The discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains trend analysis, estimates and other forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements include, without limitation, statements containing the words "believes," "anticipates," "expects," "continue," and other words of similar import or the negative of those terms or expressions. Such forward-looking statements are subject to known and unknown risks, uncertainties, estimates and other factors that may cause the actual results, performance or achievements of the Company, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Actual results could differ materially from those set forth in such forward-looking statements as a result of, but not limited to, the "Risk Factors" described below. You should read the following discussion and analysis along with the financial statements and notes attached to those statements included elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2008 as filed with the Securities and Exchange Commission on March 3, 2009.

Overview

We were incorporated in June 1995. From our inception through March 31, 2009, our activities related primarily to establishing and operating a biotechnology research and development organization and developing relationships with our corporate collaborators. Our scientific and business development endeavors currently focus on the engineering of novel zinc finger DNA-binding proteins (ZFPs) for the regulation and modification of genes. We have incurred net losses since inception and expect to incur losses in the future as we continue our research and development activities. To date, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from research grants and from corporate collaborators and strategic partners. As of March 31, 2009, we had an accumulated deficit of $180.9 million.

Our revenues have consisted primarily of revenues from our corporate partners for ZFP transcription factors (ZFP TFs) and ZFP nucleases (ZFNs), contractual payments from strategic partners for research programs and research milestones, and research grant funding. We expect revenues will continue to fluctuate from period to period and there can be no assurance that new collaborations or partner fundings will continue beyond their initial terms.

In the development of our ZFP technology platform we have continued to place more emphasis internally on higher-value therapeutic product development and less on our enabling technology applications. We believe this shift in emphasis has the potential to increase the return on investment to our stockholders by allocating capital resources to higher value, therapeutic product development activities. At the same time, it may reduce our revenues over the next several years and subject us to higher financial risk by increasing expenses associated with product development. We have filed Investigational New Drug (IND) applications with the U.S. Food and Drug Administration (FDA) and have initiated three Phase 2 clinical trials of a ZFP Therapeutic in subjects with diabetic neuropathy and one Phase 2 clinical trial in subjects with ALS. We are also conducting a Phase 1 clinical trial to evaluate a ZFP Therapeutic for the treatment of HIV/AIDS. Development of novel therapeutic products is costly and is subject to a lengthy and uncertain regulatory process by the FDA. Our future products are gene-based therapeutics. Adverse events in both our own clinical program and other programs may have a negative impact on regulatory approval, the willingness of potential commercial partners to enter into agreements and the perception of the public.

Research and development expenses consist primarily of salaries and personnel expenses, stock-based compensation expenses, laboratory supplies, pre-clinical and clinical studies, manufacturing expenses, allocated facilities expenses, subcontracted research expenses and expenses for trademark registration and technology licenses. Research and development costs incurred in connection with collaborator-funded activities are expensed as incurred. Costs to acquire technologies that are utilized in research and

development and that have no alternative future use are expensed as incurred. We believe that continued investment in research and development is critical to attaining our strategic objectives. We expect these expenses will increase as we focus on development of ZFP Therapeutics. Additionally, in order to develop ZFP TFs and ZFNs as commercially relevant therapeutics, we expect to expend additional resources for expertise in the manufacturing, regulatory affairs and clinical research aspects of biotherapeutic development.

General and administrative expenses consist primarily of salaries and personnel expenses for executive, finance and administrative personnel, stock-based compensation expenses, professional fees, allocated facilities expenses, patent prosecution expenses and other general corporate expenses. As we pursue commercial development of our therapeutic leads we expect the business aspects of the Company to become more complex. We may be required in the future to add personnel and incur additional costs related to the maturity of our business.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates are described in Note 1, Basis of Presentation and Summary of Significant Accounting Policies to the Unaudited Notes to Condensed Consolidated Financial Statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources, and evaluate our estimates on an ongoing basis. Actual results could differ from those estimates under different assumptions or conditions.

RESULTS OF OPERATIONS

Three months ended March 31, 2009 and 2008

Revenues



                                            Three months ended March 31,
                                      (in thousands, except percentage values)
                                    2009            2008          Change         %
     Revenues:
     Collaboration agreements   $       3,157    $     2,084    $     1,073       51 %

Total revenues $ 3,157 $ 2,765 $ 392 14 %

Total revenues consist of revenues from collaboration agreements, strategic partnerships and research grants.

Revenues from our corporate collaboration and strategic partnering agreements were $3.2 million for the three months ended March 31, 2009, compared to $2.1 million in the corresponding period in 2008. The increase in collaboration agreement revenues was primarily attributable to increased revenues of $897,000 in connection with our research license and commercial option agreement with Dow AgroSciences LLC ("DAS"), and revenues of $250,000 in connection with the OMT agreement, partially offset by decreased revenues of $137,000 related to our research and license agreement with Genentech. Research grant revenues were $0 for the three months ended March 31, 2009, compared to $681,000 in the corresponding period in 2008. The decrease in research grant revenues was primarily due to decreased revenues of $375,000 and $252,000 related to our grant from the Juvenile Diabetes Research Foundation ("JDRF") and the Michael J. Fox Foundation ("MJFF"), respectively.

Operating Expenses



                                             Three months ended March 31,
                                       (in thousands, except percentage values)
                                     2009            2008           Change         %
    Operating Expenses:
    Research and development     $      7,256    $      8,646    $     (1,390 )   (16 )%
    General and administrative          2,926           2,927              (1 )    (0 )%

    Total expenses               $     10,182    $     11,573    $     (1,391 )   (12 )%

Research and development

Research and development expenses consist primarily of salaries and personnel expenses, stock-based compensation expense, laboratory supplies, pre-clinical and clinical studies, manufacturing costs, allocated facilities expenses, subcontracted research expenses and expenses for trademark registration and technology licenses. We expect to continue to devote substantial resources to research and development in the future and expect research and development expenses to increase in the next several years if we are successful in advancing our ZFP Therapeutic product candidates into clinical trials. To the extent we collaborate with others with respect to clinical trials, increases in research and development expenses may be reduced or avoided.

Research and development expenses were $7.3 million for the three months ended March 31, 2009, compared to $8.6 million in the corresponding period in 2008. The decrease in research and development expenses was primarily attributable to decreased pre-clinical and clinical studies expenses of $996,000, primarily associated with our diabetic neuropathy program, and decreased expenses related to lab supplies of $184,000, consulting of $245,000, licensing of $238,000 and stock-based compensation of $142,000. This was partially offset by increased manufacturing expenses of $537,000, primarily associated with our Phase 1 HIV/AIDS study and our planned Phase 1 glioblastoma multiforme study.

General and administrative

General and administrative expenses consist primarily of salaries and personnel expenses for executive, finance and administrative personnel, stock-based compensation expenses, professional fees, allocated facilities expenses, patent prosecution expenses and other general corporate expenses. As we pursue commercial development of our therapeutic leads, we expect the business aspects of the Company to become more complex. We may be required in the future to add personnel and incur additional costs related to the maturity of our business.

General and administrative expenses were $2.9 million for both three month periods ended March 31, 2009 and 2008. There were no significant expense variances when comparing the two periods.

Interest and Other Income, net

Interest and other income, net, was $193,000 for the three months ended March 31, 2009, compared to $836,000 in the corresponding period in 2008. The decrease was primarily due to lower interest income earned of $591,000 due to lower average investment balances and lower interest rates. In addition, a foreign currency translation loss of $57,000 was recognized during the three months ended March 31, 2009, compared to a foreign currency translation loss of $4,000 during the three months ended March 31, 2008, related to our cash holdings at our wholly-owned UK subsidiary, Gendaq Limited.

Liquidity and Capital Resources

Since inception, we have funded our operations primarily through the issuance of equity securities, borrowings, payments from research grants and from corporate collaborators and strategic partners. As of March 31, 2009, we had cash, cash equivalents, marketable securities and interest receivable totaling $57.9 million.

During the three months ended March 31, 2009, the net cash used in operating activities was $7.1 million. Net cash used in operating activities related to our net loss of $6.8 million and changes in operating assets and liabilities of $1.8 million. The changes in operating assets and liabilities were primarily comprised of decreases in deferred revenues of $2.0 million and increases in accounts receivable of $363,000, partially offset by increases in accrued compensation and employee benefits of $449,000. This was partially offset by net non-cash charges of $1.6 million. Non-cash charges were primarily comprised of $1.5 million related to stock-based compensation and depreciation and amortization of $144,000, partially offset by amortization of premium / discount on marketable securities of $136,000. During the three months ended March 31, 2008, net cash used in operating activities related to our net loss of $8.0 million and changes in operating assets and liabilities of $1.8 million. The changes in operating assets and liabilities were primarily comprised of decreases in deferred revenues of $1.6 million, accrued compensation and employee benefits of $457,000 and increases in accounts receivable of $404,000, partially offset by increases in accounts payable and accrued liabilities of $574,000 and decreases in interest receivable of $155,000. This was partially offset by net non-cash charges of $1.3 million. Non-cash charges were primarily comprised of $1.7 million related to stock-based compensation and depreciation and amortization of $115,000, partially offset by amortization of premium / discount on marketable securities of $492,000.

During the three months ended March 31, 2009, net cash provided by investing activities was $2.4 million. Cash provided by investing activities was comprised of maturities of marketable securities of $21.3 million, partially offset by purchases of marketable securities of $18.8 million and purchases of property and equipment of $55,000. During the three months ended March 31, 2008, net cash provided by investing activities was $5.6 million. Cash provided by investing activities was comprised of maturities of marketable securities of $29.3 million and proceeds from sales of investments of $4.0 million, partially offset by purchases of marketable securities of $27.3 million and purchases of property and equipment of $365,000.

Net cash used in financing activities for the three months ended March 31, 2009 was $25,000 and primarily related to the repurchase of common stock. Net cash provided by financing activities for the three months ended March 31, 2008 was $17,000 and related to proceeds from the issuance of common stock.

While we expect our rate of cash usage to increase in the future, in particular, to support our product development endeavors, we believe that the available cash resources, funds received from corporate collaborators, strategic partners and research grants will be sufficient to finance our operations through 2010. We may need to raise additional capital to fund our ZFP Therapeutic development activities. Additional capital may not be available in terms acceptable to us, or at all. If adequate funds are not available, our business and our ability to develop our technology and our ZFP Therapeutic products would be harmed.