The official word from Activision states the following:
Although we made a substantial investment in the Prototype IP, it did not find a broad commercial audience. Radical is a very talented team of developers, however, we have explored various options for the studio, including a potential sale of the business, and have made a difficult conclusion through the consultation process that the only remaining option is a significant reduction in staff. As such, some employees will remain working for Radical Entertainment supporting other existing Activision Publishing projects, but the studio will cease development of its own games going forward.While it's heartening to hear that the studio, which recently celebrated its 20th Anniversary, wasn't completely closed down, there are reports as many as 145 people lost their jobs. Even with the mass firings, the PC version of Prototype 2 will still launch July 24, 2012 according to statement on Radical's Facebook page.