . diagnostic companies;
>  . academic and research instructions; and
>  . government agencies.

We are also subject to significant competition from organizations that are
   pursuing technologies and products that are the same as or similar to our
   technology and products. Many of the organizations competing with us have
   greater capital resources, research and development staffs and facilities
   and marketing capabilities. In addition, research in the field of genomics
   generally is highly competitve. Our competitors in the genomics area
   include:

> . Affymetrix, Inc.;
>  . Celera Genomics Group;
>  . Human Genome Sciences, Inc.;
>  . Incyte Pharmaceuticals, Inc.;
>  . Millennium Pharmaceuticals, Inc.;
>  . major pharmaceutical companies; and
>  . universities and other research institutions (including those receiving
>    funding from the federally funded Human Genome Project).

A number of our competitors are attempting to rapidly identify and patent
   genes and gene fragments sequenced at random, typically without specific
   knowledge of the function of such genes or gene fragments. If our
   competitors discover or characterize important genes or gene fragments
   before we do, it could adversely affect any of our related disease research
   programs. We expect that competition in genomics research will intensify as
   technical advances are made and become more widely known.

> 



Intellectual Property

Our business and competitive position are
   dependent upon our ability to protect our SeqCalling, GeneCalling and
   PathCalling proprietary databases, proprietary software and other
   proprietary methods and technology. We have filed patent applications for
   our proprietary methods and devices for gene expression analysis,
   sequencing, discovery of biological pathways and drug development. As of the
   date of this report, we had approximately 190 patent applications pending
   covering our technology with the PTO, and had filed numerous corresponding
   international and foreign patent applications. As of the date of this
   report, we have been issued nine patents with respect to our technologies,
   discoveries and products.

On December 27, 1999, the PTO issued Revised Interim Utility Guidelines and
   Revised Interim Written Description Guidelines reflecting the Office's
   current understanding regarding statutory written description and utility
   requirements for patentability. Should the PTO finalize these guidelines and
   make them effective, the implementation of these guidelines may impact the
   issuance of our pending U.S. patent applications.

Government Regulation

Prior to the marketing of any new drug
   developed by us or our collaborative customers, that new drug must undergo
   an extensive regulatory approval process in the United States and other
   countries. This regulatory process, which includes preclinical and clinical
   studies, as well as post-marketing surveillance to establish a compound's
   safety and efficacy, can take many years and require the expenditure of
   substantial resources. Data obtained from such studies are susceptible to
   varying interpretations that could delay, limit or prevent regulatory
   approval. The rate of completion of clinical trials is dependent upon, among
   other factors, the enrollment of patients. Patient accrual is a function of
   many factors, including:



We have not submitted an investigational new
   drug application for any product candidate, and no product candidate has
   been approved for commercialization in the United States or elsewhere. We or
   any of our collaborators may not be able to conduct clinical testing or
   obtain the necessary approvals from the FDA or other regulatory authorities
   for any products. Failure by us or our collaborators to obtain required
   governmental approvals will delay or preclude our collaborators from
   marketing drugs or diagnostic products developed with us or limit the
   commercial use of such products and could have a material adverse effect on
   our business, financial condition and results of operations.

Our research and development activities
   involve the controlled use of hazardous materials and chemicals. We are
   subject to federal, state and local laws and regulations governing the use,
   storage, handling and disposal of such materials and certain waste products.

Employees

As of December 31, 1999, we had 288 full and
   part-time employees, 81 of whom hold Ph.D., M.D. or J.D. degrees. The
   employee group includes engineers, physicians, molecular biologists,
   chemists and computer scientists. We believe that we maintain good
   relationships with our employees. We believe that our future success will
   depend in large part on our ability to attract and retain experienced and
   skilled employees.

ITEM 2. PROPERTIES

We maintain our principal administrative offices along
   with research facilities in New Haven, Connecticut and additional research
   facilities in Branford, Connecticut. We lease a total of 82,000 square feet
   at both locations. The leases are generally for terms of two to five years,
   and usually provide renewal options for terms of up to one year. We believe
   that our facilities are adequate for our operations and that suitable
   additional space will be available as needed.

ITEM 3. LEGAL PROCEEDINGS

We are not a party to any legal proceedings
   which would materially adversely affect our business, results of operations
   or financial condition.



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

No matters were submitted to a vote of our
   security holders during the quarter ended December 31, 1999.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON
   EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

Our voting common stock is traded on the
   Nasdaq National Market under the symbol "CRGN". There is no
   established public trading market for our non-voting common stock. The
   following table sets forth, for the periods indicated, the low and high
   closing prices per share for our voting common stock, as reported by the
   Nasdaq National Market since the voting common stock commenced public
   trading on March 18, 1998:





|                                                   | 1998  
|-------------------------------------------------- | ------
|                                                   |       
|                                                   | Low   
|                                                   |       
|Quarter Ended March 31, 1998 (from March 18, 1998) | $ 11 1⁄2
|Quarter Ended June 30, 1998                        | 6 1⁄4   
|Quarter Ended
     September 30, 1998              | 5     
|Quarter Ended
     December 31, 1998               | 5 3/8 
|                                                   |       



|
|
|
|
|
|
|
|
|
|



Stockholders

As of February 29, 2000, there were
   approximately 113 shareholders of record of our voting common stock and,
   according to our estimates, 1,976 beneficial owners of common stock. All of
   our non-voting common stock is held by Genentech.

Dividends

We have never paid cash dividends on our
   common stock and do not anticipate declaring any cash dividends in the
   foreseeable future. We currently intend to retain earnings, if any, to
   finance the development of our business.

Stock Split

On March 2, 2000, we announced a two-for-one
   split on both our voting common stock and our non-voting common stock, each
   payable to our stockholders in the form of a stock dividend. On March 30,
   2000, our stockholders of record will receive one additional share of our
   voting common stock for every share of common stock and one additional share
   of non-voting common stock for every share of non-voting common stock each
   stockholder owns at the close of business on March 15, 2000.

Use of IPO Proceeds

In connection with our initial public
   offering, we sold 3,275,000 shares of our common stock and received net
   offering proceeds of $33,160,350. On March 17, 1998, the Securities and
   Exchange Commission declared our Registration Statement on Form S-1 (File
   No. 333-38051) effective.

The following table sets forth our cumulative
   use of net offering proceeds as of December 31, 1999:



|Construction
     of plant, building and facilities       | $ 602,200 
|--------------------------------------------------------- | ----------
|Purchase and
     installation of machinery and equipment | 7,182,374 
|Purchase of
     Real Estate                              | 0         
|Acquisition of
     other businesses                      | 0         
|Repayment of
     indebtedness                            | 1,967,631 
|Working
     Capital                                      | 23,408,145
|Temporary
     Investments:                               |           
|Cash and cash
     equivalents                            | 0         
|All other
     purposes                                   | 0         

The foregoing use of net offering proceeds
   does not represent a material change in the use of proceeds described in the
   Registration Statement.



Private Placement

On December 8, 1999, we sold an aggregate of
   418,995 shares of our common stock, in a private placement, to Abgenix for
   an aggregate purchase price of $15,000,021. We sold these shares at the same
   time we entered into a collaboration agreement with Abgenix. No underwriters
   were involved in this offering and sale of these shares. We offered and sold
   these shares in reliance on an exemption from the registration provisions of
   the Securities Act of 1933, as amended, set forth in Section 4(2) of the
   Securities Act. The offer and sale was made only to "accredited
   investors" as that term is defined in Regulation D under the Securities
   Act and we did not engage in a general solicitation or advertisement of the
   offer and sale of the shares. The shares issued to Abgenix are restricted
   securities under the Securities Act. Abgenix has agreed not to dispose of
   its shares prior to December 8, 2000. After December 8, 2000, Abgenix has
   demand and piggyback registration rights.

ITEM 6. SELECTED FINANCIAL
   DATA

The selected financial data set forth below
   for each of the three years in the period ended December 31, 1999 are
   derived from our balance sheets as of December 31, 1998 and 1999 and the
   related statements of operations, of stockholders' equity (deficiency) and
   of cash flows for the three years ended December 31, 1997, 1998 and 1999 and
   notes thereto as audited by Deloitte & Touche LLP, independent auditors,
   which are included elsewhere in this report. The selected financial data as
   of December 31, 1995, 1996 and 1997 and for the three years in the period
   ended December 31, 1997 have been derived from our related financial
   statements, and are not included in this report. The selected financial data
   set forth below should be read in conjunction with, and are qualified by
   reference to, ''Management's Discussion and Analysis of Financial Condition
   and Results of Operations'' and our audited financial statements.





|                                                            |                         |  |               |  |              |  |            |  |             
|----------------------------------------------------------- | ----------------------- |  | ------------- |  | ------------ |  | ---------- |  | ------------
|                                                            | Year Ended December 31,
|                                                            |                        
|                                                            | 1999                    |  | 1998          |  | 1997         |  | 1996(1)    |  | 1995        
|                                                            |                         |  |               |  |              |  |            |  |             
|Statement of
     Operations Data:                          |                         |  |               |  |              |  |            |  |             
|Total
     revenue                                          | $15,103,517             |  | $9,257,025    |  | $5,896,543   |  | $4,422,947 |  | $1,581,175  
|Net loss
     attributable to common stockholders           | $(25,762,760)           |  | $(18,936,920) |  | $(7,290,434) |  | $(606,241) |  | $(1,088,605)
|Net loss per
     share attributable to common stockholders | $(1.79)                 |  | $(1.55)       |  | $(0.92)      |  | $(0.12)    |  | $(0.22)     
|Weighted average
     number of common shares outstanding   | 14,400,992              |  | 12,201,006    |  | 7,888,383    |  | 5,097,073  |  | 4,915,087   
|                                                            |                         |  |               |  |              |  |            |  |             
|                                                            |                        
|                                                            | December 31,           
|                                                            |                        
|                                                            | 1999                    |  | 1998          |  | 1997         |  | 1996       |  | 1995        
|                                                            |                         |  |               |  |              |  |            |  |             
|Balance Sheet
     Data:                                    |                         |  |               |  |              |  |            |  |             
|Total
     assets                                           | $93,894,276             |  | $60,804,501   |  | $26,519,029  |  | $5,653,391 |  | $1,006,816  
|Total long-term
     liabilities                            | $8,409,994              |  | $6,983,927    |  | $4,375,125   |  | $1,908,915 |  | $897,691    
|Cash and cash
     equivalents                              | $76,374,571             |  | $43,293,995   |  | $17,417,161  |  | $3,298,642 |  | $9,129      
|Cash dividends
     declared per common share               | None                    |  | None          |  | None         |  | None       |  | None        



|(1) | During the year ended December
     31, 1996, we completed our development stage activities with the signing
     of our first collaborative research agreement and commenced our planned
     principal operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 7. MANAGEMENT'S DISCUSSION AND
   ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

We are a biotechnology company focusing on the
   application of genomics to the systematic discovery of genes, gene
   sequences, variations in gene sequences, biological pathways and drug
   candidates in order to accelerate the discovery and development of the
   therapeutic, agricultural and diagnostic products to improve human and
   animal health and the vitality of agriculture. We were incorporated in
   November 1991 and, until March 1993, were engaged primarily in
   organizational activities, research and development of our technology, grant
   preparation and obtaining financing. 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 anticipate
   incurring additional losses over at least the next several years as we
   expand our collaborative gene discovery efforts and internal discovery and
   development to discover genes, biological pathways and drug candidates,
   continue development of our technology and expand our operations. We expect
   that losses will fluctuate from quarter to quarter and that such
   fluctuations may be substantial.

On February 2, 2000, we completed an offering
   for $125,000,000 of 6% convertible subordinated debentures due 2007 and
   received net proceeds of approximately $121,250,000. In addition, on
   February 16, 2000, the initial purchasers exercised their option to purchase
   an additional $25,000,000 of 6% convertible subordinated debentures due
   2007, providing us with additional net proceeds of approximately
   $24,308,000. The debentures may be resold by the initial purchasers to
   qualified institutional buyers under Rule 144A of the Securities Act and to
   non-U.S. persons outside the United States under Regulation S under the
   Securities Act. The debentures are convertible into our common stock. In
   addition, prior to February 2, 2003, if our common stock price reaches
   specified levels, we have the right to redeem the debentures at a premium by
   converting the debentures into common stock. If the price of our common
   stock reaches $217.01 for 20 of 30 consecutive trading days prior to
   February 2, 2003, we may redeem all of the debentures by converting them
   into common stock. If we were to convert the debentures prior to February 2,
   2003, in addition to the interest accrued and unpaid, we would make an
   interest make-whole payment equal to the present value of the aggregate
   amount of the interest that would otherwise have accrued from the
   provisional redemption date through February 2, 2003. We have agreed to file
   a registration statement with the SEC for the resale of any shares issued as
   a result of the conversion of the debentures. We are required to file the
   registration statement by May 2000.

We anticipate that collaborations will
   continue to be an important element of our future revenues. We do not expect
   that government grant revenues, which were a significant source of our
   revenues through 1998, will in future years be significant, either in actual
   dollar amounts or as a percentage of revenues. Therefore, the loss of
   revenues from existing collaborations would materially adversely affect our
   business, financial condition and results of operations. Our ability to
   generate revenue growth and become profitable is dependent, in part, on our
   ability to enter into additional collaborative arrangements, and on our
   ability and the ability of our collaborative partners to successfully
   commercialize products incorporating, or based on, our technologies (which
   are our solutions to enable discovery of drug products) and to predict the
   efficacy and safety of drug products. We cannot guarantee that we will be
   able to maintain or expand existing collaborations, or enter into future
   collaborations to develop applications of our SeqCalling, GeneCalling or
   PathCalling technologies on terms satisfactory to us, if at all, and, if
   entered into, we cannot guarantee that any such collaborative arrangements
   will be successful.

Our failure to successfully develop and market
   additional products over the next several years, or to realize existing
   product revenues, would materially adversely affect our business, financial
   condition and results of operations. Royalties or other revenue generated
   for us from commercial sales of products developed by using our technologies
   are not expected for at least several years, if at all.

Results of Operations

Years Ended December 31, 1999 and
   1998

Revenue. Our revenue for the year ended
   December 31, 1999 was $15,103,517, representing an increase of $5,846,492,
   or 63%, compared to our revenue of $9,257,025 in 1998. This increase was
   largely due to an increase in collaboration revenue recorded under our
   arrangements with Glaxo,Roche Pharma, Roche Vitamins,and
   COR. The increase wasoffset by a decrease in grant revenue due to the completion of
   all of our federal grants during the 1999 calendar year. As a result of the
   completion of such federal grants, we foresee no additional grant revenue in
   future periods, unless additional grant awards are received. The revenue we
   recognized under our collaborative arrangements is generally based upon work
   performed on behalf of collaborators by our employees, or based upon our
   attainment of certain benchmarks specified in the related agreements. We
   expect that collaboration revenues will continue to increase as we add
   additional collaborations.

Operating Expenses. Grant research
   expenses for the year ended December 31, 1999 were $417,386, representing a
   decrease of $1,441,116, or 78%, compared to $1,858,502 in 1998.The decrease in grant research expenses was attributable to the
   completion of our federal grants during the first and second quarters of
   1999.As a result of the completion of
   such federal grants, we foresee no additional grant research expenses in
   future periods, unless additional grant awards are received.



Collaborative research and development
   expenses for the year ended December 31, 1999 were $25,794,421, representing
   an increase of $7,663,528, or 42%, compared to $18,130,893 for the year
   ended December 31, 1998. The increase in such expenses was primarily
   attributable to our obligations to fulfill research requirements under new
   and existing collaborations, in addition to internal research efforts, which
   resulted in increased purchases of laboratory supplies, increased equipment
   depreciation and facilities expenses, and additional personnel costs. We
   expect our future collaborative research and development expenses to
   increase as we hire additional personnel and expand our research and
   development facilities in support of our collaborations and internal
   research.

During the fourth quarter of 1999, we
   undertook an upgrade of scientific technologies and related lab equipment
   and signed an agreement with Comdisco, Inc. ("Comdisco") for the
   acquisition of certain lab equipment with a fair market value of
   approximately $2,400,000. As a part of this transaction, we also purchased
   other lab equipment recorded as a capital lease for approximately $3,600,000
   from Transamerica Business Credit Corporation ("TBCC"). The
   Comdisco agreement calls for the exchange of the TBCC equipment for the
   Comdisco equipment. As a result of the exchange of the TBCC equipment for
   the Comdisco equipment, we recognized an asset impairment expense of
   approximately $2,700,000 in the fourth quarter of 1999 (see further
   discussion in "Liquidity and Capital Resources"
   section).

General and administrative expenses for the
   year ended December 31, 1999 increased $3,956,147, or 43%, to $13,084,852 as
   compared to $9,128,705 for the year ended December 31, 1998. The increase
   was primarily attributable to the expansion of administration facilities,
   increasing payroll costs and the incurrence of related depreciation expense
   and legal expenses in support of developing our intellectual property
   portfolios. Over the next several years, we anticipate that the percentage
   increases in general and administrative expenses will be proportionate to
   percentage increases in collaborative research and development expenses.

Interest Income, Net. Net interest
   income for the year ended December 31, 1999 of $1,087,400 decreased
   $345,190, or 24%, compared to $1,432,590 for 1998. The decrease was
   primarily due to the lower balances held in our cash and cash equivalent
   accounts, and the additional interest expense we paid on capital lease
   obligations. We anticipate that net interest income will increase in the
   future, due to higher cash and cash equivalent balances as a result of funds
   received from the completion of our convertible debt offering, our recent
   private placements with Pequot Partners Fund, L.P. and Pequot International
   Fund, Inc. (collectively ''Pequot'') and Abgenix, and from the drawdown and
   simultaneous conversion of loans from Biogen and Genentech, offset by the
   interest expense associated with the completion of our convertible debt
   offering and the expected increase in capital lease obligations. Gross
   interest expense for the year ended December 31, 1999 of $1,191,891
   represented an increase of $197,087, or 20%, compared to $994,804 for 1998.
   This increase in gross interest expense was primarily attributable to
   additional capital lease obligations for equipment entered into during the
   last twelve months, which enabled us to support our research and development
   activities.

Net Loss Attributable to Common
   Stockholders. For the year ended December 31, 1999, we reported a net
   loss attributable to common stockholders of $25,762,760, or ($1.79) per
   share as compared to $18,936,920, or ($1.55) per share in 1998. Since
   inception, we have incurred operating losses, and as of December 31, 1999
   had an accumulated deficit of $54,702,268 and therefore, have not paid any
   federal income taxes. Realization of deferred tax assets is dependent on
   future earnings, if any, the timing and amount of which are uncertain.
   Accordingly, valuation allowances in amounts equal to the deferred income
   tax assets have been established to reflect these uncertainties in all
   periods presented.

Years Ended December 31, 1998 and
   1997

Revenue. Revenue for the year ended
   December 31, 1998 was $9,257,025, representing an increase of $3,360,482, or
   57%, compared to $5,896,543 in 1997. This increase was largely due to an
   increase in collaboration revenue due to additional revenue recorded under
   our arrangements with Pioneer Hi-Bred and Biogen, offset by a decrease in
   revenue received from Genentech under the Evaluation Agreement. See Note 4
   of Notes to Financial Statements. In April 1998, Pioneer Hi-Bred doubled its
   annual collaboration funding to us to a minimum of $5,000,000. The increase
   in total revenue was also due to additional grant revenue recorded as a
   result of timing issues in connection with grant expenses
   incurred.

Operating Expenses. Grant research
   expenses for the year ended December 31, 1998 were $1,858,502, representing
   a decrease of $2,757,384, or 60%, compared to $4,615,886 in 1997. The
   decrease in grant research expenses was primarily attributable to the
   completion of two federal grants during the first quarter of 1998, thereby
   decreasing the costs incurred by us in support of these grants.

Collaborative research and development
   expenses for the year ended December 31, 1998 were $18,130,893, representing
   an increase of $13,004,233, or 254%, compared to $5,126,660 for the year
   ended December 31, 1997. The increase in collaborative research and
   development expenses was primarily attributable to increased expenses as we
   hired additional research and development personnel, increased purchases of
   laboratory supplies, increased



equipment depreciation and increased
   facilities expenses in connection with the expansion of our collaborative
   research efforts and our internal discovery and development programs.

General and administrative expenses for the
   year ended December 31, 1998 increased $5,647,454, or 162%, to $9,128,705 as
   compared to $3,481,251 for the year ended December 31, 1997. This increase
   was primarily attributable to the expansion of administration facilities,
   the incurrence of related depreciation expense, payment of legal fees,
   compensation related expenses in connection with a separation agreement,
   amortization of stock-based compensation and hiring of additional personnel
   to support our future growth.

Interest Income, Net. Net interest
   income for the year ended December 31, 1998 of $1,432,590 increased
   $1,327,346 compared to $105,244 for 1997. This increase was primarily gross
   interest received on larger cash and cash equivalent balances we held as a
   result of our receipt of proceeds from our initial public offering and
   concurrent private placements of securities. Gross interest expense for the
   year ended December 31, 1998 of $994,804 represented an increase of
   $310,267, or 45%, compared to $684,537 for 1997. This increase in gross
   interest expense was primarily attributable to additional capital lease
   obligations for equipment entered into in 1998 in support of our research
   and development activities.

Net Loss Attributable to Common
   Stockholders. For the year ended December 31, 1998, we reported a net
   loss attributable to common stockholders of $18,936,920, or ($1.55) per
   share as compared to $7,290,434, or ($0.92) per share in 1997. Since
   inception, we have incurred operating losses, and as of December 31, 1998
   had an accumulated deficit of $28,939,508 and therefore, we have not paid
   any federal income taxes.

Liquidity and Capital
   Resources

As of December 31, 1999, we had $76,374,571 in
   cash and cash equivalents, compared to $43,293,995 as of December 31, 1998.
   This increase was primarily a result of our receipt of combined net proceeds
   of approximately $56,000,000 from our private placements with Pequot and
   Abgenix, and from the drawdown and simultaneous conversion of loans from
   Biogen and Genentech, offset by operating losses in support of our research
   and development activities. We have financed our operations since inception
   primarily through our initial public offering, revenues received under our
   collaborative research and development arrangements, private placements of
   equity securities, government grants, and capital leases. As of December 31,
   1999, we had recognized $36,540,646 of cumulative sponsored research
   revenues from collaborative research agreements and government grants. To
   date, inflation has not had a material effect on our business.

In September 1999, we completed a private
   placement of 1,500,000 shares of unregistered common stock for an aggregate
   purchase price of $15,000,000 to Pequot.

In October 1999, we exercised our right under
   existing collaborative agreements with Biogen and Genentech to borrow an
   aggregate of $26,000,000 to support on-going operating activities.
   Simultaneously with these drawdowns, we converted the loan from Biogen into
   611,022 shares of our common stock, and converted the loan from Genentech
   into 977,636 shares of our non-voting common stock. On November 4, 1999, we
   filed a registration statement registering the resale of the 611,022 shares
   of common stock issued to Biogen and the 977,636 shares of common stock that
   are issuable upon the conversion of the 977,636 shares of non-voting common
   stock issued to Genentech. The registration of such shares is required under
   the collaborative agreements with Biogen and Genentech. In addition, we
   included in such registration statement 21,111 shares of our common stock
   issuable to Transamerica Business Credit Corporation and 25,597 shares of
   our common stock issuable to Casdin Life Services Partners LP upon exercise
   of warrants purchased from us in a private placement. Pursuant to the terms
   of such private placement, each party had the right to participate in such
   registration. On February 23, 2000, we filed an amendment to the
   registration statement for the above shares to, in part, include in such
   registration statement 341,297 shares of our common stock issuable to
   Quantum Industrial Partners LDC ("Quantum") upon exercise of
   warrants purchased by Quantum from us in a private placement. We expect the
   SEC to declare the registration statement effective shortly.

In December 1999, we completed a private placement of
   418,995 shares of unregistered common stock for an aggregate purchase price
   of $15,000,000 to Abgenix.

During the fourth quarter of 1999, we undertook an
   upgrade of scientific technologies and related lab equipment. Accordingly,
   on November 7, 1999, we signed an agreement with Comdisco, for the
   acquisition of certain lab equipment with a fair market value of
   approximately $2,400,000. As a part of this transaction, we also purchased
   other lab equipment recorded as a capital lease for approximately $3,600,000
   from TBCC. The Comdisco agreement calls for the exchange of the TBCC
   equipment for the Comdisco Equipment. As a result of the exchange of the
   TBCC equipment for the Comdisco equipment, we recognized an asset impairment
   expense of approximately $2,700,000



in the fourth quarter of 1999 in order to properly
   reflect our estimate of the fair market value of the retired lab equipment
   in accordance with Statement of Financial Accounting Standards No. 121
   (Accounting for the Impairment of Long-Lived Assets and for Long-lived
   Assets to Be Disposed Of). The newly-acquired Comdisco equipment will be
   treated as a capital lease in the amount of $4,128,243.

On February 2, 2000, we completed an offering
   for $125,000,000 of 6% convertible subordinated debentures due 2007 and
   received net proceeds of approximately $121,250,000. In addition, on
   February 16, 2000, the initial purchasers exercised their option to purchase
   an additional $25,000,000 of 6% convertible subordinated debentures due
   2007, providing us with additional net proceeds of approximately
   $24,308,000. The debentures may be resold by the initial purchasers to
   qualified institutional buyers under Rule 144A of the Securities Act and to
   non-U.S. Persons outside the United States under Regulation S under the
   Securities Act. The debentures are convertible into our common stock. In
   addition, prior to February 2, 2003, if our common stock price reaches
   specified levels, we have the right to redeem the debentures at a premium by
   converting the debentures into common stock. If the price of our common
   stock reaches $217.01 for 20 of 30 consecutive trading days at any time
   prior to February 2, 2003, we may redeem all of the debentures by converting
   them into common stock. If we were to convert the debentures prior to
   February 2, 2003, in addition to the interest accrued and unpaid, we would
   make an interest make-whole payment equal to the present value of the
   aggregate amount of the interest that would otherwise have accrued from the
   provisional redemption date through February 2, 2003. We have agreed to file
   a registration statement with the SEC for the resale of any shares issued as
   a result of the conversion of the debentures. We are required to file the
   registration statement by May 2000.

On March 2, 2000, we announced a two-for-one split on both our voting
   common stock and our non-voting common stock, each payable to our
   stockholders in the form of a stock dividend. On March 30, 2000, our
   stockholders of record will receive one additional share of our voting
   common stock for every share of voting common stock and one additional share
   of non-voting common stock for every share of non-voting common stock each
   stockholder owns at the close of business on March 15, 2000.

Our investing activities have consisted
   primarily of acquisitions of equipment and expenditures for leasehold
   improvements. At December 31, 1999, our gross investment in equipment,
   computers and leasehold improvements since inception was $22,415,972. At
   December 31, 1999, equipment with a gross book value of $12,609,660 secures
   our equipment financing facility. We anticipate that net proceeds of
   approximately $6,000,000 from our available lease line will be utilized for
   capital expenditures over the next several years, primarily for the purchase
   of additional equipment and improvements at our laboratories. We had
   approximately $365,000 in material commitments for capital expenditures at
   December 31, 1999.

In accordance with our investment policy, we
   are utilizing the following investment objectives for cash and cash
   equivalents: (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 after-tax yield is
   achieved.

Net cash used in operating activities was
   $19,470,656 for the year ended December 31, 1999, compared to $9,184,466 for
   the year ended December 31, 1998. The increase of $10,286,190 can be
   attributed to an increase in our net loss and accrued expenses, primarily
   offset by decreases in accounts payable, accrued bonuses, deferred revenue,
   and the asset impairment charge as well as depreciation and amortization
   costs.

As of December 31, 1999, we had federal and
   Connecticut net operating loss carryforwards for income tax purposes of
   approximately $56,000,000 and $51,000,000, respectively. Federal net
   operating loss carryforwards expire beginning in 2008, and Connecticut net
   operating loss carryforwards began expiring in 1998. We also had federal and
   Connecticut research and development tax credit carryforwards for income tax
   purposes of approximately $3,000,000 and $3,200,000, respectively at
   December 31, 1999.

Year 2000 Compliance

The ''Year 2000 Problem'' arose because many
   existing computer programs use only the last two digits to refer to a year.
   Therefore, these computer programs may recognize a year ending in ''00'' as
   the Year 1900 rather than the Year 2000, which could result in a significant
   disruption of operations and an inability to process certain transactions.
   Early in 1998, we assessed our internal computer systems and our
   non-information technology systems and determined that, because our computer
   applications use four digits to identify a year in the field date, we were
   internally compliant with Year 2000 requirements. With respect to material
   non-information technology systems, we determined that substantially all of
   these systems were provided by third parties. We developed a strategic plan
   to estimate the potential risks related to third parties with which we have
   significant relationships and concluded that Year 2000 issues would not
   materially affect the continuation of our normal daily operations. To date,
   our operations have suffered no significant disruption from Year 2000
   problems. We incurred no material historical costs relating to Year 2000
   compliance, and we have not incurred any material costs in resolving the
   Year 2000 problems of third parties with whom we interact. We intend,
   however, to continue monitoring our internal computer systems and those of
   third parties for Year 2000 problems. Year 2000 problems that are as yet
   undiscovered may arise in the future and could have a significant impact on
   our operations.

Recently Enacted
   Pronouncements

The Financial Accounting Standards Board (
   "FASB") issued SFAS No. 131, "Disclosures About Segments of
   an Enterprise and Related Information" effective for fiscal years
   beginning after December 15, 1997. At December 31, 1999 we had one
   reportable segment.

In June 1998, the FASB issued SFAS No. 133,
   "Accounting for Derivative Instruments and Hedging Activities."
   SFAS No. 133 modifies the accounting for derivatives and hedging activities
   and is effective for the quarterly periods beginning after June 15, 2000. We
   have not determined the effects, if any, that SFAS No. 133 will have on our
   financial statements.

The AICPA has issued Statement of Position (
   "SOP") 98-1, "Accounting for Costs of Computer
   Software



Developed or Planned for Internal Use."
   This SOP provides guidance on accounting for the costs of computer software
   developed or obtained for internal use. This SOP requires that the following
   costs be capitalized: (1) external direct costs of materials and services
   incurred in developing or obtaining internal-use computer software; (2)
   payroll and payroll-related costs for employees who are directly associated
   with and devote time to the internal-use software project (to the extent of
   time spent directly on the project); and (3) interest costs. Computer
   software costs that are research and development should be expensed as
   incurred. In addition, training costs should be expensed as incurred. This
   statement is effective for financial statements for fiscal years beginning
   after December 15, 1998, however, earlier application is encouraged. We
   adopted SOP 98-1 in 1999.

Certain Factors That May Affect Results of
   Operations

This report may contain forward-looking statements that are subject to
   certain risks and uncertainties. These statements include statements
   regarding (i) our plan to build additional technologies and to enhance our
   GeneScape platform and to systematically analyze the genetic basis of many
   common diseases, (ii) the expected transformation of the pharmaceutical
   industry and our opportunity with respect thereto, (iii) the likely success
   of our technologies, (iv) the expected benefits of the linkage to be
   provided by our PathCalling systems, (v) the expected benefits, effects,
   efficiency and performance of our services and products, (vi) our ability
   (a) to overcome the limitations of competing technologies, processes and
   databases by condensing key steps in gene-based discovery and development,
   (b) to develop, through our products and services, the next generation of
   therapeutic products for important complex diseases, (c) to populate our
   databases, and (d) to develop, in a timely fashion, a broad portfolio of
   research programs that encompass drug discovery, drug development and
   pharmacogenomics, (vii) the capacity of our products to predict the
   efficiency and safety of drugs already on the market, (viii) the suitability
   of Company discovered genes and proteins involved in diabetes, hypertension
   and ischemic stroke as targets for small molecule drug development and (ix)
   the expected future levels of losses, operating expenses and material
   commitments. Such statements are based on our management's current
   expectations and are subject to a number of factors and uncertainties that
   could cause actual results to differ materially from those described in the
   forward-looking statements. We caution investors that there can be no
   assurance that actual results or business conditions will not differ
   materially from those projected or suggested in such forward-looking
   statements as a result of various factors, including, but not limited to,
   the following: our early stage of development, technological uncertainty and
   product development risks, uncertainty of additional funding, reliance on
   research collaborations, competition, our ability to protect our patents and
   proprietary rights and uncertainties relating to commercialization rights.
   For further information, refer to the more specific risk and uncertainties
   discussed throughout this discussion and analysis.

ITEM 7A. QUANTITATIVE AND QUALITATIVE
   DISCLOSURES ABOUT MARKET RISK

We have reviewed the provisions of Regulation
   S-X Item 305. At December 31, 1999, we did not hold any derivative financial
   instruments, commodity-based instruments or other long-term debt
   obligations.

ITEM 8. FINANCIAL STATEMENTS AND
   SUPPLEMENTARY DATA



CURAGEN CORPORATION
 
 BALANCE SHEETS

|                                                                                                                                                                               | December 31, |              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------ | -------------
|
|
|
|ASSETS                                                                                                                                                                         |              |              
|Current assets:                                                                                                                                                                |             
|Cash and cash equivalents                                                                                                                                                      |              | $ 43,293,995 
|Grants receivable                                                                                                                                                              |              | 600,241      
|Accounts receivable                                                                                                                                                            |              | 10,400       
|Other current assets                                                                                                                                                           |              | 1,150        
|Prepaid expenses                                                                                                                                                               |              | 505,203      
|
|Total
     current assets                                                                                                                                                      |              | 44,410,989   
|
|Property and equipment, net                                                                                                                                                    |              | 15,900,281   
|Notes receivable - related parties                                                                                                                                             |              | 93,500       
|Other assets                                                                                                                                                                   |              | 399,731      
|
|Total
     assets                                                                                                                                                              |              | $ 60,804,501 
|
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                           |             
|Current liabilities:                                                                                                                                                           |             
|Accounts payable                                                                                                                                                               |              | $   2,778,000
|Accrued bonuses                                                                                                                                                                |              | 841,386      
|Accrued expenses                                                                                                                                                               |              | 480,450      
|Accrued payroll                                                                                                                                                                |              | 324,924      
|Deferred revenue                                                                                                                                                               |              | 4,875,000    
|Deferred rent                                                                                                                                                                  |              | 103,406      
|Current portion of obligations
     under capital leases                                                                                                                       |              | 1,942,215    
|
|Total
     current liabilities                                                                                                                                                 |              | 11,345,381   
|
|                                                                                                                                                                               |             
|Long-term liabilities:                                                                                                                                                         |             
|Deferred rent, net of current
     portion                                                                                                                                     |              | 196,494      
|Interest payable                                                                                                                                                               |              | 21,000       
|Obligations under capital leases,
     net of current portion                                                                                                                  |              | 6,766,433    
|
|Total
     long-term liabilities                                                                                                                                               |              | 6,983,927    
|
|                                                                                                                                                                               |             
|Commitments and contingencies                                                                                                                                                  |             
|                                                                                                                                                                               |             
|Stockholders' equity:                                                                                                                                                          |             
|Common Stock-Voting; $.01
     par value, issued and outstanding
   
       13,316,757 shares at December 31, 1998, and
     16,421,538 shares at
   
       December 31, 1999 |              | 133,168      
|Common Stock-Non-Voting;
     $.01 par value, issued and outstanding
   
       977,636 shares at December 31, 1999                                                            |              | -            
|Additional paid-in
     capital                                                                                                                                                |              | 72,050,465   
|Accumulated deficit                                                                                                                                                            |              | (28,939,508  
|Unamortized stock-based
     compensation                                                                                                                                      |              | (768,932     
|
|Total
     stockholders' equity                                                                                                                                                |              | 42,475,193   
|
|Total liabilities and stockholders' equity                                                                                                                                     |              | $ 60,804,501 
|

See accompanying notes to financial statements

CURAGEN CORPORATION
 
 STATEMENTS OF OPERATIONS

|                                                                                                                                                             | Year Ended December 31, | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------- | 
|
|Revenue:                                                                                                                                                     |                         | 
|Grant
     revenue                                                                                                                                           |                         | 
|Collaboration revenue                                                                                                                                        |                         | 
|                                                                                                                                                             |                         | 
|Total
     revenue                                                                                                                                           |                         | 
|                                                                                                                                                             |                         | 
|Operating expenses:                                                                                                                                          |                         | 
|Grant
     research                                                                                                                                          |                         | 
|Collaborative research and development                                                                                                                       |                         | 
|Asset
     impairment expense                                                                                                                                |                         | 
|General and administrative                                                                                                                                   |                         | 
|                                                                                                                                                             |                         | 
|Total
     operating expenses                                                                                                                                |                         | 
|                                                                                                                                                             |                         | 
|Loss
     from operations                                                                                                                                    |                         | 
|Interest income, net                                                                                                                                         |                         | 
|                                                                                                                                                             |                         | 
|Net
     loss                                                                                                                                                |                         | 
|Preferred dividends                                                                                                                                          |                         | 
|                                                                                                                                                             |                         | 
|Net
     loss attributable to common stockholders                                                                                                            |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|Basic and
     diluted net loss per share attributable to common stockholders                                                                                |                         | 
|                                                                                                                                                             |                         | 
|Weighted average number of shares used in                                                                                                                    |                         | 
|computing basic and diluted net loss per share                                                                                                               |                         | 
|attributable to common stockholders                                                                                                                          |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|Proforma
     basic and diluted net loss per share attributable to common stockholders
     (See Note 9)                                                     |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|                                                                                                                                                             |                         | 
|Weighted
     average number of shares used in computing proforma basic and diluted net
     loss per share attributable to common stockholders (See Note 9) |                         | 
|                                                                                                                                                             |                         | 

See accompanying notes to financial statements



CURAGEN CORPORATION
 
 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
 
 Year Ended December 31, 1997, 1998 and 1999

|                                                                   | Number of
   
   Shares | Voting Common
   
   Stock ($.01 Par
   
   value) | Number of Shares | Non-Voting
   
   Common Stock
   
   ($.01 par value) | Number of
   
   Shares | Preferred
   
   Stock | Additional
   
   Paid-in
   
   Capital | Accumulated
   
   Deficit | Unamortized
   
   Stock-Based
   
   Compensation | Total
|------------------------------------------------------------------ | ----------------------- | -------------------------------------------------- | ---------------- | ------------------------------------------------------ | ----------------------- | ---------------------- | ---------------------------------------- | -------------------------- | -------------------------------------------------- | -----
|January 1,
     1997                                               | 5,121,731               |                                                    | $  51,218        |                                                        | --                      |                        | --                                       |                            | 482,167                                            |      
|Issuance of Common
     Stock                                      | 39,746                  |                                                    | 397              |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Issuance of Preferred
     Stock with warrants - Series C          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | 2,011,468                                          |      
|Issuance of Preferred
     Stock - Series D                        | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | 1,000,000                                          |      
|Issuance of Preferred
     Stock - Series E                        | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | 100,000                                            |      
|Issuance of options to
     non-employees                          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Unamortized stock-based
     compensation                          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Issuance of warrants -
     capital lease obligations              | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Amortization of warrants
     - capital lease obligations          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Preferred
     dividends                                           | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Adjustment of Redeemable
     Common Stock                         | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Adjustment to reflect
     automatic conversion of Preferred Stock | 3,418,635               |                                                    | 34,186           |                                                        | --                      |                        | --                                       |                            | (3,418,635                                         | )    
|Net loss                                                           | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|                                                                   |                         |                                                    |                  |                                                        |                         |                        |                                          |                            |                                                    |      
|December 31,
     1997                                             | 8,580,112               |                                                    | 85,801           |                                                        | --                      |                        | --                                       |                            | 175,000                                            |      
|Issuance of Common
     Stock                                      | 4,231,520               |                                                    | 42,315           |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Conversion of Redeemable
     Common Stock                         | 291,875                 |                                                    | 2,919            |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Redemption of Preferred
     Stock - Series B                      | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | (175,000                                           | )    
|Stock issuance
     costs                                          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Amortization of
     stock-based compensation                      | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Amortization of warrants
     - capital lease obligations          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Preferred
     dividends                                           | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Exercise of employee
     stock options                            | 213,250                 |                                                    | 2,133            |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Issuance of options to
     non-employees                          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Net loss                                                           | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|                                                                   |                         |                                                    |                  |                                                        |                         |                        |                                          |                            |                                                    |      
|December 31,
     1998                                             | 13,316,757              |                                                    | 133,168          |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Issuance of Common
     Stock                                      | 2,530,017               |                                                    | 25,300           |                                                        | 977,636                 |                        | $9,776                                   |                            | --                                                 |      
|Stock issuance
     costs                                          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Amortization and
     write-off of stock-based compensation        | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Amortization of warrants
     - capital lease obligations          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Exercise of employee
     stock options                            | 92,419                  |                                                    | 924              |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Exercise of non-employee
     stock options                        | 456,000                 |                                                    | 4,560            |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Issuance of options to
     non-employees                          | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Stock-based 401(k)
     employer plan match                        | 26,345                  |                                                    | 263              |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Other                                                              | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|Net loss                                                           | --                      |                                                    | --               |                                                        | --                      |                        | --                                       |                            | --                                                 |      
|                                                                   |                         |                                                    |                  |                                                        |                         |                        |                                          |                            |                                                    |      
|December 31,
     1999                                             | 16,421,538              |                                                    | $164,215         |                                                        | 977,636                 |                        | $9,776                                   |                            | --                                                 |      
|                                                                   |                         |                                                    |                  |                                                        |                         |                        |                                          |                            |                                                    |      

See accompanying notes to financial
   statements



CURAGEN CORPORATION
 
 STATEMENTS OF CASH FLOWS

|                                                                                                    
|----------------------------------------------------------------------------------------------------
|                                                                                                    
|1997                                                                                                
|                                                                                                    
|Cash flows from
     operating activities:                                                          
|Net loss                                                                                            
|Adjustments to reconcile net loss to net cash                                                       
|used in operating activities:                                                                       
|Asset impairment expense                                                                            
|Depreciation and amortization                                                                       
|Non-monetary compensation                                                                           
|Stock-based 401(k) employer plan
     match                                                         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Changes in assets and liabilities:                                                                  
|Grants receivable                                                                                   
|Accounts receivable                                                                                 
|Other current assets                                                                                
|Prepaid expenses                                                                                    
|Other assets                                                                                        
|Accounts payable                                                                                    
|Accrued payroll-related party                                                                       
|Accrued bonuses                                                                                     
|Accrued expenses                                                                                    
|Accrued payroll                                                                                     
|Deferred revenue                                                                                    
|Deferred rent                                                                                       
|Interest payable                                                                                    
|                                                                                                    
|Net cash used in
     operating activities                                                          
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Cash flows from
     investing activities:                                                          
|Acquisitions of property and equipment                                                              
|Loans to related parties                                                                            
|                                                                                                    
|Net cash used in
     investing activities                                                          
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Cash flows from
     financing activities:                                                          
|Payments on capital lease obligations                                                               
|Proceeds from issuance of Common Stock                                                              
|Proceeds from issuance of Preferred Stock                                                           
|Proceeds from sale-leaseback of equipment                                                           
|Payments of stock issuance costs                                                                    
|Proceeds from exercise of stock options                                                             
|Redemption of Series B Preferred Stock                                                              
|                                                                                                    
|Net cash provided by
     financing activities                                                      
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Net increase in cash
     and cash equivalents                                                      
|Cash and cash
     equivalents, beginning of year                                                   
|                                                                                                    
|Cash and cash
     equivalents, end of year                                                         
|                                                                                                    
|                                                                                                    
|                                                                                                    
|                                                                                                    
|Supplemental cash
     flow information:                                                            
|Interest paid                                                                                       
|Noncash financing
     transactions:                                                                
|Reduction of note and related interest payable upon exercise of
   
           Common Stock warrants
|Reduction of accrued expenses upon issuance of Common
     Stock                                    
|Obligations under capital leases                                                                    
|Adjustment of Redeemable Common Stock                                                               
|                                                                                                    

See accompanying notes to financial statements



NOTES TO FINANCIAL
   STATEMENTS

1. Organization and Summary of Significant
   Accounting Policies

OrganizationCuraGen Corporation
   (the "Company" or "CuraGen") is a biotechnology company
   focusing on the application of genomics to the systematic discovery of
   genes, gene sequences, variations in gene sequences, biological pathways and
   drug candidates in order to accelerate the discovery and development of the
   therapeutic, agricultural and diagnostic products to improve human and
   animal health and the vitality of agriculture. The Company was incorporated
   in November 1991 and, until March 1993, was engaged primarily in
   organizational activities, research and development of the Company's
   technology, grant preparation and obtaining financing.

Revenue RecognitionThe Company
   has entered into certain collaborative research agreements which provide for
   the partial or complete funding of specified projects in exchange for access
   to and certain rights in the resultant data discovered under the related
   project. Revenue is recognized based upon work performed or upon the
   attainment of certain benchmarks specified in the related agreements (see
   Note 4). Grant revenue is recognized as related costs qualifying under the
   terms of the grants are incurred. Grant revenue is derived solely from
   federal and Connecticut agencies (see Note 8). Deferred revenue arising from
   payments received from collaborative agreements is recognized as income when
   earned.

Cash and Cash EquivalentsThe
   Company considers investments readily convertible into cash with a maturity
   of three months or less at the date of purchase to be cash
   equivalents.

Property and EquipmentProperty
   and equipment are recorded at cost. Equipment under capital leases is
   recorded at the lower of the net present value of the minimum lease payments
   required over the term of the lease or the fair value of the assets at the
   inception of the lease. Additions, renewals and betterments that
   significantly extend the life of an asset are capitalized. Minor
   replacements, maintenance and repairs are charged to operations as incurred.
   Equipment is depreciated over the estimated useful lives of the related
   assets, ranging from three to seven years, using the straight-line method.
   Equipment under capital leases is amortized over the shorter of the
   estimated useful life or the terms of the lease, using the straight-line
   method. Leasehold improvements are amortized over the shorter of the
   estimated life or the term of the lease, using the straight-line method.
   When assets are retired or otherwise disposed of, the assets and related
   accumulated depreciation or amortization are eliminated from the accounts
   and any resulting gain or loss is reflected in income.

Impairment of Long-Lived AssetsThe Company regularly evaluates
   the recoverability of the net carrying value of its property, and intangible
   assets by comparing the carrying values to the estimated future undiscounted
   cash flows. A deficiency in these cash flows relative to the carrying
   amounts is an indication of the need for a write-down due to impairment. The
   impairment write-down would be the difference between the carrying amounts
   and the fair value of these assets as determined by using estimated future
   undiscounted cash flows. A loss of impairment would be recognized by a
   charge to earnings.

Deferred Real Estate Commissions
   Deferred real estate commissions were paid in 1997 in connection with
   the signing of the operating lease in New Haven, Connecticut (see Note 3).
   These costs, which are included in Other assets, are amortized over the
   remaining life of the lease as of the date of occupancy, 69 months, using
   the straight-line method. Accumulated amortization aggregated $20,984 and
   $32,975, respectively, as of December 31, 1998 and 1999. Related
   amortization expense was $11,991 for each of the years ended December 31,
   1998 and 1999.

Licensing FeesLicensing fees for
   various research and development purposes were paid during 1998 and 1999.
   The costs, which are included in Other assets, are amortized over the
   various lives of the licenses. Accumulated amortization aggregated $30,288
   and $127,503, respectively, as of December 31, 1998 and 1999. Related
   amortization expense was $30,288 and $97,215, respectively, for the years
   ended December 31, 1998 and 1999.

Patent Application CostsCosts
   incurred in filing for patents are charged to operations, until such time as
   it is determined that the filing will be successful. When it becomes evident
   with reasonable certainty that an application will be successful, the costs
   incurred in filing for patents will begin to be capitalized. Capitalized
   costs related to successful patent applications will be amortized over a
   period not to exceed twenty years or the remaining life of the patent,
   whichever is shorter, using the straight-line method. During 1998 and 1999,
   all patent application costs have been charged to operations.

Research and Development Costs
   Research and development costs are charged to operations as incurred.
   Grant research expenses include all direct research and development costs
   incurred related to specific grant awards and programs. All remaining
   research and development costs are incurred for the development and
   maintenance of current and future research collaboration agreements, and
   accordingly, have been classified as collaborative research and development
   expenses.

Stock-Based CompensationIn
   October 1995, the Financial Accounting Standards Board issued Statement of
   Financial Accounting Standards No. 123 "Accounting for Stock-Based
   Compensation" ("SFAS 123"), which was effective for the
   Company beginning January 1, 1996. SFAS 123 requires expanded disclosures of
   stock-based
 compensation arrangements with employees and non-employees and encourages (but
   does not require) compensation cost to be measured based on the fair value
   of the equity instruments awarded to employees. Companies are permitted to
   continue to apply Accounting Principles Board ("APB") No. 25,
   which recognizes compensation cost based on the intrinsic value of the
   equity instruments awarded. The Company will continue to apply APB No. 25 to
   its stock-based compensation awards to employees. For equity instruments
   awarded to non-employees, the Company records the transactions based upon
   the consideration received for such awards or the fair value of the equity
   instruments issued, whichever is more reliably measurable. The Company
   recorded stock-based compensation expense attributable to non-employees
   totaling $277,247, $289,754 and $103,655 for the years ended December 31,
   1997, 1998 and 1999, respectively. For options issued to employees, the
   Company records the transactions based upon the difference between the
   option strike price and the estimated fair market value as of the date of
   issuance. Stock-based compensation associated with options granted to
   employees during 1997 amounted to $1,672,998 and is being expensed by the
   Company over the vesting period of the underlying options. During 1998 and
   1999, no stock-based compensation in connection with options granted to
   employees was recorded as all options granted were issued at the estimated
   fair market value as of the date of issuance. The Company recorded
   amortization of stock-based compensation expense for options issued to
   employees of $444,532 and $453,888 for the years ended December 31, 1998 and
   1999, respectively.

Income TaxesIncome taxes are
   provided for as required under Statement of Financial Accounting Standards
   No. 109, "Accounting for Income Taxes" ("SFAS 109").
   This Statement requires the use of the asset and liability method in
   determining the tax effect on future years of the "temporary differences
   " between the tax basis of assets and liabilities and their financial
   reporting amounts.

Loss Per ShareBasic earnings per
   share ("EPS") is computed by dividing net loss by the
   weighted-average number of common shares outstanding for the period. Diluted
   EPS reflects the potential dilution that could occur if securities or other
   contracts to issue common stock were exercised or converted into common
   stock. Due to the loss from operations, stock options and warrants granted
   but not yet exercised under the Company's stock option plans are
   antidilutive and therefore not considered for the diluted EPS calculations.
   Under the assumption that stock options and warrants were not antidilutive,
   the denominator for diluted loss per share would be 7,888,383, 13,024,973,
   and 15,394,706 at December 31, 1997, 1998 and 1999, respectively.

Fair Value of Financial Instruments
   Statement of Financial Accounting Standards No. 107,
   "Disclosures about Fair Value of Financial Instruments" (
   "SFAS 107"), requires the disclosure of fair value information for
   certain assets and liabilities, whether or not recorded in the balance
   sheets, for which it is practical to estimate that value. The Company has
   the following financial instruments: cash, receivables, accounts payable and
   accrued expenses, and certain liabilities. The Company considers the
   carrying amount of these items to approximate fair value.

Conversion of Preferred StockThe
   accompanying financial statements retroactively reflect the conversion of
   all outstanding shares of Series A, C, D and E Preferred Stock (Convertible
   Preferred Stock) to Common Stock on a one for one basis. The above
   conversion has been presented since the Company amended its Certificate of
   Incorporation in December 1997 to provide that the Series A, C, D and E
   Preferred Stock would be automatically converted into shares of Common Stock
   upon the closing of a firm commitment underwritten public offering of the
   Common Stock. In March 1998, upon the closing of the Company's initial
   public offering, the foregoing conversion was completed.

Recently Enacted Pronouncements
   The Financial Accounting Standards Board ("FASB") issued
   SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
   Information" effective for fiscal years beginning after December 15,
   1997. The Company had one reportable segment as of December 31,
   1999.

In June 1998, the FASB issued SFAS No. 133,
   "Accounting for Derivative Instruments and Hedging Activities".
   SFAS No. 133 modifies the accounting for derivatives and hedging activities
   and is effective for the quarterly periods beginning after June 15, 1999.
   The Company has not determined the effects, if any, that SFAS No. 133 will
   have on its financial statements.

The AICPA has issued Statement of Position (
   "SOP") 98-1, "Accounting for Costs of Computer Software
   Developed or Planned for Internal Use". This SOP provides guidance on
   accounting for the costs of computer software developed or obtained for
   internal use. This SOP requires that the following costs be capitalized: 1)
   external direct costs of materials and services incurred in developing or
   obtaining internal-use computer software; 2) payroll and payroll-related
   costs for employees who are directly associated with and devote time to the
   internal-use software project (to the extent of time spent directly on the
   project); and 3) interest costs. Computer software costs that are research
   and development should be expensed asincurred. In addition, training costs should be expensed as
 incurred. This statement is effective for financial statements for fiscal
   years beginning after December 15, 1998, however, earlier application is
   encouraged. The Company adopted SOP 98-1 in 1999.

Use of EstimatesThe preparation
   of financial statements in conformity with generally accepted accounting
   principles requires management to make estimates and assumptions that affect
   the reported amounts of assets and liabilities and disclosure of contingent
   assets and liabilities at the date of the financial statements and the
   reported amounts of revenues and expenses during the reporting period.
   Actual results could differ from those estimates.

2. Property and Equipment

Property and equipment consisted of the
   following:



|December 31,                                       
|---------------------------------------------------
|                                                   
|                                                   
|                                                   
|Laboratory equipment                               
|Leased equipment                                   
|Leasehold improvements                             
|Office equipment                                   
|                                                   
|Total property and equipment                       
|Less accumulated depreciation and
     amortization
|                                                   
|Total property and equipment, net                  
|                                                   

Depreciation and amortization expense was $2,580,400, and $5,441,172 for
   the years ended December 31, 1998 and 1999, respectively.

3. Leases

Capital Leases

In April 1997, the Company signed a
   lease-financing commitment to receive $4,000,000 to purchase equipment and
   expand its facilities. The lease commitment provides for a payment term of
   48 months per individual lease schedule. In addition, the commitment
   provides for the issuance to the lessor of two warrants (the "First
   Warrant" and the "Second Warrant") to purchase shares of the
   Common Stock. The First Warrant was issued in April 1997 and entitles the
   lessor to purchase 11,111 shares of Common Stock at an exercise price of
   $9.00 per share. The Second Warrant was issued in September 1997 when the
   Company's aggregate equipment cost under the agreement exceeded $2,000,000.
   The Second Warrant entitles the lessor to purchase 10,000 shares of Common
   Stock at an exercise price of $10.00 per share. The value ascribed to the
   warrants was $59,520. In June 1998, the Company signed a lease-financing
   commitment to receive $10,000,000 to purchase various laboratory, office and
   computer equipment. The lease commitment provides for payment terms of 60
   months per individual lease schedule. In November 1999, the Company signed
   an agreement with Comdisco, Inc. ("Comdisco") for the acquisition
   of certain lab equipment of $2,400,000. The agreement provides for payment
   terms of 12 quarterly installments.

The Company has also entered into other
   capital lease agreements to finance the purchase of equipment. Leased
   equipment under all such agreements consisted of the following:



|                              | December 31,
|----------------------------- | ------------
|                              |             
|                              | 1998        
|                              |             
|Leased equipment              | $11,091,434 
|Less accumulated amortization | 3,037,429   
|                              |             
|Total Leased equipment, net   | $ 8,054,005 
|                              |             

The Company financed leased assets with costs
   of $5,302,666, $5,051,378 and $8,381,778 for the years ended December 31,
   1997, 1998 and 1999, respectively. These arrangements have terms of three to
   five years with interest rates ranging from approximately 9% to 20%,
   however, of the remaining total minimum lease payments of approximately
   $13,000,000, 97% of those arrangements have interest rates ranging from
   approximately 9% to 15%. At the end of the respective lease terms, the
   Company has the right to either return the equipment to the lessor or
   purchase the equipment at between $1 and 15% of the then fair market value
   of the equipment.



The future minimum lease payments under
   capital lease obligations at December 31, 1999 were as follows:



|Within 1 year                                                 | $3,725,902
|------------------------------------------------------------- | ----------
|Within 1 to 2
     years                                      | 4,263,164 
|Within 2 to 3
     years                                      | 3,771,172 
|Within 3 to 4
     years                                      | 1,422,100 
|Within 4 to 5
     years                                      | 97,309    
|                                                              |           
|Total minimum
     lease payments                             | 13,279,647
|Less amounts
     representing interest                       | 2,268,412 
|                                                              |           
|Present value
     of future minimum lease payments           | 11,011,235
|Less current
     portion of obligations                      | 2,732,393 
|                                                              |           
|Obligations
     under capital leases, net of current portion | $8,278,842
|                                                              |           

Operating Leases

In December 1996, the Company
   entered into a six-year lease agreement for 26,000 square feet to house its
   principal administrative and research facilities at 555 Long Wharf Drive,
   New Haven, Connecticut. In October 1997 and August 1998, the Company amended
   that lease to increase its leased space to a total of 31,000 and 36,000
   square feet, respectively. The Company may renew the lease for two
   additional terms of five years each. In May 1998, the Company entered into a
   lease agreement, expiring in May 2000, for its 32,000 square foot research
   facility in Branford, Connecticut. The lease agreement may be renewed for
   three additional terms of two years each. In November 1999, the Company
   exercised its option to renew the Branford lease for a two year term which
   will expire in May 2002, and amended the lease to increase its leased space
   to 46,000 square feet. An additional 12,000 square feet at the Company's
   third research location in Alachua, Florida is also leased under an
   agreement due to expire in July 2000.

Total rent expense under all operating leases
   for 1997, 1998 and 1999 was approximately $487,300, $1,016,050 and
   $1,335,350 respectively.

The future minimum rental payments for all
   operating leases are as follows as of December 31, 1999:



| | Year  |           
| | ----- | ----------
| | 2000  | $1,494,238
| | 2001  | 1,441,909 
| | 2002  | 1,066,492 
| |       |           
| | Total | $4,002,639
| |       |           

4. Collaborations

Genentech, Inc.

In June 1996, the Company entered
   into a Pilot Research Services and Evaluation Agreement with Genentech, Inc.
   ("Genentech") pursuant to which the Company performed certain
   research services for a $200,000 fee. The pilot collaboration was superseded
   by the Evaluation Agreement, signed and effective December 27, 1996. In
   connection with the execution of the Evaluation Agreement, Genentech made an
   equity investment of $1,800,000 in the form of 307,167 shares of Series A
   Convertible Preferred Stock (see Note 6).

In November 1997, CuraGen and
   Genentech entered into a research collaboration and database subscription
   arrangement to discover novel genes and therapeutics. Pursuant to the
   agreement, Genentech purchased $5,000,000 of Common Stock in a private
   placement concurrent with the Company's initial public offering at the
   initial public offering price. Genentech also agreed to provide CuraGen with
   an interest-bearing loan facility which could in the aggregate reach
   $26,000,000 if the research program continues beyond its initial three year
   term. The loan facility contains annual borrowing limits and the outstanding
   principal and interest under the loan facility are payable five years from
   the date of the agreement. Subject to certain limitations, during the term
   of the agreement, and after the end of the first year, the drawn-down
   portion of the loan is convertible at CuraGen's option into CuraGen
   Non-Voting Common Stock, par value $.01 per share (the "Non-Voting
   Common Stock") based upon a formula that approximates the prevailing
   market price of the Company's Common Stock. On October 15, 1999, the Company
   made a drawdown of $16,000,000 under this facility and simultaneously
   converted the loan into 977,636 shares of its Non-Voting Common Stock, par
   value $.01 per share. The Non-Voting Common Stock is convertible into Common
   Stock (a) at any time, at Genentech's option or (b) automatically upon the
   sale or transfer of the Non-Voting Common Stock to a non-affiliated
   party.



Pioneer Hi-Bred International,
   Inc.

Effective June 1, 1997, the
   Company entered into a Collaborative Research and License Agreement with
   Pioneer Hi-Bred International, Inc. ("Pioneer Hi-Bred") whereby
   the Company is to perform research that will be funded by Pioneer Hi-Bred.
   In conjunction with the execution of this agreement, Pioneer Hi-Bred made an
   equity investment of $7,500,000 in the form of 1,000,000 shares of Series D
   Convertible Preferred Stock (see Note 6). In addition, Pioneer Hi-Bred paid
   the Company $2,500,000 per year, for the first 10 months, in quarterly
   installments with the first payment prorated. In March of 1998, Pioneer
   Hi-Bred increased the minimum annual research funding to $5,000,000 per
   year. Pioneer Hi-Bred has the right to terminate the research program at any
   time upon a breach by the Company and on three months' written notice at any
   time after May 2000.

The $5,000,000 per year fee is
   based upon an established number of CuraGen employees whom will be devoted
   to the Pioneer Hi-Bred research. In accordance with the Company's revenue
   recognition policy as described in Note 1, revenue has been recorded based
   upon work performed. For the years ended December 31, 1998 and 1999, the
   Company recorded revenue of $4,375,000 and $5,000,000 related to this
   agreement, which represented 47% and 33% of total revenue, respectively. In
   addition, $1,250,000 has been received from Pioneer Hi-Bred for which the
   related services have not been performed and, therefore, such amount is
   recorded as deferred revenue at December 31, 1999.

Biogen, Inc.

In October 1997, the Company
   entered into a research collaboration and database subscription arrangement
   with Biogen, Inc. ("Biogen") to discover novel genes and
   therapeutics across a range of Biogen-specified disease programs. The
   parties also expect to conduct pharmacogenomic analysis of selected products
   and product candidates in Biogen's portfolio. The collaboration, which calls
   for payments by Biogen for up to five years, provides Biogen with access to
   the Company's proprietary genomics technologies, including the GeneScape
   bioinformatics software platform in order to generate GeneCalling and
   PathCalling databases from Biogen-specified disease systems. Biogen has an
   option to acquire exclusive licenses to certain discoveries arising from the
   collaboration. Biogen has the right to terminate the research collaboration
   upon any breach by the Company of any material obligation under the Biogen
   agreement or at any time after October 1999, on 30 days' written notice.
   Work performed and work that will be performed through June 30, 2000 for
   Biogen under the arrangement has been and will be recognized as revenue on a
   per employee basis. Beginning July 1, 2000, work performed for Biogen by the
   Company under the arrangement will be recognized on a per project basis. In
   addition, pursuant to the agreement, Biogen purchased $5,000,000 of the
   Company's Common Stock in a private placement concurrent with the Company's
   initial public offering at the initial public offering price of $11.50 per
   share, and agreed to provide a $10,000,000 interest-bearing loan facility.
   On October 15, 1999, the Company made a drawdown of $10,000,000 under this
   facility and simultaneously converted the loan into 611,022 shares of its
   Common Stock.

For the years ended December 31,
   1998 and 1999, the Company recorded revenue of $1,500,000 and $2,100,000
   related to this agreement which represented 16% and 14% of total revenue,
   respectively.

Glaxo-Wellcome,
   Inc.

In November 1998, CuraGen and
   Glaxo-Wellcome, Inc. ("Glaxo") announced a drug discovery
   collaboration to utilize CuraGen's integrated genomics processes for the
   study and selection of Glaxo compounds for clinical development. This
   pharmacogenomics collaboration, up to five years in duration, is intended to
   enable Glaxo to select drug candidates with the highest likelihood of
   success in clinical trials. Specifically, CuraGen will evaluate numerous
   compounds across Glaxo therapeutic programs, identifying gene responses
   associated with compound efficacy and toxicity.

For the year ended December 31,
   1999, the Company recorded revenue of $2,407,918 related to this agreement
   which represents 16% of total revenue. However, $2,177,082 has been received
   from Glaxo for which the related services have not been performed and,
   therefore, such amount is recorded as deferred revenue at December 31,
   1999.

Hoffman-La Roche Inc. and Roche Vitamins,
   Inc.

In March 1999, the Company signed
   a life sciences target discovery and pharmacogenomics collaboration
   retroactively effective as of January 1, 1999 with Hoffmann-La Roche Inc. (
   "Roche Pharma") and its affiliate, Roche Vitamins, Inc. (
   "Roche Vitamins"). This agreement outlines strategic partnerships
   with F. Hoffmann-La Roche Ltd. and its affiliates and is designed to
   discover new drug targets, evaluate existing product candidates and
   facilitate the development of drugs and diagnostic tests for the purposes of
   improving human and animal health. Under the terms of this agreement, the
   Company will receive research funding and may receive additional
 milestone and royalty payments if any products emerge from this collaboration.
   The agreement is for an initial term of two years and includes an option to
   extend for three additional one-year terms.

For the year ended December 31,
   1999, the Company recorded revenue of $3,736,396 related to this agreement
   which represents 25% of total revenue. However, $111,628 and $186,977 has
   been received from Roche Pharma and Roche Vitamins, respectively, for which
   the related services have not been performed and, therefore, such amounts
   are recorded as deferred revenue at December 31, 1999.

COR Therapeutics, Inc.

In May 1999, the Company signed a product
   discovery and pharmacogenomics agreement with COR Therapeutics, Inc. (
   "COR"). Under the terms of this agreement, CuraGen will apply its
   SeqCalling, GeneCalling, and PathCalling technologies, related services, and
   pharmacogenomics expertise to identify new drug targets and develop novel
   cardiovascular drugs. This collaboration is for an initial term of eighteen
   months with an option to extend the collaboration for three additional
   twelve-month terms. The Company may receive research funding, milestone
   payments and royalty payments for products developed by COR as a result of
   this collaboration.

Abgenix, Inc.

In December 1999, CuraGen entered into a
   collaboration agreement with Abgenix, Inc. ("Abgenix") to develop
   and commercialize genomics-based antibody drugs using Abgenix'
   XenoMouse technology. This
   five-year alliance has been established to identify up to 120 fully human
   antibody drug candidates intended for treating a broad range of complex
   diseases including cancer and autoimmune disorders. Antibodies determined to
   have commercial product potential will be allocated between the parties for
   further development. Abgenix and the Company will receive reciprocating
   milestone payments and royalty payments for products resulting from this
   drug development alliance. In addition, under the agreement Abgenix
   purchased 418,995 shares of the Company's Common Stock for $15,000,000.

5. Asset Impairment

During the fourth quarter of 1999, the Company
   undertook an upgrade of scientific technologies and related lab equipment.
   Accordingly, on November 7, 1999, the Company signed an agreement with
   Comdisco for the acquisition of certain lab equipment with a fair market
   value of approximately $2,400,000. As a part of this transaction, the
   Company also purchased other lab equipment recorded as a capital lease for
   approximately $3,600,000 from Transamerica Business Credit Corporation
   (''TBCC"). The Comdisco agreement calls for the exchange of the TBCC
   equipment for the Comdisco equipment. As a result of the exchange of the
   TBCC equipment for the Comdisco equipment, the Company recognized an asset
   impairment expense of approximately $2,700,000 in the fourth quarter of 1999
   in order to properly reflect our estimate of the fair market value of the
   retired lab equipment in accordance with Statement of Financial Accounting
   Standards No. 121 (Accounting for the Impairment of Long-Lived Assets and
   for Long-lived Assets to be Disposed of). The newly acquired Comdisco
   equipment will be treated as a capital lease in the amount of
   $4,128,243.

6. Stockholders' Equity

Authorized Capital Stock

The Company's authorized capital stock
   consists of 50,000,000 shares of Common Stock, par value of $.01 per share
   (''Common Stock''), 5,000,000 shares of Preferred Stock, par value of $.01
   per share (''Preferred Stock'') and 3,000,000 shares of Nonvoting Common
   Stock.In March 2000, the Board of Directors of the Company
   unanimously approved an amendment to the Articles of Incorporation to
   increase the number of authorized shares of Common Stock from 50,000,000 to
   250,000,000 and to submit the proposed amendment to shareholders at the next
   Annual Meeting of the Shareholders of the Company.

At December 31, 1997, the Company
   had reserved 1,583,666 shares of Common Stock pursuant to outstanding
   warrants, 1,500,000 shares of Common Stock for issuance pursuant to the 1993
   Stock Option and Incentive Award Plan (the "1993 Stock Plan"),
   1,500,000 shares of Common Stock for issuance pursuant to the 1997 Employee,
   Director and Consultant Stock Plan (the "1997 Stock Plan") and
   570,000 shares of Common Stock for issuance pursuant to non-qualified stock
   options. At December 31, 1998, the Company had reserved 1,583,666 shares of
   Common Stock pursuant to outstanding warrants, 871,883 shares of Common
   Stock for issuance pursuant to the 1993 Stock Plan, 1,500,000 shares of
   Common Stock for issuance pursuant to the 1997 Stock Plan and 453,750 shares
   of Common Stock for issuance pursuant to non-qualified stock options. At the
   May 1999 Annual Meeting of the Shareholders of the Company, the holders of
   shares of the Corporation's Common Stock approved an
 amendment to and restatement of the 1997 Stock Option Plan to increase the
   number of shares of Common Stock reserved for issuance of options granted
   pursuant to such Plan from 1,500,000 to 3,500,000. At December 31, 1999, the
   Company had reserved 1,583,666 shares of Common Stock pursuant to
   outstanding warrants, 654,183 shares of Common Stock for issuance pursuant
   to the 1993 Stock Plan, 3,500,000 shares of Common Stock for issuance
   pursuant to the 1997 Stock Plan and 8,250 shares of Common Stock for
   issuance pursuant to non-plan stock options.

Common Stock

In March 1998, the Company completed its initial public offering of
   3,000,000 shares of its Common Stock and received net proceeds of
   $30,200,000. Concurrently with completion of the initial public offering,
   the Company privately placed an aggregate of 956,520 shares of Common Stock
   and received net proceeds of $5,000,000 each from Biogen and Genentech, two
   of the Company's collaborative partners and existing stockholders, and
   $1,000,000 from the University of Florida Research Foundation, Inc.
   Accordingly, the combined net proceeds raised by the Company from the
   offering and the concurrent private placements were $41,200,000. In
   addition, in April 1998, the Company's underwriters exercised their option
   to purchase an additional 275,000 shares of Common Stock at a price of
   $11.50 per share to cover over-allotments, providing CuraGen with additional
   net proceeds of $2,900,000.

In September 1999, the Company completed a
   private placement of 1,500,000 shares of unregistered Common Stock for an
   aggregate purchase price of $15,000,000 to Pequot Partners Fund, L.P. and
   Pequot International Fund, Inc.

In October 1999, the Company drew down the
   $10,000,000 loan facility made available to it under a certain Research and
   Option Agreement and Promissory Note by and between the Company and Biogen
   each dated October 1, 1997 (collectively, the "Agreement"). The
   Company also exercised its option under the Agreement to prepay the entire
   outstanding balance of $10,000,000 in CuraGen Corporation Voting Common
   Stock. At the date of notice to Biogen, the "Fair Market Value" of
   the Company's Common Stock (as defined in the Agreement) was $16.366 per
   share. Accordingly, the Company issued Biogen 611,022 shares of its Voting
   Common Stock and $13.95 (representing .8522 fractional shares) in full
   satisfaction of the outstanding balance.



Also in October 1999, the Company drew down
   the $16,000,000 loan facility made available to it under a certain Research
   and Option Agreement and Promissory Note by and between the Company and
   Genentech each dated November 20, 1997 (collectively, the "Agreement
   "). The Company also exercised its option under the Agreement to prepay
   the entire outstanding balance of $16,000,000 in CuraGen Corporation
   Convertible Non-Voting Common Stock. At the date of notice to Genentech, the
   "Fair Market Value" of the Company's Common Stock (as defined in
   the Agreement) was $16.366 per share. Accordingly, the Company issued
   Genentech 977,636 shares of its Convertible Non-Voting Common Stock and
   $9.22 (representing .5636 fractional shares) in full satisfaction of the
   outstanding balance.

In December 1999, the Company completed a
   private placement of 418,995 shares of unregistered Common Stock for an
   aggregate purchase price of $15,000,000 to Abgenix (see Note 4).

Stock Options

The Company's 1993 Stock Plan was adopted by
   the Company Board of Directors and stockholders in December 1993 and
   subsequently amended by the Board of Directors in May 1997. The 1993 Stock
   Plan provides for the issuance of stock options and stock awards to
   officers, directors, advisors, employees, and affiliates of the Company. Of
   the 1,500,000 shares of Common Stock which were reserved for issuance under
   the 1993 Stock Plan, options to purchase 871,883 and 654,183 shares were
   granted and outstanding as of December 31, 1998 and 1999, respectively. The
   Company does not intend to grant any additional options or awards under the
   1993 Stock Plan.

A summary of all stock option activity under
   the 1993 Stock Plan during the years ended December 31, 1997, 1998 and 1999
   is as follows:



|                                   |  | Number
   of Shares |  | Weighted
   Average
   Exercise Price
|---------------------------------- |  | ------------------- |  | -------------------------------------
|                                   |  |                     |  |                                      
|Outstanding January 1,
     1997   |  | 541,550             |  | $2.67                                
|Granted                            |  | 518,583             |  | 6.83                                 
|Canceled
     or lapsed            |  | (31,249)            |  | 3.29                                 
|                                   |  |                     |  |                                      
|Outstanding December
     31, 1997 |  | 1,028,884           |  | 4.75                                 
|Granted                            |  | -                   |  | -                                    
|Exercised                          |  | (97,001)            |  | 2.50                                 
|Canceled or lapsed                 |  | (60,000)            |  | 4.37                                 
|                                   |  |                     |  |                                      
|Outstanding December
     31, 1998 |  | 871,883             |  | 5.02                                 
|Granted                            |  | -                   |  | -                                    
|Exercised                          |  | (109,900)           |  | 4.35                                 
|Canceled or lapsed                 |  | (107,800)           |  | 7.08                                 
|                                   |  |                     |  |                                      
|Outstanding December
     31, 1999 |  | 654,183             |  | 4.80                                 
|                                   |  |                     |  |                                      
|Exercisable December
     31, 1997 |  | 347,611             |  | 3.32                                 
|                                   |  |                     |  |                                      
|Exercisable December
     31, 1998 |  | 458,584             |  | 4.23                                 
|                                   |  |                     |  |                                      
|Exercisable December
     31, 1999 |  | 449,461             |  | 4.11                                 
|                                   |  |                     |  |                                      

The following table summarizes information
   about stock options under the 1993 Stock Plan at December 31,
   1999:



|Range of
   
   Exercise Prices | Number of
   
   Options
   
   Oustanding  |  | Weighted
   
   Average
   
   Contractual
   
   Life                             |  | Weighted
   
   Average
   
   Exercise Price
|------------------------------- | ------------------------------------------- |  | ---------------------------------------------------------------------------------- |  | ---------------------------------------------
|                                |                                             |  |                                                                                    |  |                                              
|$ 1.00 - $ 2.50                 | 162,700                                     |  | 5.3 years                                                                          |  | $2.11                                        
|2.51 -   
      4.10            | 242,550                                     |  | 6.7 years                                                                          |  | 3.47                                         
|4.11 -   
      7.50            | 205,733                                     |  | 7.6 years                                                                          |  | 7.40                                         
|7.51 -
      10.09              | 43,200                                      |  | 7.7 years                                                                          |  | 10.00                                        
|                                |                                             |  |                                                                                    |  |                                              
|                                | 654,183                                     |  | 6.7
     years                                                                     |  | 4.80                                         
|                                |                                             |  |                                                                                    |  |                                              
|Range of
   
   Exercise Prices | Number of
   
   Options
   
   Exercisable |  | Weighted
   
   Average
   
   Exercise Price
   
   of Options
   
   Exercisable |  |                                              
|                                |                                             |  |                                                                                    |  |                                              
|$ 1.00 - $ 2.50                 | 156,100                                     |  | $
      2.09                                                                       |  |                                              
|2.51 -
        4.10             | 173,228                                     |  | 3.44                                                                               |  |                                              
|4.11 -
        7.50             | 106,933                                     |  | 7.43                                                                               |  |                                              
|7.51 -
      10.09              | 13,200                                      |  | 10.00                                                                              |  |                                              
|                                |                                             |  |                                                                                    |  |                                              
|                                | 449,461                                     |  | 4.11                                                                               |  |                                              
|                                |                                             |  |                                                                                    |  |                                              

In addition to the options granted under the
   1993 Stock Plan, the Company has granted non-plan options to purchase shares
   of Common Stock pursuant to individual agreements with Company employees and
   consultants. As of December 31, 1998 and 1999, there were 453,750 and 8,250
   options, respectively, outstanding which are not part of a specific plan.
   These options incorporate the provisions of the 1993 Stock Plan to the
   extent such provisions are not inconsistent with the terms of those
   options.

A summary of all non-plan stock option
   activity during the years ended December 31, 1997, 1998 and 1999 is as
   follows:



|                                   |  | Number
   of Shares |  | Weighted
   Average
   Exercise Price
|---------------------------------- |  | ------------------- |  | -------------------------------------
|                                   |  |                     |  |                                      
|Outstanding January 1,
     1997   |  | 456,000             |  | $1.40                                
|Granted                            |  | 114,000             |  | 4.10                                 
|Canceled or
     lapsed            |  | -                   |  | -                                    
|                                   |  |                     |  |                                      
|Outstanding December
     31, 1997 |  | 570,000             |  | 1.94                                 
|Granted                            |  | -                   |  | -                                    
|Exercised                          |  | (116,250)           |  | 1.17                                 
|Canceled or
     lapsed            |  | -                   |  | -                                    
|                                   |  |                     |  |                                      
|Outstanding December
     31, 1998 |  | 453,750             |  | 2.14                                 
|Granted                            |  | -                   |  | -                                    
|Exercised                          |  | (388,500)           |  | 1.88                                 
|Canceled
     or lapsed            |  | (57,000)            |  | 4.10                                 
|                                   |  |                     |  |                                      
|Outstanding December
     31, 1999 |  | 8,250               |  | 1.00                                 
|                                   |  |                     |  |                                      
|Exercisable December
     31, 1997 |  | 349,500             |  | 1.31                                 
|                                   |  |                     |  |                                      
|Exercisable December
     31, 1998 |  | 315,000             |  | 1.68                                 
|                                   |  |                     |  |                                      
|Exercisable December
     31, 1999 |  | 8,250               |  | 1.00                                 
|                                   |  |                     |  |                                      



The following table summarizes information
   about non-plan stock options at December 31, 1999:

|Number of
   
   Options
   
   Outstanding |                                             | Weighted
   
   Average
   
   Contractual
   
   Life |                                                                                    | Weighted
   
   Average
   
   Excercise Price
|------------------------------------------- | ------------------------------------------- | ------------------------------------------------------ | ---------------------------------------------------------------------------------- | ----------------------------------------------
|                                            |                                             |                                                        |                                                                                    |                                               
|                                            |                                             |                                                        |                                                                                    |                                               
|$ 1.00 - $ 2.50                             | 8,250                                       |                                                        | 4.0 Years                                                                          |                                               
|                                            |                                             |                                                        |                                                                                    |                                               
|                                            |                                             |                                                        |                                                                                    |                                               
|Range of
   
   Exercise Prices             | Number of
   
   Options
   
   Exercisable |                                                        | Weighted
   
   Average
   
   Exercise Price
   
   of Options
   
   Exercisable |                                               
|                                            |                                             |                                                        |                                                                                    |                                               
|                                            |                                             |                                                        |                                                                                    |                                               
|$ 1.00 - $ 2.50                             | 8,250                                       |                                                        | $1.00                                                                              |                                               
|                                            |                                             |                                                        |                                                                                    |                                               



The Company's 1997 Stock Plan was approved by
   the Company's Board of Directors and stockholders in October 1997. The 1997
   Stock Plan provides for the issuance of stock options and stock grants
   (''Stock Rights'') to employees, directors and consultants of the Company. A
   total of 1,500,000 shares of Common Stock have been reserved for issuance
   under the 1997 Stock Plan. At the May 1999 Annual Meeting of the
   Shareholders of the Company, the holders of shares of the Corporation's
   Common Stock approved an amendment to and restatement of the 1997 Stock
   Option Plan to increase the number of shares of Common Stock reserved for
   issuance of options granted pursuant to such Plan from 1,500,000 to
   3,500,000. The 1997 Stock Plan is administered by the Compensation Committee
   of the Board of Directors. The Compensation Committee has the authority to
   administer the provisions of the 1997 Stock Plan and to determine the
   persons to whom Stock Rights will be granted, the number of shares to be
   covered by each Stock Right and the terms and conditions upon which a Stock
   Right may be granted. At December 31, 1997, the Company had 65,000 options
   outstanding under the 1997 Stock Plan and an additional 1,435,000 available
   for grant. At December 31, 1998, the Company had 1,276,100 options
   outstanding under the 1997 Stock Plan and an additional 223,900 available
   for grant. As of December 31, 1999, the Company had 1,488,833 options
   outstanding under the 1997 Stock Plan and an additional 2,011,167 available
   for grant. In addition, 50,019 stock options have been exercised under the
   1997 Stock Plan as of December 31, 1999.

A summary of all stock option activity under
   the 1997 Stock Plan during the years ended December 31, 1997, 1998 and 1999
   is as follows:



|                                   | Number
   of Shares |  | Weighted
   Average
   Exercise Price
|---------------------------------- | ------------------- |  | -------------------------------------
|                                   |                     |  |                                      
|Outstanding January 1,
     1997   | 65,000              |  | 11.50                                
|Granted                            | 1,306,100           |  | 8.73                                 
|Exercised                          | -                   |  | -                                    
|Canceled or
     lapsed            | (95,000)            |  | 11.33                                
|                                   |                     |  |                                      
|Outstanding December
     31, 1998 | 1,276,100           |  | 8.68                                 
|Granted                            | 599,500             |  | 9.66                                 
|Exercised                          | (50,019)            |  | 9.14                                 
|Canceled or
     lapsed            | (336,748)           |  | 8.88                                 
|                                   |                     |  |                                      
|Outstanding December
     31, 1999 | 1,488,833           |  | 9.02                                 
|                                   |                     |  |                                      
|Exercisable December
     31, 1997 | 21,668              |  | 11.50                                
|                                   |                     |  |                                      
|Exercisable December
     31, 1998 | 70,383              |  | 10.98                                
|                                   |                     |  |                                      
|Exercisable December
     31, 1999 | 314,306             |  | 8.51                                 
|                                   |                     |  |                                      

The following table summarizes information
   about stock options under the 1997 Stock Plan at December 31,
   1999:

|Range of
   
   Exercise Prices | Number of
   
   Options
   
   Oustanding |  | Weighted
   
   Average
   
   Contractual
   
   Life |  | Weighted
   
   Average
   
   Exercise Price
|------------------------------- | ------------------------------------------ |  | ------------------------------------------------------ |  | ---------------------------------------------
|                                |                                            |  |                                                        |  |                                              
|$ 4.11 - $ 7.50                 | 596,933                                    |  | 8.4 years                                              |  | $6.60                                        
|7.51 -
      10.00              | 360,000                                    |  | 9.5 years                                              |  | 7.75                                         
|10.01 -  11.94                  | 373,900                                    |  | 8.1 years                                              |  | 11.37                                        
|11.95 -  16.81                  | 158,000                                    |  | 9.7 years                                              |  | 15.51                                        
|                                |                                            |  |                                                        |  |                                              
|                                | 1,488,833                                  |  | 8.7 years                                              |  | 9.02                                         
|                                |                                            |  |                                                        |  |                                              
|Range of
   
   Exercise Prices
|                                |                                            |  |                                                        |  |                                              
|$ 4.11 - $ 7.50                 | 183,940                                    |  | $6.43                                                  |  |                                              
|7.51 -
      10.00              | 1,666                                      |  | 7.94                                                   |  |                                              
|10.01 -  11.94                  | 128,700                                    |  | 11.49                                                  |  |                                              
|11.95 -  16.81                  | -                                          |  | -                                                      |  |                                              
|                                |                                            |  |                                                        |  |                                              
|                                | 314,306                                    |  | 8.51                                                   |  |                                              
|                                |                                            |  |                                                        |  |                                              

Had compensation cost for the Company's stock option plans been determined
   in accordance with SFAS 123, the Company's net loss attributable to common
   stockholders and net loss per share attributable to common stockholders
   would have approximated the pro forma amounts shown below for each of the
   years ended December 31, 1997, 1998 and 1999.



|                                   | December
     31,
|---------------------------------- | -----------------
|                                   |                  
|                                   | 1997             
|                                   |                  
|                                   | As Reported      
|                                   |                  
|Net loss attributable to           |                  
|common
     stockholders           | $(7,290,434)     
|Net loss per share attributable to |                  
|common
     stockholders           | $(.92)           

The assumptions utilized by the Company in
   deriving the pro forma amounts for the years ended December 31, 1997 are as
   follows: 1) 0% dividend yield, 2) .1% expected volatility, 3) risk-free
   interest rate of approximately 6%, and 4) expected life of the options of 10
   years. The assumptions utilized by the Company in deriving the pro forma
   amounts for the year ended December 31, 1998 are as follows: 1) 0% dividend
   yield, 2) 50% expected volatility, 3) risk-free interest rate of
   approximately 5.25%, and 4) expected life of the options of 10 years. The
   assumptions utilized by the Company in deriving the pro forma amounts for
   the year ended December 31, 1999 are as follows: 1) 0% dividend yield, 2)
   102% expected volatility, 3) risk-free interest rate of approximately 5.25%,
   and 4) expected lives of the options between 5.2 and 8.7 years. The weighted
   average grant date fair value of options granted during the years ended
   December 31, 1997, 1998, and 1999 was approximately $6.14 per share, $5.77
   per share and $6.46 per share, respectively.

Preferred Stock

The Company received aggregate consideration
   of $1,750,000 from five investors as subscriptions for the purchase of
   175,000 shares of Series B Preferred Stock. In September 1996, October 1996
   and January 1997, the Company received proceeds of $1,600,000, $50,000 and
   $100,000, respectively. The Series B Preferred Stock was non-convertible and
   accrued dividends at the prime rate. Dividends were payable when declared by
   the Board of Directors. Dividends in arrears at December 31, 1997 were
   $181,563. Upon completing a qualified equity financing, as defined in the
   Series B Preferred Stock Agreement, the Company was entitled to redeem all
   of the shares of the Series B Preferred Stock. The completion of the
   Company's initial public offering satisfied such requirement, and
   accordingly, in March 1998, the Company redeemed all of such Series B
   Preferred Stock for an aggregate redemption price of $1,750,000, plus
   accrued dividends and dividends in arrears.

In addition, holders of the Series B Preferred
   Stock received 5 year warrants to purchase an aggregate of 358,361 shares of
   Common Stock at $5.86 per share, which warrants expire on March 27, 2002.
   Such warrants were valued at $376,334. The value of such warrants was
   accreted over the warrant period and such accretion was classified as
   preferred dividends. For the years ended December 31, 1997 and 1998, such
   accretion amounted to $68,424 and $17,106, respectively.

In December 1996, in connection with the Genentech Evaluation Agreement
   (see Note 4), Genentech purchased 307,167 shares of Series A Preferred Stock
   for $1,800,000, or $5.86 per share. In March 1997, the Company issued
   2,011,468 shares of convertible Series C Preferred Stock for an aggregate
   purchase price of $11,787,202. In addition, three year warrants were issued
   to certain purchasers of the Series C Preferred Stock to purchase an
   aggregate of 366,894 shares of Common Stock at an exercise price of $9.00
   per share. Such warrants were valued at $0 upon issuance. In May 1997, as a
   result of the Pioneer Hi-Bred Agreement (see Note 4), the Company issued
   1,000,000 shares of Series D Convertible Preferred Stock, for an aggregate
   purchase price of $7,500,000. In June 1997, the Company issued 100,000
   shares of Series E Convertible Preferred Stock for an aggregate purchase
   price of $1,000,001.

In March 1998, upon the closing of the initial
   public offering of its Common Stock, the Company automatically converted the
   Series A, C, D and E Preferred Stock into shares of Common Stock on a 1 for
   1 basis.

7. Income Taxes











The deferred income tax assets
   are primarily a result of the federal and Connecticut net operating loss and
   research and development credit carryforwards and timing differences
   relating to accrued payroll and depreciation and amortization. As the
   Company has no prior earnings history, a valuation allowance has been
   established due to the Company's uncertainty in its ability to benefit from
   the federal and Connecticut net operating loss carryforwards. The change in
   the valuation allowance was $4,068,000, $9,470,000 and $14,800,000 for the
   years ended December 31, 1997, 1998 and 1999, respectively.

At December 31, 1999, the Company
   had federal and Connecticut net operating loss carryforwards for income tax
   purposes of approximately $56,000,000 and $51,000,000, respectively. Federal
   net operating loss carryforwards expire beginning in 2008, and Connecticut
   net operating loss carryforwards began expiring in 1998. The Company also
   had federal and Connecticut research and development tax credit
   carryforwards for income tax purposes of approximately $3,000,000 and
   $3,200,000, respectively at December 31, 1999.

8. Grants

The Company has received federal
   grants for specific purposes that are subject to review and audit by the
   grantor agencies. Such audits could lead to requests for reimbursement by
   the grantor agency for any expenditures disallowed under the terms of the
   grant. Additionally, any noncompliance with the terms of the grant could
   lead to loss of current or future awards.

During 1995, the Company received
   two grants from CII in the amounts of $450,000 and $237,500. The term of the
   $450,000 grant is January 4, 1995 to December 31, 2004, and the term of the
   $237,500 grant is February 1, 1995 to January 31, 2005. The Company could be
   required to repay 100% of these amounts if during the terms of the
   respective grants (i) the Company breaches and fails to cure a material
   covenant, (ii) a material representation or warranty of the Company becomes
   untrue and is not cured, (iii) the Company becomes bankrupt or insolvent or
   liquidates its assets, or (iv) the Company is required to repay the federal
   grants to which the CII grants relate. In addition, the Company could be
   required to repay up to 200% of the amounts of the CII grants if the Company
   ceases to have a "Connecticut presence," during the terms of the
   respective grants.

9. Subsequent
   Events

Convertible Debt Offering

On February 2, 2000, the Company completed an
   offering for $125,000,000 of 6% convertible subordinated debentures due 2007
   and received net proceeds of approximately $121,250,000. In addition, on
   February 16, 2000, the initial purchasers exercised their option to purchase
   an additional $25,000,000 of 6% convertible subordinated debentures due
   2007, providing the Company with additional net proceeds of approximately
   $24,308,000. The debentures may be resold by the initial purchasers to
   qualified institutional buyers under Rule 144A of the Securities Act and to
   non-U.S. persons outside the United States under Regulation S under the
   Securities Act. The debentures are convertible into the Company's Common
   Stock. In addition, prior to February 2, 2003, if the Company's Common Stock
   price reaches specified levels, it has the right to redeem the debentures at
   a premium by converting the debentures into Common Stock. If the price of
   the Company's Common Stock reaches $217.01 for 20 of 30 consecutive trading
   days prior to February 2, 2003, it may redeem all of the debentures by
   converting them into Common Stock. If the Company was to convert the
   debentures prior to February 2, 2003, in addition to the interest accrued
   and unpaid, the Company would make an interest make-whole payment equal to
   the present value of the aggregate amount of the interest that would
   otherwise have accrued from the provisional redemption date through February
   2, 2003. The Company has agreed to file a registration statement with the
   SEC for the resale of any shares issued as a result of the conversion of the
   debentures by May 2000.

Stock Split

On March 2, 2000 the Company announced a
   two-for-one split of its Voting and Non-Voting Common Stock payable to its
   stockholders in the form of a stock dividend. On March 30, 2000, the
   Company's stockholders of record will receive one additional share of its
   Voting Common Stock for every share of Voting Common Stock and one
   additional share of Non-Voting Common Stock for every share of Non-Voting
   Common Stock each stockholder owns at the close of business on March 15,
   2000.

As a result of this announcement, a proforma
   presentation of basic and diluted net loss per share attributable to the
   Company's common stockholders for the years ended December 31, 1997, 1998
   and 1999 has been included on the accompanying "Statements of Operations
   " (See Item 8. Financial Statements and Supplementary Data).



10. Supplemental Disclosure

Summary Selected Quarterly Financial Data
   (Unaudited)





|                                                  |  |              
|------------------------------------------------- |  | -------------
|                                                  |  | Quarter Ended
|                                                  |  |              
|                                                  |  | March 31     
|                                                  |  |              
|1999:                                             |  |              
|Total
     revenues                               |  | $2,671,943   
|Total operating
     expenses                     |  | 10,181,137   
|Net loss
     attributable to common stockholders |  | (7,206,927)  
|Net loss per
     common share                    |  | (0.54)       
|1998:                                             |  |              
|Total
     revenues                               |  | $1,989,572   
|Total operating
     expenses                     |  | 5,193,696    
|Net loss
     attributable to common stockholders |  | (3,675,948)  
|Net loss per
     common share                    |  | (0.40)       



INDEPENDENT AUDITORS'
   REPORT

To the Board of Directors
 
 of CuraGen Corporation
 
 New Haven, Connecticut

We have audited the accompanying balance
   sheets of CuraGen Corporation (the "Company") as of December 31,
   1998 and 1999, and the related statements of operations, changes in
   stockholders' equity (deficiency) and cash flows for each of the three years
   in the period ended December 31, 1999. These financial statements are the
   responsibility of the Company's management. Our responsibility is to express
   an opinion on these financial statements based on our audits.

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

In our opinion, the financial statements
   referred to above present fairly, in all material respects, the financial
   position of the Company at December 31, 1998 and 1999, and the results of
   its operations and its cash flows for each of the three years in the period
   ended December 31, 1999, in conformity with generally accepted accounting
   principles.

/s/ Deloitte & Touche LLP

Hartford, Connecticut
 
 January 19, 2000
 
 (except as to Footnote 9, as to which the date is February 16, 2000 with
   respect to the Convertible Debt Offering and March 2, 2000 with respect to
   the Stock Split.)



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

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
   OF THE REGISTRANT

The response to this item is incorporated by
   reference from the discussion responsive thereto under the captions
   "Management" and "Section 16(a) Beneficial Ownership
   Reporting Compliance" in our Proxy Statement for the 2000 Annual
   Meeting of Stockholders.

ITEM 11. EXECUTIVE
   COMPENSATION

The response to this item is incorporated by
   reference from the discussion responsive thereto under the caption
   "Executive Compensation" in our Proxy Statement for the 2000
   Annual Meeting of Stockholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN
   BENEFICIAL OWNERS AND MANAGEMENT

The response to this item is incorporated by
   reference from the discussion responsive thereto under the caption
   "Security Ownership of Certain Beneficial Owners and Management"
   in our Proxy Statement for the 2000 Annual Meeting of
   Stockholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
   TRANSACTIONS

The response to this item is incorporated by
   reference from the discussion responsive thereto under the captions
   "Executive Compensation-Employment Agreements and Other Termination of
   Employment Agreements" and "Related Transactions" in our
   Proxy Statement for the 2000 Annual Meeting of Stockholders.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT
   SCHEDULES, AND REPORTS ON FORM 8-K.





|ITEM 14 (a)(3) EXHIBITS.                                                                  
|------------------------------------------------------------------------------------------
|The following is a list of exhibits filed as part of this Annual
     Report on Form 10-K.
|                                                                                          
|EXHIBIT
     NO.                                                                          
|                                                                                          
|@3.1                                                                                      
|@3.2                                                                                      
|@4.1                                                                                      
|@4.2                                                                                      
|%10.1                                                                                     
|#10.2                                                                                     
|@10.3                                                                                     
|10.4                                                                                      
|@10.5                                                                                     
|@10.6                                                                                     
|$10.7                                                                                     
|+!10.8                                                                                    
|@10.9                                                                                     
|@10.10                                                                                    
|+@10.11                                                                                   
|+@10.12                                                                                   
|+@10.13                                                                                   
|+@10.14                                                                                   
|+@10.15                                                                                   
|+@10.16                                                                                   
|@10.17                                                                                    
|@10.18                                                                                    
|@10.19                                                                                    
|@10.20                                                                                    
|+%10.21                                                                                   
|+&10.22                                                                                   
|÷10.23                                                                                    
|*11.1                                                                                     
|*21.1                                                                                     
|*23.1                                                                                     
|*27.1                                                                                     



|* |  | Filed herewith                                                                                                                                                       
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|@ |  | Previously filed with the Commission
     as Exhibits to, and incorporated herein by reference from,                                                                 
|  |  | the Registrant's Registration
     Statement filed on Form S-1, File No. 333-38051.                                                                                  
|# |  | Previously filed with the Commission and
     incorporated herein by reference from the Form 10-Q, File No. 000-23223,
     for the period ending June 30, 1998.     
|% |  | Previously filed with the Commission and
     incorporated herein by reference from the Form 10-K, File No. 000-23223,
     for the year ended December 31, 1998.    
|! |  | Previously filed with the Commission and
     incorporated herein by reference from the Form 10-K, File No.
     000-23223, for the year ended March
     31, 1999.  
|& |  | Previously filed with the Commission and
     incorporated herein by reference from the Form 10-Q, File No. 000-23223,
     for the period ending June 30, 1999.     
|÷ |  | Previously filed with the Commission and
     incorporated herein by reference from the Form 10-Q, File No. 000-23223,
     for the period ending September 30, 1999.
|$ |  | Previously filed as Exhibit 99.3 to the
     Company's Registration Statement on Form S-8, File No. 333-56829, and
     incorporated herein by reference.            
|= |  | Previously filed as Exhibit 99.1 to the Company's Registration Statement
     on Form S-8, File No. 333-89465, and incorporated herein by reference.                 
|+ |  | Confidential Treatment has been
     granted by the Commission as to certain portions.                                                                               

Where a document is incorporated
   by reference from a previous filing, the Exhibit number of the document in
   that previous filing is indicated in parentheses after the description of
   such document.

# ITEM 14 (b) REPORTS ON FORM
   8-K

The following Reports on Form 8-K were filed
   by the Company during the quarter ended December 31, 1999:

September 8, 1999 - Item 5, Other Events -
   private placement of 1,500,000 shares of common stock to Pequot Capital
   Management, Inc.

December 20, 1999 - Item 5, Other Events -
   private placement of 418,995 shares of common stock to, and strategic
   alliance with, Abgenix, Inc.





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: March 7, 2000 |  | CuraGen Corporation                     
|-------------------- |  | ----------------------------------------
|                     |  |                                         
|                     |  |                                         
|                     |  | By: /s/ David M.
     Wurzer            
|                     |  | David M. Wurzer                         
|                     |  | Executive Vice-President,
     Treasurer
|                     |  | and Chief Financial
     Officer        

Pursuant
   to the requirements of the Securities Exchange Act of 1934, this report has
   been signed below by the following persons on behalf of Registrant and in
   the capacities indicated on March 7, 2000.

|Signature                                                    |  | Title                                                                                                                                  
|------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------
|                                                             |  |                                                                                                                                        
|/s/ Jonathan M.
     RothbergJonathan M. Rothberg            |  | Chief Executive Officer,
     Chairman
   
   of the Board of Directors and President
   
   (principal executive officer and director)
|                                                             |  |                                                                                                                                        
|/s/ David M. WurzerDavid M. Wurzer                           |  | Executive
     Vice-President, Treasurer
   
   and Chief Financial Officer
   
   (principal financial and accounting officer)        
|                                                             |  |                                                                                                                                        
|/s/ Richard H.
     Booth
   
   Richard H. Booth            |  | Director                                                                                                                               
|                                                             |  |                                                                                                                                        
|/s/ Vincent T.
     DeVita, Jr.
   
   Vincent T. DeVita, Jr |  | Director                                                                                                                               
|                                                             |  |                                                                                                                                        
|/s/ Robert E. PatricelliRobert E. Patricelli                 |  | Director                                                                                                                               
|                                                             |  |                                                                                                                                        
|/s/ Randy ThurmanRandy Thurman                               |  | Director                                                                                                                               



EXHIBIT INDEX

|EXHIBIT
     NUMBER |  | DESCRIPTION                                       
|------------------- |  | --------------------------------------------------
|                    |  |                                                   
|11.1                |  | Schedule of Computation of Net
     Loss Per Share
|                    |  |                                                   
|21.1                |  | Subsidiaries of the
     Registrant               
|                    |  |                                                   
|23.1                |  | Consent of Deloitte &
     Touche LLP             
|                    |  |                                                   
|27.1                |  | Financial Data
     Schedule