Curis (CRIS)

Liquidity and Capital Resources

We have financed our operations primarily through license fees, contingent cash payments and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At March 31, 2009, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $30,003,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We maintain cash balances with financial institutions in excess of insured limits. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or marketable securities since March 31, 2009, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Further dislocations in the credit market may adversely impact the value and/or liquidity of marketable securities owned by us.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees. During 2008, we began incurring clinical costs associated with our phase I trial of CUDC-101. We expect that costs associated with clinical studies will increase in future periods assuming that CUDC-101 advances into further stages of clinical testing and other of our targeted cancer drug candidates reach clinical trials.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. As a result of the conclusion of all research funding, the majority of our research and development effort and expense has shifted from our programs that were funded under collaborations relating to the Hedgehog pathway and various discovery and preclinical programs to the development of our targeted cancer programs, particularly for our lead targeted cancer drug candidate, CUDC-101, and CUDC-305, which is currently being evaluated in IND-enabling studies.

While we are seeking a corporate collaborator for one or more of our targeted cancer programs, we are currently progressing the research and development of these programs on our own. We believe that our research and development expenses will increase in future years in connection with our plans to continue phase I clinical testing for CUDC-101 and to progress CUDC-305 in preclinical testing toward an anticipated IND filing in mid-2009. We are actively seeking collaborators for our targeted cancer drug candidates, particularly CUDC-305, but have not reached advanced stages of negotiation with any party. Our intention is to enter into a license or collaboration agreement with CUDC-305 prior to initiation of phase I clinical testing. If we are unable to consummate such a transaction, we would consider our further development options for CUDC-305. Our ability to progress CUDC-305 would depend on a number of factors including, our future cash position and the overall financial markets, and phase I data generated by CUDC-101, among others.

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In general, our only source of cash flows from operations for the foreseeable future will be from up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of development objectives, if any are met, under new collaborations or our existing collaborations with Genentech and royalty payments that are contingent upon the successful commercialization of any products based upon collaborations. The timing of or entrance into any new collaboration agreements and any contingent cash payments under our existing collaboration agreements with Genentech are not assured, cannot be easily predicted and may vary significantly from quarter to quarter.

Net cash provided by operating activities was $1,201,000 for the three-month period ended March 31, 2009 as compared to net cash used of $5,977,000 for the three-month period ended March 31, 2008. Cash provided by operating activities during the three-month period ended March 31, 2009 was primarily the result of our net income for the period of $1,125,000. In addition, changes in certain operating assets and liabilities affected operating cash during the three-month period ended March 31, 2009, including a decrease of $676,000 in our accounts payable and accrued liabilities and an increase of $109,000 in prepaids and other assets. Offsetting these uses of operating cash was noncash stock-based compensation expense of $599,000 and depreciation of $191,000.

We expect to continue to use cash in operations as we continue to seek to advance our targeted cancer drug programs through preclinical testing and into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and other specified objectives.

Investing activities used cash of $1,569,000 for the three-month period ended March 31, 2009 resulting principally from $1,562,000 in net investment purchases for the period. Investing activities provided cash of $5,062,000 for the three-month period ended March 31, 2008 principally from $5,096,000 in net investment sales during the period. We currently do not expect to undertake any significant capital projects during 2009.

There were no cash flows from financing activities for the three-month period ended March 31, 2009. Financing activities used cash of approximately $241,000 for the three-month period ended March 31, 2008, resulting from repayment of $308,000 on our notes with the Boston Private Bank & Trust Company, which were fully repaid and canceled in April 2008.

We anticipate that existing capital resources at March 31, 2009 should enable us to maintain current and planned operations into the second half of 2010. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials, for the foreseeable future. Our ability to continue funding planned operations beyond into the second half of 2010 is dependent upon, among other things, the success of our collaborations, our ability to control our cash burn rate and our ability to raise additional funds through additional corporate collaborations, equity or debt financings, or from other sources of financing. We are seeking additional collaborative arrangements and also anticipate that we will seek to raise funds through one or more financing transactions, if conditions permit. Due to our significant long-term capital requirements, we intend to seek to raise funds through the sale of debt or equity securities when conditions are favorable, even if we do not have an immediate need for additional capital at such time. Our general business strategy may be adversely affected by the recent economic downturn and volatile business environment and continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate further, or do not improve, it may make any necessary debt or equity financing more difficult or impossible, more costly, and more dilutive. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon clinical development plans. In addition, there is a risk that one or more of our current service providers, manufacturers and other partners may not survive these difficult economic times, which could directly affect our ability to attain our operating goals on schedule and on budget. See “Part II, Item 1A—Risk Factors,” for a further discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional capital.

Liquidity and Capital Resources

We have financed our operations primarily through license fees, contingent cash payments and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At December 31, 2008, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $28,853,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We maintain cash balances with financial institutions in excess of insured limits. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or marketable securities since December 31, 2008, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Further dislocations in the credit market may adversely impact the value and/or liquidity of marketable securities owned by us.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees. During the third quarter of 2008, we began incurring clinical costs associated with our phase I trial of CUDC-101. We expect that costs associated with clinical studies will increase in future periods assuming that CUDC-101 advances into further stages of clinical testing and other of our targeted cancer drug candidates reach clinical trials.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. As a result of the conclusion of all research funding, the majority of our research and development effort and expense has shifted from our programs that were funded under collaborations relating to the Hedgehog pathway and various discovery and preclinical programs to the development of our targeted cancer programs, particularly for our lead targeted cancer drug candidate, CUDC-101, and CUDC-305, which we selected as a development candidate in July 2008 and is currently being evaluated in IND-enabling studies.

While we are seeking a corporate collaborator for one or more of our targeted cancer programs, we are currently progressing the research and development of these programs on our own. We believe that our research and development expenses will increase in future years in connection with our plans to continue phase I clinical testing for CUDC-101 and to progress CUDC-305 in preclinical testing toward an anticipated IND filing in mid-2009. We are actively seeking collaborators for our targeted cancer drug candidates, particularly CUDC-305, but have not reached advanced stages of negotiation with any party. Our intention is to enter into a license

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or collaboration agreement with CUDC-305 prior to initiation of phase I clinical testing. If we are unable to consummate such a transaction, we would consider our further development options for CUDC-305. Our ability to progress CUDC-305 would depend on a number of factors including, our future cash position and the overall financial markets, and phase I data generated by CUDC-101, among others.

In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of development objectives, if any are met, under new collaborations or our existing collaborations with Genentech and royalty payments that are contingent upon the successful commercialization of any products based upon collaborations. The timing of or entrance into any new collaboration agreements and any contingent cash payments under our existing collaboration agreements with Genentech are not assured, cannot be easily predicted and may vary significantly from quarter to quarter.

Net cash used in operating activities was $12,441,000 for the year ended December 31, 2008, compared to $8,594,000 for the year ended December 31, 2007. Cash used in operating activities during the year ended December 31, 2008 was primarily the result of our net loss for the period of $12,123,000. In addition, changes in certain operating assets and liabilities affected operating cash during the year ended December 31, 2008, including a decrease in deferred revenue of $1,853,000 as a result of the recognition of the $1,750,000 license fee that we received in December 2007 under our BMP transaction with Stryker Corporation and a decrease of $1,961,000 in our accounts payable and accrued liabilities. Offsetting these decreases were noncash items stock-based compensation expense of $2,206,000 and depreciation of $999,000.

Cash used in operating activities during the years ended December 31, 2007 was primarily the result of our net loss for the period of $6,964,000. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during year ended December 31, 2007. Specifically, our deferred revenue decreased $9,034,000 as a result of accelerated license fee amortization under our Genentech and Procter & Gamble collaborations. Offsetting this decrease, our accounts receivables decreased $1,112,000 primarily related to our Microment settlement, and our accounts payable and accrued liabilities increased $1,201,000. Finally, several noncash items further offset our net loss, including stock-based compensation expense of $3,190,000, depreciation of $1,302,000 and impairment of assets of $497,000.

We expect to continue to use cash in operations as we continue to seek to advance our targeted cancer drug programs through preclinical testing and into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and other specified objectives.

Investing activities provided cash of $5,316,000 for the year ended December 31, 2008, resulting from $5,376,000 in net investment sales to fund ongoing operations. Investing activities used $5,919,000 of cash for the year ended December 31, 2007, resulting from $6,160,000 in net investment purchases primarily related to investment of funds received from our August 2007 private placement. In addition, for the year ended December 31, 2007, we received $316,000 in net proceeds from the sale of certain of our assets used to pay down our outstanding principal obligations to the Boston Private Bank & Trust Company. We currently do not expect to undertake any significant capital projects during 2009.

Financing activities used cash of approximately $112,000 for the year ended December 31, 2008, resulting from repayment of $401,000 on our notes with the Boston Private Bank & Trust Company, which were canceled in April 2008. This decrease in cash was offset by cash received of $289,000 upon the exercise of stock options and purchases under our employee stock purchase plan. Financing activities provided cash of $13,080,000 for the year ended December 31, 2007, resulting primarily from $14,646,000 received in issuances of common stock, including net proceeds of $14,422,000 from our August 2007 private placement of common stock and $224,000 received upon the exercise of stock options and purchases under our employee stock purchase plan. Offsetting these increases in cash, we repaid $1,565,000 of our term debt with the Boston Private Bank & Trust Company.

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Liquidity and Capital Resources

We have financed our operations primarily through license fees, contingent cash payments and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At December 31, 2008, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $28,853,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We maintain cash balances with financial institutions in excess of insured limits. While as of the date of this filing, we are not aware of any downgrades, material losses, or other significant deterioration in the fair value of our cash equivalents or marketable securities since December 31, 2008, no assurance can be given that further deterioration in conditions of the global credit and financial markets would not negatively impact our current portfolio of cash equivalents or marketable securities or our ability to meet our financing objectives. Further dislocations in the credit market may adversely impact the value and/or liquidity of marketable securities owned by us.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees. During the third quarter of 2008, we began incurring clinical costs associated with our phase I trial of CUDC-101. We expect that costs associated with clinical studies will increase in future periods assuming that CUDC-101 advances into further stages of clinical testing and other of our targeted cancer drug candidates reach clinical trials.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. As a result of the conclusion of all research funding, the majority of our research and development effort and expense has shifted from our programs that were funded under collaborations relating to the Hedgehog pathway and various discovery and preclinical programs to the development of our targeted cancer programs, particularly for our lead targeted cancer drug candidate, CUDC-101, and CUDC-305, which we selected as a development candidate in July 2008 and is currently being evaluated in IND-enabling studies.

While we are seeking a corporate collaborator for one or more of our targeted cancer programs, we are currently progressing the research and development of these programs on our own. We believe that our research and development expenses will increase in future years in connection with our plans to continue phase I clinical testing for CUDC-101 and to progress CUDC-305 in preclinical testing toward an anticipated IND filing in mid-2009. We are actively seeking collaborators for our targeted cancer drug candidates, particularly CUDC-305, but have not reached advanced stages of negotiation with any party. Our intention is to enter into a license

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or collaboration agreement with CUDC-305 prior to initiation of phase I clinical testing. If we are unable to consummate such a transaction, we would consider our further development options for CUDC-305. Our ability to progress CUDC-305 would depend on a number of factors including, our future cash position and the overall financial markets, and phase I data generated by CUDC-101, among others.

In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of development objectives, if any are met, under new collaborations or our existing collaborations with Genentech and royalty payments that are contingent upon the successful commercialization of any products based upon collaborations. The timing of or entrance into any new collaboration agreements and any contingent cash payments under our existing collaboration agreements with Genentech are not assured, cannot be easily predicted and may vary significantly from quarter to quarter.

Net cash used in operating activities was $12,441,000 for the year ended December 31, 2008, compared to $8,594,000 for the year ended December 31, 2007. Cash used in operating activities during the year ended December 31, 2008 was primarily the result of our net loss for the period of $12,123,000. In addition, changes in certain operating assets and liabilities affected operating cash during the year ended December 31, 2008, including a decrease in deferred revenue of $1,853,000 as a result of the recognition of the $1,750,000 license fee that we received in December 2007 under our BMP transaction with Stryker Corporation and a decrease of $1,961,000 in our accounts payable and accrued liabilities. Offsetting these decreases were noncash items stock-based compensation expense of $2,206,000 and depreciation of $999,000.

Cash used in operating activities during the years ended December 31, 2007 was primarily the result of our net loss for the period of $6,964,000. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during year ended December 31, 2007. Specifically, our deferred revenue decreased $9,034,000 as a result of accelerated license fee amortization under our Genentech and Procter & Gamble collaborations. Offsetting this decrease, our accounts receivables decreased $1,112,000 primarily related to our Microment settlement, and our accounts payable and accrued liabilities increased $1,201,000. Finally, several noncash items further offset our net loss, including stock-based compensation expense of $3,190,000, depreciation of $1,302,000 and impairment of assets of $497,000.

We expect to continue to use cash in operations as we continue to seek to advance our targeted cancer drug programs through preclinical testing and into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and other specified objectives.

Investing activities provided cash of $5,316,000 for the year ended December 31, 2008, resulting from $5,376,000 in net investment sales to fund ongoing operations. Investing activities used $5,919,000 of cash for the year ended December 31, 2007, resulting from $6,160,000 in net investment purchases primarily related to investment of funds received from our August 2007 private placement. In addition, for the year ended December 31, 2007, we received $316,000 in net proceeds from the sale of certain of our assets used to pay down our outstanding principal obligations to the Boston Private Bank & Trust Company. We currently do not expect to undertake any significant capital projects during 2009.

Financing activities used cash of approximately $112,000 for the year ended December 31, 2008, resulting from repayment of $401,000 on our notes with the Boston Private Bank & Trust Company, which were canceled in April 2008. This decrease in cash was offset by cash received of $289,000 upon the exercise of stock options and purchases under our employee stock purchase plan. Financing activities provided cash of $13,080,000 for the year ended December 31, 2007, resulting primarily from $14,646,000 received in issuances of common stock, including net proceeds of $14,422,000 from our August 2007 private placement of common stock and $224,000 received upon the exercise of stock options and purchases under our employee stock purchase plan. Offsetting these increases in cash, we repaid $1,565,000 of our term debt with the Boston Private Bank & Trust Company.

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Liquidity and Capital Resources

Liquidity and Capital Resources

Liquidity and Capital Resources

We have financed our operations primarily through license fees, contingent cash payments and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At September 30, 2008, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $29,929,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We maintain cash balances with financial institutions in excess of insured limits. However, we do not anticipate any losses with respect to such cash balances because the balances are invested in highly rated securities. Our marketable securities are investments with expected maturities of greater than three months, but less than twelve months, and consist of commercial paper, corporate debt securities, and government obligations. We do not hold any asset-backed or auction rate securities.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees. During the third quarter of 2008, we began incurring clinical costs associated with our phase I trial of CUDC-101, which began in August 2008. We expect that costs associated with clinical studies will increase in future periods assuming that CUDC-101 advances into further stages of clinical testing and other of our targeted cancer drug candidates reach clinical trials.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. As a result of the conclusion of all research funding, the majority of our research and development effort and expense has shifted from our programs that were funded under collaborations relating to the Hedgehog pathway and various discovery and preclinical programs to the development of our targeted cancer programs, particularly for our lead targeted cancer drug candidate, CUDC-101, which is currently being tested in patients in a phase I clinical trial and CUDC-305, which we selected as a development candidate in July 2008 and is currently being tested in IND-enabling studies.

While we are seeking a corporate collaborator for one or more of our targeted cancer programs, we are currently progressing the research and development of these programs on our own. We believe that our research and development expenses will increase for the remainder of 2008 and in future years in connection with our plans to continue phase I clinical

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testing for CUDC-101 and to progress CUDC-305 in preclinical testing toward an anticipated IND filing in mid-2009. We are actively seeking collaborators for our targeted cancer drug candidates, particularly CUDC-305, but have not reached advanced stages of negotiation with any party. Our intention is to enter into a license or collaboration agreement with CUDC-305 prior to initiation of phase I clinical testing. If we are unable to consummate such a transaction, we would consider suspending further development of CUDC-305, at least temporarily. Our decision would be based on a number of factors including, phase I data generated by CUDC-101, our future cash position and the overall financial markets, among others.

In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of development objectives, if any are met, under new collaborations or our existing collaborations with Genentech and royalty payments that are contingent upon the successful commercialization of any products based upon collaborations. The timing of or entrance into any new collaboration agreements and any contingent cash payments under our existing collaboration agreements with Genentech are not assured, cannot be easily predicted and may vary significantly from quarter to quarter.

Net cash used in operating activities was $11,186,000 for the nine-month period ended September 30, 2008 as compared to $9,176,000 for the nine-month period ended September 30, 2007. Cash used in operating activities during the nine-month period ended September 30, 2008 was primarily the result of our net loss of $9,967,000. In addition, changes in certain operating assets and liabilities affected operating cash during the nine-month period ended September 30, 2008, including a decrease in deferred revenue of $1,853,000 as a result of the recognition of the $1,750,000 license fee that we received in December 2007 under our BMP transaction with Stryker Corporation and a decrease of $1,967,000 in our accounts payable and accrued liabilities. Offsetting these decreases were noncash items stock-based compensation expense of $1,774,000 and depreciation of $763,000.

Cash used in operating activities during the nine-month period ended September 30, 2007 was primarily the result of our net loss of $11,257,000 offset by increases in operating cash resulting from non-cash charges, including stock-based compensation expense of $2,434,000, depreciation of $1,047,000 and impairment of assets of $492,000 during the nine-month period ended September 30, 2007. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during the nine months ended September 30, 2007. Specifically, our accounts payable and accrued liabilities decreased $211,000 and our deferred revenue decreased $2,736,000 as a result of accelerated license fee amortization under our Genentech and Procter & Gamble collaborations. We also collected $1,101,000 of our accounts receivable primarily related to our Micromet settlement.

We expect to continue to use cash in operations as we continue to seek to advance our targeted cancer drug programs through preclinical testing and into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and other specified objectives.

Investing activities used cash of $621,000 for the nine-month period ended September 30, 2008 as compared to cash of $5,092,000 generated in the nine-month period ended September 30, 2007. Cash used by investing activities resulted principally from $561,000 in net investment purchases for the nine months ended September 30, 2008. Cash used by investing activities resulted principally from $5,334,000 in net investment purchases for the nine months ended September 30, 2007 primarily related to investment of funds received from our August 2007 private placement. In addition, for the nine months ended September 30, 2007, we received $316,000 in net proceeds from the sale of certain of our assets. We currently do not expect to undertake any significant capital projects during 2008.

Financing activities used cash of approximately $221,000 for the nine-month period ended September 30, 2008, resulting from repayment of $401,000 on our notes with the Boston Private Bank & Trust Company. This decrease in cash was offset by cash received of $181,000 upon the exercise of stock options and purchases under our employee stock purchase plan. Financing activities provided cash of $13,320,000 for the nine-month period ended September 30, 2007, resulting primarily from $14,578,000 received in issuances of common stock, including net proceeds of $14,422,000 from our August 2007 private placement of common stock and $156,000 received upon the exercise of stock options. Offsetting these increases in cash, we repaid $1,257,000 on our term debt with the Boston Private Bank & Trust Company.

We anticipate that existing capital resources at September 30, 2008, should enable us to maintain current and planned operations into the first half of 2010. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials, for the foreseeable future. Our ability to continue funding planned operations beyond the first half of 2010 is dependent upon, among other things, the success of our collaborations, our ability to control our cash burn rate and our ability to raise additional funds through additional corporate collaborations,

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equity or debt financings, or from other sources of financing. We are seeking additional collaborative arrangements and also anticipate that we will seek to raise funds through one or more financing transactions, if conditions permit. Due to our significant long-term capital requirements, we intend to seek to raise funds through the sale of debt or equity securities when conditions are favorable, even if we do not have an immediate need for additional capital at such time. Additional financing may not be available or, if available, it may not be available on favorable terms. In addition, the sale of additional debt or equity securities could result in dilution to our stockholders. If substantial additional funding is not available, our ability to fund research and development and other operations will be significantly affected and, accordingly, our business will be materially and adversely affected. See “Part II, Item 1A—Risk Factors,” for a further discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional capital.

Liquidity and Capital Resources

We have financed our operations primarily through license fees and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At June 30, 2008, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $33,914,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We maintain cash balances with financial institutions in excess of insured limits. However, we do not anticipate any losses with respect to such cash balances because the balances are invested in highly rated securities. Our marketable securities are investments with expected maturities of greater than three months, but less than twelve months, and consist of commercial paper, corporate debt securities, and government obligations. We do not hold any asset-backed or auction rate securities.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. As a result of the conclusion of all research funding, the majority of our research and development effort and expense has shifted from our programs that were funded under collaborations relating to the Hedgehog pathway and various discovery and preclinical programs to the development of programs under our targeted cancer drug development platform, particularly for our lead targeted cancer development candidate, CUDC-101, which is currently enrolling patients in a phase I clinical trial. While we are seeking a corporate collaborator for one or more of the programs in this platform, we are currently progressing the research and development of these programs on our own. We believe that our research and development expenses will increase for the remainder of 2008 in connection with our plans to commence phase I clinical testing for CUDC-101 and to progress CUDC-305 in preclinical testing toward an anticipated IND filing in mid-2009.

In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of development objectives, if any are met, under new collaborations or our existing collaborations with Genentech and royalty payments that are contingent upon the successful commercialization of any

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products based upon collaborations. The timing of or entrance into any new collaboration agreements and any contingent cash payments under our existing collaboration agreements with Genentech are not assured, cannot be easily predicted and may vary significantly from quarter to quarter.

Net cash used in operating activities was $7,182,000 for the six-month period ended June 30, 2008 as compared to $5,918,000 for the six-month period ended June 30, 2007. Cash used in operating activities during the six-month period ended June 30, 2008 was primarily the result of our net loss for the period of $5,395,000. In addition, changes in certain operating assets and liabilities affected operating cash during the six-month period ended June 30, 2008, including a decrease in deferred revenue of $1,853,000 as a result of the recognition of the $1,750,000 license fee that we received in December 2007 under our BMP transaction with Stryker Corporation and a decrease of $1,905,000 in our accounts payable and accrued liabilities. Offsetting these decreases were noncash items stock-based compensation expense of $1,280,000 and depreciation of $510,000.

Cash used in operating activities during the six-month period ended June 30, 2007 was primarily the result of our net loss of $7,538,000 offset by increases in operating cash resulting from non-cash charges, including stock-based compensation expense of $1,798,000, depreciation of $787,000 and impairment of assets of $463,000 during the six-month period ended June 30, 2007. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during the six months ended June 30, 2007. Specifically, our accounts payable and accrued liabilities decreased $724,000 and our deferred revenue decreased $1,989,000 as a result of accelerated license fee amortization under our Genentech and Procter & Gamble collaborations. During the first half of 2007, we also collected $1,059,000 of our accounts receivable primarily related to our Micromet settlement.

We expect to continue to use cash in operations as we continue to seek to advance our targeted cancer drug development programs through preclinical testing and into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and other specified objectives.

Investing activities used cash of $684,000 for the six-month period ended June 30, 2008 as compared to cash provided of $2,918,000 in the six-month period ended June 30, 2007. Cash used by investing activities resulted principally from $634,000 in net investment purchases for the six months ended June 30, 2008. Cash generated by investing activities resulted principally from $2,771,000 in net investment sales for the six months ended June 30, 2007. In addition, for the six months ended June 30, 2007, we received $197,000 in net proceeds from the sale of certain of our assets. We currently do not expect to undertake any significant capital projects during 2008.

Financing activities used cash of approximately $232,000 for the six-month period ended June 30, 2008, resulting from repayment of $401,000 on our notes with the Boston Private Bank & Trust Company. This decrease in cash was offset by cash received of $169,000 upon the exercise of stock options and purchases under our employee stock purchase plan. Financing activities used cash of approximately $663,000 for the six-month period ended June 30, 2007, resulting from repayment of $818,000 on our notes with the Boston Private Bank & Trust Company, $202,000 of which resulted from the sale of certain of our assets during the quarter. Offsetting this decrease, we received approximately $156,000 as proceeds from the issuance of common stock.

We anticipate that existing capital resources at June 30, 2008, should enable us to maintain current and planned operations into the fourth quarter of 2009. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials, for the foreseeable future. Our ability to continue funding planned operations beyond the fourth quarter of 2009 is dependent upon, among other things, the success of our collaborations, our ability to control our cash burn rate and our ability to raise additional funds through additional corporate collaborations, equity or debt financings, or from other sources of financing. We are seeking additional collaborative arrangements and also anticipate that we will seek to raise funds through one or more financing transactions, if conditions permit. Due to our significant long-term capital requirements, we intend to seek to raise funds through the sale of debt or equity securities when conditions are favorable, even if we do not have an immediate need for additional capital at such time. Additional financing may not be available or, if available, it may not be available on favorable terms. In addition, the sale of additional debt or equity securities could result in dilution to our stockholders. If substantial additional funding is not available, our ability to fund research and development and other operations will be significantly affected and, accordingly, our business will be materially and adversely affected. See “Part II, Item 1A—Risk Factors,” for a further discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional capital.

Liquidity and Capital Resources

We have financed our operations primarily through license fees and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At March 31, 2008, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $35,232,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We also maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances because the balances are invested in highly rated securities. Our marketable securities are investments with expected maturities of greater than three months, but less than twelve months, and consist of commercial paper, corporate debt securities, and government obligations. We do not hold any asset-backed or auction rate securities.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. As a result of the conclusion of all research funding, the majority of our research and development effort and expense has shifted from our programs that were funded under collaborations relating to the Hedgehog pathway and various discovery programs to the development of programs under our targeted cancer drug development platform, particularly for our lead targeted cancer development candidate, CUDC-101. While we are seeking a corporate collaborator for one or more of the programs in this platform, we are currently progressing the research and development of these programs on our own. We believe that our research and development expenses will increase in 2008 in connection with out plan to initiate phase I clinical testing for CUDC-101, and to select at least one additional development candidate from our proprietary platform.

In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments and funded research and development that we may receive under new collaboration agreements, if any, contingent cash payments for the achievement of development objectives, if any are met, under new collaborations or our existing collaborations with Genentech and royalty payments that are contingent upon the successful commercialization of any products based upon collaborations. The timing of or entrance into any new collaboration agreements and any contingent cash payments under our existing collaboration agreements with Genentech are not assured, cannot be easily predicted and may vary significantly from quarter to quarter.

Net cash used in operating activities was $5,977,000 for the three-month period ended March 31, 2008 as compared to $3,624,000 for the three-month period ended March 31, 2007. Cash used in operating activities during the three-month period ended March 31, 2008 was primarily the result of our net loss for the period of $3,431,000. In addition, changes in certain operating assets and liabilities affected operating cash during the three-month period ended March 31, 2008, including a decrease in deferred revenue of $1,853,000 as a result of both the recognition of the $1,750,000 license fee that we received in December 2007 under our BMP transaction with Stryker Corporation and a decrease of $1,645,000 in our accounts payable and accrued liabilities. Offsetting these decreases were noncash items stock-based compensation expense of $752,000 and depreciation of $256,000.

Cash used in operating activities during the three-month period ended March 31, 2007 was primarily the result of our net loss for the quarter of $3,541,000. Increases in operating cash resulting from non-cash charges, including stock-based compensation expense of $915,000 and depreciation of $476,000 during the three-month period ended March 31, 2007, were offset by a decrease of $1,258,000 in deferred revenue as a result of license fee amortization under our various collaborations.

We expect to continue to use cash in operations as we continue to seek to advance our targeted cancer drug development platform programs through preclinical development and into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and specified other objectives.

Investing activities provided cash of $5,062,000 for the three-month period ended March 31, 2008 as compared to $1,759,000 for the three-month period ended March 31, 2007. Cash generated in investing activities resulted principally from

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$5,096,000 and $1,583,000 in net investment sales for the three months ended March 31, 2008 and 2007, respectively. In addition, for the quarter ended March 31, 2007, we received $197,000 in net proceeds from the sale of certain of our assets. We currently do not expect to undertake any significant capital projects during 2008.

Financing activities used cash of approximately $241,000 for the three-month period ended March 31, 2008, resulting from repayment of $308,000 on our notes with the Boston Private Bank & Trust Company. This decrease in cash was offset by cash received of $68,000 upon the exercise of stock options. Financing activities used cash of approximately $466,000 for the three-month period ended March 31, 2007, resulting from repayment of $510,000 on our notes with the Boston Private Bank & Trust Company, including proceeds from the sale of certain of our assets during the quarter. As of April 1, 2008, our two loan agreements with the Boston Private Bank & Trust Company have been paid in full and we do not expect to secure any significant debt financing in the near term.

We anticipate that existing capital resources at March 31, 2008, should enable us to maintain current and planned operations into the fourth quarter of 2009. This projection excludes any contingent cash payments other than those stated above. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials, for the foreseeable future. Our ability to continue funding planned operations beyond the fourth quarter of 2009 is dependent upon, among other things, the success of our collaborations, our ability to control our cash burn rate and our ability to raise additional funds through additional corporate collaborations, equity or debt financings, or from other sources of financing. We are seeking additional collaborative arrangements and also anticipate that we will seek to raise funds through one or more financing transactions, if conditions permit. Due to our significant long-term capital requirements, we intend to seek to raise funds through the sale of debt or equity securities when conditions are favorable, even if we do not have an immediate need for additional capital at such time. Additional financing may not be available or, if available, it may not be available on favorable terms. In addition, the sale of additional debt or equity securities could result in dilution to our stockholders. If substantial additional funding is not available, our ability to fund research and development and other operations will be significantly affected and, accordingly, our business will be materially and adversely affected. See “Part II, Item 1A—Risk Factors,” for a further discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional capital.

Liquidity and Capital Resources

We have financed our operations primarily through license fees and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At December 31, 2007, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $41,459,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions and short-term commercial paper. We also maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances because the balances are invested in highly rated securities. Our marketable securities are investments with expected maturities of greater than three months, but less than twelve months, and consist of commercial paper, corporate debt securities, and government obligations.

The use of our cash flows for operations primarily consists of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees and legal fees.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. Recently, however, a majority of our research and development effort and expense has shifted from our programs that are funded under collaborations relating to the Hedgehog pathway and various discovery programs to the development of programs under our targeted cancer drug development platform. While we are seeking a corporate collaborator for one or more of the programs in this platform, we are currently

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progressing the research and development of these programs on our own. We believe that our research and development expenses will increase in 2008 as we expect to initiate phase I clinical testing for CUDC-101, the first development candidate from our proprietary platform, as well as to select at least one additional development candidate from our proprietary platform during 2008. Should we begin clinical evaluations of CUDC-101 or another of these drug candidates, we expect that our research and development costs would increase significantly in 2008.

In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments from new collaborations, if any, contingent cash payments for the achievement of development objectives, if any are met, and funded research and development that we may receive under collaboration agreements. Except for five researchers who were funded by Wyeth through February 9, 2008, substantially all of our research staff is working on developing drug candidates from our targeted cancer drug development platform. The timing of or entrance into any new collaboration agreements and any contingent cash payments under existing collaboration agreements are not assured, cannot be easily predicted and may vary significantly from quarter to quarter. Potential future cash payments, if any, are contingent upon the successful completion principally of contractually defined development and regulatory approval objectives under existing collaboration agreements, and royalty payments are contingent upon the successful commercialization of any products based upon the collaboration.

Net cash used in operating activities was $8,594,000 for the year ended December 31, 2007, compared to $5,980,000 for the year ended December 31, 2006. Cash used in operating activities during the year ended December 31, 2007 was primarily the result of our net loss for the period of $6,964,000. In addition, changes in certain operating assets and liabilities affected operating cash during the year ended December 31, 2007, including a decrease in deferred revenue of $9,034,000 as a result of accelerated license fee amortization under our Genentech and Procter & Gamble collaborations. Offsetting this decrease, and increasing our cash position, our accounts receivables decreased $1,112,000 primarily related to our Microment settlement, and our accounts payable and accrued liabilities increased $1,201,000. Finally, several noncash items further offset our net loss, including stock-based compensation expense of $3,190,000, depreciation of $1,302,000 and impairment of assets of $497,000.

Cash used in operating activities during the years ended December 31, 2006 was primarily the result of our net loss for the period of $8,829,000, partially offset by non-cash charges including stock-based compensation of $3,762,000 and depreciation of $1,408,000. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during year ended December 31, 2006. Specifically, our accounts payable and accrued liabilities decreased $1,603,000 primarily as a result of the cessation on August 31, 2006 of our co-development arrangement with Genentech and our deferred revenue decreased $1,107,000 as a result of license fee amortization under our various collaborations.

We expect to continue to use cash in operations as we continue to research and develop our existing product candidates and advance our targeted cancer drug development platform programs through preclinical development and, we expect, into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and specified other objectives.

Investing activities used $5,919,000 of cash for the year ended December 31, 2007, resulting from $6,160,000 in net investment purchases primarily related to investment of funds received from our August 2007 private placement. In addition, for the year ended December 31, 2007, we received $316,000 in net proceeds from the sale of certain of our assets used to pay down our outstanding principal obligations to the Boston Private Bank & Trust Company. We currently do not expect to undertake any significant capital projects during 2007. Investing activities generated cash of $3,420,000 for the year ended December 31, 2006, resulting from $4,120,000 in net investment sales offset by $694,000 in fixed asset purchases.

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Financing activities provided cash of $13,080,000 for the year ended December 31, 2007, resulting primarily from $14,646,000 received in issuances of common stock, including net proceeds of $14,422,000 from our August 2007 private placement of common stock and $224,000 received upon the exercise of stock options and purchases under our employee stock purchase plan. Offsetting these increases in cash, we repaid $1,565,000 of our term debt with the Boston Private Bank & Trust Company. Financing activities used $921,000 of cash for the year ended December 31, 2006, resulting from debt repayments of $1,233,000 on our notes offset by proceeds of $312,000 received upon stock option exercises and purchases under our employee stock purchase plan.

On August 8, 2007, we completed a private placement of units, each with a purchase price of $1.06375 per share and comprising one share of common stock and a warrant to purchase 0.35 shares of common stock. As a result, we issued an aggregate of 13,631,022 shares of common stock and warrants to purchase an additional 4,770,859 shares of common stock. We intend to use the $14,422,000 in net proceeds from the private placement primarily to support our clinical and research and development efforts, working capital and other general corporate purposes. The warrants have an exercise price of $1.02 per share and expire on August 8, 2012. We can require the mandatory exercise of the warrants in the event that our stock closing price on NASDAQ exceeds $2.50 per share for a period of 30 days. We filed a resale registration statement in Form S-3, which was declared effective by the SEC on September 10, 2007, to register for resale the shares of common stock, and the shares of common stock underlying the warrants, held by the investors.

On March 23, 2005, we converted $2,250,000 financed under an amended loan agreement with the Boston Private Bank & Trust Company into a 36-month term note that bears interest at a fixed rate of 7.36% for the repayment period. Under the terms of the note payable, we are required to make equal monthly payments of $62,500 plus any accrued interest beginning on May 1, 2005 extending through April 2008, unless the outstanding principal is paid in full earlier.

On December 9, 2005, we converted $1,450,000 financed under a separate loan agreement with the Boston Private Bank & Trust Company into a 36-month term note that bears interest at a fixed rate of 7.95% for the repayment period. During the year ended December 31, 2007, we sold certain of our assets and lab supplies for which we received $321,000 in gross proceeds for the assets and $11,000 for lab supplies that were not collateralized by this note. The total proceeds of $332,000 were remitted to Boston Private Bank & Trust and were applied to the principal obligation outstanding under this loan agreement. None of the terms of the loan were changed as a result of the sale of assets collateralized under this agreement. Under the terms of the note payable, we are required to make equal monthly payments of $40,278 plus any accrued interest beginning on January 1, 2006 extending through the repayment period, which is April 2008 after giving effect to the $332,000 in additional principal payments, which resulted from our sale of certain of our pledged assets during 2007.

These loans are collateralized by all of our property and equipment assets, except for fixtures. The loan collateral also excludes and property or equipment that are purchased after March 23, 2005 under purchase money arrangements with equipment lenders, however, we have not completed any such purchases. As of December 31, 2007, we were in compliance with the sole covenant under each of these financing agreements. The covenant requires us to maintain a minimum working capital ratio. Should we fail to pay amounts when due or fail to maintain compliance with the covenant under the agreements, the entire obligation becomes immediately due at the option of the Boston Private Bank & Trust Company.

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Liquidity and Capital Resources

We have financed our operations primarily through license fees and research and development funding from our collaborators and licensors, the private and public placement of our equity securities, debt financings and the monetization of certain royalty rights.

At September 30, 2007, our principal sources of liquidity consisted of cash, cash equivalents, and marketable securities of $41,090,000, excluding restricted long-term investments of $210,000. Our cash and cash equivalents are highly liquid investments with a maturity of three months or less at date of purchase and consist of time deposits and investments in money market funds with commercial banks and financial institutions, short-term commercial paper, and government obligations. We also maintain cash balances with financial institutions in excess of insured limits. We do not anticipate any losses with respect to such cash balances because the balances are invested in highly rated securities. Our marketable securities are investments with expected maturities of greater than three months, but less than twelve months, and consist of commercial paper, corporate debt securities, and government obligations.

The use of our cash flows for operations has primarily consisted of salaries and wages for our employees, facility and facility-related costs for our office and laboratory, fees paid in connection with preclinical studies, laboratory supplies, consulting fees, legal fees and our equal share of co-development expenses under a co-development arrangement with Genentech that we opted out of in August 2006.

To date, the primary source of our cash flows from operations has been payments received from our collaborators and licensors. Recently, however, a majority of our research and development effort and expense has shifted from our work funded under collaborations in Hedgehog pathway and our various discovery programs to the development of programs under our Targeted Cancer Drug Development Platform. While we believe that our research and development expenses will neither increase nor decrease significantly in 2007 as compared to 2006, we believe that we will be required to use more cash to fund these research and development programs in 2007 since we are responsible for 100% of the research and development costs. In addition, we are seeking to advance one or more of our drug candidates from this platform into at least the early stages of clinical testing ourselves. We plan to file an IND application for CUDC-101 in the first quarter of 2008 and, assuming that this IND application is not rejected or otherwise delayed by the FDA, we are seeking to begin our Phase I clinical trial of CUDC-101 early in the second quarter of 2008. Should we begin clinical evaluations of CUDC-101 or another of these drug candidates, we expect that our research and development costs would increase significantly.

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In general, our only source of cash flows from operations for the foreseeable future will be up-front license payments from new collaborations, contingent cash payments for the achievement of development objectives, if any are met, and funded research and development that we may receive under collaboration agreements. Except for five researchers who are funded by Wyeth through February 9, 2008, substantially all of our research staff is working on developing drug candidates from our Targeted Cancer Drug Development Platform. The timing of or entrance into any new collaboration agreements and any contingent cash payments under existing collaboration agreements are not assured, cannot be easily predicted and may vary significantly from quarter to quarter. Potential future cash payments, if any, are contingent upon the successful completion principally of contractually defined development and regulatory approval objectives under existing collaborations, and royalty payments are contingent upon the successful commercialization of any products based upon the collaboration.

Net cash used in operating activities was $9,176,000 for the nine-month period ended September 30, 2007 as compared to $8,183,000 for the nine-month period ended September 30, 2006. Cash used in operating activities during the nine-month period ended September 30, 2007 was primarily the result of our net loss of $11,257,000 offset by increases in operating cash resulting from non-cash charges, including stock-based compensation expense of $2,434,000, depreciation of $1,047,000 and impairment of assets of $492,000 during the nine-month period ended September 30, 2007. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during the nine months ended September 30, 2007. Specifically, our accounts payable and accrued liabilities decreased $211,000 and our deferred revenue decreased $2,736,000 as a result of accelerated license fee amortization under our Genentech and Procter & Gamble collaborations. We also collected $1,101,000 of our accounts receivable primarily related to our Micromet settlement.

Cash used in operating activities during the nine-month periods ended September 30, 2006 was primarily the result of our net loss for the period partially offset by non-cash charges including stock-based compensation, depreciation and non-cash interest expense. In addition, changes in certain operating assets and liabilities offset these increases in operating cash during the nine-month period ended September 30, 2006. Our accounts receivable increased $2,007,000 primarily as a result of our settlement with Micromet. In addition, our accounts payable and accrued liabilities decreased $1,139,000 primarily as a result of payment of co-development costs incurred under our collaboration with Genentech.

We expect to continue to use cash in operations as we continue to research and develop our existing product candidate and advance our Targeted Cancer Drug Development Platform programs through preclinical development and, we expect, into clinical development. In addition, in the future we may owe royalties and other contingent payments to our licensors based on the achievement of developmental milestones, product sales and specified other objectives. We also expect that the increase in cash used will be partially offset by anticipated payments made under our collaboration with Wyeth through February 9, 2008, assuming this collaboration continues in accordance with its terms.

Investing activities used cash of $5,092,000 for the nine-month period ended September 30, 2007 as compared to cash of $7,781,000 generated in the nine-month period ended September 30, 2006. Cash used by investing activities resulted principally from $5,334,000 in net investment purchases for the nine months ended September 30, 2007 primarily related to investment of funds received from our August 2007 private placement. In addition, for the nine months ended September 30, 2007, we received $316,000 in net proceeds from the sale of certain of our assets. We currently do not expect to undertake any significant capital projects during 2007. Cash provided by investing activities resulted principally from $7,861,000 in net investment sales offset by $74,000 in fixed asset purchases for the nine-month period ended September 30, 2006.

Financing activities provided cash of $13,320,000 for the nine-month period ended September 30, 2007, resulting primarily from $14,578,000 received in issuances of common stock, including net proceeds of $14,422,000 from our August 2007 private placement of common stock and $156,000 received upon the exercise of stock options. Offsetting these increases in cash, we repaid $1,257,000 on our term debt with the Boston Private Bank & Trust Company. Financing activities used $805,000 of cash for the nine-month period ended September 30, 2006, resulting from debt repayments of $925,000 on our term debt with the Boston Private Bank & Trust Company and proceeds of $120,000 received upon stock option exercises.

On August 8, 2007, we completed a private placement of units, each with a purchase price of $1.06375 per share and comprising one share of common stock and a warrant to purchase 0.35 shares of common stock. As a result, we issued an aggregate of 13,631,022 shares of common stock and warrants to purchase an additional 4,770,859 shares of common stock. We intend to use the $14,422,000 in net proceeds from the private placement primarily to support our clinical and research and development efforts, working capital and other general corporate purposes. The warrants have an exercise price of $1.02

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per share and expire on August 8, 2012. We can require the mandatory exercise of the warrants in the event that our stock closing price on NASDAQ exceeds $2.50 per share for a period of 30 days. We filed a resale registration statement in Form S-3, which was declared effective by the SEC on September 10, 2007, to register for resale the shares of common stock, and the shares of common stock underlying the warrants, held by the investors.

On March 23, 2005, we converted $2,250,000 financed under an amended loan agreement with the Boston Private Bank & Trust Company into a 36-month term note that bears interest at a fixed rate of 7.36% for the repayment period. Under the terms of the note payable, we are required to make equal monthly payments of $62,500 plus any accrued interest beginning on May 1, 2005 extending through April 2008, unless the outstanding principal is paid in full earlier.

On December 9, 2005, we converted $1,450,000 financed under a separate loan agreement with the Boston Private Bank & Trust Company into a 36-month term note that bears interest at a fixed rate of 7.95% for the repayment period. During the nine months ended September 30, 2007, we sold certain of our assets and lab supplies for which we received $321,000 in gross proceeds for the assets and $11,000 for the lab supplies. The total proceeds of $332,000 were remitted to Boston Private Bank & Trust and were applied to the principal obligation outstanding under this loan agreement. None of the terms of the loan were changed as a result of the sale of assets collateralized under this agreement. Under the terms of the note payable, we are required to make equal monthly payments of $40,278 plus any accrued interest beginning on January 1, 2006 extending through the repayment period, which is July 2008 after giving effect to the $332,000 in additional principal payments, which resulted from our sale of certain of our pledged assets during 2007.

These loans are collateralized by all of our property and equipment assets, except for fixtures and those that are purchased after March 23, 2005 under purchase money arrangements with equipment lenders. As of September 30, 2007, we were in compliance with the sole covenant under each of these financing agreements. The covenant requires us to maintain a minimum working capital ratio. Should we fail to pay amounts when due or fail to maintain compliance with the covenant under the agreements, the entire obligation becomes immediately due at the option of the Boston Private Bank & Trust Company.

We anticipate that existing capital resources at September 30, 2007, together with the cash payment of $3,000,000 that we recently received from Genentech and assuming the payment of all contractually-defined research funding payments from Wyeth, but excluding any cash payments that are contingent upon the achievement of defined development objectives under our collaborations and with Genentech and Wyeth, assuming this contract is not earlier terminated, should enable us to maintain current and planned operations into mid-2009. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials, for the foreseeable future. Our ability to continue funding planned operations beyond mid-2009 is dependent upon, among other things, the success of our collaborations, our ability to control our cash burn rate and our ability to raise additional funds through additional corporate collaborations, equity or debt financings, or from other sources of financing. We are seeking additional collaborative arrangements and also anticipate that we will seek to raise funds through one or more financing transactions, if conditions permit. Due to our significant long-term capital requirements, we intend to seek to raise funds through the sale of debt or equity securities when conditions are favorable, even if we do not have an immediate need for additional capital at such time. Additional financing may not be available or, if available, it may not be available on favorable terms. In addition, the sale of additional debt or equity securities could result in dilution to our stockholders. If substantial additional funding is not available, our ability to fund research and development and other operations will be significantly affected and, accordingly, our business will be materially and adversely affected. See “Part II, Item 1A – Risk Factors,” for a further discussion of certain risks and uncertainties that could affect our liquidity, capital requirements and ability to raise additional capital.