**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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**FORM 10-Q**

| **x**                                                                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                        |       | ** **                                                                                               |
| **FOR THE  QUARTERLY PERIOD ENDED JUNE 30, 2007**                                                                                                                                                 |
| ** **                                                                                                                                                                                        |       | ** **                                                                                               |
| **OR**                                                                                                                                                                                            |
| ** **                                                                                                                                                                                        |       | ** **                                                                                               |
| **o**                                                                                                                                                                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                        |       | ** **                                                                                               |
| **FOR THE  TRANSITION PERIOD FROM             TO             ** |
| ** **                                                                                                                                                                                        |       |                                                                                                     |
| **Commission  File Number 0-29889**                                                                                                                                                               |

 

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**RigelPharmaceuticals, Inc.**

(Exact name of registrantas specified in its charter)

| **Delaware**                                               |   | **94-3248524**                        |
|------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or          |   | (I.R.S. Employer  Identification No.) |
| organization)                                              |   |                                  |
|                                                       |   |                                  |
| **1180  Veterans Blvd.**                                   |   | ** **                            |
| **South  San Francisco, CA**                               |   | **94080**                             |
| (Address of principal  executive offices)                  |   | (Zip Code)                            |
|                                                       |   |                                  |
| **(650) 624-1100**                                    |   | ** **                            |
| (Registrant’s  telephone number, including area code) |   |                                  |

 

Indicateby check mark whether the registrant: (1) has filed all reports requiredto be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes  x  No  o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act) (Check one):
| Large accelerated filer  o |   | Accelerated filer  x |   | Non-accelerated filer  o |
|--------------------------------------|--------|--------------------------------|--------|------------------------------------|

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes  o  No  x

As ofAugust 2, 2007, there were 31,020,872 shares of the registrant’s common stockoutstanding.

 

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**RIGELPHARMACEUTICALS, INC.**QUARTERLY REPORT ONFORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007

**INDEX**
|                  | ** ** | ** **                                                                                                | ** ** | **Page** |
|------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I**  | ** ** | **FINANCIAL INFORMATION**                                                                                 |       | 3        |
| **Item 1.**      |       | Condensed  Financial Statements                                                                           |       | 3        |
|             |       | Condensed  Balance Sheets — June 30, 2007 (Unaudited) and December 31, 2006                     |       | 3        |
|             |       | Condensed  Statements of Operations (Unaudited) — three and six months ended June 30,  2007 and 2006 |       | 4        |
|             |       | Condensed  Statements of Cash Flows (Unaudited) — six months ended June 30, 2007 and  2006           |       | 5        |
|             |       | Notes to  Condensed Financial Statements (Unaudited)                                                      |       | 6        |
|             |       | Report of Independent  Registered Public Accounting Firm                                                  |       | 13       |
| **Item 2.**      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |       | 14       |
| **Item 3.**      |       | Quantitative  and Qualitative Disclosures About Market Risk                                               |       | 22       |
| **Item 4.**      |       | Controls and Procedures                                                                                   |       | 22       |
| **PART II** | ** ** | **OTHER INFORMATION**                                                                                     |       | 22       |
| **Item 1A.**     |       | Risk  Factors                                                                                             |       | 22       |
| **Item 4.**      |       | Submission of  Matters to a Vote of Security Holders                                                      |       | 33       |
| **Item  6.**     |       | Exhibits                                                                                                  |       | 34       |
|             |       |                                                                                                      |       |     |
| **Signatures**   |       | 35                                                                                                        |

 

2

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**PART I  FINANCIAL INFORMATION**

**Item 1.****   ****Condensed Financial Statements**

**RIGELPHARMACEUTICALS, INC.CONDENSED**BALANCESHEETS (in thousands, except share and per share amounts)
| ** **                                                                                                                                                                          | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2007**          | ** ** | **2006(1)**           | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                                                                     |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                 | 66,423     |                  | $          | 47,727 |   |
| Available-for-sale  securities                                                                                                                                                      |       | 60,028            |       | 56,744                |       |
| Accounts  receivable                                                                                                                                                                |       | 485               |       | 1,104                 |       |
| Other  receivables                                                                                                                                                                  |       | 279               |       | 286                   |       |
| Prepaid expenses  and other current assets                                                                                                                                          |       | 1,826             |       | 2,153                 |       |
| Total current  assets                                                                                                                                                               |       | 129,041           |       | 108,014               |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| Property and equipment,  net                                                                                                                                                        |       | 2,946             |       | 2,975                 |       |
| Other assets                                                                                                                                                                        |       | 2,175             |       | 2,251                 |       |
|                                                                                                                                                                                |       | $                 | 134,162    |                  | $          | 113,240 |   |
|                                                                                                                                                                                |       |              |       |                  |       |
| Liabilities and  stockholders’ equity                                                                                                                                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                                                                               |       |              |       |                  |       |
| Accounts payable                                                                                                                                                                    |       | $                 | 2,366      |                  | $          | 1,957 |   |
| Accrued  compensation                                                                                                                                                               |       | 2,100             |       | 3,060                 |       |
| Other accrued  liabilities                                                                                                                                                          |       | 1,745             |       | 1,886                 |       |
| Deferred revenue                                                                                                                                                                    |       | —            |       | 3,066                 |       |
| Capital lease  obligations – current portion                                                                                                                                   |       | 1,151             |       | 1,269                 |       |
| Total current  liabilities                                                                                                                                                          |       | 7,362             |       | 11,238                |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| Long-term portion of  capital lease obligations                                                                                                                                     |       | 1,046             |       | 1,082                 |       |
| Long-term portion of  deferred rent                                                                                                                                                 |       | 15,243            |       | 13,328                |       |
| Other long-term  liabilities                                                                                                                                                        |       | 248               |       | 363                   |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| Commitments                                                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                                                |       |              |       |                  |       |
| Stockholders’ equity:                                                                                                                                                          |       |              |       |                  |       |
| Common stock,  $0.001 par value; 100,000,000 shares authorized; 31,020,872 and 25,180,687  shares issued and outstanding on June 30, 2007 and December 31, 2006,  respectively |       | 31                |       | 25                    |       |
| Additional  paid-in capital                                                                                                                                                         |       | 441,665           |       | 382,350               |       |
| Accumulated  other comprehensive income                                                                                                                                             |       | 52                |       | 13                    |       |
| Accumulated  deficit                                                                                                                                                                |       | (331,485          | )          | (295,159              | )          |
| Total stockholders’  equity                                                                                                                                                    |       | 110,263           |       | 87,229                |       |
|                                                                                                                                                                                |       | $                 | 134,162    |                  | $          | 113,240 |   |

 

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(1)             Thebalance sheet at December 31, 2006 has been derived from the auditedfinancial statements at that date included in Rigel’s Annual Report onForm 10-K for the year ended December 31, 2006.

See accompanying notes.

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**RIGELPHARMACEUTICALS, INC.CONDENSED**STATEMENTS OFOPERATIONS(in thousands, except per share amounts)(unaudited)
| ** **                                                                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| Contract  revenues                                                               |       | $                                                   | 1,956      |                                              | $          | 14,321 |   | $ | 4,600 |   | $ | 24,218 |   |
| Costs and  expenses:                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Research and development                                                         |       | 17,189                                              |       | 13,205                                            |       | 33,032 |   | 27,916 |   |
| General and administrative                                                       |       | 5,373                                               |       | 4,725                                             |       | 10,412 |   | 9,728 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
|                                                                             |       | 22,562                                              |       | 17,930                                            |       | 43,444 |   | 37,644 |   |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Loss from  operations                                                            |       | (20,606                                             | )          | (3,609                                            | )          | (38,844 | ) | 13,426 | ) |
| Interest income                                                                  |       | 1,419                                               |       | 1,426                                             |       | 2,634 |   | 2,840 |   |
| Interest expense                                                                 |       | (58                                                 | )          | (147                                              | )          | (116 | ) | (213 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                                                         |       | $                                                   | (19,245    | )                                                 | (2,330     | ) | $ | (36,326 | ) | $ | (10,799 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Net loss per  share, basic and diluted                                           |       | $                                                   | (0.68      | )                                                 | $          | (0.09 | ) | $ | (1.36 | ) | $ | (0.43 | ) |
|                                                                             |       |                                                |       |                                              |       |   |   |   |   |
| Weighted average shares  used in computing net loss per share, basic and diluted |       | 28,355                                              |       | 24,842                                            |       | 26,779 |   | 24,829 |   |

 

See accompanying notes.

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**RIGELPHARMACEUTICALS, INC.CONDENSED**STATEMENTS OFCASH FLOWS(in thousands)(unaudited)
| ** **                                                                   | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                   | ** ** | **June 30,**              | ** ** |
| ** **                                                                   | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Operating  activities**                                                    |       |                           |       |   |   |
| Net loss                                                                     |       | $                              | (36,326    | ) | $ | (10,799 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                |       | 674                            |       | 664 |   |
| Stock-based compensation expense                                             |       | 6,327                          |       | 6,688 |   |
| Changes in assets and liabilities:                                           |       |                           |       |   |   |
| Accounts receivable                                                          |       | 619                            |       | — |   |
| Other receivables                                                            |       | 7                              |       | (73 | ) |
| Prepaid expenses and other current assets                                    |       | 327                            |       | 387 |   |
| Other assets                                                                 |       | 76                             |       | 95 |   |
| Accounts payable                                                             |       | 409                            |       | (953 | ) |
| Accrued compensation                                                         |       | (960                           | )          | (1,044 | ) |
| Other accrued liabilities                                                    |       | (141                           | )          | (307 | ) |
| Deferred revenue                                                             |       | (3,066                         | )          | (11,117 | ) |
| Deferred rent and other long-term liabilities                                |       | 1,800                          |       | (322 | ) |
| Net cash used in operating activities                                        |       | (30,254                        | )          | (16,781 | ) |
|                                                                         |       |                           |       |   |   |
| **Investing  activities**                                                    |       |                           |       |   |   |
| Purchases of available-for-sale securities                                   |       | (60,015                        | )          | (27,792 | ) |
| Maturities of available-for-sale securities                                  |       | 56,770                         |       | 29,168 |   |
| Capital expenditures                                                         |       | (645                           | )          | (585 | ) |
| Net cash provided by (used in) investing activities                          |       | (3,890                         | )          | 791 |   |
|                                                                         |       |                           |       |   |   |
| **Financing  activities**                                                    |       |                           |       |   |   |
| ** **                                                                   |       |                           |       |   |   |
| Proceeds from capital lease financings                                       |       | 640                            |       | 1,257 |   |
| Payments on capital lease obligations                                        |       | (794                           | )          | (663 | ) |
| Net proceeds from issuances of common stock                                  |       | 52,994                         |       | 845 |   |
| Net cash provided by financing activities                                    |       | 52,840                         |       | 1,439 |   |
|                                                                         |       |                           |       |   |   |
| Net  increase/(decrease) in cash and cash equivalents                        |       | 18,696                         |       | (14,551 | ) |
|                                                                         |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 47,727                         |       | 76,779 |   |
| Cash and cash  equivalents at end of period                                  |       | $                              | 66,423     |   | $ | 62,228 |   |

 

See accompanying notes.

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**RigelPharmaceuticals, Inc.Notes to Condensed Financial Statements(unaudited)**

Inthis report, “Rigel,” “we,” “us” and “our” refer to RigelPharmaceuticals, Inc.

**1. Natureof Operations**

Wewere incorporated in the state of Delaware on June 14, 1996. We areengaged in the discovery and development of novel, small-molecule drugs for thetreatment of inflammatory/autoimmune diseases, cancer and viral diseases.

**2. Basisof Presentation**

Our accompanying unaudited condensed financial statements have beenprepared in accordance with U.S. generally accepted accounting principlesfor interim financial information and pursuant to the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, theydo not include all of the information and notes required by generally acceptedaccounting principles for complete financial statements. These unauditedcondensed financial statements include all normal and recurring adjustmentsthat we believe are necessary to fairly state our financial position and theresults of our operations and cash flows. Interim-period results are notnecessarily indicative of results of operations or cash flows for a full-year.The balance sheet at December 31, 2006 has been derived from auditedfinancial statements at that date, but does not include all disclosuresrequired by U.S. generally accepted accounting principles for completefinancial statements.  Because all of thedisclosure required by U.S. generally accepted accounting principles for completefinancial statements are not included herein, these unaudited interim condensedfinancial statements and the notes accompanying them should be read inconjunction with our audited financial statements and the notes theretoincluded in our Annual Report on Form 10-K for the year ended December 31,2006.

Thepreparation of financial statements in conformity with U.S. generally acceptedaccounting principles requires management to make estimates and assumptionsthat affect the amounts reported in the financial statements and accompanyingnotes. Actual results could differ from these estimates.

Comprehensivenet loss did not differ materially from the net loss as reported.

**3. Recent** accountingpronouncements

On June 27, 2007,the Financial Accounting Standards Board (or “FASB”) ratified the consensusreached by the EITF on EITF Issue No. 07-3, **“***Accounting for AdvancePayments for Goods or Services to Be Used in Future Research and DevelopmentActivities**”*** (or “EITF 07-3”).  EITF 07-3 requires companies to defer andcapitalize prepaid, nonrefundable research and development payments to thirdparties, and amortize them over the period that the research and developmentactivities are performed or the services are provided, subject to an assessmentof recoverability.   EITF 07-3 iseffective for new contracts entered into during fiscal years beginning afterDecember 15, 2007, including interim periods within those fiscal years.  We are currently evaluating the impact ofadopting EITF 07-3 on our financial statements.

**4. Basicand Diluted Net Loss Per Share**

Basicand diluted net loss per share were computed by dividing the net loss for theperiod by the number of weighted average shares of common stock outstandingduring the period. The calculation of diluted net loss per share excludedshares of potential common stock, consisting of stock options and warrants,because their effect would have been anti-dilutive.

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**5. StockAward Plans**

Totalstock-based compensation expense related to all of our share-based awards thatwe recognized for the three and six months ended June 30, 2007 and 2006 iscomprised as follows (in thousands):
| ** **                              | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                              | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                              | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| Research and  development               |       | $                                | 1,718      |                           | $          | 1,543 |   | $ | 2,918 |   | $ | 3,464 |   |
| General and  administrative             |       | 1,987                            |       | 1,584                          |       | 3,409 |   | 3,224 |   |
| Total stock-based  compensation expense |       | $                                | 3,705      |                           | $          | 3,127 |   | $ | 6,327 |   | $ | 6,688 |   |

 

Werecorded approximately $3.7 million and $6.3 million in stock-basedcompensation expense for the three and six months ended June 30, 2007, consistingof approximately $3.7 million and $6.3 million in stock-based awards granted toofficers, directors and all other employees from our stock option plans andESPP.  Our stock compensation expense forthe three months ended June 30, 2007 includes a charge of approximately$924,000 to correct the misapplication of our estimated forfeiture rate tostock-based compensation expense in 2006. In 2006, our quarterly reported amounts of stock compensation expensewere inadvertently reduced by the effect of the expected forfeitures which hadalready been taken into account in the preceding quarters.  The impact of this adjustment was notmaterial to 2006 and prior reporting periods.

UnderSFAS 123(R), the fair value of each option award is estimated on the date ofgrant using the Black-Scholes option pricing model. We have segregated optionawards into three homogenous groups, officers and directors, all otheremployees and consultants, for purposes of determining fair values of options.

Wedetermined weighted-average valuation assumptions separately for each of thesegroups as follows:

·                  Volatility-  We estimated volatility using thehistorical share price performance over the expected life of the option up tothe point where we have historical market data. As our publicly listed optionsare not actively traded, implied volatility was not representative of ourcurrent volatility. We also considered other factors, such as our currentclinical trials and other company activities, that may affect the volatility ofour stock in the future, but determined that at this time historical volatilityis more indicative of our expected future stock performance.

·                  Expectedterm - We worked with various historical data to determine the most applicableexpected term for each option group. These data included: (1) for optionsexercised, expected term of the options from option grant date to exercisedate; (2) for options cancelled, term of options from grant date tocancellation date, excluding unvested option forfeitures; and (3) for optionswhich remain outstanding at the balance sheet date, term of options from grantdate to the end of the reporting period, and the estimated remaining term ofthe options. The consideration and calculation of the above data gave usreasonable estimates of the expected term for each option group.  We also considered the vesting schedules ofthe options granted and factors surrounding exercise behavior of our groups,our current market price and company activity that may affect our market price.In addition, we also considered the vesting schedules of the options, theoptionee type (i.e., officers and directors, all other employees andconsultants) and other factors that may affect the expected term of the option.For options granted to consultants, we use the contractual term of the option,which is generally ten years, for the initial valuation of the option and theremaining contractual term of the option for the succeeding years.

·                  Risk-freeinterest rate - The risk-free interest rate is based on U.S. Treasury constantmaturity rates with similar terms to the expected term of the options for eachoption group.

·                  Forfeiturerate - We estimated the forfeiture rate using our historical experience withpre-vesting options. Our annual weighted-average forfeiture rate wasapproximately 7.2% as of June 30, 2007, as compared to 7.6% as of June 30,2006.  We review our forfeiture rateseach quarter and make changes as factors affecting our forfeiture ratecalculations and assumptions change.

·                  Dividendyield - The expected dividend yield is 0% as we have not paid and do not expectto pay dividends.

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Thefollowing table summarizes the weighted-average assumptions relating to ouremployee options for the three  and sixmonths ended June 30, 2007 and 2006:
| ** **                | ** ** | **Stock Option Plans** | ** ** | **Stock Option Plans** | ** ** |
|---------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
| ** **                | ** ** | **June 30,**                | ** ** | **June 30,**                | ** ** |
| ** **                | ** ** | **2007**                         | ** ** | **2006**                         | ** ** | **2007** | ** ** | **2006** | ** ** |
| Risk-free  interest rate  |       | 4.8                              | %          | 5.0                              | %          | 4.7 | % | 4.6 | % |
| Expected life  (in years) |       | 4.7                              |       | 4.9                              |       | 4.1 |   | 4.6 |   |
| Dividend yield            |       | 0.0                              | %          | 0.0                              | %          | 0.0 | % | 0.0 | % |
| Expected volatility       |       | 81.6                             | %          | 94.0                             | %          | 79.5 | % | 98.2 | % |

 

Optionexercise prices are set at not less than the closing price of our common stockon the trading day immediately preceding the date of grant, become exercisableat varying dates and generally expire ten years from the date of grant. At June30, 2007, options to purchase 2,543,692 shares of common stock were availablefor future grant under our stock option plans.

***Employee Stock Purchase Plan***

Thefair value of awards granted under our ESPP is estimated on the date of grantusing the Black-Scholes option pricing model, which uses the weighted-averageassumptions set forth in the table below. Our ESPP provides for a twenty-fourmonth offering period comprised of four six-month purchase periods with alook-back option. A look-back option is a provision in our ESPP where eligibleemployees can purchase shares of our common stock at a price per share equal tothe lesser of 85% of the fair market value on the first day of the offeringperiod or 85% of the fair market value on the purchase date. The plan alsoincludes a feature that provides for a new offering period to begin when thefair market value of our common stock during an offering falls below the fairmarket value of our common stock on the first day of such offering period.  Participants are automatically enrolled inthe new offering period. Expected volatilities are based on historicalvolatility of our stock. Expected term represents the purchase periods withinour offering period. The risk-free rate for periods within the contractual lifeof the option is based on U.S. Treasury constant maturity rates. Stock-based compensation expense relating toour ESPP is recognized according to the Financial Accounting Standards BoardTechnical Bulletin No. 97-1, “Accounting under Statement 123 for CertainEmployee Stock Purchase Plans with a Look-back Option,” or FTB 97-1. As of June30, 2007, there wereapproximately 6,600 shares in reserve for future issuance under the ESPP. Thefollowing table summarizes the weighted-average assumptions relating to ourESPP for the six months ended June 30, 2007 and 2006:
|                           | ** ** | **Employee Stock Purchase Plan** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|
| ** **                | ** ** | **Six Months Ended**                  | ** ** |
| ** **                | ** ** | **June 30,**                               | ** ** |
| ** **                | ** ** | **2007**                                        | ** ** | **2006** | ** ** |
| Risk-free  interest rate  |       | 5.1                                             | %          | 4.6 | % |
| Expected life  (in years) |       | 0.7                                             |       | 1.2 |   |
| Dividend yield            |       | 0.0                                             | %          | 0.0 | % |
| Expected volatility       |       | 43.5                                            | %          | 110.3 | % |

 

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***Stock-basedCompensation Award Activity***

Thefollowing table summarizes activity under our equity incentive and stock optionplans as of June 30, 2007 (in thousands, except per share amounts):
| ** **                                    | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted-  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic  Value** | ** ** |
|-----------------------------------------------|------------|------------|------------|--------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | ** ** | ** ** | ** **                                 | ** ** | **(Years)**                                          | ** ** | ** **                      | ** ** |
| Outstanding at  December 31, 2006             |       | 4,405,211  |       | $                                          | 14.50      |                                                 |       |                            |       |   |
| Granted                                       |       | 989,317    |       | $                                          | 11.40      |                                                 |       |                            |       |   |
| Exercised                                     |       | (29,177    | )          | $                                          | 7.43       |                                                 |       |                            |       |   |
| Forfeited/Expired/Cancelled                   |       | (46,803    | )          | $                                          | 15.43      |                                                 |       |                            |       |   |
| Outstanding at  June 30, 2007                 |       | 5,318,548  |       | $                                          | 13.95      |                                                 | 7.78       |                            | $          | 2,072,802 |   |
| Vested and  expected to vest at June 30, 2007 |       | 5,190,917  |       | $                                          | 13.95      |                                                 |       |                            |       |   |
| Exercisable at June 30,  2007                 |       | 3,545,896  |       | $                                          | 13.39      |                                                 | 7.27       |                            | $          | 1,935,104 |   |

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the quoted price of our common stock for theoptions to acquire 1.8 million shares that were in-the-money at June 30, 2007.During the six months ended June 30, 2007 and 2006, the aggregate intrinsicvalue of options exercised under our stock option plans was approximately$109,000 and $88,000, respectively, determined as of the date of option exercise.As of June 30, 2007, there was approximately $10.2 million of totalunrecognized compensation cost, net of forfeitures, related to unvestedshare-based compensation arrangements granted under our stock option plans and$121,000 of total unamortized compensation cost related to our ESPP. Thesecosts are expected to be recognized over a weighted-average period of 1.61years. In addition, we had approximately 1.8 million shares of unvested stockoptions at June 30, 2007. Future option grants and their valuation willincrease our compensation cost in the future as the options are granted, valuedand expensed ratably according to their vesting periods. The weighted averagegrant-date fair values of options granted in the six months ended June 30, 2007and 2006 were $7.02 and $6.01, respectively.

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**6.Revenue Recognition**

Werecognize revenue from our contract arrangements. Our revenue arrangements withmultiple elements are evaluated under EITF No. 00-21, *“Revenue Arrangements with Multiple Deliverables,”*and are divided into separate units of accounting if certain criteria are met,including whether the delivered element has stand-alone value to the customerand whether there is objective and reliable evidence of the fair value of theundelivered items. The consideration we receive is allocated among the separateunits based on their respective fair values, and the applicable revenuerecognition criteria is applied to each of the separate units. Advance paymentsreceived in excess of amounts earned are classified as deferred revenue untilearned.

Non-refundable,up-front payments received in connection with research and developmentcollaboration agreements, including technology access fees, are deferred andrecognized on a straight-line basis over the relevant periods of continuinginvolvement, generally the research term. When a research term is not specified, we estimate the time it will takeus to complete our deliverables under the contract and recognize the upfrontfee using the straight-line method over that time period.  We review our estimates every quarter forreasonableness.

Revenuerelated to collaborative research with our corporate collaborators isrecognized as research services are performed over the related developmentfunding periods for each contract. Under these agreements, we are required toperform research and development activities as specified in the applicableagreement. The payments received are not refundable and are generally based ona contractual cost per full-time equivalent employee working on the project.Research and development expenses under the collaborative research agreements,except for the Merck collaboration signed in November 2004 related toubiquitin ligases, approximate or exceed the revenue recognized under such agreementsover the term of the respective agreements. For the Merck collaboration, werecognized a pro-rata portion of the invoiced amounts for funding of ourresearch scientists based on the headcount dedicated to the project for thequarter.  When the research portion ofthe collaboration ended in May 2007, we recognized the full amount of thedeferred revenue related to the contract as we had no further obligations.  It is our policy to recognize revenue basedon our level of effort expended, and that revenue recognized will not exceedamounts billable under the arrangement.

Revenueassociated with at-risk milestones pursuant to collaborative agreements isrecognized based upon the achievement of the milestones as set forth in theapplicable agreement.

Royaltieswill be recognized as earned in accordance with the contract terms when thethird party results are reliably measurable and collectibility is reasonablyassured.

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**7.Cash, Cash Equivalents and Available-For-Sale Securities**

Cash,cash equivalents and available-for-sale securities consist of the following (inthousands):
| ** **                     | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                     | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| Checking account               |       | $                 | 571        |                  | $          | 332 |   |
| Money market  funds            |       | 5,387             |       | 4,441                 |       |
| Federal agency  securities     |       | 3,498             |       | 13,463                |       |
| Corporate bonds  and notes     |       | 116,995           |       | 86,235                |       |
|                           |       |              |       |                  |       |
|                           |       | $                 | 126,451    |                  | $          | 104,471 |   |
| Reported as:                   |       |              |       |                  |       |
| Cash and cash  equivalents     |       | $                 | 66,423     |                  | $          | 47,727 |   |
| Available-for-sale  securities |       | 60,028            |       | 56,744                |       |
|                           |       |              |       |                  |       |
|                           |       | $                 | 126,451    |                  | $          | 104,471 |   |

 

Available-for-salesecurities consist of the following (in thousands):
| ** **                 | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|----------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                 | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| ** **                 | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| June 30, 2007    |       |          |       |           |       |           |       |                |       |
| Federal agency  securities |       | $             | 3,500      |           | $          | —         |       | $                   | (2         | ) | $ | 3,498 |   |
| Corporate bonds  and notes |       | 56,476        |       | 58             |       | (4             | )          | 56,530              |       |
|                       |       |          |       |           |       |           |       |                |       |
| Total                      |       | $             | 59,976     |           | $          | 58             |       | $                   | (6         | ) | $ | 60,028 |   |

 
| ** **                | ** ** | ** **    | ** ** | **Gross**      | ** ** | **Gross**      | ** ** | ** **          | ** ** |
|---------------------------|------------|---------------|------------|----------------|------------|----------------|------------|---------------------|------------|
| ** **                | ** ** | **Amortized** | ** ** | **Unrealized** | ** ** | **Unrealized** | ** ** | ** **          | ** ** |
| ** **                | ** ** | **Cost**      | ** ** | **Gains**      | ** ** | **Losses**     | ** ** | **Fair Value** | ** ** |
| December 31, 2006         |       |          |       |           |       |           |       |                |       |
| Federal agency securities |       | $             | 9,497      |           | $          | —         |       | $                   | (8         | ) | $ | 9,489 |   |
| Corporate bonds and notes |       | 47,232        |       | 21             |       | —         |       | 47,253              |       |
|                      |       |          |       |           |       |           |       |                |       |
| Total                     |       | $             | 56,729     |           | $          | 21             |       | $                   | (8         | ) | $ | 56,742 |   |

 

AtJune 30, 2007, the above available-for-sale securities had a weighted averagematurity of approximately 125 days.  Onesecurity with a fair market value of approximately $2 million had a maturitygreater than 360 days.

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Thefollowing table shows the fair values and gross unrealized losses of ourinvestments in individual securities that are in an unrealized loss position,aggregated by investment category (in thousands):
|                            | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
|----------------------------|------------|---------------------|------------|----------------|------------|
| ** **                 | ** ** | **Fair Value** | ** ** | **Losses**     | ** ** |
| June 30, 2007    |       |                |       |           |       |
| Federal agency  securities |       | $                   | 3,500      |           | $          | (2 | ) |
| Corporate bonds  and notes |       | 2,960               |       | (4             | )          |
| Total                      |       | $                   | 6,460      |           | $          | (6 | ) |

 
|                            | ** ** | ** **          | ** ** | **Unrealized** | ** ** |
|----------------------------|------------|---------------------|------------|----------------|------------|
| ** **                 | ** ** | **Fair Value** | ** ** | **Losses**     | ** ** |
| December 31, 2006          |       |                |       |           |       |
| Federal agency  securities |       | $                   | 9,474      |           | $          | (8 | ) |
| Corporate bonds  and notes |       | —              |       | —         |       |
|                       |       |                |       |           |       |
| Total                      |       | $                   | 9,474      |           | $          | (8 | ) |

 

AtJune 30, 2007 and December 31, 2006, we had no investment that had been in acontinuous unrealized loss position for more than twelve months.

As ofJune 30, 2007, a total of four individual securities were in an unrealized lossposition for twelve months or less and deemed to be temporary. As ofDecember 31, 2006, five individual securities were in an unrealized lossposition for less than twelve months and deemed to be temporary.

*Investment GradeDebt Securities.**  *Ourinvestments in investment grade debt securities consist primarily ofinvestments in federal agency securities and corporate bonds and notes. Theunrealized losses on our investments in investment grade debt securities werecaused by interest rate increases. Due to the fact that the decline in marketvalue is attributable to changes in interest rates and not credit quality, andbecause the severity and duration of the unrealized losses were notsignificant, we considered these unrealized losses to be temporary atJune 30, 2007.   .

**8.Income Taxes**

We adopted SFASInterpretation 48, *Accounting forUncertainty in Income Taxes,*or “FIN 48,” on January 1, 2007. We did not recognize any adjustment to the liability for uncertain taxpositions nor did we have any unrecognized tax benefits and therefore did notrecord any adjustment to the beginning balance of retained earnings on thebalance sheet.

We file income taxreturns in the U.S. federal jurisdiction and in California, and the tax returnsfiled for the years 2002 through 2006 have not been examined and have notexpired by the statute of limitations. Because of net operating loss and research credit carryovers,substantially all of the Company’s tax years remain open to examination.

Our policy is that werecognize interest and penalties accrued on any unrecognized tax benefits as acomponent of income tax expense. As of the date of adoption of FIN 48, we didnot have any accrued interest or penalties associated with any unrecognized taxbenefits.

**9.Equipment Lease Line**

In June 2006, we obtained a new borrowing limit of $1.5 million underour equipment lease line.  This equipmentlease line was originally scheduled to terminate in June 2007, however, thetermination date was extended to December 2007 in June 2007.  We have the ability to draw down on this linethrough the termination date and the repayment period will be for three yearsbeginning on each draw down, with the interest rate on the line fixed at eachdrawdown. Each line has a bargain purchase buyout provision of $101. During thesix months ended June 30, 2007, we drew down approximately $640,000, which isincluded in our capital lease obligation on our balance sheet.  Approximately $446,000 remained availableunder the equipment lease line as of June 30, 2007.

**10. EquityFinancings**

On May 8, 2007, wecompleted a public offering in which we sold 5,000,000 shares of common stockat a price of $9.75 per share. We received net proceeds of approximately $45.5million after deducting commissions, underwriting discounts and offering costs.On June 1, 2007, we issued an additional 750,000 shares of our common stock at$9.75 per share pursuant to the full exercise of our underwriters’overallotment option.  We received netproceeds of approximately $6.8 million after deducting commissions as a resultof the exercise of the over-allotment option.

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**Reportof Independent Registered Public Accounting Firm**

The Board of DirectorsRigel Pharmaceuticals, Inc.

We have reviewed the accompanying condensed balance sheet of RigelPharmaceuticals, Inc. as of June 30, 2007, the related condensed statements ofoperations for the three-month and six-month periods ended June 30, 2007and 2006, and the condensed statementsof cash flows for the six-month periods ended June 30, 2007 and 2006. These interim financial statementsare the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). A review of interimfinancial information consists principally of applying analytical proceduresand making inquiries of persons responsible for financial and accountingmatters. It is substantially less in scope than an audit conducted inaccordance with the standards of the Public Company Accounting Oversight Board,the objective of which is the expression of an opinion regarding the financialstatements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modificationsthat should be made to the condensed interim financial statements referred toabove for them to be in conformity with U.S. generally accepted accountingprinciples.

We have previously audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States), the balance sheet ofRigel Pharmaceuticals, Inc. as of December 31, 2006, and the relatedstatements of operations, stockholders’ equity, and cash flows for the yearthen ended (not presented herein), and in our report dated March 6, 2007,we expressed an unqualified opinion on those financial statements and included an explanatory paragraphreferencing Rigel Pharmaceuticals, Inc.’s change in method of accounting forstock-based compensation in 2006 and Note 1 to the financial statements.In our opinion, the information set forth in the accompanying balance sheet asof December 31, 2006, is fairly stated, in all material respects, inrelation to the balance sheet from which it has been derived.
|                        |   | /s/ Ernst & Young LLP |
|------------------------|--------|--------------------------------|
| Palo Alto,  California |   |                           |
| August 3, 2007         |   |                           |

 

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

*This discussion and analysis should be readin conjunction with our financial statements and accompanying notes included inthis report and the audited financial statements and accompanying notesincluded in our Annual Report on Form 10-K for the year endedDecember 31, 2006. Operating results for the three and six months endedJune 30, 2007 are not necessarily indicative of results that may occur in futureperiods.*

*We usually use words such as “may,”“will,” “should,” “could,” “expect,” “plan,” “anticipate,” “believe,” “estimate,”“predict,” “future,” “intend,” “potential” or “continue” or the negative ofthese terms or similar expressions to identify these forward-lookingstatements. These statements appear throughout this quarterly report onForm 10-Q and are statements regarding our current intent, belief orexpectation, primarily with respect to our operations and related industrydevelopments. Examples of these statements include, but are not limited to,statements regarding the following: our business and scientific strategies; theprogress of our product development programs, including clinical testing; ourcorporate collaborations, including revenues that may be received from thesecollaborations; our drug discovery technologies; our research and developmentexpenses; protection of our intellectual property; sufficiency of our cashresources; and our operations and legal risks. You should not place undue relianceon these forward-looking statements. Our actual results could differ materiallyfrom those anticipated in these forward-looking statements for many reasons,including as a result of the risks and uncertainties discussed in the “RiskFactors” in Item 1A of Part II of this quarterly report on Form 10-Q. Anyforward-looking statement speaks only as of the date on which it is made, andwe undertake no obligation to update any forward-looking statement to reflectevents or circumstances after the date on which the statement is made or toreflect the occurrence of unanticipated events. New factors emerge from time totime, and it is not possible for us to predict which factors will arise. Inaddition, we cannot assess the impact of each factor on our business or theextent to which any factor, or combination of factors, may cause actual resultsto differ materially from those contained in any forward-looking statements.*

**Overview**

We area clinical-stage drug development company that discovers and develops novel,small-molecule drugs for the treatment of inflammatory/autoimmune diseases,cancer and viral diseases. Our goal is to file one new investigative new drug,or IND, application in a significant indication each year. We have achievedthis goal each year beginning in 2002. Our pioneering research focuses onintracellular signaling pathways and related targets that are critical todisease mechanisms. Our productivity has resulted in strategic collaborationswith large pharmaceutical partners to develop and market our productcandidates. We have internal product development programs ininflammatory/autoimmune diseases, such as rheumatoid arthritis andthrombocytopenia, and cancer, as well as partnered product development programsrelating to asthma and cancer*.*

Rigelhas the following product candidates in development:

·                  *R788—Product Candidate for Rheumatoid Arthritis (RA). *R788 is our lead product candidate. It has anovel mechanism of action-blocking IgG receptor signaling in macrophages andB-cells. Previously, we studied R788 in a Phase 1 single center, double-blind,randomized, placebo-controlled clinical trial evaluating the safety andpharmacokinetics of escalating single and multiple doses of R788. We alsocompleted a clinical trial of R788 to evaluate its safety and pharmacokineticsin combination with methotrexate, a commonly prescribed treatment for RA.Results of this clinical trial suggested that there is not an adverseinteraction between R788 and methotrexate. In September 2006, weinitiated a 90-day Phase 2, multicenter, ascending dose, randomized,double-blind, placebo-controlled, dose ranging clinical trial to evaluate up tothree doses of R788 in RA patients who were taking methotrexate.  We have completed enrollment in all threedose groups and expect to receive top-line results by the end of 2007.  To date, R788 appears to be well tolerated bythe first and second dose groups.

·                  *R788**—*ProductCandidate for Immune Thombocytopenic Purpura (ITP).* *Plateletdestruction from ITP is mediated by IgG signaling, and R788 is a potentinhibitor of IgG signaling. In preclinical studies, R788 was shown to improvethrombocytopenia in an ITP mouse model. We initiated an exploratory Phase 2clinical trial of R788 in January 2007 to evaluate its safety and efficacy inchronic ITP patients.  In this clinicaltrial, R788 was orally administered in varying doses for 30 or more days.  We have observed encouraging preliminary drugactivity in raising platelet counts in a number of the patients studied todate.  Based on these initial results, wesubmitted an amended protocol to the Food and Drug Administration, or FDA, andexpanded this trial to allow for a greater range of dose regimens and tocontinue to treat those patients that are responding beyond 90 days.  We expect to receive top-line results fromthis clinical trial by the end of 2007.

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·                  *R788**—*ProductCandidate for B-Cell Lymphoma.* *Research has shownthat overactivity of the signaling enzyme spleen tyrosine kinase, or Syk, is anessential mechanism in several types of B-cell lymphoma survival and that R788inhibits the growth of B-cell lymphoma driven by Syk overactivity.  We filed an IND for this indication inDecember 2006. In April 2007, we began enrolling patients in a multicenter,open label Phase 1/2 clinical trial to evaluate the safety and efficacy of R788for the treatment of patients with B-cell lymphoma.  The clinical trial is expected to enroll atotal of approximately 60 patients at 10 major treatment centers in the UnitedStates and will focus on certain types of B-cell lymphomas.  Depending on enrollment, we expect to receiveinterim results from the clinical trial by the end of 2007, with top-lineresults in 2008.

·                  *R763—Product Candidate for Oncology.*  We have identified R763 as alead compound in our aurora kinase inhibition program targeting cancer cellproliferation.* *R763 isa potent, highly-selective, small-molecule inhibitor of aurora kinase. InOctober 2005, we signed a licensing agreement with Merck Serono thatgranted to Merck Serono an exclusive license to develop and commercializeinhibitors in our aurora kinase program, including R763.  Under the agreement, we were responsible forfiling an IND for R763, which we filed with the FDA in December 2005, and wereallowed to proceed under the IND in January 2006.  Merck Serono is responsible for the furtherdevelopment and commercialization of R763. In September 2006, Merck Serono initiated a Phase 1 multicenter clinicaltrial to evaluate R763 for the treatment of patients with refractory solidtumors. In February 2007, Merck Serono began an additional Phase 1 clinicaltrial evaluating R763 on patients with hematological malignancies.  We expect top-line results from both of theseclinical trials in 2008.  In July 2007,  Merck Serono began a Phase 1 clinical trialevaluating R763 in combination with a standard of care therapy in patients withadvanced malignancies.

In the first quarter of 2005, we announced that weentered into a collaborative research and license agreement with Pfizer for thedevelopment of inhaled products for the treatment of allergic asthma and otherrespiratory diseases, such as chronic obstructive pulmonary disease, or COPD.The collaboration is focused on our preclinical small molecule compounds, whichinhibit IgE receptor signaling in respiratory tract mast cells by blocking thesignaling enzyme Syk, a novel drug target for respiratory diseases. Mast cellsplay important roles in both early and late phase allergic reactions, and Sykinhibitors could prevent both phases. In May 2006, Pfizer nominated R343 to commence advancedpreclinical development in allergic asthma. We expect R343 to be delivered using Pfizer’s dry powder inhaler and toenter the clinic by the end of 2007.

In October 2006, we announced that we selected R348, anorally-available, potent and selective inhibitor of Janus Kinase 3, orJAK3, to enter preclinical studies to support an IND application.  We plan to initiate a Phase 1 clinical trialof R348 by the end of 2007.  We are alsostudying Axl and JAK2 inhibition in oncology. In addition to the aforementioned product candidates, we have ongoingresearch programs involving back-up candidates for the product candidates setforth above and drug discovery efforts in our immunology/inflammation, virologyand oncology programs.

**Corporate Collaborations**

We carry on research and development programs inconnection with our corporate collaborations. As of June 30, 2007, we hadcollaborations with the following six major pharmaceutical/biotech companies:one with Janssen Pharmaceutica N.V., a division of Johnson & Johnson,relating to oncology therapeutics and diagnostics; two with Pfizer Inc.,one initiated in 1999 in immunology and the other in 2005, relating tointrapulmonary asthma and allergy therapeutics; one with Novartis Pharma AGwith respect to four different programs relating to immunology, oncology andchronic bronchitis; one with Daiichi Pharmaceuticals Co., Ltd. relating tooncology; one with Merck, also relating to oncology; and one with Merck Seronorelating to oncology. All of these collaborations, other than the recent Pfizerand the Merck Serono collaborations, had a research phase during which wereceived funding based on the level of headcount allocated to the program. Noneof these programs currently provides regular research reimbursement since theresearch phase of the Merck collaboration ended in May 2007.  In all of these collaborations, if certainconditions are met, we are entitled to receive future milestone payments androyalties. We cannot guarantee that these conditions will be met or thatresearch and development efforts will be successful. As a result, we may notreceive any further milestone payments or royalties under these agreements.

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We are exploring new opportunities with existing andpotential collaborators. Our earliest partnerships focused on the early stagesof drug discovery, specifically on target discovery and validation. Ourcollaborations with Daiichi and recently with Merck are both later stage,focusing on drug discovery and development. Our 2005 collaboration with Pfizercovers a compound that Pfizer selected for advanced preclinical development inMay 2006, while our 2005 collaboration with Merck Serono covers a compoundthat began clinical trials in September 2006. We currently anticipate thatin order to support our current research programs, we will need to self-fundour own research programs, which involves an increased rate of spending onlater stages of development prior to partnering with collaborative partners.Therefore, it is expected that future collaborations may have an expanded focusand could include high throughput screening, combinatorial and medicinalchemistry, preclinical evaluations and/or clinical development of compounds wehave discovered. In addition, we believe these future collaborations could bestructured to consist of upfront payments, the purchase of our common stock,milestone payments upon meeting certain conditions, research or developmentreimbursement payments and/or royalties upon commercialization of productsresulting from the collaboration.

***Equity Financings***

On May 8, 2007, we completed a public offering inwhich we sold 5,000,000 shares of common stock at a price of $9.75 per share.We received net proceeds of approximately $45.5 million after deductingcommissions, underwriting discounts and offering costs. On June 1, 2007, weissued an additional 750,000 shares of our common stock at $9.75 per sharepursuant to the full exercise of our underwriters’ overallotment option.  We received net proceeds of approximately$6.8 million after deducting commissions as a result of the exercise of theover-allotment option.

**CriticalAccounting Policies and the Use of Estimates**

Our discussion and analysis of our financial conditionand results of operations is based upon our financial statements, which havebeen prepared in accordance with U.S generally accepted accounting principles.The preparation of these financial statements requires us to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. Weevaluate our estimates, including those related to terms of the researchcollaborations (i.e., amortization of upfront fees and certain milestonepayments), investments, stock compensation, impairment issues, the estimateduseful life of assets and contingencies, on an on-going basis. Our estimatesare based on historical experience and on various other assumptions that webelieve to be reasonable under the circumstances, the results of which form thebasis for making judgments about the carrying values of assets and liabilitiesthat are not readily apparent from other sources. Actual results may differfrom these estimates under different assumptions or conditions.  There have been no significant changes in ourcritical accounting policies during the period ended June 30, 2007 as comparedto those previously disclosed in our Annual Report on Form 10-K forthe year ended December 31, 2006.

***RecentAccounting Pronouncements***

On June 27, 2007,the Financial Accounting Standards Board (or “FASB”) ratified the consensusreached by the EITF on EITF Issue No. 07-3, **“***Accounting for AdvancePayments for Goods or Services to Be Used in Future Research and DevelopmentActivities**”*** (or “EITF 07-3”).  EITF 07-3 requires companies to defer andcapitalize prepaid, nonrefundable research and development payments to thirdparties, and amortize them over the period that the research and developmentactivities are performed or the services are provided, subject to an assessmentof recoverability.   EITF 07-3 iseffective for new contracts entered into during fiscal years beginning afterDecember 15, 2007, including interim periods within those fiscal years.  We are currently evaluating the impact ofadopting EITF 07-3 on our financial statements.

***Revenue Recognition***

Our revenue from contractual arrangements withmultiple elements are evaluated under Emerging Issues Task Force No. 00-21,*“Revenue Arrangements with MultipleDeliverables,”* and are divided into separate units of accounting ifcertain criteria are met, including whether the delivered element hasstand-alone value to the customer and whether there is objective and reliableevidence of the fair value of the undelivered items. The consideration wereceive is allocated among the separate units based on their respective fairvalues, and the applicable revenue recognition criteria are applied to each ofthe separate units. Advance payments received in excess of amounts earned areclassified as deferred revenue until earned.

Non-refundable, up-front payments received inconnection with research and development collaboration agreements, includingtechnology access fees, are deferred and recognized on a straight-line basisover the relevant periods of continuing involvement, generally the researchterm. When a research term is not specified, we estimate the time it will takeus to

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complete our deliverablesunder the contract and recognize the upfront fee using the straight-line methodover that time period. We review our estimates every quarter forreasonableness.

Revenue related to collaborative research with ourcorporate collaborators is recognized as research services are performed overthe related development funding periods for each contract. Under theseagreements, we are required to perform research and development activities asspecified in the applicable agreement. The payments received are not refundableand are generally based on a contractual cost per full-time equivalent employeeworking on the project. Research and development expenses under thecollaborative research agreements, except for the Merck collaboration signed inNovember 2004 related to ubiquitin ligases, approximate or exceed therevenue recognized under such agreements over the term of the respectiveagreements. For the Merck collaboration, we recognized a pro-rata portion ofthe invoiced amounts for funding of our research scientists based on theheadcount dedicated to the project for the quarter.  When the research portion of thecollaboration ended in May 2007, we recognized the full amount of the deferredrevenue related to the contract as we had no further obligations.  It is our policy to recognize revenue basedon our level of effort expended and that revenue recognized will not exceedamounts billable under the arrangement.

Revenue associated with at-risk milestones pursuant tocollaborative agreements is recognized based upon the achievement of themilestones as set forth in the applicable agreement.

Royalties will be recognized as earned in accordancewith the contract terms when the third party results are reliably measurableand collectibility is reasonably assured.

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***Stock-basedCompensation***

Thedetermination of the fair value of share-based payment awards on the date ofgrant using an option-pricing model is affected by our stock price as well asassumptions regarding a number of complex and subjective variables. Thesevariables include, but are not limited to volatility, expected term, risk-freeinterest rate and dividends.  We estimatevolatility using our historical share price performance over the expected lifeof the option up to the point where we have historical market data.  For expected term, among other things, wetake into consideration our historical data of options exercised, cancelled andexpired.  The risk-free rate is based onthe U.S. Treasury constant maturity rate. We have not paid and do not expect topay dividends. In order to calculate share-based expense, we also estimate theforfeiture rate using our historical experience with options that cancel beforethey vest.

If these factors change and we employ differentassumptions in the application of SFAS 123(R) in future periods, thecompensation expense that we record under SFAS 123(R) may differ significantlyfrom what we have recorded in the current period. Therefore, we believe it isimportant to be aware of the high degree of subjectivity involved when usingoption pricing models to estimate share-based compensation under SFAS 123(R).

**Resultsof Operations**

**Three andSix Months Ended June 30, 2007 and 2006**

**Revenues**
| ** **               | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|--------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **               | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **               | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Aggregate Change**      | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **               | ** ** | **(in thousands)**          | ** ** |
| ***Contract  revenues*** |       | $                                | 1,956      |       | $          | 14,321                         |       | $          | (12,365    | ) | $ | 4,600 |   | $ | 24,218 |   | $ | (19,618 | ) |
|                          |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Revenuesby collaborator were:
| ** **          | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|---------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **          | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **          | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Aggregate Change**      | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **          | ** ** | **(in thousands)**          | ** ** |
| ***Merck***         |       | $                                | 1,956      |       | $          | 2,378                          |       | $          | (422       | ) | $ | 3,841 |   | $ | 4,191 |   | $ | (350 | ) |
| ***Pfizer***        |       | —                           |       | 6,250      |       | (6,250                         | )          | 759        |       | 7,500 |   | (6,741 | ) |
| ***Merck  Serono*** |       | —                           |       | 5,693      |       | (5,693                         | )          | —     |       | 12,527 |   | (12,527 | ) |
| ***Total***         |       | $                                | 1,956      |       | $          | 14,321                         |       | $          | (12,365    | ) | $ | 4,600 |   | $ | 24,218 |   | $ | (19,618 | ) |

 

Contract revenues from collaborations for the threeand six months ended June 30, 2007 and 2006 consisted primarily ofresearch support and amortization of upfront fees and milestone payments fromour collaborations. Revenue

for the threemonths ended June 30, 2006 included the recognition of a $5.0 million paymentfrom Pfizer for the nomination of R343 to commence advanced preclinicaldevelopment in allergic asthma and $5.7 million related to the amortization ofupfront payments and milestones from Merck Serono.  Revenue for the three months ended June 30,2007 included the recognition of approximately $1.0 million of deferred revenuefrom the Merck collaboration due to the ending of the research phase of thecollaboration in May 2007.  We have nodeferred revenue remaining as of June 30, 2007. Therefore, our potential revenues for the remainder of 2007 may includecertain milestone payments from Pfizer, Merck Serono, and/or any newcollaborations.

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**Research and Development Expenses**

|                                                                                                  | ** **   | **Three months ended** | ** ** | ** **   | ** ** | **Six months ended** | ** **   | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------|--------------|----------------------------------|------------|--------------|------------|--------------------------------|--------------|------------|------------|
| ** **                                                                                       | ** **   | **June 30,**                | ** ** | ** **   | ** ** | **June 30,**              | ** **   | ** ** | ** ** |
| ** **                                                                                       | ** **   | **2007**                         | ** ** | **2006**     | ** ** | **Aggregate Change**      | ** **   | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                                       | ** **   | **(in thousands)**          | ** ** |
| ***Research  and development expenses***                                                         |         | $                                | 17,189     |         | $          | 13,205                         |         | $          | 3,984      |   | $ | 33,032 |   | $ | 27,916 |   | $ | 5,116 |   |
| ***Stock-based  compensation expense******included in research and******development  expenses*** | *** *** | $                           | 1,718      | *** *** | $     | 1,543                          | *** *** | $     | 175        | *** *** | $  | 2,918 | *** *** | $  | 3,464 | *** *** | $  | (546 | ) |

 

Theincrease in research and development expenses for the three and six monthsended June 30, 2007, as compared to the same period in 2006, was primarily dueto an increase in preclinical and clinical costs attributable to increasedcosts relating to running our ongoing Phase 2 clinical trials of R788 in thethree different indications.  We expectthat our research and development expenses will continue at this level for theremainder of 2007 as we continue our Phase 2 clinical trials of R788 for RA,ITP and Lymphoma and initiate clinical trials for our Jak3 inhibitor, R348.

The scope and magnitude of future research anddevelopment expenses are difficult to predict given the number of studies thatwe will need to conduct for any of our potential products, as well as ourlimited capital resources. In general, biopharmaceutical development involves aseries of steps,beginning with identification of a potential target andincluding, among others, proof of concept in animals and Phase 1, 2 and 3clinical studies in humans.  Each ofthese steps is typically more expensive than the previous step. Success indevelopment, therefore, results in increasing expenditures. Our research anddevelopment expenditures currently include costs for scientific personnel,supplies, equipment, consultants, sponsored research, allocated facility costs,costs related to preclinical and clinical trials, and stock-based compensation.

**Generaland Administrative Expenses**

|                                                                                               | ** **   | **Three months ended** | ** ** | ** **   | ** ** | **Six months ended** | ** **   | ** ** | ** ** |
|-----------------------------------------------------------------------------------------------|--------------|----------------------------------|------------|--------------|------------|--------------------------------|--------------|------------|------------|
| ** **                                                                                    | ** **   | **June 30,**                | ** ** | ** **   | ** ** | **June 30,**              | ** **   | ** ** | ** ** |
| ** **                                                                                    | ** **   | **2007**                         | ** ** | **2006**     | ** ** | **Aggregate Change**      | ** **   | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                                                    | ** **   | **(in thousands)**          | ** ** |
| ***General and administrative  expenses***                                                    |         | $                                | 5,373      |         | $          | 4,725                          |         | $          | 648        |   | $ | 10,412 |   | $ | 9,728 |   | $ | 684 |   |
| ***Stock-based  compensation expense******included in general and  administrative expenses*** | *** *** | $                           | 1,987      | *** *** | $     | 1,584                          | *** *** | $     | 403        | *** *** | $  | 3,409 | *** *** | $  | 3,224 | *** *** | $ | 185 | *** *** |

 

Theincrease in general and administrative expenses for the three and six monthsended June 30, 2007, as compared to the same period in 2006, is primarilyattributable to an increase in compensation expenses, including stock-basedcompensation expense as discussed under “Stock-based Compensation” below.

**Stock-basedCompensation**
| ** **                                                   | ** **   | **Three months ended** | ** **   | ** **   | ** **   | **Six months ended** | ** **   | ** ** | ** **   |
|--------------------------------------------------------------|--------------|----------------------------------|--------------|--------------|--------------|--------------------------------|--------------|------------|--------------|
| ** **                                                   | ** **   | **June 30,**                | ** **   | ** **   | ** **   | **June 30,**              | ** **   | ** ** | ** **   |
| ** **                                                   | ** **   | **2007**                         | ** **   | **2006**     | ** **   | **Aggregate Change**      | ** **   | **2007**   | ** **   | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **                                                   | ** **   | **(in thousands)**          | ** **   |
| **Stock-based  compensation  expense/(recovery) from:** |         |                             |         |         |         |                           |         |       |         |   |   |   |   |
| ***Officer,  director and employee options***                | *** *** | $                                | 3,656        | *** *** | $            | 3,220                          | *** *** | $          | 436          | *** *** | $ | 6,272 | *** *** | $ | 6,504 | *** *** | $ | (232 | ) |
| ***Consultant options***                                     | *** *** | 49                               | *** *** | (93          | )            | 142                            | *** *** | 55         | *** *** | 184 | *** *** | (129 | ) |
| ***Other employee options***                                 | *** *** | —                           | *** *** | —       | *** *** | —                         | *** *** | —     | *** *** | — | *** *** | — | *** *** |
| ***Total***                                                  | *** *** | $                                | 3,705        | *** *** | $            | 3,127                          | *** *** | $          | 578          | *** *** | $ | 6,327 | *** *** | $ | 6,688 | *** *** | $ | (361 | ) |

 

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Theincrease in stock-based compensation expense for the three months ended June30, 2007, as compared to the same period in 2006, includes the recording of a$924,000 adjustment to our stock compensation expense offset by a decrease instock-based compensation expense from there being fewer unvested optionsgranted prior to 2006 for which the expense is recognized using the acceleratedmethod. The $924,000 adjustment corrects the misapplication of our estimatedforfeiture rate to stock-based compensation expense in 2006.  In 2006, our quarterly reported amounts ofstock compensation expense were inadvertently reduced by the effect of theexpected forfeitures which had already been taken into account in the precedingquarters.  The impact of this adjustmentwas not material to 2006 and prior reporting periods.  The decrease in stock-based compensationexpense in the six months ended June 30, 2007, as compared to the same periodin 2006, was primarily due to options that fully vested in the period and thechange in the estimated forfeiture rates arising from the resignation of ourformer chief financial officer,offset by the $924,000 adjustment describedabove. We expect stock-based compensation to fluctuate as options are grantedand vest during the period.

**Interest Income**
| ** **             | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **             | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **             | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Aggregate Change**      | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **             | ** ** | **(in thousands)**          | ** ** |
| ***Interest  income*** |       | $                                | 1,419      |       | $          | 1,426                          |       | $          | (7         | ) | $ | 2,634 |   | $ | 2,840 |   | $ | (206 | ) |
|                        |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interestincome results from our interest-bearing cash and investment balances. Thedecrease in the six months ended June 30, 2007, as compared to the same periodin 2006, is attributable to a decrease in our overall investment balances as weuse the cash for our operations.

**Interest Expense**
| ** **              | ** ** | **Three months ended** | ** ** | ** ** | ** ** | **Six months ended** | ** ** | ** ** | ** ** |
|-------------------------|------------|----------------------------------|------------|------------|------------|--------------------------------|------------|------------|------------|
| ** **              | ** ** | **June 30,**                | ** ** | ** ** | ** ** | **June 30,**              | ** ** | ** ** | ** ** |
| ** **              | ** ** | **2007**                         | ** ** | **2006**   | ** ** | **Aggregate Change**      | ** ** | **2007**   | ** ** | **2006** | ** ** | **Aggregate Change** | ** ** |
| ** **              | ** ** | **(in thousands)**          | ** ** |
| ***Interest  expense*** |       | $                                | 58         |       | $          | 147                            |       | $          | (89        | ) | $ | 116 |   | $ | 213 |   | $ | (97 | ) |
|                         |            |                                  |            |            |            |                                |            |            |            |  |  |  |  |  |  |  |  |  |  |

 

Interest expense is the resultof our capital lease obligations associated with fixed asset acquisitions.  Interest expense decreased for the three andsix months ended June 30, 2007, as compared to the same periods in 2006,due to the decrease in capital lease obligations outstanding during those periods.

**Liquidity and Capital Resources**

***Cash Requirements***

Wehave financed our operations from inception primarily through sales of equitysecurities, contract payments under our collaboration agreements and equipmentfinancing arrangements. We have consumed substantial amounts of capital todate, and our operating expenditures are expected to increase over the nextseveral years.

 We believe that our existing capital resourcesand anticipated proceeds from current collaborations will be sufficient tosupport our current operating plan through at least the next 12 months. Inthe foreseeable future, our operations will require significant additionalfunding, in large part due to our research and development expenses, futurepreclinical and clinical testing costs and the absence of any meaningfulrevenues from product sales. The amount of future funds needed will dependlargely on the timing and structure of potential future collaborations. We donot know whether additional financing will be available when needed, or that,if available, we will obtain financing on terms favorable to our stockholdersor us.

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To the extent we raise additional capital byissuing equity securities, our stockholders could at that time experiencesubstantial dilution. To the extent that we raise additional funds throughcollaboration and licensing arrangements, we may be required to relinquish somerights to our technologies or product candidates, or grant licenses on termsthat are not favorable to us.

Ourfuture funding requirements will depend upon many factors, including, but notlimited to:

·                                          theprogress and success of clinical trials and preclinical activities (includingstudies and manufacture of materials) of our product candidates conducted by usor our collaborative partners or licensees;

·              ourability to establish new collaborations and to maintain our existingcollaboration relationships;

·              theprogress of research programs carried out by us;

·              anychanges in the breadth of our research and development programs;

·              ourability to meet the milestones identified in our collaborative agreements thattrigger payments;

·              theprogress of the research and development efforts of our collaborative partnersor licensees;

·              ourability to acquire or license other technologies or compounds that we seek topursue;

·              ourability to manage our growth;

·              competingtechnological and market developments;

·                                          thecosts and timing of obtaining, enforcing and defending our patent andintellectual property rights;

·              thecosts and timing of regulatory approvals and filings by us and ourcollaborators; and

·              expensesassociated with unforeseen litigation.

Insufficient funds may require us to delay, scaleback or eliminate some or all of our research or development programs, to loserights under existing licenses or to relinquish greater or all rights toproduct candidates at an earlier stage of development or on less favorableterms than we would otherwise choose or may adversely affect our ability tooperate as a going concern.  As of June 30, 2007, we had approximately$126.5 million in cash, cash equivalents and available-for-sale securities, ascompared to $104.5 million as of December 31, 2006, an increase ofapproximately $22.0 million. The increase was primarily attributable tocombined net proceeds of approximately $52.3 million from our public offeringin May 2007 and the exercise of the underwriters’ over-allotment option in June2007, offset by operating spending for the six months ended June 30, 2007. Forthe three  and six months ended June 30,2007 and 2006, we maintained an investment portfolio primarily in money marketfunds, federal agency securities and corporate bonds and notes. Cash in excessof immediate requirements is invested with regard to liquidity and capitalpreservation. Wherever possible, we seek to minimize the potential effects ofconcentration and degrees of risk.

**ContractualObligations**

As of June 30, 2007, we had the following contractual commitments (byfiscal year):
|                                | ** ** | **Total**               | ** ** | **2007** | ** ** | **2008-2010** | ** ** | **2011-2013** | ** ** | **2014-2018** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                     | ** ** | **(in thousands)** | ** ** |
| Capital Lease  obligations (1) |       | $                       | 2,437      |     | $          | 672           |       | $             | 1,765      |          | $          | — |   | $ | — |   |
| Facilities lease               |       | 155,281                 |       | 3,978    |       | 44,988        |       | 44,001        |       | 62,314        |       |
|                           |       |                    |       |     |       |          |       |          |       |          |       |
| Total                          |       | $                       | 157,718    |     | $          | 4,650         |       | $             | 46,753     |          | $          | 44,001 |   | $ | 62,314 |   |

 

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(1)             Asof June 30, 2007, we had approximately $2.4 million in capital leaseobligations (including the interest portion) associated with our equipmentadditions. All existing capital lease agreements as of June 30, 2007 aresecured by the equipment financed, bear interest at rates between 8.8% and12.2% and are due in monthly installments through 2010.

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**Item 3.****                Quantitative and QualitativeDisclosures About Market Risk**

Theprimary objective of our investment activities is to preserve principal whileat the same time maximizing the income we receive from our investments withoutsignificantly increasing risk. Some of the securities in which we invest mayhave market risk. This means that a change in prevailing interest rates maycause the fair value amount of the investment to fluctuate. For example, if wehold a security that was issued with a fixed interest rate at thethen-prevailing rate and the prevailing interest rate later rises, the marketvalue amount of our investment will decline. To minimize this risk in thefuture, we intend to maintain our portfolio of cash equivalents andavailable-for-sale securities in a variety of securities, including moneymarket funds and government and non-government debt securities. For the threeand six months ended June 30, 2007 and 2006, we maintained an investmentportfolio primarily in money market funds, federal agency securities andcorporate bonds and notes. Due to the short-term nature of the majority ofthese investments, we believe we do not have a material exposure to interestrate risk arising from our investments. Therefore, no quantitative tabulardisclosure is provided.

Weoperate primarily in the United States, and all funding activities with ourcollaborators to date have been made in U.S. dollars. Accordingly, we have hadminimal exposure to foreign currency rate fluctuations.

**Item 4.**** ****  Controls and Procedures**

*Evaluationof Disclosure Controls and Procedures.*Based on ourmanagement’s evaluation (with the participation of our chief executive officerand chief financial officer), our chief executive officer and chief financialofficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended), were effective as of June 30, 2007.

*Changesin Internal Controls.*There were no changes in our internalcontrols over financial reporting during the quarter ended June 30, 2007 thathave materially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

*Limitations on theEffectiveness of Controls.*Acontrol system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the controls aremet. Because of the inherent limitations in all control systems, no evaluationof controls can provide absolute assurance that all control issues, if any,within a company have been detected. Accordingly, our disclosure controls andprocedures are designed to provide reasonable, not absolute, assurance that theobjectives of our disclosure control system are met and, as set forth above,our chief executive officer and chief financial officer have concluded, basedon their evaluation as of the end of the period covered by this quarterlyreport on Form 10-Q, that our disclosure controls and procedures weresufficiently effective to provide reasonable assurance that the objectives ofour disclosure control system were met.

**PART II.OTHER INFORMATION**

**Item 1A. RiskFactors**

*In evaluating ourbusiness, you should carefully consider the following risks, as well as theother information contained in our Quarterly Report on Form 10-Q. Ifany of the following risks actually occurs, our business could be harmed. Therisks and uncertainties described below are not the only ones facing us.Additional risks and uncertainties not presently known to us, or that wecurrently see as immaterial, may also harm our business.*

*We have markedwith an asterisk(*) those risk factors below that reflect material changes fromthe risk factors included in our Annual Report on Form 10-K filedwith the Securities and Exchange Commission on March 8, 2007.*

**We will need additional capital in the future tosufficiently fund our operations and research.***

We have consumed substantial amounts of capital todate, and operating expenditures are expected to increase over the next severalyears as we expand our research and development activities. We believe that ourexisting capital resources and anticipated proceeds from current collaborationswill be sufficient to support our current operating plan through at least

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the next 12 months.In the foreseeable future, our operations will require significant additionalfunding in large part due to our research and development expenses, futurepreclinical and clinical-testing costs, and the absence of any meaningfulrevenues. The amount of future funds needed will depend largely on the timingand structure of potential future collaborations. We do not know whetheradditional financing will be available when needed, or that, if available, wewill obtain financing on terms favorable to our stockholders or us. As ofJune 30, 2007 and December 31, 2006, our cash, cash equivalents andavailable-for-sale securities were $126.5 million and $104.5 million,respectively.

To the extent we raise additional capital by issuingequity securities, our stockholders could at that time experience substantialdilution. To the extent that we raise additional funds through collaborationand licensing arrangements, we may be required to relinquish some rights to ourtechnologies or product candidates, or grant licenses on terms that are notfavorable to us.

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**Our future fundingrequirements will depend on many uncertain factors.**

       Our future funding requirements willdepend upon many factors, including, but not limited to:

·       theprogress and success of clinical trials and preclinical activities (includingstudies and manufacture of materials) of our product candidates conducted by usor our collaborative partners or licensees;

·       ourability to establish new collaborations and to maintain our existingcollaboration partnerships;

·       theprogress of research programs carried out by us;

·       anychanges in the breadth of our research and development programs;

·       ourability to meet the milestones identified in our collaborative agreements thattrigger payments;

·       theprogress of the research and development efforts of our collaborative partners;

·       ourability to acquire or license other technologies or compounds that we seek topursue;

·       ourability to manage our growth;

·       competingtechnological and market developments;

·       thecosts and timing of obtaining, enforcing and defending our patent andintellectual property rights;

·       thecosts and timing of regulatory approvals and filings by us and ourcollaborators; and

·       expensesassociated with unforeseen litigation.

Insufficient funds may require us to delay, scale backor eliminate some or all of our research or development programs, to loserights under existing licenses or to relinquish greater or all rights toproduct candidates at an earlier stage of development or on less favorableterms than we would otherwise choose or may adversely affect our ability tooperate as a going concern.

**Our success as a company is uncertain due to ourhistory of operating losses and the uncertainty of future profitability.***

Due in large part to the significant research anddevelopment expenditures required to identify and validate new productcandidates and pursue our development efforts, we have not been profitable andhave incurred operating losses since we were incorporated in June 1996.The extent of our future losses and the timing of potential profitability arehighly uncertain, and we may never achieve profitable operations. We incurrednet losses of approximately $19.2 million and $36.3 million for the three andsix months ended June 30, 2007, $37.6 million in 2006 and $45.3 million in2005. Currently, our revenues are generated solely from research paymentspursuant to our collaboration agreements and licenses and are insufficient togenerate profitable operations. As of June 30, 2007, we had an accumulateddeficit of approximately $331.5 million. We expect to incur losses for at leastthe next several years and expect that these losses could increase as we expandour research and development activities and incur significant clinical andtesting costs.

**There is a high risk that drug discovery anddevelopment efforts might not successfully generate good product candidates. ***

At the present time, the majority of our operationsare in various stages of drug identification and development. We currently havetwo product compounds in the clinical testing stage: one with indications forRA, ITP and B-Cell Lymphoma, which is proprietary to our company, and the otherwith three indications for oncology, which is subject to a collaborationagreement with Merck Serono. In our industry, it is statistically unlikely thatthe limited number of compounds that we have identified as potential productcandidates will actually lead to successful product development efforts, and wedo not expect

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any drugs resulting fromour research to be commercially available for several years, if at all. Ourcompounds in clinical trials and our future leads for potential drug compoundsare subject to the risks and failures inherent in the development ofpharmaceutical products. These risks include, but are not limited to, theinherent difficulty in selecting the right drug and drug target and avoidingunwanted side effects as well as unanticipated problems relating to productdevelopment, testing, regulatory compliance, manufacturing, competition andcosts and expenses that may exceed current estimates. The results ofpreliminary studies do not necessarily predict clinical or commercial success,and larger later-stage clinical trials may fail to confirm the results observedin the preliminary studies. With respect to our own compounds in development,we have established anticipated timelines with respect to the initiation orcompletion of clinical studies based on existing knowledge of the compound.However, we cannot provide assurance that we will meet any of these timelinesfor clinical development.

Because of the uncertainty of whether the accumulatedpreclinical evidence (pharmacokinetic, pharmacodynamic, safety and/or otherfactors) or early clinical results will be observed in later clinical trials,we can make no assurances regarding the likely results from our future clinicaltrials or the impact of those results on our business.

**We might not be able to commercialize our productcandidates successfully if problems arise in the clinical testing and approvalprocess.**

Commercialization of our product candidates dependsupon successful completion of preclinical studies and clinical trials. Preclinicaltesting and clinical development are long, expensive and uncertain processes.We do not know whether we, or any of our collaborative partners, will bepermitted to undertake clinical trials of potential products beyond the trialsalready concluded and the trials currently in process. It will take us or ourcollaborative partners several years to complete any such testing, and failurecan occur at any stage of testing. Interim results of trials do not necessarilypredict final results, and acceptable results in early trials may not berepeated in later trials. A number of companies in the pharmaceutical industry,including biotechnology companies, have suffered significant setbacks inadvanced clinical trials, even after achieving promising results in earliertrials. Moreover, we or our collaborative partners or regulators may decide todiscontinue development of any or all of these projects at any time forcommercial, scientific or other reasons.

**Delays in clinicaltesting could result in increased costs to us.**

Significant delays in clinical testing couldmaterially impact our product development costs and timing. We do not knowwhether planned clinical trials will begin on time, will need to be halted orrevamped or will be completed on schedule, or at all. Clinical trials can bedelayed for a variety of reasons, including delays in obtaining regulatoryapproval to commence a study, delays from scale up, delays in reachingagreement on acceptable clinical study agreement terms with prospectiveclinical sites, delays in obtaining institutional review board approval toconduct a study at a prospective clinical site or delays in recruiting subjectsto participate in a study.

In addition, we typically rely on third-party clinicalinvestigators to conduct our clinical trials and other third-partyorganizations to oversee the operations of such trials and to perform datacollection and analysis. As a result, we may face additional delaying factorsoutside our control if these parties do not perform their obligations in atimely fashion. While we have not yet experienced delays that have materiallyimpacted our clinical trials or product development costs, delays of this sortcould occur for the reasons identified above or other reasons. If we havedelays in testing or approvals, our product development costs will increase.For example, we may need to make additional payments to third-partyinvestigators and organizations to retain their services or we may need to payrecruitment incentives. If the delays are significant, our financial resultsand the commercial prospects for our product candidates will be harmed, and ourability to become profitable will be delayed.

**We lack the capability tomanufacture compounds for development and rely on third parties to manufactureour product candidates, and we may be unable to obtain required material in atimely manner, at an acceptable cost or at a quality level required to receiveregulatory approval.***

We currently do not have manufacturing capabilities orexperience necessary to produce our product candidate R788. We rely on a singlemanufacturer for the R788 product for clinical trials. We will rely onmanufacturers to deliver materials on a timely basis and to comply withapplicable regulatory requirements, including the FDA’s current GoodManufacturing Practices, or GMP. These outsourcing efforts with respect tomanufacturing preclinical and clinical supplies will result in a dependence onour suppliers to timely manufacture and deliver sufficient quantities ofmaterials produced under GMP conditions to enable us to conduct plannedpreclinical studies, clinical trials and, if possible, to bring products tomarket in a timely manner.

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Our current and anticipated future dependence uponthese third-party manufacturers may adversely affect our ability to develop andcommercialize product candidates on a timely and competitive basis. Thesemanufacturers may not be able to produce material on a timely basis ormanufacture material at the quality level or in the quantity required to meetour development timelines and applicable regulatory requirements. We may not beable to maintain or renew our existing third-party manufacturing arrangements,or enter into new arrangements, on acceptable terms, or at all. Our third-partymanufacturers could terminate or decline to renew our manufacturingarrangements based on their own business priorities, at a time that is costlyor inconvenient for us. If we are unable to contract for the production ofmaterials in sufficient quantity and of sufficient quality on acceptable terms,our planned clinical trials may be significantly delayed. Manufacturing delayscould postpone the filing of our IND applications and/or the initiation ofclinical trials that we have currently planned.

Our third-party manufacturers may not be able tocomply with the GMP regulations, other applicable FDA regulatory requirementsor similar regulations applicable outside of the United States. Additionally,if we are required to enter into new supply arrangements, we may not be able toobtain approval from the FDA of any alternate supplier in a timely manner, orat all, which could delay or prevent the clinical development and commercializationof any related product candidates. Failure of our third-party manufacturers orus to obtain approval from the FDA or to comply with applicable regulationscould result in sanctions being imposed on us, including fines, civilpenalties, delays in or failure to grant marketing approval of our productcandidates, injunctions, delays, suspension or withdrawal of approvals, licenserevocation, seizures or recalls of products and compounds, operatingrestrictions and criminal prosecutions, any of which could significantly andadversely affect our business.

**Because most of our expected future revenues arecontingent upon collaborative and license agreements, we might not meet ourstrategic objectives.**

Our ability to generate revenue in the near termdepends on our ability to enter into additional collaborative agreements withthird parties and to maintain the agreements we currently have in place. Ourability to enter into new collaborations and the revenue, if any, that may berecognized under these collaborations is highly uncertain. If we are unable toenter into new collaborations, our business prospects could be harmed, whichcould have an immediate adverse effect on the trading price of our stock.

To date, most of our revenues have been related to theresearch phase of each of our collaborative agreements. Such revenues are forspecified periods, and the impact of such revenues on our results of operationsis partially offset by corresponding research costs. Following the completionof the research phase of each collaborative agreement, additional revenues maycome only from milestone payments and royalties, which may not be paid, if atall, until some time well into the future. The risk is heightened due to thefact that unsuccessful research efforts may preclude us from receiving anymilestone payments under these agreements. Our receipt of revenues fromcollaborative arrangements is also significantly affected by the timing ofefforts expended by us and our collaborators and the timing of lead compound identification.In late 2001, we recorded the first revenue from achievement of milestones inboth the Pfizer and Johnson & Johnson collaborations. In addition, wehave subsequently received milestone payments from Novartis, Daiichi, Merck,Merck Serono and Pfizer. Under many agreements, however, milestone payments maynot be earned until the collaborator has advanced product candidates intoclinical testing, which may never occur or may not occur until some time wellinto the future. If we are not able to generate revenue under ourcollaborations when and in accordance with our expectations or the expectationsof industry analysts, this failure could harm our business and have animmediate adverse effect on the trading price of our stock.

Our business requires us to generate meaningfulrevenue from royalties and licensing agreements. To date, we have not receivedany revenue from royalties for the commercial sale of drugs, and we do not knowwhen we will receive any such revenue, if at all. Likewise, we have notlicensed any lead compounds or drug development candidates to third parties,and we do not know whether any such license will be entered into on acceptableterms in the future, if at all.

**If our current corporate collaborations or licenseagreements are unsuccessful, our research and development efforts could bedelayed.***

Our strategy depends upon the formation andsustainability of multiple collaborative arrangements and license agreementswith third parties in the future. We rely on these arrangements for not onlyfinancial resources, but also for expertise that we expect to need in thefuture relating to clinical trials, manufacturing, sales and marketing, and forlicenses to technology rights. To date, we have entered into several sucharrangements with corporate collaborators; however, we do not know if suchthird parties will dedicate sufficient resources or if any development orcommercialization efforts by third parties will be successful. Should acollaborative partner fail to develop or commercialize a compound or product towhich it 

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has rights from us forany reason including corporate restructuring, such failure might delay ongoingresearch and development efforts at Rigel, because we might not receive anyfuture milestone payments, and we would not receive any royalties associatedwith such compound or product. In addition, the continuation of some of ourpartnered drug discovery and development programs may be dependent on theperiodic renewal of our corporate collaborations.

The research phase of our collaboration withJohnson & Johnson ended in 2003, and the research phases conducted atour facilities under our broad collaboration with Novartis ended in 2004.The research phase of our corporate collaboration agreement with Daiichi endedin 2005. In 2004, we signed a new corporate collaboration with Merck, and theresearch phase of this collaboration ended in May 2007. In 2005, we signedadditional collaborations with Pfizer and Merck Serono. Each of ourcollaborations could be terminated by the other party at any time, and we maynot be able to renew these collaborations on acceptable terms, if at all, ornegotiate additional corporate collaborations on acceptable terms, if at all.If these collaborations terminate or are not renewed, any resultant loss ofrevenues from these collaborations or loss of the expertise of ourcollaborative partners could adversely affect our business.

Conflicts also might arise with collaborative partnersconcerning proprietary rights to particular compounds. While our existingcollaborative agreements typically provide that we retain milestone paymentsand royalty rights with respect to drugs developed from certain derivativecompounds, any such payments or royalty rights may be at reduced rates, anddisputes may arise over the application of derivative payment provisions tosuch drugs, and we may not be successful in such disputes.

We are also a party to various license agreements thatgive us rights to use specified technologies in our research and development processes.The agreements pursuant to which we have in-licensed technology permit ourlicensors to terminate the agreements under certain circumstances. If we arenot able to continue to license these and future technologies on commerciallyreasonable terms, our product development and research may be delayed.

**If conflicts arise between our collaborators oradvisors and us, any of them may act in their self-interest, which may beadverse to our stockholders’ interests.**

If conflicts arise between us and our corporatecollaborators or scientific advisors, the other party may act in itsself-interest and not in the interest of our stockholders. Some of ourcorporate collaborators are conducting multiple product development effortswithin each disease area that is the subject of the collaboration with us ormay be acquired or merged with a company having a competing program. In some ofour collaborations, we have agreed not to conduct, independently or with anythird party, any research that is competitive with the research conducted underour collaborations. Our collaborators, however, may develop, either alone orwith others, products in related fields that are competitive with the productsor potential products that are the subject of these collaborations. Competingproducts, either developed by our collaborators or to which our collaboratorshave rights, may result in their withdrawal of support for our productcandidates.

If any of our corporate collaborators were to breachor terminate its agreement with us or otherwise fail to conduct thecollaborative activities successfully and in a timely manner, the preclinicalor clinical development or commercialization of the affected product candidatesor research programs could be delayed or terminated. We generally do notcontrol the amount and timing of resources that our corporate collaboratorsdevote to our programs or potential products. We do not know whether current orfuture collaborative partners, if any, might pursue alternative technologies ordevelop alternative products either on their own or in collaboration withothers, including our competitors, as a means for developing treatments for thediseases targeted by collaborative arrangements with us.

**Our success is dependent on intellectual propertyrights held by us and third parties, and our interest in such rights is complexand uncertain.**

Our success will depend to a large part on our own,our licensees’ and our licensors’ ability to obtain and defend patents for eachparty’s respective technologies and the compounds and other products, if any,resulting from the application of such technologies. We have over 160 pendingpatent applications and over 80 issued patents in the United States that areowned or exclusively licensed in our field as well as pending correspondingforeign patent applications. In the future, our patent position might be highlyuncertain and involve complex legal and factual questions. For example, we maybe involved in interferences before the United States Patent and TrademarkOffice. Interferences are complex and expensive legal proceedings and there isno assurance we will be successful in such proceedings. An interference couldresult in our losing our patent rights and/or our freedom to operate and/orrequire us to pay significant royalties. Additional uncertainty may 

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result because noconsistent policy regarding the breadth of legal claims allowed inbiotechnology patents has emerged to date. Accordingly, we cannot predict thebreadth of claims allowed in our or other companies’ patents.

Because the degree offuture protection for our proprietary rights is uncertain, we cannot ensurethat:

·       wewere the first to make the inventions covered by each of our pending patentapplications;

·       wewere the first to file patent applications for these inventions;

·       otherswill not independently develop similar or alternative technologies or duplicateany of our technologies;

·       anyof our pending patent applications will result in issued patents;

·       anypatents issued to us or our collaborators will provide a basis forcommercially-viable products or will provide us with any competitive advantagesor will not be challenged by third parties;

·       wewill develop additional proprietary technologies that are patentable; or

·       thepatents of others will not have a negative effect on our ability to dobusiness.

We rely on trade secrets to protect technology wherewe believe patent protection is not appropriate or obtainable; however, tradesecrets are difficult to protect. While we require employees, collaborators andconsultants to enter into confidentiality agreements, we may not be able toadequately protect our trade secrets or other proprietary information in theevent of any unauthorized use or disclosure or the lawful development by othersof such information.

We are a party to certain in-license agreements thatare important to our business, and we generally do not control the prosecutionof in-licensed technology. Accordingly, we are unable to exercise the samedegree of control over this intellectual property as we exercise over ourinternally-developed technology. Moreover, some of our academic institutionlicensors, research collaborators and scientific advisors have rights topublish data and information in which we have rights. If we cannot maintain theconfidentiality of our technology and other confidential information inconnection with our collaborations, then our ability to receive patentprotection or protect our proprietary information will be impaired. Inaddition, some of the technology we have licensed relies on patented inventionsdeveloped using U.S. government resources. The U.S. government retains certainrights, as defined by law, in such patents, and may choose to exercise suchrights. Certain of our in-licenses may be terminated if we fail to meetspecified obligations. If we fail to meet such obligations and any of ourlicensors exercise their termination rights, we could lose our rights underthose agreements. If we lose any of our rights, it may adversely affect the waywe conduct our business. In addition, because certain of our licenses aresublicenses, the actions of our licensors may affect our rights under thoselicenses.

**If a dispute arises regarding the infringement ormisappropriation of the proprietary rights of others, such dispute could becostly and result in delays in our research and development activities andpartnering.**

Our success will also depend, in part, on our abilityto operate without infringing or misappropriating the proprietary rights ofothers. There are many issued patents and patent applications filed by thirdparties relating to products or processes that are similar or identical to oursor our licensors, and others may be filed in the future. There can be noassurance that our activities, or those of our licensors, will not infringepatents owned by others. We believe that there may be significant litigation inthe industry regarding patent and other intellectual property rights, and we donot know if we or our collaborators would be successful in any such litigation.Any legal action against our collaborators or us claiming damages or seeking toenjoin commercial activities relating to the affected products, our methods orprocesses could:

·       requireour collaborators or us to obtain a license to continue to use, manufacture ormarket the affected products, methods or processes, which may not be availableon commercially reasonable terms, if at all;

·       preventus from using the subject matter claimed in the patents held by others;

·       subjectus to potential liability for damages;

·       consumea substantial portion of our managerial and financial resources; and

·       resultin litigation or administrative proceedings that may be costly, whether we winor lose.

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**If we are unable to obtain regulatory approval tomarket products in the United States and foreign jurisdictions, we might not bepermitted to commercialize products from our research and development.**

Due, in part, to the early stage of our productcandidate research and development process, we cannot predict whetherregulatory clearance will be obtained for any product that we, or ourcollaborative partners, hope to develop. Satisfaction of regulatoryrequirements typically takes many years, is dependent upon the type complexityand novelty of the product and requires the expenditure of substantialresources. Of particular significance to us are the requirements relating toresearch and development and testing.

Before commencing clinical trials in humans in theUnited States, we, or our collaborative partners, will need to submit andreceive approval from the FDA of an IND. Clinical trials are subject tooversight by institutional review boards and the FDA and:

·       mustbe conducted in conformance with the FDA’s good clinical practices and otherapplicable regulations;

·       mustmeet requirements for institutional review board oversight;

·       mustmeet requirements for informed consent;

·       aresubject to continuing FDA oversight;

·       mayrequire large numbers of test subjects; and

·       maybe suspended by us, our collaborators or the FDA at any time if it is believedthat the subjects participating in these trials are being exposed tounacceptable health risks or if the FDA finds deficiencies in the IND or theconduct of these trials.

While we have stated that we intend to file additionalINDs, this is only a statement of intent, and we may not be able to do sobecause we may not be able to identify potential product candidates. Inaddition, the FDA may not approve any IND in a timely manner, or at all.

Before receiving FDA approval to market a product, wemust demonstrate that the product is safe and effective in the patientpopulation and the indication that will be treated. Data obtained frompreclinical and clinical activities are susceptible to varying interpretationsthat could delay, limit or prevent regulatory approvals. In addition, delays orrejections may be encountered based upon additional government regulation fromfuture legislation or administrative action or changes in FDA policy during theperiod of product development, clinical trials and FDA regulatory review.Failure to comply with applicable FDA or other applicable regulatoryrequirements may result in criminal prosecution, civil penalties, recall orseizure of products, total or partial suspension of production or injunction,as well as other regulatory action against our potential products or us.Additionally, we have limited experience in conducting and managing theclinical trials necessary to obtain regulatory approval.

If regulatory approval of a product is granted, thisapproval will be limited to those indications or disease states and conditionsfor which the product is demonstrated through clinical trials to be safe andefficacious. We cannot ensure that any compound developed by us, alone or withothers, will prove to be safe and efficacious in clinical trials and will meetall of the applicable regulatory requirements needed to receive marketingapproval.

Outside the United States, our ability, or that of ourcollaborative partners, to market a product is contingent upon receiving amarketing authorization from the appropriate regulatory authorities. Thisforeign regulatory approval process typically includes all of the risksassociated with FDA approval described above and may also include additional risks.

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**If our competitors develop technologies that are moreeffective than ours, our commercial opportunity will be reduced or eliminated.**

The biotechnology and pharmaceutical industries areintensely competitive and subject to rapid and significant technologicalchange. Many of the drugs that we are attempting to discover will be competingwith existing therapies. In addition, a number of companies are pursuing thedevelopment of pharmaceuticals that target the same diseases and conditionsthat we are targeting. We face competition from pharmaceutical andbiotechnology companies both in the United States and abroad.

Our competitors may utilize discovery technologies andtechniques or partner with collaborators in order to develop products morerapidly or successfully than we, or our collaborators, are able to do. Many ofour competitors, particularly large pharmaceutical companies, havesubstantially greater financial, technical and human resources than we do. Inaddition, academic institutions, government agencies and other public andprivate organizations conducting research may seek patent protection withrespect to potentially competitive products or technologies and may establishexclusive collaborative or licensing relationships with our competitors.

We believe that our ability to compete is dependent,in part, upon our ability to create, maintain and licensescientifically-advanced technology and upon our and our collaborators’ abilityto develop and commercialize pharmaceutical products based on this technology,as well as our ability to attract and retain qualified personnel, obtain patentprotection or otherwise develop proprietary technology or processes and securesufficient capital resources for the expected substantial time period betweentechnological conception and commercial sales of products based upon ourtechnology. The failure by us or any of our collaborators in any of those areasmay prevent the successful commercialization of our potential drug targets.

Our competitors might develop technologies and drugsthat are more effective or less costly than any that are being developed by usor that would render our technology and potential drugs obsolete andnoncompetitive. In addition, our competitors may succeed in obtaining theapproval of the FDA or other regulatory agencies for product candidates morerapidly. Companies that complete clinical trials, obtain required regulatoryagency approvals and commence commercial sale of their drugs before theircompetitors may achieve a significant competitive advantage, including certainpatent and FDA marketing exclusivity rights that would delay or prevent ourability to market certain products. Any drugs resulting from our research anddevelopment efforts, or from our joint efforts with our existing or futurecollaborative partners, might not be able to compete successfully withcompetitors’ existing or future products or obtain regulatory approval in theUnited States or elsewhere.

**Our ability to generate revenues will be diminished ifour collaborative partners fail to obtain acceptable prices or an adequatelevel of reimbursement for products from third-party payors or governmentagencies.**

The drugs we hope to develop may be rejected by themarketplace due to many factors, including cost. Our ability to commerciallyexploit a drug may be limited due to the continuing efforts of government andthird-party payors to contain or reduce the costs of health care throughvarious means. For example, in some foreign markets, pricing and profitabilityof prescription pharmaceuticals are subject to government control. In theUnited States, we expect that there will continue to be a number of federal andstate proposals to implement similar government control. In addition,increasing emphasis on managed care in the United States will likely continueto put pressure on the pricing of pharmaceutical products. Cost controlinitiatives could decrease the price that any of our collaborators wouldreceive for any products in the future. Further, cost control initiatives couldadversely affect our collaborators’ ability to commercialize our products andour ability to realize royalties from this commercialization.

Our ability to commercialize pharmaceutical productswith collaborators may depend, in part, on the extent to which reimbursementfor the products will be available from:

·       governmentand health administration authorities;

·       privatehealth insurers; and

·       otherthird-party payors.

Significant uncertainty exists as to the reimbursementstatus of newly-approved healthcare products. Third-party payors, includingMedicare, are challenging the prices charged for medical products and services.Government and other third-party payors increasingly are attempting to containhealthcare costs by limiting both coverage and the level of reimbursement fornew drugs and by refusing, in some cases, to provide coverage for uses ofapproved products for disease indications for which the FDA has not grantedlabeling approval. Third-party insurance coverage may not be available to patientsfor any products we discover and develop, alone or with collaborators. Ifgovernment and other third-party payors do not provide adequate coverage andreimbursement levels for our products, the market acceptance of these productsmay be reduced.

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**If product liability lawsuits are successfully broughtagainst us, we may incur substantial liabilities and may be required to limitcommercialization of our products.**

The testing and marketing of medical products entailan inherent risk of product liability. If we cannot successfully defendourselves against product liability claims, we may incur substantialliabilities or be required to limit commercialization of our products althoughwe are not currently aware of any specific causes for concern with respect toclinical liability claims. We currently do not have product liabilityinsurance, and our inability to obtain sufficient product liability insuranceat an acceptable cost to protect against potential product liability claimscould prevent or inhibit the commercialization of pharmaceutical products wedevelop, alone or with corporate collaborators. We, or our corporatecollaborators, might not be able to obtain insurance at a reasonable cost, ifat all. While under various circumstances we are entitled to be indemnifiedagainst losses by our corporate collaborators, indemnification may not beavailable or adequate should any claim arise.

**Our research and development efforts will be seriouslyjeopardized, if we are unable to attract and retain key employees andrelationships.***

As a small company with only 152 employees as ofJune 30, 2007, our success depends on the continued contributions of ourprincipal management and scientific personnel and on our ability to develop andmaintain important relationships with leading academic institutions, scientistsand companies in the face of intense competition for such personnel. Inparticular, our research programs depend on our ability to attract and retainhighly skilled chemists, other scientists, and development, regulatory andclinical personnel. If we lose the services of any of our personnel, ourresearch and development efforts could be seriously and adversely affected. Ouremployees can terminate their employment with us at any time.

**We depend on various scientific consultants andadvisors for the success and continuation of our research and developmentefforts.**

We work extensively with various scientificconsultants and advisors. The potential success of our drug discovery anddevelopment programs depends, in part, on continued collaborations with certainof these consultants and advisors. We, and various members of our managementand research staff, rely on certain of these consultants and advisors forexpertise in our research, regulatory and clinical efforts. Our scientificadvisors are not our employees and may have commitments to, or consulting oradvisory contracts with, other entities that may limit their availability tous. We do not know if we will be able to maintain such consulting agreements orthat such scientific advisors will not enter into consulting arrangements,exclusive or otherwise, with competing pharmaceutical or biotechnologycompanies, any of which would have a detrimental impact on our researchobjectives and could have a material adverse effect on our business, financialcondition and results of operations.

**If we use biological and hazardous materials in amanner that causes injury or violates laws, we may be liable for damages.**

Our research and development activities involve thecontrolled use of potentially harmful biological materials as well as hazardousmaterials, chemicals and various radioactive compounds. We cannot completelyeliminate the risk of accidental contamination or injury from the use, storage,handling or disposal of these materials. In the event of contamination orinjury, we could be held liable for damages that result, and such liabilitycould exceed our resources. We are also subject to federal, state and locallaws and regulations governing the use, storage, handling and disposal of thesematerials and specified waste products. The cost of compliance with, or anypotential violation of, these laws and regulations could be significant.

**Our facilities are located near known earthquake faultzones, and the occurrence of an earthquake or other catastrophic disaster couldcause damage to our facilities and equipment, which could require us to ceaseor curtail operations.**

Our facilities are located in the San Francisco BayArea near known earthquake fault zones and are vulnerable to significant damagefrom earthquakes. We are also vulnerable to damage from other types ofdisasters, including fires, floods, power loss, communications failures andsimilar events. If any disaster were to occur, our ability to operate our businessat our facilities would be seriously, or potentially completely, impaired, andour research could be lost or destroyed. In addition, the unique nature of ourresearch activities and of much of our equipment could make it difficult for usto recover from a disaster. The insurance we maintain may not be adequate tocover our losses resulting from disasters or other business interruptions.

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**Our stock price may bevolatile, and our stockholders’ investment in our stock could decline in value.**

The market prices for our securities and those ofother biotechnology companies have been highly volatile and may continue to behighly volatile in the future. The following factors, in addition to other riskfactors described in this section, may have a significant impact on the marketprice of our common stock:

·       theprogress and success of clinical trials and preclinical activities (i.e.,studies, manufacture of materials) of our product candidates conducted by us orour collaborative partners or licensees;

·       thereceipt or failure to receive the additional funding necessary to conduct ourbusiness;

·       sellingby large stockholders;

·       announcementsof technological innovations or new commercial products by our competitors orus;

·       developmentsconcerning proprietary rights, including patents;

·       developmentsconcerning our collaborations;

·       publicityregarding actual or potential medical results relating to products underdevelopment by our competitors or us;

·       regulatorydevelopments in the United States and foreign countries;

·       litigation;

·       economicand other external factors or other disaster or crisis; and

·       period-to-periodfluctuations in financial results.

**Anti-takeover provisions in our charter documents andunder Delaware law may make an acquisition of us, which may be beneficial toour stockholders, more difficult.**

Provisions of our amended and restated certificate ofincorporation and bylaws, as well as provisions of Delaware law, could make itmore difficult for a third party to acquire us, even if doing so would benefitour stockholders. These provisions:

·       establishthat members of the board of directors may be removed only for cause upon theaffirmative vote of stockholders owning a majority of our capital stock;

·       authorizethe issuance of “blank check” preferred stock that could be issued by our boardof directors to increase the number of outstanding shares and thwart a takeoverattempt;

·       limitwho may call a special meeting of stockholders;

·       prohibitstockholder action by written consent, thereby requiring all stockholderactions to be taken at a meeting of our stockholders;

·       establishadvance notice requirements for nominations for election to the board ofdirectors or for proposing matters that can be acted upon at stockholdermeetings;

·       providefor a board of directors with staggered terms; and

·       providethat the authorized number of directors may be changed only by a resolution ofour board of directors.

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In addition, Section 203 of the Delaware GeneralCorporation Law, which imposes certain restrictions relating to transactionswith major stockholders, may discourage, delay or prevent a third party fromacquiring us.

**Item 4.****           Submissionof Matters to a Vote of Security Holders**

We held our 2007 AnnualMeeting of Stockholders on May 31, 2007. At such meeting, the followingactions were voted upon.

(a)          To elect a director,Jean Deleage, Ph.D., to hold office until our 2010 Annual Meeting ofStockholders.
| Votes in Favor | ** ** | **Votes Withheld** | ** ** |
|--------------------------|------------|-------------------------|------------|
| 19,222,387               |       | 2,465,103               |       |

 

(b)         To elect a director,Peter S. Ringrose, Ph.D., to hold office until our 2010 Annual Meeting ofStockholders.
| Votes in Favor | ** ** | **Votes Withheld** | ** ** |
|--------------------------|------------|-------------------------|------------|
| 20,868,997               |       | 818,493                 |       |

 

(c)          To elect a director, BradfordS. Goodwin, to hold office until our 2010 Annual Meeting of Stockholders.
| Votes in Favor | ** ** | **Votes Withheld** | ** ** |
|--------------------------|------------|-------------------------|------------|
| 20,869,176               |       | 818,314                 |       |

 

(d)         To approve our 2000Equity Incentive Plan as amended.
| Votes in Favor | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------|------------|---------------------------|------------|
| 11,342,310               |       | 6,259,214              |       | 9,737           |       | 4,076,229                 |       |

 

(e)          To approve our 2000Non-Employee Directors’ Stock Plan as amended.
| Votes in Favor | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------|------------|---------------------------|------------|
| 15,802,747               |       | 1,798,287              |       | 10,227          |       | 4,076,229                 |       |

 

(f)            To approve our 2000Employee Stock Purchase Plan as amended.
| Votes in Favor | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------|------------|---------------------------|------------|
| 16,052,613               |       | 1,546,121              |       | 12,527          |       | 4,076,229                 |       |

 

(g)         To ratify the selectionby the audit committee of our board of directors of Ernst & Young LLPas independent auditors of Rigel for our fiscal year ending December 31,2007.
| Votes in Favor | ** ** | **Votes Against** | ** ** | **Abstentions** | ** ** | **Broker Non-Votes** | ** ** |
|--------------------------|------------|------------------------|------------|-----------------|------------|---------------------------|------------|
| 21,591,327               |       | 92,374                 |       | 3,789           |       | —                    |       |

 

**ContinuingDirectors**

Our directors whoseterms of office continued after the 2007 Annual Meeting of Stockholders were:(1) James M. Gower, Gary A. Lyons and Donald G. Payan, M.D., whose currentterms expire at the 2009 Annual Meeting of the Stockholders, and (2) Walter H.Moos, Ph.D., Hollings C. Renton, and Stephen A. Sherwin, M.D., whose currentterms expire at the 2008 Annual Meeting of the Stockholders.

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**Item 6.****    Exhibits**

Theexhibits listed on the accompanying index to exhibits are filed or incorporatedby reference (as stated therein) as part of this Quarterly Report onForm 10-Q.
| Exhibit  Number | ** ** | **Description of Document** |
|-----------------|------------|---------------------------------------|
|            |       |                                  |   |
| 3.1             |       |                                  | Amended and Restated Certificate of  Incorporation.(1) |
|            |       |                                  |   |
| 3.2             |       |                                  | Amended and Restated Bylaws.(2) |
|            |       |                                  |   |
| 10.31           |       |                                  | Rigel Pharmaceuticals, Inc. 2000 Equity Incentive  Plan, as amended. (3) |
|            |       |                                  |   |
| 10.32           |       |                                  | Rigel Pharmaceuticals, Inc. 2000 Employee Stock  Purchase Plan, as amended. (3) |
|            |       |                                  |   |
| 10.33           |       |                                  | Rigel Pharmaceuticals, Inc. 2000 Non-Employee  Directors’ Stock Option Plan, as amended. |
|            |       |                                  |   |
| 15.1            |       |                                  | Letter re: unaudited interim financial information. |
|            |       |                                  |   |
| 31.1            |       |                                  | Certification required by  Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|            |       |                                  |   |
| 31.2            |       |                                  | Certification required by  Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|            |       |                                  |   |
| 32.1            |       |                                  | Certification required by  Rule 13a-14(b) or Rule 15d-14(b) of the Exchange Act and  Section 1350 of Chapter 63 of Title 18 of the United States Code (18  U.S.C. 1350). |

 

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(1)             Filedas an exhibit to Rigel’s Current Report on Form 8-K filed on June 24,2003 and incorporated herein by reference.

(2)             Filedas an exhibit to Rigel’s Current Report on Form 8-K filed on February 2, 2007and incorporated herein by reference.

(3)             Filed as an exhibitto Rigel’s Current Report on Form 8-K filed on June 6, 2007 and incorporatedherein by reference.

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, as amended, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|        |   |   |   | RIGEL PHARMACEUTICALS, INC. |
|--------|--------|--------|--------|-----------------------------|
|   |   |   |   |                        |   |   |
|   |   |   |   |                        |   |   |
|   |   |   |   | By:                         |   | /s/ JAMES M. GOWER |
|   |   |   |   |                        |   | James M. Gower |
|   |   |   |   |                        |   | Chief Executive Officer |
|   |   |   |   |                        |   |   |
|   |   |   |   |                        |   |   |
|   |   |   |   | Date: August 7, 2007        |
|   |   |   |   |                        |   |   |
|   |   |   |   |                        |   |   |
|   |   |   |   | By:                         |   | /s/ RYAN D. MAYNARD |
|   |   |   |   |                        |   | Ryan D. Maynard |
|   |   |   |   |                        |   | Vice President and Chief Financial Officer |
|   |   |   |   |                        |   | (Principal Financial and Accounting Officer) |
|   |   |   |   |                        |   |   |
|   |   |   |   |                        |   |   |
|   |   |   |   | Date: August 7, 2007        |

 

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**INDEX TO EXHIBITS**
| Exhibit  Number | ** ** | **Description of Document** |
|-----------------|------------|---------------------------------------|
|            |       |                                  |   |
| 3.1             |       |                                  | Amended and Restated Certificate of  Incorporation.(1) |
|            |       |                                  |   |
| 3.2             |       |                                  | Amended and Restated Bylaws.(2) |
|            |       |                                  |   |
| 10.31           |       |                                  | Rigel Pharmaceuticals, Inc. 2000 Equity Incentive  Plan, as amended. (3) |
|            |       |                                  |   |
| 10.32           |       |                                  | Rigel Pharmaceuticals, Inc. 2000 Employee Stock  Purchase Plan, as amended. (3) |
|            |       |                                  |   |
| 10.33           |       |                                  | Rigel Pharmaceuticals, Inc. 2000 Non-Employee  Directors’ Stock Option Plan, as amended. |
|            |       |                                  |   |
| 15.1            |       |                                  | Letter re: unaudited interim financial information. |
|            |       |                                  |   |
| 31.1            |       |                                  | Certification required by  Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|            |       |                                  |   |
| 31.2            |       |                                  | Certification required by  Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act. |
|            |       |                                  |   |
| 32.1            |       |                                  | Certification required by Rule 13a-14(b) or  Rule 15d-14(b) of the Exchange Act and Section 1350 of Chapter  63 of Title 18 of the United States Code (18 U.S.C. 1350). |

 

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(1)             Filedas an exhibit to Rigel’s Current Report on Form 8-K filed on June 24,2003 and incorporated herein by reference.

(2)             Filedas an exhibit to Rigel’s Current Report on Form 8-K filed on February 2, 2007and incorporated herein by reference.

(3)             Filedas an exhibit to Rigel’s Current Report on Form 8-K on June 6, 2007 andincorporated herein by reference.

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