10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM             TO

Commission File Number 0-23223

CURAGEN CORPORATION

(Exact name of registrant as specified in its charter)

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

555 Long Wharf Drive, 11th Floor, New Haven, Connecticut (Address of principal executive office) 06511 (Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

Yes  x    No   ¨

The number of shares outstanding of the Registrant’s common stock as of August 1, 2003 was 49,526,310.

CURAGEN CORPORATION AND SUBSIDIARY

FORM 10-Q

INDEX

PART I.   Financial Information			Page
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets, June 30, 2003 (unaudited) and December 31, 2002	3
		Condensed Consolidated Statements of Operations, for the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)	4
		Condensed Consolidated Statements of Cash Flows, for the Six Months Ended June 30, 2003 and 2002 (unaudited)	5
		Notes to Condensed Consolidated Financial Statements (unaudited)	6-8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9-14
	Item 4.	Controls and Procedures	14
PART II. Other Information
	Item 4.	Submission of Matters to a Vote of Security Holders	15
	Item 6.	Exhibits and Reports on Form 8-K	15-16
Signature			17
Exhibit Index			18

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

	June 30, 2003			December 31, 2002
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	61,314		$	68,401
Short-term investments		132,027			198,301
Marketable securities		185,249			148,107
Cash and investments		378,590			414,809
Income taxes receivable		1,503			2,359
Other current assets		136			275
Prepaid expenses		2,893			3,405
Total current assets		383,122			420,848
Property and equipment, net		23,932			24,336
Other assets		222			245
Intangible assets, net		3,110			3,100
Total assets	$	410,386		$	448,529
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,380		$	2,426
Accrued expenses		2,586			2,539
Accrued payroll and related items		2,220			2,300
Interest payable, short-term		3,750			3,750
Deferred revenue		2,318			2,610
Current portion of obligations under capital leases		698			1,511
Other current liabilities		3,759			1,501
Total current liabilities		19,711			16,637
Long-term liabilities:
Convertible subordinated debt		150,000			150,000
Obligations under capital leases, net of current portion		—			263
Total long-term liabilities		150,000			150,263
Commitments and contingencies
Minority interest in subsidiary		7,301			10,125
Stockholders’ equity:
Common Stock; $.01 par value, issued and outstanding 49,519,539 shares at June 30, 2003, and 49,362,463 shares at December 31, 2002		495			494
Treasury Stock, at cost; none at June 30, 2003 and 12,500 shares at December 31, 2002		—			(49	)
Additional paid-in capital		484,412			483,824
Accumulated other comprehensive income		3,696			3,357
Accumulated deficit		(254,564	)		(214,995	)
Unamortized stock-based compensation		(665	)		(1,127	)
Total stockholders’ equity		233,374			271,504
Total liabilities and stockholders’ equity	$	410,386		$	448,529

See accompanying notes to condensed consolidated financial statements

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CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenue:
Collaboration revenue	$	1,695		$	3,659		$	3,639		$	8,471
Total revenue		1,695			3,659			3,639			8,471
Operating expenses:
Research and development		18,388			22,238			32,848			42,372
General and administrative		4,823			5,253			9,773			11,187
Restructuring and related charges		2,888			—			2,888			—
Total operating expenses		26,099			27,491			45,509			53,559
Loss from operations		(24,404	)		(23,832	)		(41,870	)		(45,088	)
Interest income		2,078			3,033			4,411			6,023
Interest expense		(2,464	)		(2,560	)		(4,939	)		(5,144	)
Interest income (expense), net		(386	)		473			(528	)		879
Loss before income taxes and minority interest in subsidiary loss		(24,790	)		(23,359	)		(42,399	)		(44,209	)
Income tax benefit (expense)		(117	)		350			0			885
Minority interest in subsidiary loss		1,480			988			2,829			1,672
Net loss	$	(23,427	)	$	(22,021	)	$	(39,569	)	$	(41,652	)
Basic and diluted net loss per share	$	(0.48	)	$	(0.45	)	$	(0.80	)	$	(0.85	)
Weighted average number of shares used in computing basic and diluted net loss per share		49,234			48,897			49,195			48,851

See accompanying notes to condensed consolidated financial statements.

4

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2003			2002
Cash flows from operating activities:
Net loss	$	(39,569	)	$	(41,652	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		4,140			4,542
Non-monetary compensation		487			6
Stock-based 401(k) employer plan match		423			538
Minority interest		(2,829	)		(1,672	)
Changes in assets and liabilities:
Income taxes receivable		856			(1,035	)
Other current assets		139			(73	)
Prepaid expenses		512			(379	)
Other assets		(3	)		13
Accounts payable		1,954			71
Accrued expenses		47			960
Accrued payroll and related items		(80	)		20
Deferred revenue		(292	)		481
Other current liabilities		2,301			—
Net cash used in operating activities		(31,914	)		(38,180	)
Cash flows from investing activities:
Acquisitions of property and equipment		(3,278	)		(15,017	)
Payments for intangible assets		(491	)		(13	)
Repayment of loan from employee		17			50
Net inflows from purchases and maturities of short-term investments		66,274			50,110
Net outflows from purchases and maturities of marketable securities		(36,803	)		(139,363	)
Net cash provided by (used in) investing activities		25,719			(104,233	)
Cash flows from financing activities:
Payments on capital lease obligations		(1,076	)		(1,632	)
Payments of financing costs		(12	)		(12	)
Proceeds from exercise of stock options		197			824
Payments of stock issuance costs		(1	)		—
Net cash used in financing activities		(892	)		(820	)
Net decrease in cash and cash equivalents		(7,087	)		(143,233	)
Cash and cash equivalents, beginning of period		68,401			235,618
Cash and cash equivalents, end of period	$	61,314		$	92,385
Supplemental cash flow information:
Interest paid	$	4,562		$	4,747
Income tax benefit payments received	$	862		$	—

See accompanying notes to condensed consolidated financial statements

5

CURAGEN CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.    Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly our consolidated financial position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements of CuraGen Corporation and subsidiary (the “Company”) include CuraGen Corporation (“CuraGen”) and our majority-owned subsidiary, 454 Corporation (currently doing business as 454 Life Sciences, or “454”), and accordingly, all material intercompany balances and transactions have been eliminated.

The June 30, 2002 and December 31, 2002 condensed consolidated financial statements have been reclassified to conform to the classifications used in 2003. All dollar amounts in tabular presentations are shown in thousands, except par value and per share data.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2002.

2.    Comprehensive Loss

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income” (“SFAS 130”) requires reporting and displaying of comprehensive income and its components. In accordance with SFAS 130, the accumulated balance of other comprehensive income is disclosed as a separate component of stockholders’ equity and is composed of unrealized gains and losses on marketable securities.

A summary of total comprehensive loss is as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Net loss	$	23,427		$	22,021		$	39,569		$	41,652
Other comprehensive income		(58	)		(998	)		(339	)		(998	)
Total comprehensive loss	$	23,369		$	21,023		$	39,230		$	40,654

3.    Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which was effective 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 Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), which recognizes compensation cost based on the intrinsic value of the equity instruments awarded. The Company will continue to apply APB 25 to its stock-based compensation awards to employees.

6

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”, an amendment of SFAS 123 (“SFAS 148”). SFAS 148 permits two additional transition methods for entities that voluntarily change to the fair value based method of accounting for stock-based compensation. In addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 became effective for financial statements issued after December 15, 2002, and the adoption of SFAS 148 did not have a material effect on the Company’s financial statements, as it has not adopted SFAS 123.

Had compensation cost for the Company’s stock option plans been determined in accordance with SFAS 123, net loss and net loss per share would have approximated the pro forma amounts shown below for each of the three and six month periods ended June 30, 2003 and 2002.

	Three Months Ended June 30,					Six Months Ended June 30,
	2003			2002		2003			2002
Net loss, as reported	$	23,427		$	22,021	$	39,569		$	41,652
Stock-based employee compensation expense included in net loss		(231	)		—		(462	)		—
Total stock-based employee compensation expense determined under Black-Scholes option pricing model		3,100			3,045		6,200			6,090
Pro forma net loss	$	26,296		$	25,066	$	45,307		$	47,742
Basic and diluted net loss per share:
As reported	$	0.48		$	0.45	$	0.80		$	0.85
Pro forma	$	0.53		$	0.51	$	0.92		$	0.98

4.    Restructuring and Related Charges

In November 2002, the Company announced a restructuring plan intended to reduce costs and focus its resources on prioritizing, selecting and rapidly advancing its most promising drug candidates. In connection with this restructuring plan, a charge of approximately $11.0 million was recorded in the fourth quarter of 2002. The cash requirements under the November 2002 restructuring plan were $1.9 million, of which $1.7 million was paid prior to June 30, 2003, and the remainder will be paid by the end of 2003.

On June 19, 2003, the Company announced a restructuring plan intended to focus resources on continuing to advance its broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development. As a result of the restructuring plan, the Company’s employee base was reduced by approximately 80 personnel, representing approximately 20% of its workforce.

In connection with the June 2003 restructuring plan, a charge of approximately $2.9 million was recorded in the second quarter of 2003, including $1.8 million related to employee separation costs, $1.0 million of operating lease obligations and $0.1 million of asset impairment costs. The employee separation costs were recorded under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, and included amounts to be paid for severance and related benefits, the services for which had been performed in full as of June 30, 2003. The cash requirements under the June 2003 restructuring plan were $2.7 million, of which $0.2 million was paid prior to June 30, 2003. The Company expects to pay approximately $1.5 million of its remaining cash requirements related to the June 2003 restructuring plan during the remainder of 2003. The remaining cash requirements of $1.0 million will be paid through the end of 2008.

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5.    Segment Reporting

The FASB issued Statement of Financial Accounting Standards No. 131, “Disclosures About Segments of an Enterprise and Related Information”, which establishes standards for reporting information on operating segments in interim and annual financial statements, and became effective for fiscal years beginning after December 15, 1997. An enterprise is required to separately report information about each operating segment that engages in business activities from which the segment may earn revenues and incur expenses, whose separate operating results are regularly reviewed by the chief operating decision maker regarding allocation of resources and performance assessment and which exceeds specific quantitative thresholds related to revenue, profit or loss and assets.

The Company currently operates in two business segments: CuraGen and 454. CuraGen is a genomics-based pharmaceutical company, which is applying integrated functional genomic technologies and Internet-based bioinformatic systems to discover and develop protein, antibody, and small molecule therapeutics to treat unmet medical needs. 454 is developing technologies for rapidly and comprehensively analyzing entire genomes. The operations of 454 are run by a separate management team and governed by a separate Board of Directors made up of members of CuraGen’s management team and Board of Directors. During the first half of 2003, the Company exceeded the quantitative thresholds described above governing the segment reporting, and as a result, the financial information disclosed herein represents all of the material financial information related to the Company’s reportable business segments. All of the Company’s revenues are generated in the United States and all assets are located in the United States.

	June 30, 2003			December 31, 2002
Total assets:
CuraGen	$	402,446		$	437,908
454		19,204			26,157
Intercompany eliminations		(11,264	)		(15,536	)
Total	$	410,386		$	448,529
	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
Revenues:
CuraGen	$	1,695		$	3,659		$	3,639		$	8,471
454		—			—			—			—
Total	$	1,695		$	3,659		$	3,639		$	8,471
Operating expenses:
CuraGen	$	22,347		$	24,811		$	38,312		$	48,992
454		3,752			2,680			7,197			4,567
Total	$	26,099		$	27,491		$	45,509		$	53,559
Net loss:
CuraGen	$	21,208		$	20,539		$	35,326		$	39,146
454		3,699			2,470			7,072			4,178
Minority interest in subsidiary loss		(1,480	)		(988	)		(2,829	)		(1,672	)
Total	$	23,427		$	22,021		$	39,569		$	41,652

8

CURAGEN CORPORATION AND SUBSIDIARY

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of June 30, 2003 and for the three and six month periods ended June 30, 2003 and 2002 should be read in conjunction with the sections of our audited condensed consolidated financial statements and notes thereto as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included in our Annual Report on Form 10-K for the year ended December 31, 2002.

Overview

We are a genomics-based pharmaceutical company. We apply our integrated functional genomic technologies and Internet-based bioinformatic systems to discover and develop protein, antibody, and small molecule therapeutics to treat unmet medical needs. Our disease areas include obesity and diabetes, oncology, inflammatory diseases, and central nervous system disorders. We are developing protein drugs on our own behalf, we have established a strategic alliance with Abgenix, Inc. (“Abgenix”) to develop antibody drugs, and we have established a strategic alliance with Bayer AG (“Bayer”) to develop small molecule drugs to treat obesity and adult onset diabetes.

We were incorporated in November 1991 and, until March 1993, were engaged primarily in organizational activities, research and development of our technologies, 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 the next several years as we focus our resources on prioritizing, selecting and rapidly advancing our most promising drug candidates. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial.

Our ability to earn revenues and become profitable is dependent primarily on our ability to successfully develop and commercialize pharmaceutical products based upon our expertise in genomics, our technologies, and our drug development pipeline. Accomplishing this goal also depends in part on our ability to maintain our existing strategic alliances with Abgenix and Bayer, and on our ability to establish new alliances to aid us in developing and commercializing small molecule therapeutics. We cannot guarantee that any such strategic alliances, either new or existing, will be successful. We have also established a majority-owned subsidiary, 454 Corporation (currently doing business as 454 Life Sciences, or “454”), to develop novel technologies for rapidly and comprehensively analyzing entire genomes. We expect that 454 will commercialize these products upon their development, which may be a future source of revenues for us.

Our failure to successfully develop and market pharmaceutical products over the next several years would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated from commercial sales of products developed through the application of our technologies and expertise are not expected for several years, if at all.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and as such, actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2002.

9

Results of Operations

Three and Six Months Ended June 30, 2003 and 2002

Revenue. Collaboration revenue for the three and six months ended June 30, 2003 was $1.7 million and $3.6 million, respectively, a decrease of $2.0 million and $4.9 million, or 54% and 58%, as compared to $3.7 million and $8.5 million for the corresponding periods in 2002. The decreases are attributable to the shift in our focus from revenue generating service agreements to collaborations that enhance the value of our growing pipeline. Revenue recorded in the three month period ended June 30, 2003 was primarily related to our collaborative arrangements with Alexion Pharmaceuticals (“Alexion”), Bayer, Pfizer, Inc. (“Pfizer”) and Philip Morris, Inc. (“Philip Morris”) while the same period in 2002 primarily included revenue from our collaborative arrangements with Abgenix and Bayer. Revenue recorded in the six month period ended June 30, 2003 was primarily related to our collaborative arrangements with Alexion, Bayer, Genentech, Inc., Pfizer, and Philip Morris, while the same period in 2002 primarily included revenue from our collaborative arrangements with Abgenix and Bayer.

We expect that 2003 collaboration revenues will continue to decrease significantly compared to 2002 revenues, unless we receive royalties or milestone payments from products currently under development by our current and former collaborative partners. We will continue to shift our focus from revenue generating service agreements, and instead pursue strategic research and development alliances to gain access to expertise that is currently unavailable to us. We expect these alliances with pharmaceutical and biotechnology companies to provide us with access to unique technologies, access to capital, near term revenues, milestone and/or royalty payments, and/or potential profit sharing arrangements. Future revenues will be dependent upon our ability to successfully develop and market products that may arise from our own internal drug development pipeline, enter into additional alliances, maintain and expand pharmacogenomic and biomarker collaborations, receive royalties and milestone payments from products currently under development by our current and former collaborators and successfully sell technologies being developed by 454.

Operating Expenses.  Research and development expenses for the three and six months ended June 30, 2003 were $18.4 million and $32.8 million, respectively, compared to $22.2 million and $42.4 million for the same periods in 2002. The decreases of $3.8 million and $9.6 million, or 17% and 23%, were primarily attributable to our corporate restructuring undertaken at the end of 2002, including decreases in lab supplies and reagents, contractual services, depreciation expense and personnel costs, partially offset by a $1.2 million non-cash discovery related expense. Research and development expenses for 2003 are expected to continue to decrease in comparison to 2002, reflecting the expected reduction in costs as a result of our corporate restructurings undertaken in November 2002 and in June 2003, including decreases in lab supplies and reagents, personnel costs and depreciation expense partially offset by an expected increase in 454’s operating expenses as its operations continue to expand.

General and administrative expenses for the three and six months ended June 30, 2003 decreased $0.5 million and $1.4 million, or 9% and 13%, to $4.8 million and $9.8 million, as compared to $5.3 million and $11.2 million for the same periods in 2002. The decreases were due to the corporate restructuring undertaken in November 2002, including decreased personnel costs, depreciation expenses, consulting costs and facility repair and maintenance expenses. Additionally, lower legal patent expenses are indicative of our focus shifting from discovery to the advancement of our development efforts. General and administrative expenses for 2003 are expected to continue to decrease in comparison to 2002, reflecting the corporate restructurings undertaken in November 2002 and in June 2003 including decreases in rent expense, consulting costs and facility repairs and maintenance expenses.

Restructuring and related charges.  Restructuring and related charges of approximately $2.9 million were incurred in the second quarter of 2003 as a part of our June 2003 restructuring plan which was intended to focus resources on continuing to advance our broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development. As a result of the June 2003 restructuring plan, our employee base was reduced by approximately 80 personnel, representing approximately 20% of our workforce. In connection with this restructuring plan, we incurred $1.8 million related to employee separation costs, $1.0 million of operating lease obligations and $0.1 million of asset impairment costs. The employee separation costs were recorded under Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” and included amounts to be paid for severance and related benefits, the services for which had been performed in full as of June 30, 2003. The cash requirements under the June 2003 restructuring plan were $2.7 million, of which $0.2 million was paid prior to June 30, 2003. We expect to pay approximately $1.5 million of our remaining cash requirements related to the June 2003 restructuring plan during the remainder of 2003. The remaining cash requirements of $1.0 million will be paid through the end of 2008.

10

Interest Income (Expense), Net.  Interest income for the three and six months ended June 30, 2003 of $2.1 million and $4.4 million, respectively, decreased $0.9 million and $1.6 million, or 30% and 27%, as compared to $3.0 million and $6.0 million for the corresponding periods in 2002. The decreases in interest income were primarily due to lower yields in our investment portfolio and a decrease in cash and investment balances during 2003. We earned an average yield of 2.13% in the second quarter of 2003 as compared to 2.57% during the same period in 2002, and earned an average yield of 2.20% in the first six months of 2003 as compared to 2.49% during the same period in 2002. We anticipate that interest income for the remainder of 2003 will continue to decrease as cash and investment balances are utilized in the normal course of operations.

Interest expense for the three and six months ended June 30, 2003 of $2.5 million and $4.9 million, respectively, represented decreases of $0.1 million and $0.2 million, or 4% and 4%, as compared to $2.6 million and $5.1 million for the three and six months ended June 30, 2002. Interest expense was primarily attributable to our convertible subordinated debt which we issued on February 2, 2000. We expect that interest expense will remain relatively constant in 2003.

Income Tax Benefit (Expense).  For the three and six months ended June 30, 2003, we recorded a Connecticut income tax expense of $0.1 million and $0, respectively, as compared to an income tax benefit of $0.4 million and $0.9 million for the same periods in 2002. The decreases in the income tax benefit of $0.5 million and $0.9 million, or 125% and 100%, were due to the State of Connecticut budget impasse at June 30, 2003 which resulted in the lack of a guarantee that there would be an ability for us to recognize an income tax benefit for years beginning on or after January 1, 2003. We originally recorded the income tax benefit for the first quarter of 2003 under Connecticut legislation, which allowed companies to elect to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for forgoing carryforward of the credit. However, during the budget discussions in June 2003 this legislation was allowed to expire effective December 31, 2002.

We determine our income taxes using the asset and liability method. Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. As we have no prior earnings history, a valuation allowance in an amount equal to the deferred income tax assets has been established to reflect these uncertainties.

Minority Interest in Subsidiary Loss.  Minority interest in subsidiary loss for the three and six months ended June 30, 2003, which is the portion of 454’s loss attributable to stockholders of 454 other than us, was $1.5 million and $2.8 million, respectively, as compared to $1.0 million and $1.7 million for the same periods in 2002. The increases of $0.5 million and $1.1 million, or 50% and 65%, were primarily due to 454’s additional personnel costs, increased purchases of laboratory supplies, increased equipment depreciation expense and payments for consulting and contractual services. During 2003, losses attributed to the minority ownership in 454 are expected to increase as 454 continues to make significant progress in developing new technologies as compared to 2002.

Net Loss.  For the three and six months ended June 30, 2003, we reported a net loss of $23.4 million and $39.6 million, respectively, or $0.48 per share and $0.80 per share as compared to $22.0 million and $41.7 million or $0.45 per share and $0.85 per share for the same periods in 2002. Our net loss for 2003 is expected to continue decreasing, as compared to 2002, as a result of the recent corporate restructurings undertaken in November 2002 and in June 2003. Since inception, we have incurred operating losses, and as of June 30, 2003, we had an accumulated deficit of $254.6 million. To date, we have not paid any federal income taxes.

Liquidity and Capital Resources

As of June 30, 2003, we had $378.6 million in cash and investments as compared to $414.8 million as of December 31, 2002. The decrease of $36.2 million in cash and investments during the first six months of 2003 was primarily a result of additional operating losses in support of our research and development activities, acquisitions of additional property and equipment and payment of interest to the holders of our convertible subordinated debt issued in February 2000. We have financed our operations since inception primarily through public offerings, our convertible subordinated debt offering, revenues received under our collaborative research agreements, private placements of equity securities, government grants, and capital leases. As of June 30, 2003, we had recognized $102.7 million of cumulative sponsored research revenues from collaborative research agreements and government grants.

Our cash investing activities have consisted primarily of acquisitions of equipment and expenditures for leasehold improvements and net outflows from purchases and maturities of short-term investments and marketable securities. At June 30, 2003, our gross

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investment in lab and office equipment, computers, land and leasehold improvements since inception was $45.2 million. At June 30, 2003, equipment with a gross book value of $3.0 million secured our equipment financing facilities. We had approximately $2.0 million in material commitments for capital expenditures at June 30, 2003.

Restructuring and related charges of approximately $13.9 million were incurred in 2002 and 2003 as a part of our corporate restructuring plans undertaken in November 2002 and in June 2003, which were intended to reduce costs and continue to advance our broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development. The cash requirements under the restructuring plans totaled $4.6 million, of which $1.9 million was paid prior to June 30, 2003. Of the remaining cash requirements, approximately $1.7 million will be paid by the end of 2003. The remaining cash requirements of $1.0 million will be paid through the end of 2008.

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

Cash Flows For The Six Months Ended June 30, 2003

Operating Activities.  Net cash used in operating activities was $31.9 million for the six months ended June 30, 2003 and was primarily due to the net cash loss from operations of $37.3 million, offset by decreases in income taxes receivable of $0.9 million and prepaid expenses of $0.5 million, and increases in accounts payable of $2.0 million and accrued restructuring and related charges of $2.2 million.

Investing Activities.  Net cash provided by investing activities was $25.7 million for the six months ended June 30, 2003 and was primarily due to net inflows from purchases and maturities of short-term investments and marketable securities of $29.5 million offset by acquisitions of property and equipment of $3.3 million, including expenditures for leasehold improvements and payments of intangible assets of $0.5 million.

Financing Activities.  Net cash used in financing activities was $0.9 million for the six months ended June 30, 2003 and primarily included payments on capital lease obligations.

Future Liquidity

Sources of Liquidity.  During 2003, we expect to continue to fund our operations through a combination of the following sources: cash and investment balances; collaboration revenue; gross interest income; and potential public securities offerings and/or private strategic-driven common stock offerings.

Uses of Liquidity.  Throughout 2003, we plan to continue making substantial investments in our emerging preclinical and clinical drug pipeline. In that regard, we foresee the following as significant uses of liquidity: salaries and benefits, supplies and reagents, contractual services including costs incurred related to our manufacturing agreement with Abgenix for CR002, clinical trials on our protein therapeutic CG53135, manufacturing costs related to Phase II production for our protein therapeutic CG53135, legal expenses in support of the development of our intellectual property portfolio, and interest expense related to payments made to the holders of our convertible subordinated debt issued in February 2000. In addition, we anticipate that we will also incur additional capital expenditures in 2003, primarily for the purchase of equipment and leasehold improvements at our New Haven and Branford research facilities and administrative offices, including the expansion of our existing protein production laboratory and growth in 454 operations. At June 30, 2003, we had approximately $0.5 million of purchase obligations which we will be required to pay within the next twelve months.

We believe that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements through 2004. Our operating and capital expenditures are considered to be crucial to our future success, and by continuing to make strategic investments in research and development programs, we believe that we are building substantial value for our shareholders. The adequacy of our available funds to meet our future operating and capital requirements, including our $150.0 million of 6% convertible subordinated debentures due February 2, 2007, will depend on many factors, including the progress

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we make in our drug development and pharmacogenomic programs, the magnitude of these programs, the success of our strategic research and development alliance partners in developing and commercializing drugs from existing programs and our ability to establish additional collaborative and licensing arrangements. While we will continue to explore alternative sources for financing our business activities, including the possibility of public securities offerings and/or private strategic-driven common stock offerings, we cannot be certain that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing arrangements for the development and testing of products under development. However, should we be unable to obtain future financing either through the methods described above or through other means, we may be unable to meet the critical objective of our long-term business plan, which is to successfully develop and market pharmaceutical products.

Minority Interest in Subsidiary

As of June 30, 2003, minority interest in subsidiary was $7.3 million. Minority interest in subsidiary is related to the establishment of 454 during 2000 and reflects the initial minority shareholders’ capitalization less a gain recognition of $3.9 million as a result of our contribution of technology to 454, less the minority shareholders’ portion of losses incurred to date. The loss attributed to the minority ownership in 454 is expected to continue to increase during 2003, as 454’s expenditures associated with technology development continue to increase, and therefore, the minority interest in subsidiary is expected to decrease during the remainder of 2003.

Certain Factors That May Affect Results of Operations

This report contains forward-looking statements that are subject to certain risks and uncertainties. These include statements regarding: (i) our intention to apply APB 25 to our stock-based compensation awards to employees, (ii) our ability to pay $1.7 million of our cash requirements for restructuring charges by the end of 2003 and the remainder through the end of 2008, (iii) our ability to apply our integrated functional genomic technologies and Internet-based bioinformatic systems to discover and develop pharmaceutical products to treat unmet medical needs, (iv) our expectation that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial, (v) the ability of our subsidiary, 454 Corporation, to commercialize products upon their development and create a future source of revenues for us, (vi) our expectation that research and development expenses for 2003 will continue to decrease in comparison to 2002, (vii) our expectation that general and administrative expenses for 2003 will decrease slightly in comparison to 2002, (viii) our expectation that interest income for the remainder of 2003 will continue to decrease as cash and investment balances are utilized in the normal course of operations, (ix) our expectation that interest expense will remain relatively constant in 2003, (x) our expectation that losses attributed to the minority ownership in 454 Corporation will continue to increase in 2003 as 454 continues to make progress in developing new technologies as compared to 2002, (xi) our expectation that the net loss for 2003 will decrease slightly as compared to 2002, (xii) our ability to fund our operations through a combination of sources during 2003 and to make substantial investments in our emerging preclinical and clinical drug pipeline, and (xiii) our belief that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements through 2004. Such statements are based on management’s current expectations and are subject to a number of risks 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 expectation that we will incur operating losses in the near future, our stage of development as a genomics-based pharmaceutical company, uncertainties of preclinical and clinical testing and trials, government regulation and healthcare reform, technological uncertainty and product development risks, product liability exposure, uncertainty of additional funding, our history of incurring losses and the uncertainty of achieving profitability, reliance on research collaborations and strategic alliances, competition, the ability of our third party manufacturers to deliver materials on a timely basis and to comply with applicable regulatory requirements, including the FDA’s current Good Manufacturing Practices, or GMP, patent infringement claims against our products, processes and technologies, our ability to protect our patents and proprietary rights and uncertainties relating to commercialization rights. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2002 for a more detailed description of these risks. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.

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Recently Enacted Pronouncements

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”, (“SFAS 149”) which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The provisions of SFAS 149 are effective for financial statements issued after June 30, 2003, and the adoption of SFAS 149 did not have a material effect on our financial statements.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” (“SFAS 150”) which requires that an issuer classify a financial instrument that is within its scope as a liability, or an asset in some circumstances, where those instruments were previously classified as equity. The provisions of SFAS 150 are effective for financial statements issued after May 15, 2003, and the adoption of SFAS 150 did not have a material effect on our financial statements.

Item 4.    Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were adequate and effective to ensure that material information relating to us, including our consolidated subsidiaries, was made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

(b) Changes in Internal Controls

The CEO and CFO have indicated that there have been no changes in our internal controls over financial reporting, identified in connection with the above-mentioned evaluation of such internal controls that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Part II—Other Information

Item 4.    Submission of Matters to a Vote of Security Holders

We held our annual meeting of shareholders on May 28, 2003, and the following matters were voted on at that meeting:

1. The election of Ronald M. Cresswell, Ph.D. and Vincent T. DeVita, Jr., M.D. as Class II Directors, to serve for a three-year term of office or until their respective successors have been elected. The following chart shows the number of votes cast for or withheld:

DIRECTOR	FOR	WITHHELD
Ronald M. Cresswell, Ph.D.	43,041,361	2,186,893
Vincent T. DeVita, Jr., M.D.	43,603,123	1,625,131

Our current Directors are Ronald M. Cresswell, Ph.D., Vincent T. DeVita, Jr., M.D., David R. Ebsworth, Ph.D., John H. Forsgren, Robert E. Patricelli, J.D., Jonathan M. Rothberg, Ph.D. and Patrick J. Zenner.

2. The proposal to increase by 3,500,000 shares the aggregate number of shares of the Company’s Common Stock, $0.01 par value per share, for which stock options and stock awards may be granted under the Company’s 1997 Employee, Director and Consultant Stock Plan. The following chart shows the number of votes cast for or against, as well as the number of abstentions and broker nonvotes:

FOR	AGAINST	ABSTAIN
22,509,471	10,783,904	155,724

Item 6.    Exhibits and Reports on Form 8-K

A.    Exhibits

@Exhibit 3.1	Restated Certificate of Incorporation of the Registrant dated March 12, 1998, as filed with the Delaware Secretary of State on March 23, 1998.
Exhibit 3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, dated May 25, 2000, as filed with the Delaware Secretary of State on May 25, 2000, increasing the authorized common stock of the Company from 50,000,000 to 250,000,000.
#Exhibit 3.3	Certificate of Designation, Series A Junior Participating Preferred Stock dated March 27, 2002, as filed with the Delaware Secretary of State on March 27, 2002.
Exhibit 10.1	1997 Employee, Director and Consultant Stock Plan, as amended and restated through May 28, 2003.
Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

@ Previously filed with the Commission as Exhibit 3.3 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 as Exhibit 3.3 to, and incorporated herein by reference from, the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 000-23223.

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B.    Reports on Form 8-K

On April 24, 2003, we furnished a report on Form 8-K under Item 9, “Regulation FD Disclosure”, announcing financial results for the first quarter of 2003. In accordance with the procedural guidance in SEC Release No. 33-8216, the information in the Form 8-K and the Exhibit attached to the Form 8-K was furnished under “Item 9. Regulation FD Disclosure” rather than under “Item 12. Disclosure of Results of Operations and Financial Condition.”

On June 20, 2003, we filed a report on Form 8-K under Item 5, “Other Events and Regulation FD Disclosure”, announcing a corporate restructuring to focus resources on continuing to advance our broad pipeline of protein, antibody, and small molecule therapeutics into preclinical and clinical development.

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SIGNATURES

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

Dated: August 12, 2003	CuraGen Corporation
	By:	/s/    JONATHAN M. ROTHBERG, PH.D.
		Jonathan M. Rothberg, Ph.D. Chief Executive Officer, President and Chairman of the Board
	By:	/s/    DAVID M. WURZER
		David M. Wurzer Executive Vice-President, Chief Financial Officer and Treasurer (principal financial and accounting officer of the registrant)

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CURAGEN CORPORATION

EXHIBIT INDEX

No.

@Exhibit 3.1	Restated Certificate of Incorporation of the Registrant dated March 12, 1998, as filed with the Delaware Secretary of State on March 23, 1998.
Exhibit 3.2	Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, dated May 25, 2000, as filed with the Delaware Secretary of State on May 25, 2000, increasing the authorized common stock of the Company from 50,000,000 to 250,000,000.
#Exhibit 3.3	Certificate of Designation, Series A Junior Participating Preferred Stock dated March 27, 2002, as filed with the Delaware Secretary of State on March 27, 2002.
Exhibit 10.1	1997 Employee, Director and Consultant Stock Plan, as amended and restated through May 28, 2003.
Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code).

@ Previously filed with the Commission as Exhibit 3.3 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 as Exhibit 3.3 to, and incorporated herein by reference from, the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2002, File No. 000-23223.

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EX-3.2

Exhibit 3.2

CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION

OF CURAGEN CORPORATION

It is hereby certified that:

1.    The name of the corporation (hereinafter called the “Corporation”) is CuraGen Corporation.

2.    The Certificate of Incorporation of the Corporation was filed on November 22, 1991. A Restated Certificate of Incorporation filed on March 23, 1998 (the “Restated Certificate”).

3.    The Restated Certificate is hereby amended by striking out Article FOURTH Section A thereof in its entirety and by substituting in lieu of said Article the following new Article FOURTH Section A:

FOURTH:

A.    Designation and Number of Shares.

The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 258,000,000 shares, consisting of 250,000,000 shares of common stock, par value $.01 per share (the “Common Stock”), 3,000,000 shares of non-voting common stock, par value $.01 per share (the “Non-Voting Common Stock”), and 5,000,000 shares of Preferred Stock, par value $.01 per share (the “Preferred Stock”).

Each share of common stock, par value $.01 per share, of the Corporation issued and outstanding at the time and date that this Restated Certificate of Incorporation becomes effective (the “Effective Time”) is hereby reclassified and changed, without any action on the part of the holders of any such common stock or on the part of the Corporation, into one share of fully paid and nonassessable Common Stock, and each person holding of record any shares of such common stock issued and outstanding at the Effective Time shall be entitled to receive, upon the surrender of certificates evidencing such shares to the Corporation, one or more certificates to evidence the number of shares of Common Stock into which such shares of common stock have been reclassified.

A statement of the designations of the different classes of stock of the Corporation and of the powers, preferences and rights, and the qualifications, limitations or restrictions thereof, and of the authority conferred upon the Board of Directors to fix by resolution or resolutions any of the foregoing in connection with the creation of one or more series of Preferred Stock and the limitation of variations between or among such series, is set forth below in this Article FOURTH.

4.    The Amendment of this Restated Certificate of Incorporation herein certified has been duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware.

Signed this 25th day of May, 2000.

David Wurzer

Chief Financial Officer

EX-10.1

Exhibit 10.1

CURAGEN CORPORATION

AMENDED AND RESTATED

(Effective May 28, 2003)

1997 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK PLAN

1. DEFINITIONS.

Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this CuraGen Corporation 1997 Employee, Director and Consultant Stock Plan, have the following meanings:

Administrator means the Board of Directors, unless it has delegated power to act on its behalf to the Committee, in which case the Administrator means the Committee.

Affiliate means a corporation, which for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, direct or indirect.

Board of Directors means the Board of Directors of the Company.

Code means the United States Internal Revenue Code of 1986, as amended.

Committee means the committee of the Board of Directors to which the Board of Directors has delegated power to act under or pursuant to the provisions of the Plan.

Common Stock means shares of the Company’s voting common stock, $.01 par value per share.

Company means CuraGen Corporation, a Delaware corporation.

Disability or Disabled means permanent and total disability as defined in Section 22(e)(3) of the Code.

Fair Market Value of a Share of Common Stock means:

(1)        If the Common Stock is listed on a national securities exchange or traded in the over-the-counter market and sales prices are regularly reported for the Common Stock, the closing or last price of the Common Stock on the Composite Tape or other comparable reporting system for the trading day immediately preceding the applicable date;

(2)        If the Common Stock is not traded on a national securities exchange but is traded on the over-the-counter market, if sales prices are not regularly reported for the Common Stock for the trading day referred to in clause (1), and if bid and asked prices for the Common Stock are regularly reported, the mean between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market for the trading day on which Common Stock was traded immediately preceding the applicable date; and

(3)        If the Common Stock is neither listed on a national securities exchange nor traded in the over-the-counter market, such value as the Administrator, in good faith, shall determine.

ISO means an option meant to qualify as an incentive stock option under Section 422 of the Code.

Key Employee means an employee of the Company or of an Affiliate (including, without limitation, an employee who is also serving as an officer or director of the Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Stock Rights under the Plan.

Non-Qualified Option means an option which is not intended to qualify as an ISO.

Option means an ISO or Non-Qualified Option granted under the Plan.

Option Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan, in such form as the Administrator shall approve.

Participant means a Key Employee, director or consultant to whom one or more Stock Rights are granted under the Plan. As used herein, “Participant” shall include “Participant’s Survivors” where the context requires.

Plan means this CuraGen Corporation 1997 Employee, Director and Consultant Stock Plan, as Amended and Restated.

Shares means shares of the Common Stock as to which Stock Rights have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Paragraph 3 of the Plan. The Shares issued under the Plan may be authorized and unissued shares or shares held by the Company in its treasury, or both.

Stock Grant means a grant by the Company of Shares under the Plan.

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Stock Grant Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan, in such form as the Administrator shall approve.

Stock Right means a right to Shares of the Company granted pursuant to the Plan — an ISO, a Non-Qualified Option or a Stock Grant.

Survivors means a deceased Participant’s legal representatives and/or any person or persons who acquired the Participant’s rights to a Stock Right by will or by the laws of descent and distribution.

2. PURPOSES OF THE PLAN.

The Plan is intended to encourage ownership of Shares by Key Employees and directors of and certain consultants to the Company in order to attract such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The Plan provides for the granting of ISOs, Non-Qualified Options and Stock Grants.

3. SHARES SUBJECT TO THE PLAN.

The number of Shares which may be issued from time to time pursuant to this Plan shall be 10,500,000 or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with Paragraph 23 of the Plan.

If an Option ceases to be “outstanding”, in whole or in part, or if the Company shall reacquire any Shares issued pursuant to a Stock Grant, the Shares which were subject to such Option and any Shares so reacquired by the Company shall be available for the granting of other Stock Rights under the Plan. Any Option shall be treated as “outstanding” until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement.

4. ADMINISTRATION OF THE PLAN.

The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to the Committee, in which case the Committee shall be the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to:

a. Interpret the provisions of the Plan or of any Option or Stock Grant and to make all rules and determinations, which it deems necessary or advisable for the administration of the Plan;

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b. Determine which employees of the Company or of an Affiliate shall be designated as Key Employees and which of the Key Employees, directors and consultants shall be granted Stock Rights;

c. Determine the number of Shares for which a Stock Right or Stock Rights shall be granted, provided, however, that in no event shall Stock Rights with respect to more than 750,000 shares be granted to any Participant in any fiscal year; and

d. Specify the terms and conditions upon which a Stock Right or Stock Rights may be granted;

provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Section 422 of the Code of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Stock Right granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is the Committee.

5. ELIGIBILITY FOR PARTICIPATION.

The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be a Key Employee, director or consultant of the Company or of an Affiliate at the time a Stock Right is granted. Notwithstanding the foregoing, the Administrator may authorize the grant of a Stock Right to a person not then an employee, director or consultant of the Company or of an Affiliate; provided, however, that the actual grant of such Stock Right shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the delivery of the Agreement evidencing such Stock Right. ISOs may be granted only to Key Employees. Non-Qualified Options and Stock Grants may be granted to any Key Employee, director or consultant of the Company or an Affiliate. The granting of any Stock Right to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Stock Rights.

6. TERMS AND CONDITIONS OF OPTIONS.

Each Option shall be set forth in writing in an Option Agreement, duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Administrator may provide that Options be granted subject to such conditions as the Administrator may deem appropriate including, without limitation, subsequent approval by the shareholders of the Company of this Plan or any amendments thereto. The Option Agreements shall be subject to at least the following terms and conditions:

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A. Non-Qualified Options: Each Option intended to be a Non-Qualified Option shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option:

a. Option Price: Each Option Agreement shall state the option price (per share) of the Shares covered by each Option, which option price shall be determined by the Administrator but shall not be less than the par value per share of Common Stock.

b. Each Option Agreement shall state the number of Shares to which it pertains;

c. Each Option Agreement shall state the date or dates on which it first is exercisable and the date after which it may no longer be exercised, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the occurrence of certain conditions or the attainment of stated goals or events; and

d. Exercise of any Option may be conditioned upon the Participant’s execution of a Share purchase agreement in form satisfactory to the Administrator providing for certain protections for the Company and its other shareholders, including requirements that:

i. The Participant’s or the Participant’s Survivors’ right to sell or transfer the Shares may be restricted; and

ii. The Participant or the Participant’s Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear legends noting any applicable restrictions.

e. Directors’ Options: Each director of the Company who is serving on the Board of Directors on October 6, 1997 and who is not an employee of or consultant to the Company or any Affiliate, shall be granted a Non-Qualified Option to purchase 5,000 Shares as of such date. Each director of the Company who is elected or appointed to the Board of Directors after October 6, 1997 and before March 31, 2000, and who is not an employee of or consultant to the Company or any Affiliate, upon first being elected or appointed to the Board of Directors, shall be granted a Non-Qualified Option to purchase 20,000 Shares as of the date of election or appointment. Each director of the Company who is elected or appointed to the Board of Directors after March 30, 2000, and who is not an employee of or consultant to the Company or any Affiliate, upon first being elected or appointed to the Board of Directors, shall be granted a Non-Qualified Option to purchase 20,000 Shares as of the date of election

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or appointment. Each Option described in the foregoing two sentences shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, (ii) have a term of ten years, and (iii) become cumulatively exercisable as follows: (x) one-third shall vest immediately on the date of grant, (y) one-third shall vest on the first anniversary of the date of grant, and (z) one-third shall vest on the second anniversary of the date of grant.

Immediately following the 1998 annual meeting of stockholders (or special meeting in lieu of an annual meeting), and until the 1999 annual meeting of stockholders, each Continuing Director (as defined below) will be granted a Non-Qualified Option to purchase 5,000 Shares. Immediately following the 1999 annual meeting of stockholders (or special meeting in lieu of an annual meeting), and until the 2000 annual meeting of stockholders, each Continuing Director (as defined below) will be granted a Non-Qualified Option to purchase 7,500 Shares. Immediately following the 2000 annual meeting of stockholders (or special meeting in lieu of an annual meeting), and until the 2003 annual meeting of stockholders, each Continuing Director (as defined below) will be granted a Non-Qualified Option to purchase 7,500 Shares. Immediately following each annual meeting of stockholders (or special meeting in lieu of an annual meeting), commencing with the 2003 annual meeting, each Continuing Director (as defined below) will be granted a Non-Qualified Option to purchase 10,000 Shares. As used herein, the term “Continuing Director” shall mean a director who (i) is serving as a director immediately following such annual or special meeting but was not first elected at such annual or special meeting, (ii) has been in continued and uninterrupted service as a director of the Company since his or her initial election or appointment and (iii) is not an employee of or consultant to the Company or any Affiliate. Each such annual Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, (ii) have a term of ten years, and (iii) be immediately exercisable in full.

Each director of the Company who is appointed to serve as the Lead Outside Director, and who is not an employee of or consultant to the Company or any Affiliate, shall be granted a prorated annual Non-Qualified Option to purchase 2,500 Shares as of such date, the proration to be calculated from date of appointment through to date of the next annual meeting of stockholders (or special meeting in lieu of an annual meeting). Thereafter, immediately following each annual meeting of stockholders (or special meeting in lieu of an annual meeting), commencing with the 2003 annual meeting, each Continuing Lead Outside Director will be granted a Non-Qualified Option to purchase 2,500 Shares. Each such annual Option shall (i) have an exercise price equal to the Fair Market Value (per share)

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of the Shares on the date of grant of the Option, (ii) have a term of ten years, and (iii) be immediately exercisable in full.

Any director entitled to receive an Option under this subparagraph may elect to decline the Option.

Except as otherwise provided in the pertinent Option Agreement, if a director who receives Options pursuant to this subparagraph:

a. ceases to be a member of the Board of Directors for any reason other than death or Disability, any then unexercised Options granted to such director may be exercised by the director within a period of three (3) months after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of Shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option; or

b. ceases to be a member of the Board of Directors by reason of his or her death or Disability, any then unexercised Options granted to such director may be exercised by the director (or by the director’s personal representative, or the director’s Survivors) within a period of one (1) year after the date the director ceases to be a member of the Board of Directors, but only to the extent of the number of Shares with respect to which the Options are exercisable on the date the director ceases to be a member of the Board of Directors, and in no event later than the expiration date of the Option.

B. ISOs: Each Option intended to be an ISO shall be issued only to a Key Employee and be subject to at least the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Section 422 of the Code and relevant regulations and rulings of the Internal Revenue Service:

a. Minimum standards: The ISO shall meet the minimum standards required of Non-Qualified Options, as described in Paragraph 6(A) above, except clauses (a) and (e) thereunder.

b. Option Price: Immediately before the Option is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of the Code:

i. Ten percent (10%) or less of the total combined voting power of all classes of stock of the Company or an Affiliate, the Option price

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per share of the Shares covered by each Option shall not be less than one hundred percent (100%) of the Fair Market Value per share of the Shares on the date of the grant of the Option.

ii. More than ten percent (10%) of the total combined voting power of all classes of stock of the Company or an Affiliate, the Option price per share of the Shares covered by each Option shall not be less than one hundred ten percent (110%) of the said Fair Market Value on the date of grant.

c. Term of Option: For Participants who own

i. Ten percent (10%) or less of the total combined voting power of all classes of stock of the Company or an Affiliate, each Option shall terminate not more than ten (10) years from the date of the grant or at such earlier time as the Option Agreement may provide.

ii. More than ten percent (10%) of the total combined voting power of all classes of stock of the Company or an Affiliate, each Option shall terminate not more than five (5) years from the date of the grant or at such earlier time as the Option Agreement may provide.

d. Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of Options which may be exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed one hundred thousand dollars ($100,000), provided that this subparagraph (d) shall have no force or effect if its inclusion in the Plan is not necessary for Options issued as ISOs to qualify as ISOs pursuant to Section 422(d) of the Code.

7. TERMS AND CONDITIONS OF STOCK GRANTS.

Each offer of a Stock Grant to a Participant shall state the date prior to which the Stock Grant must be accepted by the Participant, and the principal terms of each Stock Grant shall be set forth in a Stock Grant Agreement, duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Stock Grant Agreement shall be in a form approved by the Administrator and shall contain terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards:

(a) Each Stock Grant Agreement shall state the purchase price (per share), if any, of the Shares covered by each Stock Grant, which purchase price shall be determined

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by the Administrator but shall not be less than the minimum consideration required by the Delaware General Corporation Law on the date of the grant of the Stock Grant;

(b) Each Stock Grant Agreement shall state the number of Shares to which the Stock Grant pertains; and

(c) Each Stock Grant Agreement shall include the terms of any right of the Company to reacquire the Shares subject to the Stock Grant, including the time and events upon which such rights shall accrue and the purchase price therefor, if any.

8. EXERCISE OF OPTIONS AND ISSUE OF SHARES.

An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company or its designee, together with provision for payment of the full purchase price in accordance with this Paragraph for the Shares as to which the Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such written notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the purchase price for the Shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option and held for at least six months, or (c) at the discretion of the Administrator, by delivery of the grantee’s personal note for full or partial recourse, bearing interest payable not less than annually at not less than the greater of the market interest rate or 100% of the applicable Federal rate, on the date of exercise, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Administrator, in accordance with a cashless exercise program established with a securities brokerage firm, and approved by the Administrator, or (e) at the discretion of the Administrator, by any combination of (a), (b), (c), and (d) above. Notwithstanding the foregoing, the Administrator shall accept only such payment on exercise of an ISO as is permitted by Section 422 of the Code.

The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant’s Survivors, as the case may be). In determining what constitutes “reasonably promptly,” it is expressly understood that the issuance and delivery of the Shares may be delayed by the Company in order to comply with any law or regulation (including, without limitation, state securities or “blue sky” laws) which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be evidenced by an appropriate certificate or certificates for fully paid, non-assessable Shares.

The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any

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installment of any Option granted to any Key Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Paragraph 26) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in Paragraph 6.B.d.

The Administrator may, in its discretion, amend any term or condition of an outstanding Option provided (i) such term or condition as amended is permitted by the Plan, (ii) any such amendment shall be made only with the consent of the Participant to whom the Option was granted, or in the event of the death of the Participant, the Participant’s Survivors, if the amendment is adverse to the Participant, and (iii) any such amendment of any ISO shall be made only after the Administrator, after consulting the counsel for the Company, determines whether such amendment would constitute a “modification” of any Option which is an ISO (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holder of such ISO.

9. ACCEPTANCE OF STOCK GRANT AND ISSUE OF SHARES.

A Stock Grant (or any part or installment thereof) shall be accepted by executing the Stock Grant Agreement and delivering it to the Company at its principal office address, together with provision for payment of the full purchase price, if any, in accordance with this Paragraph for the Shares as to which such Stock Grant is being accepted, and upon compliance with any other conditions set forth in the Stock Grant Agreement. Payment of the purchase price for the Shares as to which such Stock Grant is being accepted shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock held for at least six months and having a fair market value equal as of the date of acceptance of the Stock Grant to the purchase price of the Stock Grant determined in good faith by the Administrator, or (c) at the discretion of the Administrator, by delivery of the grantee’s personal note, for full or partial recourse, bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Administrator, by any combination of (a), (b) and (c) above.

The Company shall then reasonably promptly deliver the Shares as to which such Stock Grant was accepted to the Participant (or to the Participant’s Survivors, as the case may be), subject to any escrow provision set forth in the Stock Grant Agreement. In determining what constitutes “reasonably promptly,” it is expressly understood that the issuance and delivery of the Shares may be delayed by the Company in order to comply with any law or regulation (including, without limitation, state securities or “blue sky” laws) which requires the Company to take any action with respect to the Shares prior to their issuance.

The Administrator may, in its discretion, amend any term or condition of an outstanding Stock Grant or Stock Grant Agreement provided (i) such term or condition as amended is permitted by the Plan, and (ii) any such amendment shall be made only with the consent of the Participant to whom the Stock Grant was made, if the amendment is adverse to the Participant.

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10. RIGHTS AS A SHAREHOLDER.

No Participant to whom a Stock Right has been granted shall have rights as a shareholder with respect to any Shares covered by such Stock Right, except after due exercise of the Option or acceptance of the Stock Grant and tender of the full purchase price, if any, for the Shares being purchased pursuant to such exercise or acceptance and registration of the Shares in the Company’s share register in the name of the Participant.

11. ASSIGNABILITY AND TRANSFERABILITY OF STOCK RIGHTS.

By its terms, a Stock Right granted to a Participant shall not be transferable by the Participant other than (i) by will or by the laws of descent and distribution, or (ii) as otherwise determined by the Administrator and set forth in the applicable Option Agreement or Stock Grant Agreement. Notwithstanding the foregoing an ISO transferred except in compliance with clause (i) above shall no longer qualify as an ISO. The designation of a beneficiary of a Stock Right by a Participant shall not be deemed a transfer prohibited by this Paragraph. Except as provided above, a Stock Right shall only be exercisable or may only be accepted, during the Participant’s lifetime, by such Participant (or by his or her legal representative) and shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Stock Right or of any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon a Stock Right, shall be null and void.

12. EFFECT ON OPTIONS OF TERMINATION OF SERVICE OTHER THAN “FOR CAUSE” OR DEATH OR DISABILITY.

Except as otherwise provided in the pertinent Option Agreement in the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate before the Participant has exercised an Option, the following rules apply:

a. A Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than termination “for cause”, Disability, or death for which events there are special rules in Paragraphs 13, 14, and 15, respectively), may exercise any Option granted to him or her to the extent that the Option is exercisable on the date of such termination of service, but only within such term as the Administrator has designated in the pertinent Option Agreement.

b. Except as provided in subparagraph (c) below, or Paragraph 14 or 15, in no event may an Option Agreement provide, if an Option is intended to be an ISO, that the

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time for exercise be later than three (3) months after the Participant’s termination of employment.

c. The provisions of this Paragraph, and not the provisions of Paragraph 14 or 15, shall apply to a Participant who subsequently becomes Disabled or dies after the termination of employment, director status or consultancy, provided, however, in the case of a Participant’s Disability or death within three (3) months after the termination of employment, director status or consultancy, the Participant or the Participant’s Survivors may exercise the Option within one (1) year after the date of the Participant’s termination of employment, but in no event after the date of expiration of the term of the Option.

d. Notwithstanding anything herein to the contrary, if subsequent to a Participant’s termination of employment, termination of director status or termination of consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant’s termination, the Participant engaged in conduct which would constitute “cause”, then such Participant shall forthwith cease to have any right to exercise any Option.

e. A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant’s employment, director status or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide.

f. Except as required by law or as set forth in the pertinent Option Agreement, Options granted under the Plan shall not be affected by any change of a Participant’s status within or among the Company and any Affiliates, so long as the Participant continues to be an employee, director or consultant of the Company or any Affiliate.

13. EFFECT ON OPTIONS OF TERMINATION OF SERVICE “FOR CAUSE”.

Except as otherwise provided in the pertinent Option Agreement, the following rules apply if the Participant’s service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated “for cause” prior to the time that all his or her outstanding Options have been exercised:

a. All outstanding and unexercised Options as of the time the Participant is notified his or her service is terminated “for cause” will immediately be forfeited.

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b. For purposes of this Plan, “cause” shall include (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of “cause” will be conclusive on the Participant and the Company.

c. “Cause” is not limited to events which have occurred prior to a Participant’s termination of service, nor is it necessary that the Administrator’s finding of “cause” occur prior to termination. If the Administrator determines, subsequent to a Participant’s termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant’s termination the Participant engaged in conduct which would constitute “cause”, then the right to exercise any Option is forfeited.

d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of “cause” for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant.

14. EFFECT ON OPTIONS OF TERMINATION OF SERVICE FOR DISABILITY.

Except as otherwise provided in the pertinent Option Agreement, a Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant:

a. To the extent exercisable but not exercised on the date of Disability; and

b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights as would have accrued had the Participant not become Disabled prior to the end of the accrual period which next ends following the date of Disability. The proration shall be based upon the number of days of such accrual period prior to the date of Disability.

A Disabled Participant may exercise such rights only within a period of not more than one (1) year after the date of the Participant’s termination of employment, directorship or consultancy, as the case may be, notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if the Participant had not become disabled and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option.

The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be

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used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company.

15. EFFECT ON OPTIONS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.

Except as otherwise provided in the pertinent Option Agreement, in the event of the death of a Participant while the Participant is an employee, director or consultant of the Company or of an Affiliate, such Option may be exercised by the Participant’s Survivors:

a. To the extent exercisable but not exercised on the date of death; and

b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion of any additional rights which would have accrued had the Participant not died prior to the end of the accrual period which next ends following the date of death. The proration shall be based upon the number of days of such accrual period prior to the Participant’s death.

If the Participant’s Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one (1) year after the date of death of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option.

16. EFFECT OF TERMINATION OF SERVICE ON STOCK GRANTS.

In the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate for any reason before the Participant has accepted a Stock Grant, such offer shall terminate.

For purposes of this Paragraph 16 and Paragraph 17 below, a Participant to whom a Stock Grant has been offered under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant’s employment, director status or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide.

In addition, for purposes of this Paragraph 16 and Paragraph 17 below, any change of employment or other service within or among the Company and any Affiliates shall not be treated as a termination of employment, director status or consultancy so long as the Participant continues to be an employee, director or consultant of the Company or any Affiliate.

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17. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE OTHER THAN “FOR CAUSE” OR DEATH OR DISABILITY.

Except as otherwise provided in the pertinent Stock Grant Agreement, in the event of a termination of service (whether as an employee, director or consultant), other than termination “for cause,” Disability, or death for which events there are special rules in Paragraphs 18, 19, and 20, respectively, before all Company rights of repurchase shall have lapsed, then the Company shall have the right to repurchase that number of Shares subject to a Stock Grant as to which the Company’s repurchase rights have not lapsed.

18. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE “FOR CAUSE”.

Except as otherwise provided in the pertinent Stock Grant Agreement, the following rules apply if the Participant’s service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated “for cause”:

a. All Shares subject to any Stock Grant shall be immediately subject to repurchase by the Company at the purchase price, if any, thereof.

b. For purposes of this Plan, “cause” shall include (and is not limited to) dishonesty with respect to the employer, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of “cause” will be conclusive on the Participant and the Company.

c. “Cause” is not limited to events which have occurred prior to a Participant’s termination of service, nor is it necessary that the Administrator’s finding of “cause” occur prior to termination. If the Administrator determines, subsequent to a Participant’s termination of service, that either prior or subsequent to the Participant’s termination the Participant engaged in conduct which would constitute “cause,” then the Company’s right to repurchase all of such Participant’s Shares shall apply.

d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of “cause” for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to such Participant.

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19. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE FOR DISABILITY.

Except as otherwise provided in the pertinent Stock Grant Agreement, the following rules apply if a Participant ceases to be an employee, director or consultant of the Company or of an Affiliate by reason of Disability: to the extent the Company’s rights of repurchase have not lapsed on the date of Disability, they shall be exercisable; provided, however, that in the event such rights of repurchase lapse periodically, such rights shall lapse to the extent of a pro rata portion of the Shares subject to such Stock Grant as would have lapsed had the Participant not become Disabled prior to the end of the vesting period which next ends following the date of Disability. The proration shall be based upon the number of days of such vesting period prior to the date of Disability.

The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company.

20. EFFECT ON STOCK GRANTS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.

Except as otherwise provided in the pertinent Stock Grant Agreement, the following rules apply in the event of the death of a Participant while the Participant is an employee, director or consultant of the Company or of an Affiliate: to the extent the Company’s rights of repurchase have not lapsed on the date of death, they shall be exercisable; provided, however, that in the event such rights of repurchase lapse periodically, such rights shall lapse to the extent of a pro rata portion of the Shares subject to such Stock Grant as would have lapsed had the Participant not died prior to the end of the vesting period which next ends following the date of death. The proration shall be based upon the number of days of such vesting period prior to the Participant’s death.

21. PURCHASE FOR INVESTMENT.

Unless the offering and sale of the Shares to be issued upon the particular exercise or acceptance of a Stock Right shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the “1933 Act”), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled:

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a. The person(s) who exercise(s) or accept(s) such Stock Right shall warrant to the Company, prior to the receipt of such Shares, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing their Shares issued pursuant to such exercise or such grant:

“The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is then available, and (2) there shall have been compliance with all applicable state securities laws.”

b. At the discretion of the Administrator, the Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise or acceptance in compliance with the 1933 Act without registration thereunder.

22. DISSOLUTION OR LIQUIDATION OF THE COMPANY.

Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised and all Stock Grants which have not been accepted will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant’s Survivors have not otherwise terminated and expired, the Participant or the Participant’s Survivors will have the right immediately prior to such dissolution or liquidation to exercise or accept any Stock Right to the extent that the Stock Right is exercisable or subject to acceptance as of the date immediately prior to such dissolution or liquidation.

23. ADJUSTMENTS.

Upon the occurrence of any of the following events, a Participant’s rights with respect to any Stock Right granted to him or her hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in the pertinent Option Agreement or Stock Grant Agreement:

A.        Stock Dividends and Stock Splits.    If (i) the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, or (ii) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock, the number of shares of

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Common Stock deliverable upon the exercise or acceptance of such Stock Right may be appropriately increased or decreased proportionately, and appropriate adjustments may be made in the purchase price per share to reflect such events. The number of Shares subject to Options to be granted to directors pursuant to Paragraph 6(A)(e) and the number of Shares subject to the limitation in Paragraph 4(c) shall also be proportionately adjusted upon the occurrence of such events.

B.        Consolidations or Mergers.    If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company’s assets or otherwise (an “Acquisition”), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the “Successor Board”), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the Shares then subject to such Options either the consideration payable with respect to the outstanding shares of Common Stock in connection with the Acquisition or securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that all Options must be exercised (either to the extent then exercisable or, at the discretion of the Administrator, all Options being made fully exercisable for purposes of this Subparagraph) at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the Fair Market Value of the Shares subject to such Options (either to the extent then exercisable or, at the discretion of the Administrator, all Options being made fully exercisable for purposes of this Subparagraph) over the exercise price thereof.

With respect to outstanding Stock Grants, the Administrator or the Successor Board, shall either (i) make appropriate provisions for the continuation of such Stock Grants by substituting on an equitable basis for the Shares then subject to such Stock Grants either the consideration payable with respect to the outstanding Shares of Common Stock in connection with the Acquisition or securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that all Stock Grants must be accepted (to the extent then subject to acceptance) within a specified number of days of the date of such notice, at the end of which period the offer of the Stock Grants shall terminate; or (iii) terminate all Stock Grants in exchange for a cash payment equal to the excess of the Fair Market Value of the Shares subject to such Stock Grants over the purchase price thereof, if any. In addition, in the event of an Acquisition, the Administrator may waive any or all Company repurchase rights with respect to outstanding Stock Grants.

C.        Recapitalization or Reorganization.    In the event of a recapitalization or reorganization of the Company (other than a transaction described in Subparagraph B above) pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, a Participant upon exercising or accepting a Stock Right shall be entitled to receive for the purchase price, if any, paid upon such exercise or acceptance the securities which would have been received if such Stock Right had been exercised or accepted prior to such recapitalization or reorganization.

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D.        Modification of ISOs.    Notwithstanding the foregoing, any adjustments made pursuant to Subparagraph A, B or C with respect to ISOs shall be made only after the Administrator, after consulting with counsel for the Company, determines whether such adjustments would constitute a “modification” of such ISOs (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such “modification” on his or her income tax treatment with respect to the ISO.

24. ISSUANCES OF SECURITIES.

Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Stock Rights. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company prior to any issuance of Shares pursuant to a Stock Right.

25. FRACTIONAL SHARES.

No fractional shares shall be issued under the Plan and the person exercising a Stock Right shall receive from the Company cash in lieu of such fractional shares equal to the Fair Market Value thereof.

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26. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs.

The Administrator, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant’s ISOs (or any portions thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the Participant is an employee of the Company or an Affiliate at the time of such conversion. Such actions may include, but not be limited to, extending the exercise period or reducing the exercise price of the appropriate installments of such Options. At the time of such conversion, the Administrator (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participant’s ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the Participant, may also terminate any portion of any ISO that has not been exercised at the time of such conversion.

27. WITHHOLDING.

In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act (“F.I.C.A.”) withholdings or other amounts are required by applicable law or governmental regulation to be withheld from the Participant’s salary, wages or other remuneration in connection with the exercise or acceptance of a Stock Right or in connection with a Disqualifying Disposition (as defined in Paragraph 28) or upon the lapsing of any right of repurchase, the Company may withhold from the Participant’s compensation, if any, or may require that the Participant advance in cash to the Company, or to any Affiliate of the Company which employs or employed the Participant, the statutory minimum amount of such withholdings unless a different withholding arrangement, including the use of shares of Common Stock or a promissory note, is authorized by the Administrator (and permitted by law). For purposes hereof, the fair market value of the shares withheld for purposes of payroll withholding shall be determined in the manner provided in Paragraph 1 above, as of the most recent practicable date prior to the date of exercise. If the fair market value of the shares withheld is less than the amount of payroll withholdings required, the Participant may be required to advance the difference in cash to the Company or the Affiliate employer. The Administrator in its discretion may condition the exercise of an Option for less than the then Fair Market Value on the Participant’s payment of such additional withholding.

28. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.

Each Key Employee who receives an ISO must agree to notify the Company in writing immediately after the Key Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is any disposition (including any

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sale) of such shares before the later of (a) two years after the date the Key Employee was granted the ISO, or (b) one year after the date the Key Employee acquired Shares by exercising the ISO. If the Key Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter.

29. TERMINATION OF THE PLAN.

The Plan will terminate on 10 years after adoption, the date which is ten (10) years from the earlier of the date of its adoption and the date of its approval by the shareholders of the Company. The Plan may be terminated at an earlier date by vote of the shareholders of the Company; provided, however, that any such earlier termination shall not affect any Option Agreements or Stock Grant Agreements executed prior to the effective date of such termination.

30. AMENDMENT OF THE PLAN AND AGREEMENTS.

The Plan may be amended by the shareholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding Stock Rights granted under the Plan or Stock Rights to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, and to the extent necessary to qualify the shares issuable upon exercise or acceptance of any outstanding Stock Rights granted, or Stock Rights to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which the Administrator determines is of a scope that requires shareholder approval shall be subject to obtaining such shareholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect his or her rights under a Stock Right previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Option Agreements and Stock Grant Agreements in a manner which may be adverse to the Participant but which is not inconsistent with the Plan. In the discretion of the Administrator, outstanding Option Agreements and Stock Grant Agreements may be amended by the Administrator in a manner which is not adverse to the Participant.

31. EMPLOYMENT OR OTHER RELATIONSHIP.

Nothing in this Plan or any Option Agreement or Stock Grant Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time.

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32. GOVERNING LAW.

This Plan shall be construed and enforced in accordance with the law of the State of Delaware.

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EX-31.1

EXHIBIT 31.1

Certification Of Chief Executive Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002

I, Jonathan M. Rothberg, certify that:

1. I have reviewed this quarterly report of CuraGen Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 12, 2003	By:	/s/    JONATHAN M. ROTHBERG, PH.D.
		Jonathan M. Rothberg, Ph.D. Chief Executive Officer, President and Chairman of the Board

EX-31.2

EXHIBIT 31.2

Certification Of Chief Financial Officer Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002

I, David M. Wurzer, certify that:

1. I have reviewed this quarterly report of CuraGen Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: August 12, 2003	By:	/s/    DAVID M. WURZER
		David M. Wurzer Executive Vice-President, Chief Financial Officer and Treasurer (principal financial and accounting officer of the registrant)

EX-32

EXHIBIT 32

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of CuraGen Corporation, a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: August 12, 2003	By:	/s/    JONATHAN M. ROTHBERG, PH.D.
		Jonathan M. Rothberg, Ph.D. Chief Executive Officer, President and Chairman of the Board (principal executive officer)
Dated: August 12, 2003	By:	/s/    DAVID M. WURZER
		David M. Wurzer Executive Vice-President, Chief Financial Officer and Treasurer (principal financial and accounting officer)

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.