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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended March 31, 2007

OR



| ̈ | 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 000-33095



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ACHILLION
PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 52-2113479                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|300 George Street, New Haven, CT         |  | 06511     
|(Address of principal executive offices) |  | (Zip Code)

(203) 624-7000

(Registrants telephone number, including area code)



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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 a large accelerated filer, an accelerated filer, or non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated
filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x

As of May 1, 2007, the registrant had 15,543,214
shares of Common Stock, $0.001 par value per share, outstanding.



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##### Table of Contents

Table of Contents

INDEX



|                                                                                              |  |           
|--------------------------------------------------------------------------------------------- |  | ----------
|                                                                                              |  | PAGENUMBER
|PART I. FINANCIAL INFORMATION                                                                 |  |           
|                                                                                              | 
|ITEM 1. FINANCIAL STATEMENTS                                                                  |  |           
|                                                                                              | 
|Balance Sheets at March 31, 2007 (unaudited) and December 31, 2006                            |  | 3         
|                                                                                              | 
|Statements of Operations for the Three Months Ended March 31, 2007 and 2006 (unaudited)       |  | 4         
|                                                                                              | 
|Statements of Stockholders Equity for the Three Months Ended March 31, 2007 (unaudited)      |  | 5         
|                                                                                              | 
|Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (unaudited)       |  | 6         
|                                                                                              | 
|Notes to Financial Statements                                                                 |  | 7         
|                                                                                              | 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 14        
|                                                                                              | 
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 24        
|                                                                                              | 
|ITEM 4. CONTROLS AND PROCEDURES                                                               |  | 24        
|                                                                                              | 
|PART II. OTHER INFORMATION                                                                    |  |           
|                                                                                              | 
|ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 25        
|                                                                                              | 
|ITEM 1A. RISK FACTORS                                                                         |  | 25        
|                                                                                              | 
|ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 41        
|                                                                                              | 
|ITEM 6. EXHIBITS                                                                              |  | 41        
|                                                                                              | 
|SIGNATURES                                                                                    |  | 43        
|                                                                                              | 
|Ex-31.1 Section 302 Certification of CEO                                                      |  |           
|Ex-31.2 Section 302 Certification of CFO                                                      |  |           
|Ex-32.1 Section 906 Certification of CEO                                                      |  |           
|Ex-32.2 Section 906 Certification of CFO                                                      |  |           



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##### Table of Contents

Achillion Pharmaceuticals, Inc.

Balance Sheets

(in thousands, except per share amounts)



|                                                                                                                        |  |                |          |   |                   |   |          |  
|----------------------------------------------------------------------------------------------------------------------- |  | -------------- | -------- | - | ----------------- | - | -------- | -
|                                                                                                                        |  | March 31, 2007 |          |   | December 31, 2006 |  
|                                                                                                                        |  | (Unaudited)    |          |   |                   |  
|Assets                                                                                                                  |  |                |          |   |                   |   |          |  
|Current assets:                                                                                                         |  |                |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                               |  | $              | 11,754   |   |                   | $ | 22,662   |  
|Marketable securities                                                                                                   |  |                | 43,188   |   |                   |   | 39,904   |  
|Accounts receivable                                                                                                     |  |                | 989      |   |                   |   | 796      |  
|Prepaid expenses and other current assets                                                                               |  |                | 1,332    |   |                   |   | 1,502    |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Total current assets                                                                                                    |  |                | 57,263   |   |                   |   | 64,864   |  
|Fixed assets, net                                                                                                       |  |                | 1,874    |   |                   |   | 1,966    |  
|Deferred financing costs                                                                                                |  |                | 53       |   |                   |   | 59       |  
|Restricted cash                                                                                                         |  |                | 257      |   |                   |   | 257      |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Total assets                                                                                                            |  | $              | 59,447   |   |                   | $ | 67,146   |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Liabilities and Stockholders Equity                                                                                    |  |                |          |   |                   |   |          |  
|Current liabilities:                                                                                                    |  |                |          |   |                   |   |          |  
|Current portion of long-term debt                                                                                       |  | $              | 3,623    |   |                   | $ | 3,572    |  
|Accounts payable                                                                                                        |  |                | 2,806    |   |                   |   | 2,633    |  
|Accrued expenses                                                                                                        |  |                | 3,382    |   |                   |   | 2,639    |  
|Deferred revenue                                                                                                        |  |                | 3,128    |   |                   |   | 2,830    |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Total current liabilities                                                                                               |  |                | 12,939   |   |                   |   | 11,674   |  
|Long-term debt, net of current portion                                                                                  |  |                | 4,429    |   |                   |   | 5,327    |  
|Accrued expenses, net of current portion                                                                                |  |                | 160      |   |                   |   | 340      |  
|Deferred revenue                                                                                                        |  |                | 1,611    |   |                   |   | 2,435    |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Total liabilities                                                                                                       |  |                | 19,139   |   |                   |   | 19,776   |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Commitments                                                                                                             |  |                |          |   |                   |   |          |  
|                                                                                                                        |  |               
|Stockholders Equity:                                                                                                   |  |                |          |   |                   |   |          |  
|Common Stock, $.001 par value; 100,000 shares authorized: 15,543 and 15,535 shares issued and outstanding, respectively |  |                | 16       |   |                   |   | 16       |  
|Additional paid-in capital                                                                                              |  |                | 171,219  |   |                   |   | 170,650  |  
|Stock warrants                                                                                                          |  |                | 485      |   |                   |   | 644      |  
|Stock subscription receivable                                                                                           |  |                | (25      | ) |                   |   | (50      | )
|Accumulated deficit                                                                                                     |  |                | (131,398 | ) |                   |   | (123,908 | )
|Unrealized gain on marketable securities                                                                                |  |                | 11       |   |                   |   | 18       |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Total stockholders equity                                                                                              |  |                | 40,308   |   |                   |   | 47,370   |  
|                                                                                                                        |  |                |          |   |                   |   |          |  
|Total liabilities and stockholders equity                                                                              |  | $              | 59,447   |   |                   | $ | 67,146   |  
|                                                                                                                        |  |                |          |   |                   |   |          |  

The accompanying notes are an integral part of these financial statements.



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Achillion Pharmaceuticals, Inc.

Statements of Operations

(in thousands, except per share amounts)

(Unaudited)



|                                                                                                                   |  |                                      |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------ | ------ | - | ---- | - | ------ | -
|                                                                                                                   |  | For the Three Months Ended March 31, |       
|                                                                                                                   |  | 2007                                 |        |   | 2006 |  
|Revenue                                                                                                            |  | $                                    | 1,550  |   |      | $ | 2,151  |  
|                                                                                                                   |  |                                     
|Operating expenses                                                                                                 |  |                                      |        |   |      |   |        |  
|Research and development                                                                                           |  |                                      | 8,367  |   |      |   | 6,187  |  
|General and administrative                                                                                         |  |                                      | 1,548  |   |      |   | 1,219  |  
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Total operating expenses                                                                                           |  |                                      | 9,915  |   |      |   | 7,406  |  
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Loss from operations                                                                                               |  |                                      | (8,365 | ) |      |   | (5,255 | )
|                                                                                                                   |  |                                     
|Other income (expense)                                                                                             |  |                                      |        |   |      |   |        |  
|Interest income                                                                                                    |  |                                      | 759    |   |      |   | 72     |  
|Interest expense                                                                                                   |  |                                      | (265   | ) |      |   | (189   | )
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Net loss before tax benefits                                                                                       |  |                                      | (7,871 | ) |      |   | (5,372 | )
|Tax benefit                                                                                                        |  |                                      | 201    |   |      |   | 25     |  
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Net loss                                                                                                           |  |                                      | (7,670 | ) |      |   | (5,347 | )
|Accretion of preferred stock dividends                                                                             |  |                                      |       |   |      |   | (1,028 | )
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Loss attributable to common stockholders                                                                           |  | $                                    | (7,670 | ) |      | $ | (6,375 | )
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Basic and diluted net loss per share attributable to common stockholders (Note 2)                                  |  | $                                    | (0.49  | ) |      | $ | (12.52 | )
|                                                                                                                   |  |                                      |        |   |      |   |        |  
|Weighted average shares used in computing basic and diluted net loss per share attributable to common stockholders |  |                                      | 15,540 |   |      |   | 509    |  
|                                                                                                                   |  |                                      |        |   |      |   |        |  

The accompanying notes are an integral part of these financial statements.



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Achillion Pharmaceuticals, Inc.

Statement of Stockholders Equity for the Three Months Ended
March 31, 2007

(in thousands)

(unaudited)



|                                                   |  |              |  |                            |    |                |   |         |                               |   |      |                     |  |   |                        |   |  |                            |          |   |  |   |    |   |  |   |        |  
|-------------------------------------------------- |  | ------------ |  | -------------------------- | -- | -------------- | - | ------- | ----------------------------- | - | ---- | ------------------- |  | - | ---------------------- | - |  | -------------------------- | -------- | - |  | - | -- | - |  | - | ------ | -
|                                                   |  | Common Stock |  | Additional Paid-In Capital |    | Stock Warrants |   |         | Stock Subscription Receivable |   |      | Accumulated Deficit |  |   | Unrealized Gain (Loss) |   |  | Total Stockholders Equity |         
|                                                   |  | Shares       |  | Amount                     |    |                |   |         |                               |  
|Balances at December 31, 2006                      |  | 15,535       |  |                            | 16 |                |   | 170,650 |                               |   | 644  |                     |  |   | (50                    | ) |  |                            | (123,908 | ) |  |   | 18 |   |  |   | 47,370 |  
|Adoption of FASB Interpretation No. 48             |  |              |  |                            |    |                |   |         |                               |   |      |                     |  |   |                        |   |  |                            | 180      |   |  |   |    |   |  |   | 180    |  
|Stock compensation                                 |  |             |  |                            |   |                |   | 410     |                               |   |      |                     |  |   |                       |   |  |                            |         |   |  |   |   |   |  |   | 410    |  
|Issuance of common stock upon exercise of warrants |  | 8            |  |                            |   |                |   | 159     |                               |   | (159 | )                   |  |   |                       |   |  |                            |         |   |  |   |   |   |  |   |       |  
|Repayment of stock subscriptions receivable        |  |             |  |                            |   |                |   |        |                               |   |     |                     |  |   | 25                     |   |  |                            |         |   |  |   |   |   |  |   | 25     |  
|Unrealized (loss) on marketable securities         |  |             |  |                            |   |                |   |        |                               |   |     |                     |  |   |                       |   |  |                            |         |   |  |   | (7 | ) |  |   | (7     | )
|Net (loss)                                         |  |             |  |                            |   |                |   |        |                               |   |     |                     |  |   |                       |   |  |                            | (7,670   | ) |  |   |   |   |  |   | (7,670 | )
|                                                   |  |              |  |                            |    |                |   |         |                               |   |      |                     |  |   |                        |   |  |                            |          |   |  |   |    |   |  |   |        |  
|Balances at March 31, 2007                         |  | 15,543       |  | $                          | 16 |                | $ | 171,219 |                               | $ | 485  |                     |  | $ | (25                    | ) |  | $                          | (131,398 | ) |  | $ | 11 |   |  | $ | 40,308 |  
|                                                   |  |              |  |                            |    |                |   |         |                               |   |      |                     |  |   |                        |   |  |                            |          |   |  |   |    |   |  |   |        |  

The accompanying notes are an integral part of these financial statements.



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Achillion Pharmaceuticals, Inc.

Statements of Cash Flows

(in thousands)

(Unaudited)



|                                                                            |  |                              |         |   |      |   |        |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                                            |  | Three Months Ended March 31, |        
|                                                                            |  | 2007                         |         |   | 2006 |  
|Cash flows from operating activities                                        |  |                              |         |   |      |   |        |  
|Net loss                                                                    |  | $                            | (7,670  | ) |      | $ | (5,347 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |         |   |      |   |        |  
|Depreciation and amortization                                               |  |                              | 194     |   |      |   | 236    |  
|Stock-based compensation                                                    |  |                              | 410     |   |      |   | 197    |  
|Noncash interest expense                                                    |  |                              | 29      |   |      |   |       |  
|Amortization of premium on securities                                       |  |                              | (527    | ) |      |   |       |  
|Changes in operating assets and liabilities:                                |  |                              |         |   |      |   |        |  
|Accounts receivable                                                         |  |                              | (193    | ) |      |   | (135   | )
|Prepaid expenses and other current assets                                   |  |                              | 170     |   |      |   | (1,304 | )
|Account payable                                                             |  |                              | 173     |   |      |   | 1,513  |  
|Accrued expenses and other liabilities                                      |  |                              | 743     |   |      |   | 590    |  
|Deferred revenue                                                            |  |                              | (526    | ) |      |   | (1,189 | )
|                                                                            |  |                              |         |   |      |   |        |  
|Net cash (used in) operating activities                                     |  |                              | (7,197  | ) |      |   | (5,439 | )
|                                                                            |  |                              |         |   |      |   |        |  
|Cash flows from investing activities                                        |  |                              |         |   |      |   |        |  
|Purchase of property and equipment                                          |  |                              | (96     | ) |      |   |       |  
|Purchase of marketable securities                                           |  |                              | (15,764 | ) |      |   |       |  
|Maturities of marketable securities                                         |  |                              | 13,000  |   |      |   |       |  
|                                                                            |  |                              |         |   |      |   |        |  
|Net cash (used in) investing activities                                     |  |                              | (2,860  | ) |      |   |       |  
|                                                                            |  |                              |         |   |      |   |        |  
|Cash flows from financing activities                                        |  |                              |         |   |      |   |        |  
|Proceeds from issuance of Series C-2 Preferred Stock, net of issuance costs |  |                              |        |   |      |   | 4,656  |  
|Proceeds from repayment of stock subscription receivable                    |  |                              | 25      |   |      |   |       |  
|Repayments of notes payable                                                 |  |                              | (876    | ) |      |   | (422   | )
|                                                                            |  |                              |         |   |      |   |        |  
|Net cash provided by (used in) financing activities                         |  |                              | (851    | ) |      |   | 4,234  |  
|                                                                            |  |                              |         |   |      |   |        |  
|Net decrease in cash and cash equivalents                                   |  |                              | (10,908 | ) |      |   | (1,205 | )
|Cash and cash equivalents, beginning of period                              |  |                              | 22,662  |   |      |   | 9,583  |  
|                                                                            |  |                              |         |   |      |   |        |  
|Cash and cash equivalents, end of period                                    |  | $                            | 11,754  |   |      | $ | 8,378  |  
|                                                                            |  |                              |         |   |      |   |        |  
|Supplemental disclosure of cash flow information                            |  |                              |         |   |      |   |        |  
|Cash paid for interest                                                      |  | $                            | 203     |   |      | $ | 128    |  

The accompanying notes are an integral part of these financial statements.



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Achillion Pharmaceuticals, Inc.

Notes to Financial Statements

(in thousands, except per share amounts)

1. Basis
of Presentation

The accompanying unaudited condensed financial statements of Achillion Pharmaceuticals, Inc. (the Company)
should be read in conjunction with the audited financial statements and notes as of and for the year ended December 31, 2006 included in the Companys Annual report on Form 10-K filed with the SEC on March 29, 2007. The accompanying
financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information, in accordance with the instructions to Form 10-Q and the guidance in Article 10
of Regulation S-X. Accordingly, since they are interim financial statements, the accompanying financial statements do not include all of the information and disclosures required by U.S. GAAP for complete financial statements. The accompanying
financial statements reflect all adjustments, consisting of normal recurring adjustments, that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods presented. Interim results are not
necessarily indicative of results for a full year.

The preparation of financial statements in accordance with U.S. GAAP requires
management to make estimates and assumptions that affect amounts reported in the financial statements and notes thereto. A discussion of the Companys critical accounting policies and management estimates is described in the
Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this quarterly report on Form 10-Q.

In the fourth quarter of 2006, the Company completed an initial public offering of 5,175 shares of its common stock, including the underwriters overallotment option that closed in November 2006, at a public
offering price of $11.50 per share. Net proceeds to the Company were approximately $53,400, after deducting underwriting discounts and commissions and offering expenses. In connection with the Companys initial public offering, the outstanding
shares of Series A, Series B, Series C, Series C-1 and Series C-2 Convertible Preferred Stock (the Preferred Stock) were converted into 9,834 shares of common stock, including shares issued in satisfaction of $15,400 of accrued but
unpaid dividends on the Preferred Stock as of October 31, 2006, the closing date of the initial public offering transaction.

2. Earnings
(Loss) Per Share (EPS)

Basic EPS is calculated in accordance with SFAS No. 128, Earnings per Share, by dividing
net income or loss attributable to common stockholders by the weighted average common stock outstanding. Diluted EPS is calculated in accordance with SFAS No. 128 by adjusting weighted average common shares outstanding for the dilutive effect
of common stock options, warrants, convertible preferred stock and accrued but unpaid convertible preferred stock dividends. In periods where a net loss is recorded, no effect is given to potentially dilutive securities, since the effect would be
antidilutive. Total securities that could potentially dilute basic EPS in the future that were not included in the computation of diluted EPS because to do so would have been antidilutive for the three months ended March 31, 2007 and 2006 were
as follows (prior to consideration of the treasury stock method):



|                                                         |  |                              |  |      
|-------------------------------------------------------- |  | ---------------------------- |  | -----
|                                                         |  | Three Months Ended March 31,
|                                                         |  | 2007                         |  | 2006 
|Options                                                  |  | 1,212                        |  | 865  
|Warrants                                                 |  | 312                          |  | 315  
|Convertible Preferred Stock, as converted                |  |                             |  | 7,407
|Accrued but unpaid Convertible Preferred Stock dividends |  |                             |  | 939  
|                                                         |  |                              |  |      
|Total potentially dilutive securities outstanding        |  | 1,524                        |  | 9,526
|                                                         |  |                              |  |      



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3. Collaboration Arrangement

In November 2004, the Company entered into a collaboration arrangement (the Gilead Arrangement) with Gilead Sciences Inc. (Gilead), which was amended in March 2007, to jointly develop and
commercialize compounds for use in treating hepatitis C infection which inhibit viral replication through a specified novel mechanism of action. Commercialization efforts will commence under the arrangement only if such compounds are found to be
commercially viable and all appropriate regulatory approvals have been obtained. In connection with this arrangement, Gilead paid to the Company $10,000 as payment for a non-refundable up-front license fee and 2,300 newly issued shares of Series
C-1.

Under the Gilead Arrangement, the Company and Gilead will work together to develop one or more compounds for use in treating
hepatitis C infection until proof-of-concept in one compound, as defined, is achieved (the Research Period). Subsequent to the achievement of proof-of-concept, the Company has no further obligation to continue providing services to
Gilead but, at Gileads request, the Company may elect to extend the Research Period for up to an additional two years after proof-of-concept is established, based upon good faith negotiations at that point in time. Further, if it is agreed
that potential back-up compounds should continue to be researched, good faith negotiations would also be conducted to determine the specifics of that arrangement.

Gilead has agreed to make milestone payments to the Company upon the achievement of various defined clinical, regulatory and commercial milestones, such as regulatory approval in the United States, the European Union,
or Japan. The Company could receive up to $157.5 million in development, regulatory and sales milestone payments, assuming the successful simultaneous development of a lead and back-up compound, and annual sales in excess of $600 million. The
Company could also receive royalties on net sales of products.

The up-front payment of $10,000 was first allocated to the fair value of
the Series C-1, as determined by management after considering a valuation analysis performed by an unrelated third-party valuation firm at the direction of the Company, in which each share of the Series C-1 was determined to be worth $0.88, or
approximately $2,000 in aggregate. The remaining $8,000 balance of the $10,000 is being accounted for as a non-refundable up-front license fee. Due to certain provisions contained within the Gilead Arrangement relating to services to be performed on
both the primary and backup compounds, as defined, the non-refundable up-front license fee, as well as any milestones achieved during the Research Period, including a $2,000 milestone received in 2005, will be accounted for under the proportionate
performance model. Revenue recognized under a proportionate performance model will be limited by the aggregate cash received or receivable to date by the Company. Milestones achieved, if any, after the termination of the Research Period, will be
recognized when the milestone is achieved as the Company has no further research or development obligations after the Research Period.

Under the Gilead Arrangement through March 31, 2007, agreed upon research or development expenses, including internal full-time equivalent (FTE) costs and external costs, incurred by both companies during the period up to
proof-of-concept were borne equally by both parties. Prior to March 31, 2007, the Company was incurring the majority of those expenses and, therefore, was the net receiver of funds under this cost-sharing portion of the arrangement. Effective
April 1, 2007, internal full-time equivalent costs are no longer subject to this cost-sharing arrangement. Instead, each party provides for the costs of their own full-time equivalents. External costs continue to be shared equally by both
parties. The Company and Gilead also revised its joint research program to focus on next-generation NS4A antagonists. As a result, the Company extended the period over which its remaining obligations under the agreement would be completed.
Accordingly, the period over which we recognize amounts received under the collaboration has been extended; resulting in lower revenue for the three month period ended March 31, 2007 than amounts recognized in previous quarters.

Payments of $250 and $515 were made by the Company to Gilead in connection with this collaboration for the three months ended March 31, 2007 and
2006, respectively, and have been recognized as a reduction in revenue.



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Gilead has the right to terminate the Arrangement without cause upon 120 days written notice to the
Company. Upon termination of the Arrangement for any reason, all cost share amounts due and payable through the date of termination shall be paid by the appropriate party and no previously paid amounts will be refundable.

During the three months ended March 31, 2007 and 2006, the Company recognized revenue of $1,515 and $2,063, respectively, under this collaboration
agreement, of which $753 and $1,189, respectively, related to the recognition of the non-refundable fee and pre-proof-of-concept milestone under the proportionate performance model. The remaining $762 and $874 recognized during the three months
ended March 31, 2007 and 2006, respectively, relate to FTE and other external costs billed under the collaboration, net of payments made to Gilead. Included in the accompanying balance sheets as of March 31, 2007 and December 31,
2006, is $989 and $772, respectively, of receivables resulting from this collaboration agreement and $4,739 and $5,265, respectively, of deferred revenue resulting from the up-front fee and the $2,000 milestone payment received during the Research
Period and internal full-time equivalent (FTE) costs. In addition to Gileads rights to unilaterally terminate this agreement, each party has the right to terminate for material breach; however the Company may terminate for
Gileads breach only on a market-by-market basis, and, if applicable, a product-by-product basis.

4. Marketable Securities

The Company classifies its entire investment portfolio as available for sale as defined in SFAS No. 115, Accounting for Certain Investments in
Debt and Equity Securities. As of March 31, 2007 and December 31, 2006, the Companys investment portfolio consisted of U.S. government and agency securities held by a major banking institution. The maturities of marketable
securities of $43,188 and $39,904 at March 31, 2007 and December 31, 2006, respectively, are less than one year.

Securities are
carried at fair value with the unrealized gains/losses reported as a separate component of stockholders equity. The unrealized gain (loss) from marketable securities was $11 and $18 at March 31, 2007 and December 31, 2006,
respectively.

As of March 31, 2007, none of the Companys investments were determined to be other than temporarily impaired.

5. Accrued Expenses

Current and
long-term accrued expenses consist of the following:



|                                      |  |                |       |                  |   |      
|------------------------------------- |  | -------------- | ----- | ---------------- | - | -----
|                                      |  | March 31, 2007 |       | December 31,2006
|Accrued compensation                  |  | $              | 562   |                  | $ | 749  
|Accrued clinical trial expense        |  |                | 1,288 |                  |   | 783  
|Accrued preclinical trial expense     |  |                | 258   |                  |   | 213  
|Accrued licenses                      |  |                | 100   |                  |   | 100  
|Accrued rent expense                  |  |                | 158   |                  |   | 160  
|Accrued manufacturing and formulation |  |                | 476   |                  |   | 218  
|Accrued consulting expenses           |  |                | 135   |                  |   | 218  
|Other taxes                           |  |                |      |                  |   | 180  
|Other accrued expenses                |  |                | 565   |                  |   | 358  
|                                      |  |                |       |                  |   |      
|Total                                 |  | $              | 3,542 |                  | $ | 2,979
|                                      |  |                |       |                  |   |      

Accrued clinical trial and preclinical expenses are comprised of amounts owed to third-party CROs,
clinical investigators, laboratories and data managers for research and development work performed on behalf of the Company. At each period end the Company evaluates the accrued clinical trial expense balance based upon information received from
each party and ensures that the estimated balance is reasonably stated based upon the information available to the Company. Such estimates are subject to change as additional information becomes available.



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6. Long-Term Debt

Long-term debt consists of the following:



|                                                                                                                                                                |  |               |        |   |                  |   |        |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|                                                                                                                                                                |  | March 31,2007 |        |   | December 31,2006 |  
|CII Term Loan, payable in monthly installments of $13 through September 2010 with a final balloon payment of $686, with interest at
7.5% per annum              |  | $             | 995    |   |                  | $ | 1,015  |  
|2002 CII Term Loan, payable in monthly installments of $6 through October 2007, with interest at 7.5% per annum                                                 |  |               | 38     |   |                  |   | 54     |  
|2002 Credit Facility, payable in monthly installments as the individual notes mature through January 2007, with interest ranging from 8.01% to
10.17% per annum |  |               | 5      |   |                  |   | 26     |  
|2003 Credit Facility, payable in monthly installments as the individual notes mature through May 2008, with interest ranging from 6.72% to
8.72% per annum      |  |               | 409    |   |                  |   | 458    |  
|2005 Credit Facility, payable in monthly installments as notes mature through December 2009, with interest of 10.92% to 11.56% per
annum                        |  |               | 6,605  |   |                  |   | 7,346  |  
|                                                                                                                                                                |  |               |        |   |                  |   |        |  
|Total long-term debt                                                                                                                                            |  |               | 8,052  |   |                  |   | 8,899  |  
|Less: current portion                                                                                                                                           |  |               | (3,623 | ) |                  |   | (3,572 | )
|                                                                                                                                                                |  |               |        |   |                  |   |        |  
|Total long-term debt, net of current portion                                                                                                                    |  | $             | 4,429  |   |                  | $ | 5,327  |  
|                                                                                                                                                                |  |               |        |   |                  |   |        |  

7. Stock-Based Compensation

The Companys 2006 stock incentive plan, or the 2006 plan, is administered by the Companys Board of Directors and provides for the grant of incentive stock options, nonstatutory stock options, restricted
stock, restricted stock units, stock appreciation rights and other stock-based awards. The Companys officers, employees, consultants, advisors and directors, and those of any subsidiaries, are eligible to receive awards under the 2006 plan;
however, incentive stock options may only be granted to our employees. Options granted are exercisable for a period determined by the Company, but in no event longer than ten years from the date of the grant. Options generally vest ratably over four
years. There were 772 shares available to be granted under our 2006 Stock Incentive Plan as of March 31, 2007.

A summary of the
status of the Companys stock option activity for the three months ended March 31, 2007 is presented in the table and narrative below:



|                                                                 |  |         |  |                                 |      
|---------------------------------------------------------------- |  | ------- |  | ------------------------------- | -----
|                                                                 |  | Options |  | Weighted Average Exercise Price
|Outstanding at January 1, 2007                                   |  | 1,208   |  | $                               | 6.53 
|Granted                                                          |  | 4       |  |                                 | 19.00
|                                                                 |  |         |  |                                 |      
|Outstanding at March 31                                          |  | 1,212   |  | $                               | 6.58 
|                                                                 |  |         |  |                                 |      
|Options exercisable at March 31                                  |  | 822     |  | $                               | 2.74 
|                                                                 |  |         |  |                                 |      
|Weighted-average fair value of options granted during the period |  |         |  | $                               | 12.62



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Effective January 1, 2006, the Company adopted SFAS 123R, Share-Based Payment, which requires
measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and employee stock purchases under our 2006 Employee Stock Purchase Plan based on estimated fair values.

The Company utilizes the Black-Scholes option pricing model for determining the estimated fair value for stock-based awards. The
Black-Scholes model requires the use of assumptions which determine the fair value of the stock-based awards. The assumptions used to value options granted are as follows:



|                        |  |                            |  |               
|----------------------- |  | -------------------------- |  | --------------
|                        |  | For the Three Months Ended
|                        |  | March 31, 2007             |  | March 31, 2006
|Expected term of option |  | 6.1 years                  |  | 5 years       
|Expected volatility     |  | 70%                        |  | 70%           
|Risk free interest rate |  | 4.51%                      |  | 4.30%         
|Expected dividend yield |  | 0%                         |  | 0%            

Total compensation expense recorded in the accompanying statements of operations associated with
option grants made to employees for the three months ended March 31, 2007 and 2006 was $372 and $161, respectively. The Company recorded no tax benefit related to these options since the Company currently maintains a full valuation allowance.

As of March 31, 2007, the intrinsic value of the options of the options outstanding was $2,806, of which $1,865 related to vested
options and $941 related to unvested options. The intrinsic value for stock options is calculated based on the difference between the exercise prices of the underlying awards and the quoted stock price of our common stock as of the reporting date.

As of March 31, 2007, the total compensation cost related to nonvested options not yet recognized in the financial statements is
approximately $4,728, net of estimated forfeitures, and the weighted average period over which it is expected to be recognized is 1.77 years.

The Company also occasionally grants stock option awards to consultants. Such grants are accounted for pursuant to EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services, and, accordingly, the Company recognizes compensation expense equal to the fair value of such awards and amortizes such expense over the performance period. Total expense for the three months ended
March 31, 2007 and 2006 was $3 and $35, respectively.

2006 Employee Stock Purchase Plan

The Company established an Employee Stock Purchase Plan effective December 1, 2006 (the 2006 ESPP Plan). A total of 250 shares of common
stock are available for issuance under the 2006 ESPP Plan. Eligible employees can purchase common stock pursuant to payroll deductions at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or end of each
six-month offering period.

The Company measures the fair value of issuances under the employee stock purchase plan using the Black-Scholes
option pricing model at the end of each reporting period. The compensation cost for the 2006 ESPP Plan consists of the discount (15% of the grant date stock price) and the fair value of the option features. The Black-Scholes model requires the use
of assumptions that determine the fair value of the stock-based awards. The assumptions used to value issuances under the 2006 ESPP Plan are similar to those used to value stock options except that the expected term is six months.



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For the three months ended March 31, 2007, the Company did not issue any shares associated with the
2006 ESPP Plan. However, the Company recorded compensation expense of $36 for the three months ended March 31, 2007. As of March 31, 2007, all 250 shares remained available for future issuance under the 2006 ESPP Plan.

8. Income Taxes

The Company uses an asset and
liability approach for financial accounting and reporting of income taxes. Deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax basis assets and liabilities and are measured by
applying enacted rates and laws to taxable years in which differences are expected to be recovered or settled. Further, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes
the enactment date.

Effective January 1, 2007, the Company adopted FASB issued Interpretation No.48, Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No.109 (FIN 48). FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that
the company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction). Under FIN 48, the financial statements reflect expected future tax consequences of such positions
presuming the taxing authorities full knowledge of the position and all relevant facts.

The IRS could challenge tax positions taken
by the Company for the periods for which there are open tax years. The Company is open to challenge for the periods of 1998 through 2006 from federal and the State of Connecticut jurisdictions.

As a result of implementation of FIN 48, the Company recognized a decrease of $180 in its liability for uncertain tax positions, which was accounted for
as a decrease to the January 1, 2007 accumulated deficit. The Company did not have any unrecognized tax benefits as of the date of adoption or March 31, 2007.

At December 31, 2006, the Companys federal and state net operating loss carryforwards, or NOLs, were approximately $101,201 and $102,709, respectively, and the Company had gross deferred income tax assets
of approximately $49,069, which result primarily from the federal and state NOL and tax credit carryforwards. In accordance with Statement of Financial Standards No. 109 Accounting for Income Taxes (SFAS 109), the Company
maintains a full valuation allowance against its deferred tax assets and liabilities.

Utilization of the NOL and research and development
credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986 due to changes in ownership of the Company that have occurred previously or that could occur in the future. These
ownership changes may limit the amount of NOL and research and development credit carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382,
results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Companys formation, the Company has raised capital
through the issuance of capital stock on several occasions which, combined with the purchasing shareholders subsequent disposition of those shares, may have resulted in a change of control, as defined by Section 382. Due to the
significant complexity and cost associated with a change in control study, and because there could be additional changes in control in the future, the Company has not assessed whether there has been one or more changes in control since the
Companys formation. If the Company has experienced a change of control at any time since Company formation, utilization of its NOL or research and development credit carryforwards would be subject to an annual limitation under
Section 382. Any limitation may result in expiration of a portion of the NOL or research and development credit carryforwards before utilization which would reduce the Companys gross deferred tax assets.



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The Company does not have any interest or penalties accrued related to tax positions as it does not have
any unrecognized tax benefits. In the event the Company determines that accrual of interest or penalties is necessary in the future, the amount will be presented as a component of income taxes.

9. Recently Issued Accounting Pronouncements

In
September 2006, the FASB issued SFAS No.157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value
measurements. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company does not believe that its adoption in the first quarter of
2008 will have a material impact on the Companys financial statements.

In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits an entity to elect to report many financial assets and liabilities at fair value. Entities electing the fair value option would be required to
recognize changes in fair value in earnings and are required to distinguish, on the face of the statement of financial position, the fair value of assets and liabilities for which the fair value option has been elected and similar assets and
liabilities measured using another measurement attribute. The initial adjustment to reflect the difference between the fair value and the carrying amount would be accounted for as a cumulative-effect adjustment to retained earnings as of the date of
initial adoption. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact, if any, of FAS 159 on its Financial Statements.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934,
as amended, that involve risks and uncertainties. All statements other than statements relating to historical matters (including statements to the effect that we believe, expect, anticipate, plan,
target and similar expressions) should be considered forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements as a result of a number of important factors, including
factors discussed in this section and elsewhere in this quarterly report on Form 10-Q, including those discussed in Item 1A of this report under the heading Risk Factors, and the risks discussed in our other filings with the
Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect managements analysis, judgment, belief or expectation only as the date hereof. We assume no obligation to
update these forward-looking statements to reflect events or circumstances that arise after the date hereof.

Overview

We are a biopharmaceutical company focused on the discovery, development and commercialization of innovative treatments for infectious diseases. Within
the anti-infective market, we are currently concentrating on the development of antivirals and antibacterials. We are targeting our antiviral development efforts on treatments for HIV infection and chronic hepatitis C, and we are directing our
antibacterial development efforts toward treatments for serious hospital-based bacterial infections.

We have devoted and are continuing to
devote substantially all of our efforts toward product research and development. We have incurred losses of $117 million from inception through March 31, 2007 and had an accumulated deficit of $131 million through March 31, 2007. Our net
losses were $7.7 million and $5.3 million for the three months ended March 31, 2007 and 2006, respectively.

In the fourth quarter of
2006, we completed an initial public offering of 5,175,000 shares of common stock at a price of $11.50 per share, which includes the exercise of the underwriters over-allotment option. Proceeds to us from the offering were approximately $53.4
million, net of underwriting discounts and commissions and offering expenses.

Financial Operations Overview

Revenue

To date, we have not
generated revenue from the sale of any drugs. The majority of our revenue recognized to date has been derived from our collaboration with Gilead Sciences to develop compounds for use in treating chronic hepatitis C. During the three months ended
March 31, 2007 and 2006, we recognized $1.5 million and $2.2 million, respectively, under this collaboration agreement.

Upon
initiating our collaboration with Gilead Sciences, we received a payment of $10.0 million, which included an equity investment by Gilead Sciences determined to be worth approximately $2.0 million. We are accounting for the remaining $8.0 million as
a nonrefundable up-front fee and recognizing it under the proportionate performance model. Revenue under the proportionate performance model is recognized as our effort under the collaboration is incurred. When our performance obligation is
complete, we will recognize milestone payments, if any, when the corresponding milestone is achieved. We will recognize royalty payments, if any, upon product sales.

Research and development expenses under our collaboration with Gilead Sciences, including internal full-time equivalent costs and external research costs, incurred by both companies prior to proof-of-concept, were
borne equally by both parties through March 31, 2007. As we were providing the majority of those services and were incurring the majority of those expenses, we were the net recipient of funds under this cost-sharing portion of the arrangement
and therefore recognize the reimbursed costs as revenue rather than research expense. We are recognizing payments made by us to Gilead Sciences in connection with this collaboration as a reduction of revenue. Effective April 1, 2007, internal
full-time equivalent costs are no longer subject to this cost-sharing arrangement. Instead, each party provides for the costs of their own full-time equivalents. We expect that the relative full-time equivalent efforts of each of Achillion and
Gilead Sciences will remain approximately one-half of total efforts. We continue to equally share external research costs with Gilead Sciences.



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We have also recognized revenue under a Small Business Innovation Research, or SBIR, grant by the
National Institutes of Health, or NIH, related to our HIV capsid research program. During the three months ended March 31, 2007 and 2006 we recognized $35,000 and $88,000, respectively, in revenue under this grant.

Research and Development

Our
research and development expenses reflect costs incurred for our proprietary research and development projects as well as costs for research and development projects conducted as part of collaborative arrangements we establish. These costs consist
primarily of salaries and benefits for our research and development personnel, costs of services by clinical research organizations, other outsourced research, materials used during research and development activities, facility-related costs such as
rent and utilities associated with our laboratory and clinical development space, and operating supplies. We expect research and development costs to increase significantly over the next several years as our drug development programs progress.

We have established our drug candidate pipeline through our internal discovery capabilities and through the in-licensing of an attractive
drug candidate. Through these efforts we have identified and are developing candidates in the following areas:



| |  |  | Elvucitabine for HIV Infection. Elvucitabine, an antiviral we are developing for the treatment of HIV infection, is our most advanced clinical-stage drug
candidate. We are currently evaluating elvucitabine in phase II clinical trials to further explore its safety and efficacy in HIV-infected patients.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ACH-702 for Serious Hospital-Based Bacterial Infections. Our most advanced preclinical candidate is ACH-702, which we are developing for the treatment of
serious hospital-based bacterial infections.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NS4A Antagonists for Chronic Hepatitis C Infection. In our second preclinical-stage program, we are evaluating drug candidates with a unique mechanism of
action for the treatment of chronic hepatitis C in collaboration with Gilead Sciences.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

All costs associated with
internal research and development, and research and development services for which we have externally contracted, are expensed as incurred. Our research and development expenses are outlined in the table below.



|                                    |  |                               |       |                               |   |      
|----------------------------------- |  | ----------------------------- | ----- | ----------------------------- | - | -----
|                                    |  | ThreeMonthsEndedMarch 31,2007 |       | ThreeMonthsEndedMarch 31,2006
|                                    |  | (in thousands)               
|Direct external costs:              |  |                               |       |                               |   |      
|Elvucitabine                        |  | $                             | 2,655 |                               | $ | 1,559
|ACH-702                             |  |                               | 1,620 |                               |   | 402  
|NS4A Antagonist (including ACH-806) |  |                               | 966   |                               |   | 1,274
|                                    |  |                               |       |                               |   |      
|                                    |  |                               | 5,241 |                               |   | 3,235
|                                    |  |                              
|Direct internal personnel costs     |  |                               | 1,934 |                               |   | 1,649
|                                    |  |                               |       |                               |   |      
|Sub-total direct costs              |  |                               | 7,175 |                               |   | 4,884
|                                    |  |                              
|Indirect costs and overhead         |  |                               | 1,192 |                               |   | 1,303
|                                    |  |                               |       |                               |   |      
|Total research and development      |  | $                             | 8,367 |                               | $ | 6,187
|                                    |  |                               |       |                               |   |      



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Currently, we are conducting two phase II clinical trials with elvucitabine and preclinical studies with
ACH-702. We and our collaborator, Gilead Sciences, recently discontinued a proof-of-concept clinical trial for ACH-806, an NS4A antagonist we were previously evaluating for the treatment of chronic hepatitis C, and are currently completing our
assessment of new lead candidates in order to nominate one for clinical development. From the inception of each respective program through March 31, 2007, we incurred approximately $35.1 million in total costs for elvucitabine, approximately
$14.9 million in total costs for ACH-702 and approximately $26.3 million in total costs for our NS4A antagonist program (including ACH-806). These figures include our internal research and development personnel costs and related facilities overhead.
We expect our research and development costs to increase substantially in the foreseeable future. We currently estimate that the clinical trial costs for two phase III clinical trials of elvucitabine in different HIV populations will be
approximately $48.0 million, exclusive of the internal personnel costs associated with conducting these trials. We estimate that the costs associated with completing preclinical studies and phase I clinical trials with ACH-702 will be approximately
$3.0 million, exclusive of the internal personnel costs associated with conducting these studies and trials. We anticipate that the costs associated with preclinical development through proof-of-concept of our next generation NS4A antagonist will be
approximately $3.7 million, exclusive of internal personnel costs. This amount represents one-half of the external costs associated with those activities, as we share such external costs with Gilead Sciences.

General and Administrative

Our general and administrative expenses consist primarily of salaries and benefits for management and administrative personnel, professional fees for legal, accounting and other services, travel costs and facility-related costs such as
rent, utilities and other general office expenses. We expect our general and administrative expenses to increase as we continue to hire additional employees, increase our recruiting efforts, expand our infrastructure and incur additional costs
related to the growth of our business and operations as a public company.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations set forth below are based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and assumptions, including
those described below. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Management makes estimates and exercises judgment in revenue recognition, research and development costs, stock-based compensation and accrued expenses. Actual
results may differ from these estimates under different assumptions or conditions.



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We believe the following critical accounting policies affect managements more significant judgments
and estimates used in the preparation of our financial statements:

Revenue Recognition

We recognize revenue from contract research and development and research progress payments in accordance with Staff Accounting Bulletin, or SAB,
No. 104, Revenue Recognition, or SAB 104, and Financial Accounting Standards Board, or FASB, Emerging Issue Task Force, or EITF, Issue No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, or EITF 00-21.
Revenue-generating research and development collaborations are often multiple element arrangements, providing for a license as well as research and development services. Such arrangements are analyzed to determine whether the deliverables, including
research and development services, can be separated or whether they must be accounted for as a single unit of accounting in accordance with EITF 00-21. We recognize upfront license payments as revenue upon delivery of the license only if the license
has standalone value and the fair value of the undelivered performance obligations can be determined. If the fair value of the undelivered performance obligations can be determined, such obligations would then be accounted for separately as
performed. If the license is considered to either (1) not have standalone value or (2) have standalone value but the fair value of any of the undelivered performance obligations cannot be determined, the arrangement would then be accounted
for as a single unit of accounting and the upfront license payments are recognized as revenue over the estimated period of when our performance obligations are performed.

When we determine that an arrangement should be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed and revenue related to upfront
license payments will be recognized. Revenue will be recognized using either a proportionate performance or straight-line method. We recognize revenue using the proportionate performance method provided that we can reasonably estimate the level of
effort required to complete our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. Direct labor hours or full-time equivalents are typically used as the measure of performance. Under
the proportionate performance method, periodic revenue related to upfront license payments is recognized as the percentage of actual effort expended in that period to total effort expected for all of our performance obligations under the
arrangement. Significant management judgment is required in determining the level of effort required under an arrangement and the period over which we expect to complete our related performance obligations. In the event that a change in estimate
occurs, the change will be accounted for using the cumulative catch-up method, which provides for an adjustment to revenue in the current period. Estimates of our level of effort may change in the future, resulting in a material change in the amount
of revenue recognized in future periods. The Company and Gilead revised its joint research program in early 2007 to focus on next-generation NS4A antagonists. As a result, the Company extended the period over which its remaining obligations under
the agreement would be completed. Accordingly, the period over which we recognize amounts received under the collaboration has been extended; resulting in lower revenue for the three month period ended March 31, 2007.

Collaborations may also involve substantive milestone payments. Substantive milestone payments are considered to be performance bonuses that are
recognized upon achievement of the milestone only if all of the following conditions are met: (1) the milestone payments are non-refundable, (2) achievement of the milestone involves a degree of risk and was not reasonably assured at the
inception of the arrangement, (3) substantive effort is involved in achieving the milestone, (4) the amount of the milestone payment is reasonable in relation to the effort expended or the risk associated with achievement of the milestone
and (5) a reasonable amount of time passes between the upfront license payment and the first milestone payment as well as between each subsequent milestone payment.

Reimbursement of costs is recognized as revenue provided the provisions of EITF Issue No. 99-19 are met, the amounts are determinable and collection of the related receivable is reasonably assured.



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Stock-Based Compensation  Employee Stock-Based Awards

Effective January 1, 2006, we adopted the Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, or
SFAS 123R, which requires measurement and recognition of compensation expense for all stock-based awards made to employees and directors, including employee stock options and employee stock purchases under our 2006 Employee Stock Purchase Plan based
on estimated fair values. SFAS 123R supersedes our previous method of accounting under APB 25. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107, or SAB 107, providing supplemental guidance for SFAS
123R implementation. We have applied the provisions of SAB 107 in our adoption of SFAS 123R.

We primarily grant qualified stock options
for a fixed number of shares to employees with an exercise price equal to the market value of the shares at the date of grant. Under the fair value recognition provisions of SFAS No. 123R, stock-based compensation cost is based on the value of
the portion of stock-based awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized during the three months March 31, 2007 and 2006 includes compensation expense for stock-based awards granted
prior to, but not yet vested as of December 31, 2005, based on the fair value on the grant date estimated in accordance with the pro forma provisions of SFAS 123. Compensation expense also includes amounts related to the stock-based awards
granted subsequent to December 31, 2005, based on the fair value on the grant date, estimated in accordance with the provisions of SFAS 123R.

Upon adoption of SFAS 123R, we selected the Black-Scholes option pricing model as the most appropriate method for determining the estimated fair value for stock-based awards. The Black-Scholes model requires the use of assumptions which
determine the fair value of the stock-based awards. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock and expected
dividends. In addition, we previously accounted for forfeitures as they occurred. In accordance with SFAS 123R, we are required to estimate forfeitures at the grant date and recognize compensation costs for only those awards that are expected to
vest. Judgment is required in estimating the amount of stock-based awards that are expected to be forfeited.

If factors change and we
employ different assumptions in the application of SFAS 123R in future periods, the compensation expense that we record under SFAS 123R may differ significantly from what we have recorded in the current period. Therefore, we believe it is important
for investors to be aware of the high degree of subjectivity involved when using option pricing models to estimate share-based compensation under SFAS 123R. There is risk that our estimates of the fair values of our share-based compensation awards
on the grant dates may differ from the actual values realized upon the exercise, expiration, early termination or forfeiture of those share-based payments in the future. Certain share-based payments, such as employee stock options, may expire
worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that is significantly
in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined in accordance with SFAS 123R and SAB 107 using an option pricing
model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

Stock-Based
Compensation  Non-Employee Stock-Based Awards

We occasionally grant stock option awards to consultants. Such grants are
accounted for pursuant to EITF Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services, and, accordingly, we recognize compensation
expense equal to the fair value of such awards and amortize such expense over the performance period. We estimate the fair value of each award using the Black-Scholes model. The unvested equity instruments are revalued on each subsequent reporting
date until performance is complete, with an adjustment recognized for any changes in their fair value. We amortize expense related to non-employee stock options in accordance with FASB Interpretation 28, Accounting for Stock Appreciation Rights
and Other Variable Stock Option or Award Plans.



18



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Accrued Expenses

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This process involves identifying services which
have been performed on our behalf and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date in our financial statements.

In accruing service fees, we estimate the time period over which services will be provided and the level of effort in each period. If the actual timing
of the provision of services or the level of effort varies from the estimate, we will adjust the accrual accordingly. The majority of our service providers invoice us monthly in arrears for services performed. In the event that we do not identify
costs that have begun to be incurred or we underestimate or overestimate the level of services performed or the costs of such services, our actual expenses could differ from such estimates. The date on which some services commence, the level of
services performed on or before a given date and the cost of such services are often subjective determinations. We make judgments based upon facts and circumstances known to us in accordance with GAAP.

Income Taxes

Effective
January 1, 2007, we adopted FASB issued Interpretation No.48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No.109, or FIN 48. FIN 48 prescribes a comprehensive model for how a company should
recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return (including a decision whether to file or not file a return in a particular jurisdiction). Under
FIN 48, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities full knowledge of the position and all relevant facts. We consider many factors when evaluating and estimating our tax
positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.

As a result of
implementation of FIN 48, we recognized a decrease of $180 in our liability for uncertain tax positions, which was accounted for as a decrease to the January 1, 2007 accumulated deficit. We do not have any unrecognized tax benefits as of the
date of adoption or March 31, 2007. We review all tax positions to ensure the tax treatment selected is sustainable based on its technical merits and that the position would be sustained if challenged.

Results of Operations

Results of operations may vary
from period to period depending on numerous factors, including the timing of payments received under existing or future strategic alliances, joint ventures or financings, if any, the progress of our research and development projects, technological
advances and determinations as to the commercial potential of proposed products.

Comparison of Three Months Ended March 31,
2007 and 2006

Revenue. Revenue was $1.6 million and $2.2 million for the three months ended March 31, 2007 and 2006,
respectively. The decrease in revenue in 2007 is primarily due to a significant change in estimate of our remaining performance obligations as of December 31, 2006, under our collaboration with Gilead. In February 2007, we announced our
decision to discontinue further development of ACH-806 and we revised our research program with Gilead to focus on next-generation NS4A antagonists. Although ACH-806 demonstrated positive antiviral activity in human patients infected with HCV, it
also demonstrated early signs of elevated serum creatinine, a marker of kidney function. As a result, our efforts under the collaboration, which were previously estimated to be complete in March 2007, will extend through 2008. In addition, in March
2007, we and Gilead Sciences entered into an amendment of our collaboration agreement pursuant to which we continue to equally share external costs, but effective April 1, 2007, each party bears the costs of their respective full-time
equivalents. Accordingly, the period over which we recognize amounts received under the collaboration has been extended, reducing revenue for the three month period ended March 31, 2007.



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|                                                |  |                              |       |      |   |        |  |   |      |  
|----------------------------------------------- |  | ---------------------------- | ----- | ---- | - | ------ |  | - | ---- | -
|                                                |  | Three Months Ended March 31, |       |      |  
|                                                |  | 2007                         |       | 2006 |   | Change | 
|                                                |  | (in thousands)               |       |      |  
|Amortization of up-front and milestone payments |  | $                            | 753   |      | $ | 1,189  |  | $ | (436 | )
|Cost-sharing revenue                            |  |                              | 762   |      |   | 874    |  |   | (112 | )
|Grant revenue                                   |  |                              | 35    |      |   | 88     |  |   | (53  | )
|                                                |  |                              |       |      |   |        |  |   |      |  
|Total revenue                                   |  | $                            | 1,550 |      | $ | 2,151  |  | $ | (601 | )
|                                                |  |                              |       |      |   |        |  |   |      |  

Through the completion of our performance obligations in 2008, we expect to recognize additional
revenue of approximately $4.7 million, offset by any payments we are obligated to make to Gilead in satisfaction of external costs paid by Gilead Sciences under our external cost-sharing agreement. It is possible that we will recognize negative
revenue in future quarters based upon the timing of our performance under the collaboration, and on the timing and magnitude of external costs borne by Gilead Sciences.

Research and development expenses. Research and development expenses were $8.4 million and $6.2 million for the three months ended March 31, 2007 and 2006, respectively. The approximate $2.2 million
increase from 2006 to 2007 was the result of: (i) increased personnel costs for our research and development staff, including an increase in headcount as well as increased wages, combined with the recognition of non-cash stock based
compensation required with our adoption of FAS 123R and (ii) the costs associated with three clinical trials with elvucitabine during 2007, which had longer duration and greater number of patients than those conducted in the same period in
2006. We expect that research and development expenses will continue to increase as we complete our phase II clinical program for elvucitabine, enter human clinical trials for ACH-702 and continue our preclinical and research work for our NS4A
antagonists. Research and development expenses for the three months ended March 31, 2007 and 2006 are comprised as follows:



|                                 |  |                              |       |        |   |       |  |   |       |  
|-------------------------------- |  | ---------------------------- | ----- | ------ | - | ----- |  | - | ----- | -
|                                 |  | Three Months Ended March 31, |       | Change |  
|                                 |  | 2007                         |       | 2006   |  
|                                 |  | (in thousands)               |      
|Personnel costs                  |  | $                            | 1,779 |        | $ | 1,582 |  | $ | 197   |  
|Stock based compensation         |  |                              | 158   |        |   | 86    |  |   | 72    |  
|Outsourced research and supplies |  |                              | 5,334 |        |   | 3,357 |  |   | 1,977 |  
|Professional and consulting fees |  |                              | 325   |        |   | 399   |  |   | (74   | )
|Facilities costs                 |  |                              | 677   |        |   | 678   |  |   | (1    | )
|Travel and other costs           |  |                              | 94    |        |   | 85    |  |   | 9     |  
|                                 |  |                              |       |        |   |       |  |   |       |  
|Total                            |  | $                            | 8,367 |        | $ | 6,187 |  | $ | 2,180 |  
|                                 |  |                              |       |        |   |       |  |   |       |  



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General and administrative expenses. General and administrative expenses were $1.5 and $1.2
million for the three months ended March 31, 2007 and 2006, respectively. The $0.3 million increase from 2006 to 2007 was primarily due to the recognition of non-cash stock based compensation required with our adoption of FAS 123R, combined
with increased capital based taxes and insurance premiums. We expect that general and administrative expenses will increase in the future due to increased payroll, expanded infrastructure, increased consulting, legal, accounting and investor
relations expenses associated with being a public company. General and administrative expenses for the three months ended March 31, 2007 and 2006 are comprised as follows:



|                                 |  |                              |       |        |   |       |  |   |     |  
|-------------------------------- |  | ---------------------------- | ----- | ------ | - | ----- |  | - | --- | -
|                                 |  | Three Months Ended March 31, |       | Change |  
|                                 |  | 2007                         |       | 2006   |  
|                                 |  | (in thousands)               |      
|Personnel costs                  |  | $                            | 528   |        | $ | 490   |  | $ | 38  |  
|Stock based compensation         |  |                              | 253   |        |   | 111   |  |   | 142 |  
|Professional and consulting fees |  |                              | 336   |        |   | 345   |  |   | (9  | )
|Facilities costs                 |  |                              | 265   |        |   | 193   |  |   | 72  |  
|Travel and other costs           |  |                              | 166   |        |   | 80    |  |   | 86  |  
|                                 |  |                              |       |        |   |       |  |   |     |  
|Total                            |  | $                            | 1,548 |        | $ | 1,219 |  | $ | 329 |  
|                                 |  |                              |       |        |   |       |  |   |     |  

Interest income (expense). Interest income was $759,000 and $72,000 for the three months
ended March 31, 2007 and 2006, respectively. The $687,000 increase from 2006 to 2007 was primarily due to increased average cash balances due to the receipt of $18.4 million in proceeds from our Series C-2 financing in March and May of 2006 and
$53.4 million in net proceeds from our initial public offering in October 2006. Interest expense was $265,000 and $189,000 for the three months ended March 31, 2007 and 2006, respectively. The $76,000 increase from 2006 to 2007 was primarily
attributable to a draw down from the 2005 credit facility in May 2006.

Tax benefit. The State of Connecticut provides companies
with the opportunity to forego certain research and development tax credit carryforwards in exchange for cash. The program provides for such exchange of the research and development credits at a rate of 65% of the annual incremental and
non-incremental research and development credits, as defined. The amount of tax benefit we recognized in connection with this exchange program was $209,000 and $25,000 for the three months ended March 31, 2007 and 2006, respectively. The
$184,000 increase from 2006 to 2007 was due to the anticipated overall incremental increase in research and development costs for the year, resulting primarily from the lack of reimbursement for internal full-time equivalent costs from Gilead
Sciences, under our amended agreement which was effective April 1, 2007.

Accretion of preferred stock dividends. Accretion of
preferred stock dividends was $1 million for the three months ended March 31, 2006. The $1 million decrease from 2006 to 2007 was due to the lack of dividends accruing following conversion of our preferred stock into common stock upon the
completion of our initial public offering in October 2006.

Liquidity and Capital Resources

Since our inception in August 1998, we have financed our operations primarily through our initial public offering, the issuance of our convertible
preferred stock and borrowings under debt facilities, as well as through receipts from our collaboration with Gilead Sciences. Through March 31, 2007, we had received approximately $161.2 million in aggregate net proceeds from stock issuances,
$17.3 million from Gilead Sciences under our collaboration agreement with them and approximately $15.9 million under the following debt facilities:



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|                                     |  |               |  |                           |   |  |                  |           |               |                    
|------------------------------------ |  | ------------- |  | ------------------------- | - |  | ---------------- | --------- | ------------- | -------------------
|Lender                               |  | Date          |  | Interest Rate (per annum) |   |  | Principal Amount |           | Maturity Date
|Connecticut Innovations, Inc.        |  | November 2000 |  | 7.5                       | % |  | $                | 1,400,000 |               | September 2010     
|Connecticut Innovations, Inc.        |  | May 2002      |  | 7.5                       | % |  | $                | 278,000   |               | October 2007       
|General Electric Capital Corporation |  | March 2002    |  | 8.01%-10.17               | % |  | $                | 3,264,182 |               | March 2005-May 2007
|Webster Bank                         |  | May 2003      |  | 6.72%-9.27                | % |  | $                | 972,185   |               | June 2006-Dec 2009 
|Oxford Finance Corporation           |  | December 2005 |  | 10.92                     | % |  | $                | 2,500,000 |               | November 2008      
|General Electric Capital Corporation |  | December 2005 |  | 10.92                     | % |  | $                | 2,500,000 |               | November 2008      
|Oxford Finance Corporation           |  | May 2006      |  | 11.56                     | % |  | $                | 2,500,000 |               | April 2009         
|General Electric Capital Corporation |  | May 2006      |  | 11.56                     | % |  | $                | 2,500,000 |               | April 2009         

The amounts reflected above represent original maturities under our debt agreements. As of
March 31, 2007, our debt balance due to borrowings is $8.1 million.

We had $54.9 million and $62.6 million in cash, cash equivalents
and marketable securities as of March 31, 2007 and December 31, 2006, respectively.

Cash used in operating activities was $7.2
million for the three months ended March 31, 2007 and was primarily attributable to our $7.7 million net loss, primarily offset by an increase in working capital and non-cash charges related to depreciation, amortization and non-cash stock
based compensation. Cash used in operating activities was $5.4 million for the three months ended March 31, 2006 and was primarily attributable to our $5.3 million net loss, partially offset by non-cash charges such as depreciation,
amortization and non-cash interest expense combined with our increase in accounts payable.

Cash used in investing activities was $2.9
million for the three months ended March 31, 2007 and was primarily attributable to the purchase of marketable securities offset by maturities of marketable securities.

Cash used in financing activities was $851,000 for the three months ended March 31, 2007 and was primarily attributable to $876,000 used for
repayments of debt. Cash provided by financing activities was $4.2 million for the three months ended March 31, 2006 and was primarily attributable to the receipt of $4.7 million in net proceeds from the sale of series C-2 convertible preferred
stock.

We expect to incur continuing and increasing losses from operations for at least the next several years as we seek to:



| |  |  | Complete our phase II clinical trials for elvucitabine and, if supported by favorable data from the phase II trials, initiate phase III clinical trials;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Advance ACH-702 through preclinical testing and early clinical testing;
| | - |  | -----------------------------------------------------------------------



| |  |  | Advance our NS4A antagonist program for HCV infection; and
| | - |  | ----------------------------------------------------------



| |  |  | Identify additional drug candidates.
| | - |  | ------------------------------------

We do not expect our existing capital resources, together with the milestone payments and research and development funding we expect to receive, to be sufficient to fund the completion of the development of any of our drug candidates. As a
result, we expect that we will need to raise additional funds prior to being able to market any drug candidates, to, among other things, obtain regulatory approvals, fund operating losses, and, if deemed appropriate, establish manufacturing and
sales and marketing capabilities. We will seek to raise such additional financing through public or private equity or debt financings, collaborative or other arrangements with third parties or through other sources of financing.



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We believe that our existing cash and cash equivalents, as supplemented by research funding pursuant to
our collaboration with Gilead Sciences, will be sufficient to meet our projected operating requirements for at least the next twelve months. However, our funding requirements may change and will depend upon numerous factors, including but not
limited to:



| |  |  | the progress of our research and development programs;
| | - |  | ------------------------------------------------------



| |  |  | the timing and results of preclinical testing and clinical studies;
| | - |  | -------------------------------------------------------------------



| |  |  | the receipt and timing of regulatory approvals, if any;
| | - |  | -------------------------------------------------------



| |  |  | determinations as to the commercial potential of our proposed products;
| | - |  | -----------------------------------------------------------------------



| |  |  | the status of competitive products;
| | - |  | -----------------------------------



| |  |  | our ability to establish and maintain collaborative arrangements with others for the purpose of funding certain research and development programs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the acquisition of technologies or drug candidates; and
| | - |  | -------------------------------------------------------



| |  |  | our participation in the manufacture, sale and marketing of any approved drugs.
| | - |  | -------------------------------------------------------------------------------

We received net proceeds of $53.4 million from our initial public offering. We expect to use the majority of the net proceeds of this offering as
follows:



| |  |  | approximately $20.7 million to complete the current phase II clinical trials of elvucitabine and to further our clinical development into phase III clinical trials,
if supported by favorable data from the phase II trials, including approximately $3.7 million of external costs related to current phase II clinical trials.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately $1.5 million to complete the preclinical development of ACH-702, followed by approximately $11.5 million to fund further clinical development of
ACH-702;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately $3.7 million to support our share of HCV program development external costs pursuant to our collaboration with Gilead Sciences through the
proof-of-concept stage of one compound; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | approximately $16.0 million to support research activities over the 24 months following our initial public offering on other HIV, chronic hepatitis C and
antibacterial drug candidates.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We anticipate that we will augment our cash balance through financing transactions,
including the issuance of debt or equity securities and further corporate alliances. No arrangements have been entered into for any future financing, and there can be no assurance that we will be able to obtain adequate levels of additional funding
or favorable terms, if at all. If adequate funds are not available, we may be required to:



| |  |  | delay, reduce the scope of or eliminate our research and development programs;
| | - |  | ------------------------------------------------------------------------------



| |  |  | reduce our planned commercialization efforts;
| | - |  | ---------------------------------------------



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| |  |  | obtain funds through arrangements with collaborators or others on terms unfavorable to us or that may require us to relinquish rights to certain drug candidates
that we might otherwise seek to develop or commercialize independently; and/or
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pursue merger or acquisition strategies.
| | - |  | ----------------------------------------

Additionally, any future equity funding may dilute the ownership of our equity investors.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities.

Recently Issued Accounting Pronouncements

In September 2006, the FASB issued SFAS No.157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim
periods within those fiscal years. We do not believe that its adoption in the first quarter of 2008 will have a material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 permits an entity to elect to report many financial assets and
liabilities at fair value. Entities electing the fair value option would be required to recognize changes in fair value in earnings and are required to distinguish, on the face of the statement of financial position, the fair value of assets and
liabilities for which the fair value option has been elected and similar assets and liabilities measured using another measurement attribute. The initial adjustment to reflect the difference between the fair value and the carrying amount would be
accounted for as a cumulative-effect adjustment to retained earnings as of the date of initial adoption. SFAS No. 159 is effective as of the beginning of an entitys first fiscal year beginning after November 15, 2007. We are
currently evaluating the impact, if any, of FAS 159 on our Financial Statements.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Interest Rate Risk. Our exposure to market risk is confined to our cash, cash equivalents and marketable securities. We invest in high-quality financial instruments, primarily money market funds, federal agency notes, asset backed
securities, corporate debt securities and U.S. treasury notes, with the effective duration of the portfolio less than six months and no security with an effective duration in excess of 12 months, which we believe are subject to limited credit risk.
We currently do not hedge interest rate exposure. Due to the short-term nature of our investments, we do not believe that we have any material exposure to interest rate risk arising from our investments.

Capital Market Risk. We currently have no product revenues and depend on funds raised through other sources. One source of funding
is through further equity offerings. Our ability to raise funds in this manner depends upon capital market forces affecting our stock price.



|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Our management, with the
participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2007. The term disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports
that it files or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the companys management, including its principal executive
and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2007,
our chief executive officer and chief financial officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.



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No change in our internal control over financial reporting (as defined in Rules 13a15(d) and
15d15(d) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are not currently a party to
any material legal proceedings.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

You should carefully consider the
risks described below in addition to the other information contained in this report, before making an investment decision. Our business, financial condition or results of operations could be harmed by any of these risks. The risks and uncertainties
described below are not the only ones we face. Additional risks not currently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operations. We have not made any
material changes to the risk factors previously disclosed in our Annual Report on Form-K for the fiscal year ended December 31, 2006.

Risks
Related to Our Business

We have a limited operating history and have incurred a cumulative loss since inception. If we do not generate significant
revenues, we will not be profitable.

We have incurred significant losses since our inception in August 1998. At March 31, 2007,
our accumulated deficit was approximately $131 million. We have not generated any revenue from the sale of drug candidates to date. We expect that our annual operating losses will increase substantially over the next several years as we expand our
research, development and commercialization efforts, including:



| |  |  | completing the phase II clinical trials for elvucitabine and, if supported by favorable data from the phase II clinical trials, moving into pivotal phase III
clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advancing our NS4A antagonist program through clinical candidate nomination, preclinical testing and completion of proof-of-concept;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advancing ACH-702 through preclinical testing, submitting an IND application to the Food and Drug Administration, or FDA, and beginning a phase I clinical trial;
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuing to advance our other research and discovery programs in HIV and HCV, and identifying other infectious disease drug candidates.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------

To become profitable, we must successfully develop and obtain regulatory approval for our drug candidates and
effectively manufacture, market and sell any drug candidates we develop. Accordingly, we may never generate significant revenues and, even if we do generate significant revenues, we may never achieve profitability.



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We will need substantial additional capital to fund our operations, including drug candidate development,
manufacturing and commercialization. If we do not have or cannot raise additional capital when needed, we will be unable to develop and commercialize our drug candidates successfully, and our ability to operate as a going concern may be adversely
affected.

We believe that our existing cash and cash equivalents will be sufficient to support our current operating plan through at
least the next twelve months. However, our operating plan may change as a result of many factors, including:



| |  |  | the costs involved in the preclinical and clinical development and manufacturing of elvucitabine, and ACH-702;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | the costs involved in the preclinical and clinical development of NS4A antagonists, certain portions of which we share with Gilead;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs involved in obtaining regulatory approvals for our drug candidates;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the scope, prioritization and number of programs we pursue;
| | - |  | -----------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining, enforcing and defending patent and other intellectual property claims;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs associated with manufacturing our drug candidates;
| | - |  | ------------------------------------------------------------



| |  |  | our ability to enter into corporate collaborations and the terms and success of these collaborations;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | our acquisition and development of new technologies and drug candidates; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | competing technological and market developments currently unknown to us.
| | - |  | ------------------------------------------------------------------------

If our operating plan changes, we may need additional funds sooner than planned. Such additional financing may not be available when we need it or may
not be available on terms that are favorable to us. In addition, we may seek additional capital due to favorable market conditions or strategic considerations, even if we believe we have sufficient funds for our current or future operating plans. If
adequate funds are not available to us on a timely basis, or at all, we may be required to:



| |  |  | terminate or delay preclinical studies, clinical trials or other development activities for one or more of our drug candidates; or
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | delay our establishment of sales and marketing capabilities or other activities that may be necessary to commercialize our drug candidates, if approved for sale.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

We may seek additional financing through a combination of private and public equity offerings, debt financings and
collaboration, strategic alliance and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders ownership interest will be diluted, and the terms may
include adverse liquidation or other preferences that adversely affect the rights of a stockholder. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as
incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and licensing arrangements with third parties, we may have to relinquish valuable rights to our
technologies or drug candidates, or grant licenses on terms that are not favorable to us.



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We depend heavily on the success of our most advanced drug candidate, elvucitabine, for the treatment of HIV
infection, which is still under development.

We have invested a significant portion of our efforts and financial resources in the
development of our most advanced drug candidate, elvucitabine, for the treatment of HIV infection. Our ability to generate revenues will depend heavily on the successful development and commercialization of this drug candidate. The commercial
success of elvucitabine will depend on several factors, including the following:



| |  |  | our ability to provide acceptable evidence of its safety and efficacy in current and future clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | receipt of marketing approvals from the FDA and similar foreign regulatory authorities;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | establishing commercial manufacturing arrangements with third-party manufacturers;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | launching commercial sales of the drug, whether alone or in collaboration with others; and
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | acceptance of the drug in the medical community and with third-party payors.
| | - |  | ----------------------------------------------------------------------------

We are currently studying elvucitabine in two phase II clinical trials. One or both of these clinical trials may not be successful, and the results of
our phase II clinical trials, even if positive, may not be necessarily indicative of the results we will obtain in our planned phase III or other subsequent clinical trials that may be required for regulatory approval of this drug candidate. If we
are not successful in commercializing elvucitabine, or are significantly delayed in doing so, our business will be materially harmed.

Our market is
subject to intense competition. If we are unable to compete effectively, our drug candidates may be rendered noncompetitive or obsolete.

We are engaged in segments of the pharmaceutical industry that are highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private
research organizations are pursuing the development of novel drugs that target infectious diseases. We face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become
available. In addition to currently approved drugs, there are a significant number of drugs that are currently under development and may become available in the future for the treatment of HIV infection, chronic hepatitis C and serious
hospital-based bacterial infections. We would expect elvucitabine, ACH-702 and our next HCV candidate to compete with the following approved drugs and drug candidates currently under development:



| |  |  | Elvucitabine. If approved, we would expect elvucitabine to compete with currently approved drugs for the treatment of HIV infection, including Epivir (3TC),
Retrovir (AZT) and Ziagen (abacavir), marketed by GlaxoSmithKline, Emtriva (FTC) and Viread (tenofovir), marketed by Gilead Sciences, and Zerit (d4T) and Videx (ddI), marketed by Bristol-Myers Squibb. Elvucitabine may also compete with NRTI drug
candidates currently in clinical development by other companies such as Avexa, Medivir, Pharmasset and Koronis, as well as other classes of drugs currently in clinical development by companies such as Abbott, Boehringer Ingelheim, Johnson &
Johnson, Merck, Panacos, Pfizer, Roche, Schering-Plough, Trimeris and Vertex.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ACH-702. If approved, we would expect ACH-702 to compete with currently approved drugs for the treatment of bacterial infections, including Cubicin
(daptomycin), marketed by Cubist Pharmaceuticals, Zyvox (linezolid), marketed by Pfizer, and Synercid (dalfopristin + quinupristin), marketed by King Pharmaceuticals. ACH-702 may also compete with drug candidates currently in clinical development by
other companies such as Intermune, Theravance, Basilea and Johnson & Johnson.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | NS4A Antagonist. If approved, we would expect our next NS4A antagonist to compete with currently approved drugs for the treatment of chronic hepatitis C,
including Pegasys and Roferon-A, marketed by Roche, and Intron-A and Peg-Intron, marketed by Schering-Plough. Our HCV compounds may also compete with drug candidates currently in
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | clinical development by other companies such as Abbott, Anadys, Arrow Pharmaceuticals, Boehringer Ingelheim, Bristol-Myers Squibb, Gilead Sciences,
GlaxoSmithKline, Human Genome Sciences, Idenix Pharmaceuticals, Intermune, Johnson & Johnson, Medivir, Merck, Novartis, Panacos, Pfizer, Pharmasset, Roche, Schering-Plough, Trimeris, Valeant and Vertex.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Many of our competitors have:



| |  |  | significantly greater financial, technical and human resources than we have and may be better equipped to discover, develop, manufacture and commercialize drug
candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | more extensive experience in preclinical testing and clinical trials, obtaining regulatory approvals and manufacturing and marketing pharmaceutical products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | drug candidates that have been approved or are in late-stage clinical development; and/or
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | collaborative arrangements in our target markets with leading companies and research institutions.
| | - |  | --------------------------------------------------------------------------------------------------

Competitive products may render our products obsolete or noncompetitive before we can recover the expenses of developing and commercializing our drug
candidates. Furthermore, the development of new treatment methods and/or the widespread adoption or increased utilization of any vaccine for the diseases we are targeting could render our drug candidates noncompetitive, obsolete or uneconomical. If
we successfully develop and obtain approval for our drug candidates, we will face competition based on the safety and effectiveness of our drug candidates, the timing of their entry into the market in relation to competitive products in development,
the availability and cost of supply, marketing and sales capabilities, reimbursement coverage, price, patent position and other factors. If we successfully develop drug candidates but those drug candidates do not achieve and maintain market
acceptance, our business will not be successful.

If we are not able to attract and retain key management and scientific personnel and advisors, we may
not successfully develop our drug candidates or achieve our other business objectives.

We depend upon our senior management and
scientific staff for our business success. Key members of our senior team include Michael Kishbauch, our president and chief executive officer, Dr. Milind Deshpande, our senior vice president and chief scientific officer, and Dr. John
Pottage, our senior vice president and chief medical officer. Many of our employment agreements with our senior management employees are terminable without notice by the employee. The loss of the service of any of the key members of our senior
management may significantly delay or prevent the achievement of drug development and other business objectives. Our ability to attract and retain qualified personnel, consultants and advisors is critical to our success. We face intense competition
for qualified individuals from numerous pharmaceutical and biotechnology companies, universities, governmental entities and other research institutions. We may be unable to attract and retain these individuals, and our failure to do so would
adversely affect our business.

Our business has a substantial risk of product liability claims. If we are unable to obtain appropriate levels of
insurance, a product liability claim could adversely affect our business.

Our business exposes us to significant potential product
liability risks that are inherent in the development, manufacturing and sales and marketing of human therapeutic products. Although we do not currently commercialize any products, claims could be made against us based on the use of our drug
candidates in clinical trials. Product liability claims could delay or prevent completion of our clinical development programs. We currently have clinical trial insurance in an amount equal to up to $9.0 million in the aggregate and will seek to
obtain product liability insurance prior to the sales and marketing of any of our drug candidates. However, our insurance may not provide adequate coverage against potential liabilities. Furthermore, clinical trial and product liability insurance is
becoming increasingly expensive. As a result, we may be unable to maintain current amounts of insurance coverage or obtain additional or sufficient insurance at a reasonable cost to protect against losses that could have a material adverse effect on
us. If a claim is brought against us, we might be required to pay legal and other expenses to defend the claim, as well as uncovered damages awards resulting from a claim brought successfully against us. Furthermore, whether or not we are ultimately
successful in defending any such claims, we might be required to direct significant financial and managerial resources to such defense, and adverse publicity is likely to result.



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Risks Related to the Development of Our Drug Candidates

All of our drug candidates are still in the early stages of development and remain subject to clinical testing and regulatory approval. If we are unable to
successfully develop and test our drug candidates, we will not be successful.

To date, we have not commercially marketed, distributed
or sold any drug candidates. The success of our business depends primarily upon our ability to develop and commercialize our drug candidates successfully. Our most advanced drug candidate is elvucitabine, which is currently in phase II clinical
trials. Our other drug candidates are in various stages of preclinical development. Our drug candidates must satisfy rigorous standards of safety and efficacy before they can be approved for sale. To satisfy these standards, we must engage in
expensive and lengthy testing and obtain regulatory approval of our drug candidates. Despite our efforts, our drug candidates may not:



| |  |  | offer therapeutic or other improvement over existing, comparable drugs;
| | - |  | -----------------------------------------------------------------------



| |  |  | be proven safe and effective in clinical trials;
| | - |  | ------------------------------------------------



| |  |  | have the desired effects or may include undesirable effects or the drug candidates may have other unexpected characteristics;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | meet applicable regulatory standards;
| | - |  | -------------------------------------



| |  |  | be capable of being produced in commercial quantities at acceptable costs; or
| | - |  | -----------------------------------------------------------------------------



| |  |  | be successfully commercialized.
| | - |  | -------------------------------

In
addition, we may experience numerous unforeseen events during, or as a result of, preclinical testing and the clinical trial process that could delay or prevent our ability to receive regulatory approval or commercialize our drug candidates,
including:



| |  |  | regulators or Institutional Review Boards, or IRBs, may not authorize us to commence a clinical trial or conduct a clinical trial at a prospective trial site;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our pre-clinical tests or clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional
pre-clinical testing or clinical trials, or we may abandon projects that we expect to be promising;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enrollment in our clinical trials may be slower than we currently anticipate or participants may drop out of our clinical trials at a higher rate than we currently
anticipate, resulting in significant delays;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we might have to suspend or terminate our clinical trials if the participants are being exposed to unacceptable health risks;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | IRBs or regulators, including the FDA, may require that we hold, suspend or terminate clinical research for various reasons, including noncompliance with regulatory
requirements; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the supply or quality of our drug candidates or other materials necessary to conduct our clinical trials may be insufficient or inadequate.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------

We, and a number of other companies in the pharmaceutical and biotechnology industries, have suffered significant
setbacks in late-stage clinical trials even after achieving promising results in early-stage development. In February 2007, we announced that we were discontinuing further clinical development of ACH-806 (also known as GS-9132) which was determined
to have positive antiviral effect in a proof-of-concept clinical trial in HCV infected patients, but also to elevate serum creatinine levels, a marker of kidney function. Accordingly, the results from the completed preclinical studies and clinical
trials and ongoing clinical trials for elvucitabine, ACH-702 and our other drug candidates may not be predictive of the results we may obtain in later stage trials. We do not expect any of our drug candidates to be commercially available for at
least several years.

If we are unable to obtain U.S. and/or foreign regulatory approval, we will be unable to commercialize our drug candidates.

Our drug candidates are subject to extensive governmental regulations relating to among other things, research, testing, development,
manufacturing, safety, efficacy, record keeping, labeling, marketing and distribution of drugs. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required in the United States and in many foreign
jurisdictions prior to the commercial sale of our drug candidates. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we
are developing will obtain marketing approval. In connection with the clinical trials for elvucitabine, ACH-702 and any other drug candidate we may seek to develop in the future, we face risks that:



| |  |  | the drug candidate may not prove to be efficacious;
| | - |  | ---------------------------------------------------



| |  |  | the drug may not prove to be safe;
| | - |  | ----------------------------------



| |  |  | the results may not confirm the positive results from earlier preclinical studies or clinical trials; and
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the results may not meet the level of statistical significance required by the FDA or other regulatory agencies.
| | - |  | ----------------------------------------------------------------------------------------------------------------

We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA. The
time required to complete clinical trials and for FDA and other countries regulatory review processes is uncertain and typically takes many years. Our analysis of data obtained from preclinical and clinical activities is subject to
confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative
action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

Any delay in
obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenues from the particular drug candidate. Furthermore, any regulatory approval to market a product may be subject to limitations on the
indicated uses for which we may market the product and affect reimbursement by third-party payors. These limitations may limit the size of the market for the product. We are also subject to numerous foreign regulatory requirements governing the
conduct of clinical trials, manufacturing and marketing authorization, pricing and third-party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above as well as risks
attributable to the satisfaction of foreign regulations. Approval by the FDA does not ensure approval by regulatory authorities outside the United States. Foreign jurisdictions may have different approval procedures than those required by the FDA
and may impose additional testing requirements for our drug candidates.



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If clinical trials for our drug candidates are prolonged or delayed, we may be unable to commercialize our drug
candidates on a timely basis, which would require us to incur additional costs and delay our receipt of any product revenue.

We cannot
predict whether we will encounter problems with any of our completed, ongoing or planned clinical trials that will cause us or regulatory authorities to delay, suspend or terminate clinical trials, or delay the analysis of data from our completed or
ongoing clinical trials. Any of the following could delay the clinical development of our drug candidates:



| |  |  | ongoing discussions with the FDA or comparable foreign authorities regarding the scope or design of our clinical trials;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in receiving, or the inability to obtain, required approvals from institutional review boards or other reviewing entities at clinical sites selected for
participation in our clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays in enrolling volunteers and patients into clinical trials;
| | - |  | -----------------------------------------------------------------



| |  |  | a lower than anticipated retention rate of volunteers and patients in clinical trials;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the need to repeat clinical trials as a result of inconclusive or negative results or unforeseen complications in testing;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | inadequate supply or deficient quality of drug candidate materials or other materials necessary to conduct our clinical trials;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | unfavorable FDA inspection and review of a clinical trial site or records of any clinical or preclinical investigation;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | serious and unexpected drug-related side effects experienced by participants in our clinical trials; or
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the placement by the FDA of a clinical hold on a trial.
| | - |  | -------------------------------------------------------

Our ability to enroll patients in our clinical trials in sufficient numbers and on a timely basis will be subject to a number of factors, including the size of the patient population, the nature of the protocol, the
proximity of patients to clinical sites, the availability of effective treatments for the relevant disease and the eligibility criteria for the clinical trial. Delays in patient enrollment may result in increased costs and longer development times.
For example, we are experiencing and may continue to experience delays in patient enrollment in connection with our phase II trial of elvucitabine in HIV infected patients who have failed a highly active anti retroviral therapy, or HAART, regimen
which included Epivir (3TC) due to the strict entry criteria for this trial. As a result, we expanded the number of sites at which the trial will be conducted and changed the protocol of the trial to include additional treatment with
elvucitabine after the initial 14 days of treatment. We cannot assure you that these actions will prevent further delays in patient enrollment in connection with this trial. In addition, subjects may drop out of our clinical trials, and thereby
impair the validity or statistical significance of the trials.

We, the FDA or other applicable regulatory authorities or IRBs may suspend
clinical trials of a drug candidate at any time if we or they believe the subjects or patients participating in such clinical trials are being exposed to unacceptable health risks or for other reasons.

We cannot predict whether any of our drug candidates will encounter problems during clinical trials which will cause us or regulatory authorities to
delay or suspend these trials, or which will delay the analysis of data from these trials. In addition, it is impossible to predict whether legislative changes will be enacted, or whether FDA regulations, guidance or interpretations will be changed,
or what the impact of such changes, if any, may be. If we experience any such problems, we may not have the financial resources to continue development of the drug candidate that is affected or the development of any of our other drug candidates.



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In addition, we, along with our collaborators or subcontractors, may not employ, in any capacity, persons
who have been debarred under the FDAs Application Integrity Policy. Employment of such a debarred person (even if inadvertently) may result in delays in FDAs review or approval of our products, or the rejection of data developed with the
involvement of such persons.

Even if we obtain regulatory approvals, our drug candidates will be subject to ongoing regulatory review. If we fail to
comply with continuing U.S. and applicable foreign regulations, we could lose those approvals, and our business would be seriously harmed.

Even if we receive regulatory approval of any drugs we are developing or may develop, we will be subject to continuing regulatory review, including the review of clinical results which are reported after our drug candidates become
commercially available approved drugs. As greater numbers of patients use a drug following its approval, side effects and other problems may be observed after approval that were not seen or anticipated during pre-approval clinical trials. In
addition, the manufacturer, and the manufacturing facilities we use to make any approved drugs, will also be subject to periodic review and inspection by the FDA. The subsequent discovery of previously unknown problems with the drug, manufacturer or
facility may result in restrictions on the drug, manufacturer or facility, including withdrawal of the drug from the market. If we fail to comply with applicable continuing regulatory requirements, we may be subject to fines, suspension or
withdrawal of regulatory approval, product recalls and seizures, operating restrictions and criminal prosecutions.

Our product promotion
and advertising is also subject to regulatory requirements and continuing regulatory review. In particular, the marketing claims we will be permitted to make in labeling or advertising regarding our marketed products will be limited by the terms and
conditions of the FDA-approved labeling. We must submit copies of our advertisements and promotional labeling to the FDA at the time of initial publication or dissemination. If the FDA believes these materials or statements promote our products for
unapproved indications, or with unsubstantiated claims, or if we fail to provide appropriate safety-related information, the FDA could allege that our promotional activities misbrand our products. Specifically, the FDA could issue an untitled letter
or warning letter, which may demand, among other things, that we cease such promotional activities and issue corrective advertisements and labeling. The FDA also could take enforcement action including seizure of allegedly misbranded product,
injunction or criminal prosecution against us and our officers or employees. If we repeatedly or deliberately fail to submit such advertisements and labeling to the agency, the FDA could withdraw our approvals. Moreover, the Department of Justice
can bring civil or criminal actions against companies that promote drugs or biologics for unapproved uses, based on the False Claims Act and other federal laws governing reimbursement for such products under the Medicare, Medicaid and other
federally supported healthcare programs. Monetary penalties in such cases have often been substantial, and civil penalties can include costly mandatory compliance programs and exclusion from federal healthcare programs.

If we do not comply with laws regulating the protection of the environment and health and human safety, our business could be adversely affected.

Our research and development efforts involve the controlled use of hazardous materials, chemicals and various radioactive compounds. Although we believe
that our safety procedures for the use, manufacture, storage, handling and disposing of these materials comply with the standards prescribed by federal, state and local laws and regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. If an accident occurs, we could be held liable for resulting damages, which could be substantial. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those
governing laboratory procedures, exposure to blood-borne pathogens and the handling of biohazardous materials. Additional federal, state and local laws and regulations affecting our operations may be adopted in the future. Although we maintain
workers compensation insurance to cover us for costs we may incur due to injuries to our employees resulting from the use of these materials, this insurance may not provide adequate coverage against potential liabilities. Due to the small
amount of hazardous materials that we generate, we have determined that the cost to secure insurance coverage for environmental liability and toxic tort claims far exceeds the benefits. Accordingly, we do not maintain any insurance to cover
pollution conditions or other extraordinary or unanticipated events relating to our use and disposal of hazardous materials. We may incur substantial costs to comply with, and substantial fines or penalties if we violate, any of these laws or
regulations.



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Risks Related to Commercialization of Our Drug Candidates

If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our drug candidates, we may not generate
product revenue.

We have no commercial products, and we do not currently have an organization for the sales and marketing of
pharmaceutical products. In order to successfully commercialize any drugs that may be approved in the future by the FDA or comparable foreign regulatory authorities, we must build our sales and marketing capabilities or make arrangements with third
parties to perform these services. For certain drug candidates in selected indications where we believe that an approved product could be commercialized by a specialty sales force in North America that calls on a limited but focused group of
physicians, we intend to commercialize these products ourselves. However, in therapeutic indications that require a large sales force selling to a large and diverse prescribing population and for markets outside of North America, we plan to enter
into arrangements with other companies for commercialization. For example, we have entered into an agreement with Gilead Sciences for the development and commercialization of certain of our HCV candidates involving NS4A antagonism. If we are unable
to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable.

If physicians and patients do not accept our future drugs, we may be unable to generate significant revenue, if any.

Even if elvucitabine and ACH-702, or any other drug candidates we may develop or acquire in the future, obtain regulatory approval, they may not gain
market acceptance among physicians, health care payors, patients and the medical community. Factors that we believe could materially affect market acceptance of our product candidates include:



| |  |  | the timing of market introduction of competitive drugs;
| | - |  | -------------------------------------------------------



| |  |  | the demonstrated clinical safety and efficacy of our product candidates compared to other drugs;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the cost-effectiveness of our product candidates;
| | - |  | -------------------------------------------------



| |  |  | the availability of reimbursement from managed care plans and other third-party payors;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | the convenience and ease of administration of our product candidates;
| | - |  | ---------------------------------------------------------------------



| |  |  | the existence, prevalence and severity of adverse side effects;
| | - |  | ---------------------------------------------------------------



| |  |  | other potential advantages of alternative treatment methods; and
| | - |  | ----------------------------------------------------------------



| |  |  | the effectiveness of marketing and distribution support.
| | - |  | --------------------------------------------------------

If our approved drugs fail to achieve market acceptance, we would not be able to generate significant revenue.



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If third-party payors do not adequately reimburse patients for any of our drug candidates that are approved for
marketing, they might not be purchased or used, and our revenues and profits will not develop or increase.

Our revenues and profits
will depend significantly upon the availability of adequate reimbursement for the use of any approved drug candidates from governmental and other third-party payors, both in the United States and in foreign markets. Reimbursement by a third party
may depend upon a number of factors, including the third-party payors determination that use of a product is:



| |  |  | a covered benefit under its health plan;
| | - |  | ----------------------------------------



| |  |  | safe, effective and medically necessary;
| | - |  | ----------------------------------------



| |  |  | appropriate for the specific patient;
| | - |  | -------------------------------------



| |  |  | cost effective; and
| | - |  | -------------------



| |  |  | neither experimental nor investigational.
| | - |  | -----------------------------------------

Obtaining reimbursement approval for a product from each third-party and government payor is a time-consuming and costly process that could require us to provide supporting scientific, clinical and cost-effectiveness data for the use of any
approved drugs to each payor. We may not be able to provide data sufficient to gain acceptance with respect to reimbursement. There also exists substantial uncertainty concerning third-party reimbursement for the use of any drug candidate
incorporating new technology, and even if determined eligible, coverage may be more limited than the purposes for which the drug is approved by the FDA. Moreover, eligibility for coverage does not imply that any drug will be reimbursed in all cases
or at a rate that allows us to make a profit or even cover our costs. Interim payments for new products, if applicable, may also not be sufficient to cover our costs and may not be made permanent. Reimbursement rates may vary according to the use of
the drug and the clinical setting in which it is used, may be based on payments allowed for lower-cost products that are already reimbursed, may be incorporated into existing payments for other products or services, and may reflect budgetary
constraints and/or imperfections in Medicare or Medicaid data used to calculate these rates. Net prices for products may be reduced by mandatory discounts or rebates required by government health care programs or by any future relaxation of laws
that restrict imports of certain medical products from countries where they may be sold at lower prices than in the United States.

There
have been, and we expect that there will continue to be, federal and state proposals to constrain expenditures for medical products and services, which may affect payments for any of our approved products. The Centers for Medicare and Medicaid
Services frequently change product descriptors, coverage policies, product and service codes, payment methodologies and reimbursement values. Third-party payors often follow Medicare coverage policy and payment limitations in setting their own
reimbursement rates and may have sufficient market power to demand significant price reductions. As a result of actions by these third-party payors, the health care industry is experiencing a trend toward containing or reducing costs through various
means, including lowering reimbursement rates, limiting therapeutic class coverage and negotiating reduced payment schedules with service providers for drug products.

Our inability to promptly obtain coverage and profitable reimbursement rates from government-funded and private payors for any approved products could have a material adverse effect on our operating results and our
overall financial condition.

Recent federal legislation will increase the pressure to reduce prices of pharmaceutical products paid for by Medicare,
which could adversely affect our revenues, if any.

The Medicare Prescription Drug Improvement and Modernization Act of 2003, or MMA,
changes the way Medicare will cover and pay for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and eventually will introduce a new reimbursement methodology based on average sales prices for
drugs. In addition, this legislation provides authority for limiting the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will
be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business.
While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the
MMA may result in a similar reduction in payments from private payors.



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Risks Related to Our Dependence on Third Parties

We may not be able to execute our business strategy if we are unable to enter into alliances with other companies that can provide capabilities and funds for the development and commercialization of our drug
candidates. If we are unsuccessful in forming or maintaining these alliances on favorable terms, our business may not succeed.

We have
entered into a collaboration arrangement with Gilead Sciences for the development and commercialization of certain of our HCV compounds involving NS4A antagonism, and we may enter into additional collaborative arrangements in the future. For
example, we may enter into alliances with major biotechnology or pharmaceutical companies to jointly develop specific drug candidates and to jointly commercialize them if they are approved. In such alliances, we would expect our biotechnology or
pharmaceutical collaborators to provide substantial funding, as well as significant capabilities in clinical development, regulatory affairs, marketing and sales. We may not be successful in entering into any such alliances on favorable terms, if at
all. Even if we do succeed in securing such alliances, we may not be able to maintain them if, for example, development or approval of a drug candidate is delayed or sales of an approved drug are disappointing. Furthermore, any delay in entering
into collaboration agreements could delay the development and commercialization of our drug candidates and reduce their competitiveness even if they reach the market. Any such delay related to our collaborations could adversely affect our business.

If a collaborative partner terminates or fails to perform its obligations under agreements with us, the development and commercialization of our drug
candidates could be delayed or terminated.

If Gilead Sciences or another, future collaborative partner does not devote sufficient time
and resources to collaboration arrangements with us, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if any existing or future collaboration partner were
to breach or terminate its arrangements with us, the development and commercialization of the affected drug candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue
development and commercialization of the drug candidate on our own. Under our collaboration agreement with Gilead Sciences, Gilead Sciences may terminate the collaboration for any reason at any time upon 120 days notice. If Gilead Sciences were to
exercise this right, the development and commercialization of our HCV compounds would be adversely affected.

Much of the potential revenue
from our existing and future collaborations will consist of contingent payments, such as payments for achieving development milestones and royalties payable on sales of drugs developed. The milestone and royalty revenues that we may receive under
these collaborations will depend upon our collaborators ability to successfully develop, introduce, market and sell new products. In addition, our collaborators may decide to enter into arrangements with third parties to commercialize products
developed under our existing or future collaborations using our technologies, which could reduce the milestone and royalty revenue that we may receive, if any. In many cases we will not be involved in these processes and accordingly will depend
entirely on our collaborators. Our collaboration partners may fail to develop or effectively commercialize products using our products or technologies because they:



| |  |  | decide not to devote the necessary resources due to internal constraints, such as limited personnel with the requisite scientific expertise, limited cash resources
or specialized equipment limitations, or the belief that other drug development programs may have a higher likelihood of obtaining regulatory approval or may potentially generate a greater return on investment;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | do not have sufficient resources necessary to carry the drug candidate through clinical development, regulatory approval and commercialization; or
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cannot obtain the necessary regulatory approvals.
| | - |  | -------------------------------------------------

In addition, a collaborator may decide to pursue a competitive drug candidate developed outside of the collaboration. In particular, Gilead Sciences, our collaborator for our chronic hepatitis C program, currently is
developing other products for the treatment of chronic hepatitis C, and the results of its development efforts could affect its commitment to our drug candidate. If our collaboration partners fail to develop or effectively commercialize drug
candidates or drugs for any of these reasons, we may not be able to replace the collaboration partner with another partner to develop and commercialize a drug candidate or drugs under the terms of the collaboration. We may also be unable to obtain,
on terms acceptable to us, a license from such collaboration partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a drug candidate.

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily, including failing to meet established deadlines for
the completion of such trials.

We do not have the ability to independently conduct clinical trials for our drug candidates, and we rely
on third parties such as contract research organizations, medical institutions and clinical investigators to enroll qualified patients and conduct our clinical trials. Our reliance on these third parties for clinical development activities reduces
our control over these activities. Accordingly, these third-party contractors may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or our trial design. To date, we believe our
contract research organizations and other similar entities with which we are working have performed well. However, if these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be required to
replace them. Although we believe that there are a number of other third-party contractors we could engage to continue these activities, it may result in a delay of the affected trial. Accordingly, our efforts to obtain regulatory approvals for and
commercialize our drug candidates may be delayed.

We currently depend on third-party manufacturers to produce our preclinical and clinical drug
supplies and intend to rely upon third-party manufacturers to produce commercial supplies of any approved drug candidates. If in the future we manufacture any of our drug candidates, we will be required to incur significant costs and devote
significant efforts to establish and maintain these capabilities.

We have relied upon third parties to produce material for preclinical
and clinical testing purposes and intend to continue to do so in the future. We also expect to rely upon third parties to produce materials required for the commercial production of our drug candidates if we succeed in obtaining necessary regulatory
approvals. If we are unable to arrange for third-party manufacturing, or to do so on commercially reasonable terms, we may not be able to complete development of our drug candidates or market them. Reliance on third-party manufacturers entails risks
to which we would not be subject if we manufactured drug candidates ourselves, including reliance on the third party for regulatory compliance and quality assurance, the possibility of breach of the manufacturing agreement by the third party because
of factors beyond our control and the possibility of termination or nonrenewal of the agreement by the third party, based on its own business priorities, at a time that is costly or damaging to us. In addition, the FDA and other regulatory
authorities require that our drug candidates be manufactured according to current good manufacturing practice regulations. Any failure by us or our third-party manufacturers to comply with current good manufacturing practices and/or our failure to
scale up our manufacturing processes could lead to a delay in, or failure to obtain, regulatory approval of any of our drug candidates. In addition, such failure could be the basis for action by the FDA to withdraw approvals for drug candidates
previously granted to us and for other regulatory action.



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We currently rely on a single manufacturer for the preclinical and clinical supplies of each of our drug
candidates and do not currently have relationships for redundant supply or a second source for any of our drug candidates. To date, our third-party manufacturers have met our manufacturing requirements, but we cannot assure you that they will
continue to do so. Any performance failure on the part of our existing or future manufacturers could delay clinical development or regulatory approval of our drug candidates or commercialization of any approved products. If for some reason our
current contract manufacturers cannot perform as agreed, we may be required to replace them. Although we believe there are a number of potential replacements as our manufacturing processes are not manufacturer specific, we may incur added costs and
delays in identifying and qualifying any such replacements. Furthermore, although we generally do not begin a clinical trial unless we believe we have a sufficient supply of a drug candidate to complete the trial, any significant delay in the supply
of a drug candidate for an ongoing trial due to the need to replace a third-party manufacturer could delay completion of the trial.

We may
in the future elect to manufacture certain of our drug candidates in our own manufacturing facilities. If we do so, we will require substantial additional funds and need to recruit qualified personnel in order to build or lease and operate any
manufacturing facilities.

Risks Related to Patents and Licenses

If we are unable to adequately protect our drug candidates, or if we infringe the rights of others, our ability to successfully commercialize our drug candidates will be harmed.

As of March 31, 2007, our patent portfolio included a total of 178 patents and patent applications worldwide. We own or hold exclusive licenses to a
total of seven U.S. issued patents and 18 U.S. pending patent applications, as well as 129 pending PCT applications and foreign counterparts to many of these patents and patent applications. Our success depends in part on our ability to obtain
patent protection both in the United States and in other countries for our drug candidates. Our ability to protect our drug candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and
maintain valid and enforceable patents. Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering pharmaceutical inventions and the scope of claims made under these patents, our ability to
maintain, obtain and enforce patents is uncertain and involves complex legal and factual questions. Accordingly, rights under any issued patents may not provide us with sufficient protection for our drug candidates or provide sufficient protection
to afford us a commercial advantage against competitive products or processes. In addition, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents have issued or
will issue, we cannot guarantee that the claims of these patents are or will be valid or enforceable or will provide us with any significant protection against competitive products or otherwise be commercially valuable to us. Patent applications in
the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications remain confidential in the U.S. Patent and Trademark Office, which we refer to as the U.S. Patent Office, for the
entire time prior to issuance as a U.S. patent. Similarly, publication of discoveries in the scientific or patent literature often lag behind actual discoveries. Consequently, we cannot be certain that we or our licensors or co-owners were the first
to invent, or the first to file patent applications on, our drug candidates or their use as anti-infective drugs. In the event that a third party has also filed a U.S. patent application relating to our drug candidates or a similar invention, we may
have to participate in interference proceedings declared by the U.S. Patent Office to determine priority of invention in the United States. The costs of these proceedings could be substantial and it is possible that our efforts would be
unsuccessful, resulting in a loss of our U.S. patent position. Furthermore, we may not have identified all U.S. and foreign patents or published applications that affect our business either by blocking our ability to commercialize our drugs or by
covering similar technologies that affect our drug market.

The laws of some foreign jurisdictions do not protect intellectual property
rights to the same extent as in the United States and many companies have encountered significant difficulties in protecting and defending such rights in foreign jurisdictions. If we encounter such difficulties in protecting or are otherwise
precluded from effectively protecting our intellectual property rights in foreign jurisdictions, our business prospects could be substantially harmed.



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We license patent rights from third-party owners. If such owners do not properly maintain or enforce the patents
underlying such licenses, our competitive position and business prospects will be harmed.

We are party to a number of licenses that
give us rights to third-party intellectual property that is necessary or useful for our business. In particular, we have obtained a sublicense from Vion Pharmaceuticals, a license from Emory University with respect to elvucitabine, and a license
from the University of Maryland for drug discovery technology. We may enter into additional licenses to third-party intellectual property in the future. Our success will depend in part on the ability of our licensors to obtain, maintain and enforce
patent protection for their intellectual property, in particular, those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue in
respect of these patent applications, our licensors may fail to maintain these patents, may determine not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would.
In addition, our licensors may terminate their agreements with us in the event we breach the applicable license agreement and fail to cure the breach within a specified period of time. Without protection for the intellectual property we license,
other companies might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing drug candidates to market
and harm our ability to operate.

Our success will depend in part on our ability to operate without infringing the proprietary rights of
third parties. Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to our drug candidates, the pharmaceutical industry is characterized by extensive
litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future and allege that the use of our technologies infringes these patent claims or that we are employing their proprietary technology
without authorization. Likewise, third parties may challenge or infringe upon our existing or future patents. Under our license agreements with Vion Pharmaceuticals and The University of Maryland, we have the right, but not an obligation, to bring
actions against an infringing third party. If we do not bring an action within a specified number of days, the licensor may bring an action against the infringing party. Pursuant to our license agreement with Emory University and our research
collaboration and license agreement with Gilead Sciences, Emory and Gilead Sciences have the primary right, but not an obligation, to bring actions against an infringing third party. However, if Gilead Sciences or Emory elects not to bring an
action, we may bring an action against the infringing party.

Proceedings involving our patents or patent applications or those of others could result in
adverse decisions regarding:



| |  |  | the patentability of our inventions relating to our drug candidates; and/or
| | - |  | ---------------------------------------------------------------------------



| |  |  | the enforceability, validity or scope of protection offered by our patents relating to our drug candidates.
| | - |  | -----------------------------------------------------------------------------------------------------------

Even if we are successful in these proceedings, we may incur substantial costs and divert management time and attention in pursuing these proceedings,
which could have a material adverse effect on us. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent
litigation is costly and time consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement
action successfully or have infringed patents declared invalid, we may:



| |  |  | incur substantial monetary damages;
| | - |  | -----------------------------------



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| |  |  | encounter significant delays in bringing our drug candidates to market; and/or
| | - |  | ------------------------------------------------------------------------------



| |  |  | be precluded from participating in the manufacture, use or sale of our drug candidates or methods of treatment requiring licenses.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------

Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information and may not adequately
protect our intellectual property.

We rely on trade secrets to protect our technology, especially where we do not believe patent
protection is appropriate or obtainable. However, trade secrets are difficult to protect. In order to protect our proprietary technology and processes, we also rely in part on confidentiality and intellectual property assignment agreements with our
corporate partners, employees, consultants, outside scientific collaborators and sponsored researchers and other advisors. These agreements may not effectively prevent disclosure of confidential information nor result in the effective assignment to
us of intellectual property, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements. In addition, others may independently discover our trade secrets and
proprietary information, and in such case we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation could be necessary to seek to enforce and determine the scope of our proprietary rights, and failure to
obtain or maintain trade secret protection could adversely affect our competitive business position.

Risks Relating to Our Common Stock

Our stock price is likely to be volatile, and the market price of our common stock may decline in value in the future.

The market price of our common stock could be subject to significant fluctuations. Market prices for securities of early stage pharmaceutical,
biotechnology and other life sciences companies have historically been particularly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:



| |  |  | the results of our current phase II and any future clinical trials for elvucitabine;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the results of our research and candidate selection in our HCV program;
| | - |  | -----------------------------------------------------------------------



| |  |  | the results of ongoing preclinical studies and planned clinical trials of our preclinical drug candidates, including ACH-702;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the entry into, or termination of, key agreements, in particular our collaboration agreement with Gilead Sciences or our sublicense agreement with Vion
Pharmaceuticals;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the results of regulatory reviews relating to the approval of our drug candidates;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the initiation of, material developments in, or conclusion of litigation to enforce or defend any of our intellectual property rights;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure of any of our drug candidates, if approved, to achieve commercial success;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | general and industry-specific economic conditions that may affect our research and development expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------



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| |  |  | the results of clinical trials conducted by others on drugs that would compete with our drug candidates;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the failure or discontinuation of any of our research programs;
| | - |  | ---------------------------------------------------------------



| |  |  | issues in manufacturing our drug candidates or any approved products;
| | - |  | ---------------------------------------------------------------------



| |  |  | the introduction of technological innovations or new commercial products by us or our competitors;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | future sales of our common stock;
| | - |  | ---------------------------------



| |  |  | changes in the structure of health care payment systems; and
| | - |  | ------------------------------------------------------------



| |  |  | period-to-period fluctuations in our financial results.
| | - |  | -------------------------------------------------------

The stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect the trading
price of our common stock.

In the past, following periods of volatility in the market price of a companys securities, stockholders
have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our profitability
and reputation.

Our executive officers, directors and principal stockholders own a large percentage of our voting common stock and could limit our
stockholders influence on corporate decisions or could delay or prevent a change in corporate control.

Our directors, executive
officers and current holders of more than 5% of our outstanding common stock, together with their affiliates and related persons, beneficially own, in the aggregate, approximately 41% of our outstanding common stock. As a result, these stockholders,
if acting together, have substantial influence on the outcome of all matters submitted to our stockholders for approval, including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets
and other extraordinary transactions. The interests of this group of stockholders may not always coincide with our corporate interests or the interest of other stockholders, and they may act in a manner with which you may not agree or that may not
be in the best interests of other stockholders. This concentration of ownership may have the effect of:



| |  |  | delaying, deferring or preventing a change in control of our company;
| | - |  | ---------------------------------------------------------------------



| |  |  | entrenching our management and/or board;
| | - |  | ----------------------------------------



| |  |  | impeding a merger, consolidation, takeover or other business combination involving our company; or
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
| | - |  | ----------------------------------------------------------------------------------------------------------------------



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Our management is required to devote substantial time and incur additional expense to comply with public company
regulations. Our failure to comply with such regulations could subject us to public investigations, fines, enforcement actions and other sanctions by regulatory agencies and authorities and, as a result, our stock price could decline in value.

As a private company with limited resources, we maintained a small finance and accounting staff. As a public company, the
Sarbanes-Oxley Act of 2002 and the related rules and regulations of the SEC, as well as the rules of the Nasdaq Global Market, now require us to implement additional corporate governance practices and adhere to a variety of reporting requirements
and complex accounting rules. Compliance with these public company obligations will increase our legal and financial compliance costs and place significant additional demands on our finance and accounting staff and on our financial, accounting and
information systems.

In particular, as a public company, our management will be required to conduct an annual evaluation of our internal
controls over financial reporting and include a report of management on our internal controls in our annual reports on Form 10-K. In addition, we will be required to have our independent public accounting firm attest to and report on
managements assessment of the effectiveness of our internal controls over financial reporting. Under current rules, we will be subject to these requirements beginning with our annual report on Form 10-K for our fiscal year ending
December 31, 2007. If we are unable to conclude that we have effective internal controls over financial reporting or, if our independent auditors are unable to provide us with an attestation and an unqualified report as to the effectiveness of
our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our common stock.

We do not anticipate paying cash dividends, and accordingly stockholders must rely on stock appreciation for any return on their investment in us.

We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying cash dividends in the future. As a
result, only appreciation of the price of our common stock will provide a return to stockholders.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

In our initial public offering, or IPO, we sold 4,500,000 shares of common stock, including an over-allotment option of 675,000 shares, pursuant to a registration statement on Form S-1 (File No. 333-132921) that was declared
effective by the SEC on October 25, 2006. We received aggregate net proceeds of approximately $53.4 million, after deducting underwriting discounts and commissions of approximately $4.2 million and expenses of the offering of
approximately $1.9 million. The underwriters of the offering were Cowen and Company, LLC, CIBC World Markets and JMP Securities. The net proceeds have been allocated for general corporate purposes and capital expenditures. As of March 31,
2007 approximately $11.4 million of the net proceeds of the offering had been used to fund operations, $149,000 for the purchase of fixed assets and approximately $1.4 million of the net proceeds of the offering had been used for debt repayments.
The remaining net proceeds are invested in U.S. Government and Agency securities.

Issuer Purchases of Equity Securities

Neither we nor any affiliated purchaser or anyone acting on behalf of us or an affiliated purchaser made any purchases of shares of our common stock in
the first quarter of 2007.



|ITEM 6. | EXHIBITS
|------- | --------



|     |  |                                                                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of President and Chief Executive Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as
amended.                                                                      
|     | 
|31.2 |  | Certification of Chief Financial Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.                                                                                    
|     | 
|32.1 |  | Certification of President and Chief Executive Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended,
and Section 1350 of Chapter 63 of Title 18 of the United States Code.



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|     |  |                                                                                                                                                                                                                                                
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|32.2 |  | Certification of Chief Financial Officer of Achillion Pharmaceuticals, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and
Section 1350 of Chapter 63 of Title 18 of the United States Code.



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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.



|                  |  |                                                                     
|----------------- |  | --------------------------------------------------------------------
|                  |  | ACHILLION PHARMACEUTICALS, INC.                                     
|                  | 
|Date: May 9, 2007 |  | /s/ Michael D. Kishbauch                                            
|                  |  | President and Chief Executive Officer (Principal
Executive Officer) 
|                  | 
|Date: May 9, 2007 |  | /s/ Mary Kay Fenton                                                 
|                  |  | Chief Financial Officer (Principal Financial and
Accounting Officer)



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