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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended June 30, 2007



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

For the transition period from to

Commission File No. 000  50564



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RENOVIS, INC.

(Exact Name of Registrant as Specified in its Charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|DELAWARE                                                       |  | 94-3353740                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                    |  |           
|--------------------------------------------------- |  | ----------
|TWO CORPORATE DRIVE SOUTH SAN FRANCISCO, CALIFORNIA |  | 94080     
|(Address of principal executive offices)            |  | (Zip Code)

(650) 266-1400

Registrants telephone number, including area code



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined Rule 12b-2 of the Exchange Act). Check one:

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

As of August 6, 2007, there were 29,723,183 shares of the registrants common stock, $0.001 par value, outstanding, which is the only class of common or voting
stock of the registrant issued.



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##### Table of Contents

Renovis, Inc.

INDEX



|           |  |                                                                                                   |  |     
|---------- |  | ------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                   |  | Page
|Part I.    |  | Financial Information                                                                             |  |     
|           |  | Item 1.     Financial Statements (Unaudited)                                                      |  |     
|           |  | Condensed Balance Sheets  June 30, 2007 and December 31, 2006                                    |  | 3   
|           |  | Condensed Statements of Operations  Three and six months ended June 30, 2007 and 2006            |  | 4   
|           |  | Condensed Statements of Cash Flows Three and six months ended June 30, 2007 and 2006             |  | 5   
|           |  | Notes to Condensed Financial Statements                                                           |  | 6   
|           |  | Item 2.     Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|           |  | Item 3.     Quantitative and Qualitative Disclosures About Market Risk                            |  | 18  
|           |  | Item 4.     Controls and Procedures                                                               |  | 18  
|Part II.   |  | Other Information                                                                                 |  |     
|           |  | Item 1.     Legal Proceedings                                                                     |  | 19  
|           |  | Item 1A.  Risk Factors                                                                            |  | 19  
|           |  | Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 29  
|           |  | Item 3.     Defaults Upon Senior Securities                                                       |  | 29  
|           |  | Item 4.     Submission of Matters to a Vote of Security Holders                                   |  | 29  
|           |  | Item 5.     Other Information                                                                     |  | 30  
|           |  | Item 6.     Exhibits                                                                              |  | 30  
|Signatures |  | 31                                                                                               



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RENOVIS, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                   |  | June 30,2007 |          |   | December 31,2006 |  
|Assets                                                                                                                                                                                                             |  |              |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                    |  |              |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                          |  | $            | 39,704   |   |                  | $ | 41,958   |  
|Short-term investments                                                                                                                                                                                             |  |              | 46,093   |   |                  |   | 57,149   |  
|Accounts receivable from collaborative partner                                                                                                                                                                     |  |              | 4,545    |   |                  |   | 47       |  
|Prepaids and other current assets                                                                                                                                                                                  |  |              | 1,357    |   |                  |   | 881      |  
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                               |  |              | 91,699   |   |                  |   | 100,035  |  
|                                                                                                                                                                                                                   |  |             
|Property and equipment, net                                                                                                                                                                                        |  |              | 6,124    |   |                  |   | 7,052    |  
|Other assets                                                                                                                                                                                                       |  |              | 235      |   |                  |   | 214      |  
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                                                   |  | $            | 98,058   |   |                  | $ | 107,301  |  
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                               |  |              |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                               |  |              |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                                   |  | $            | 391      |   |                  | $ | 517      |  
|Accrued compensation                                                                                                                                                                                               |  |              | 1,341    |   |                  |   | 2,503    |  
|Loan payable, current portion                                                                                                                                                                                      |  |              | 1,925    |   |                  |   | 2,147    |  
|Deferred revenue                                                                                                                                                                                                   |  |              | 1,667    |   |                  |   | 3,400    |  
|Other accrued liabilities                                                                                                                                                                                          |  |              | 2,076    |   |                  |   | 1,964    |  
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                          |  |              | 7,400    |   |                  |   | 10,531   |  
|Loan payable, noncurrent portion                                                                                                                                                                                   |  |              | 2,137    |   |                  |   | 3,011    |  
|Other long-term liabilities                                                                                                                                                                                        |  |              | 492      |   |                  |   | 673      |  
|Commitments                                                                                                                                                                                                        |  |              |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                              |  |              |          |   |                  |   |          |  
|Preferred stock, $0.001 par value; 5,000,000 shares authorized at June 30, 2007 and December 31, 2006; none issued and outstanding                                                                                 |  |              |         |   |                  |   |         |  
|Common stock, $0.001 par value; 100,000,000 shares authorized at June 30, 2007 and December 31, 2006; 29,716,473 and 29,455,058
shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively |  |              | 30       |   |                  |   | 29       |  
|Additional paid-in capital                                                                                                                                                                                         |  |              | 287,302  |   |                  |   | 275,439  |  
|Accumulated other comprehensive loss                                                                                                                                                                               |  |              | (21      | ) |                  |   | (44      | )
|Accumulated deficit                                                                                                                                                                                                |  |              | (199,282 | ) |                  |   | (182,338 | )
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                         |  |              | 88,029   |   |                  |   | 93,086   |  
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  
|                                                                                                                                                                                                                   |  | $            | 98,058   |   |                  | $ | 107,301  |  
|                                                                                                                                                                                                                   |  |              |          |   |                  |   |          |  

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



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RENOVIS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)



|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                            |  | 2007                        |            |   | 2006                      |   |            | 2007 |  |   | 2006       |  
|Contract revenue                                            |  | $                           | 5,816      |   |                           | $ | 3,650      |      |  | $ | 7,133      |   |  | $ | 6,128      |  
|Operating expenses:                                         |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                    |  |                             | 5,780      |   |                           |   | 6,982      |      |  |   | 14,208     |   |  |   | 13,854     |  
|General and administrative                                  |  |                             | 2,927      |   |                           |   | 3,730      |      |  |   | 12,018     |   |  |   | 7,633      |  
|Total operating expenses                                    |  |                             | 8,707      |   |                           |   | 10,712     |      |  |   | 26,226     |   |  |   | 21,487     |  
|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                             |            |  
|Loss from operations                                        |  |                             | (2,891     | ) |                           |   | (7,062     | )    |  |   | (19,093    | ) |  |   | (15,359    | )
|Interest income                                             |  |                             | 1,159      |   |                           |   | 1,351      |      |  |   | 2,374      |   |  |   | 2,613      |  
|Interest expense                                            |  |                             | (106       | ) |                           |   | (120       | )    |  |   | (225       | ) |  |   | (220       | )
|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                    |  | $                           | (1,838     | ) |                           | $ | (5,831     | )    |  | $ | (16,944    | ) |  | $ | (12,966    | )
|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                             |            |  
|Basic and diluted net loss per share                        |  | $                           | (0.06      | ) |                           | $ | (0.20      | )    |  | $ | (0.57      | ) |  | $ | (0.45      | )
|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                            |  |                             |            |  
|Shares used to compute basic and diluted net loss per share |  |                             | 29,609,853 |   |                           |   | 29,178,167 |      |  |   | 29,574,197 |   |  |   | 29,077,767 |  
|                                                            |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

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



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RENOVIS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                            |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months Ended June 30, |        
|                                                                            |  | 2007                      |         |   | 2006 |  
|Cash flows from operating activities                                        |  |                           |         |   |      |   |         |  
|Net loss                                                                    |  | $                         | (16,944 | ) |      | $ | (12,966 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |         |   |      |   |         |  
|Loss on sale of fixed assets                                                |  |                           | 1       |   |      |   |        |  
|Depreciation and amortization                                               |  |                           | 1,041   |   |      |   | 931     |  
|Employee stock-based compensation                                           |  |                           | 11,206  |   |      |   | 4,726   |  
|Noncash expense related to issuance of equity                               |  |                           | 353     |   |      |   | 1,014   |  
|Changes in assets and liabilities:                                          |  |                           |         |   |      |   |         |  
|Accounts receivable from collaborative partner                              |  |                           | (4,498  | ) |      |   | (1,553  | )
|Prepaids and other assets                                                   |  |                           | (497    | ) |      |   | (198    | )
|Accounts payable                                                            |  |                           | (126    | ) |      |   | (584    | )
|Accrued compensation                                                        |  |                           | (1,162  | ) |      |   | (555    | )
|Deferred revenue                                                            |  |                           | (1,733  | ) |      |   | (2,828  | )
|Other accrued liabilities                                                   |  |                           | (31     | ) |      |   | 18      |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                           | (12,390 | ) |      |   | (11,995 | )
|                                                                            |  |                          
|Cash flows from investing activities                                        |  |                           |         |   |      |   |         |  
|Capital expenditures                                                        |  |                           | (120    | ) |      |   | (1,814  | )
|Proceeds from disposals of property                                         |  |                           | 6       |   |      |   |        |  
|Purchase of short-term investments                                          |  |                           | (46,927 | ) |      |   | (44,783 | )
|Sales of short-term investments                                             |  |                           | 9,158   |   |      |   | 104,325 |  
|Maturities of short-term investments                                        |  |                           | 48,848  |   |      |   | 9,900   |  
|                                                                            |  |                           |         |   |      |   |         |  
|                                                                            |  |                          
|Net cash provided by investing activities                                   |  |                           | 10,965  |   |      |   | 67,628  |  
|                                                                            |  |                          
|Cash flows from financing activities                                        |  |                           |         |   |      |   |         |  
|Principal payments on loan payable                                          |  |                           | (1,096  | ) |      |   | (825    | )
|Proceeds from loan payable                                                  |  |                           |        |   |      |   | 1,795   |  
|Proceeds from issuance of common stock, net of repurchases                  |  |                           | 267     |   |      |   | 1,302   |  
|                                                                            |  |                           |         |   |      |   |         |  
|                                                                            |  |                          
|Net cash (used in) provided by financing activities                         |  |                           | (829    | ) |      |   | 2,272   |  
|                                                                            |  |                          
|Net (decrease) increase in cash and cash equivalents                        |  |                           | (2,254  | ) |      |   | 57,905  |  
|Cash and cash equivalents at beginning of period                            |  |                           | 41,958  |   |      |   | 8,149   |  
|                                                                            |  |                           |         |   |      |   |         |  
|                                                                            |  |                          
|Cash and cash equivalents at end of period                                  |  | $                         | 39,704  |   |      | $ | 66,054  |  
|                                                                            |  |                           |         |   |      |   |         |  

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



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RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

1. Summary of Significant Accounting
Policies

The Company and Nature of Operations

Renovis, Inc. (the Company or Renovis) is a biopharmaceutical company focused on the discovery and development of drugs to treat major medical needs in the areas of neurological and inflammatory diseases. We are
located in South San Francisco, California.

The Company has sustained operating losses since inception and expects such losses to continue
over the next several years. Management plans to continue to finance the Companys operations with a combination of equity issuances, debt arrangements and revenues from corporate alliances with pharmaceutical and biotechnology companies. If
adequate funds are not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its research or development programs.

Basis of Preparation

The Company has prepared the condensed financial statements following the requirements of the
Securities and Exchange Commission for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles can be condensed or omitted. In
the opinion of management, the financial statements include all normal and recurring adjustments that are considered necessary for the fair presentation of our financial position and operating results. Revenues, expenses, assets and liabilities can
vary during each quarter of the year. Therefore, the results and trends in these interim financial statements may not be the same as, or predictive of, those for the full year. The information included in this quarterly report on Form 10-Q should be
read in conjunction with the financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.

The condensed balance sheet amounts at December 31, 2006, have been derived from audited financial statements.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period
presentation.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.

Revenue Recognition

The Companys revenues are generated by complex collaborative research and licensing arrangements. Revenues under such agreements may include upfront
payments, research funding, milestone payments and royalties. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, we evaluate whether the delivered element under these
arrangements has value to our collaborative partner or licensee on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered element exists. Arrangements with multiple deliverables that do not meet these
criteria are treated as one unit of accounting for the purposes of revenue recognition.

Revenues from nonrefundable upfront technology
license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as contract revenue ratably over the estimated period of performance under the research agreement. The
performance period is estimated at the inception of the arrangement and is periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized, which would result in
an acceleration or delay of expected revenue recognition.

Research funding is recognized as revenue as the related effort is performed.

Milestone payments we receive under collaborative arrangements are recognized as revenue upon achievement of the milestone events, which
represent the culmination of the earnings process, and when collectability is reasonably assured. Milestone payments are triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a
product or the achievement of specified sales levels by a marketing partner or licensee. Accordingly, the milestone payments are substantially at risk at the inception of the contract, and the amounts of the payments assigned thereto are
commensurate with the milestone achieved. Upon the achievement of a milestone event, we have no future performance obligations related to that milestone as the milestone payments we receive are nonrefundable.

Research and Development

Research and
development costs, which include related employee compensation, contractor fees, administrative expenses, and allocations of overhead costs, are charged to expense as incurred. License and milestone obligations that we must pay prior to regulatory
approval to market a product related to the licensed technology are also charged to research and development expense.



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Cash, Cash Equivalents and Short-Term Investments

The Company invests its excess cash in bank deposits, money market accounts and other marketable securities. The Company considers all highly liquid
investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents.

The Company has designated its
investment securities as available-for-sale. The Company considers its available-for-sale portfolio as available for use in current operations. Accordingly, all investments have been classified as short-term, even though the stated maturity date may
be one year or more beyond the current balance sheet date. Available-for-sale securities are carried at fair value and unrealized gains and losses are included in other comprehensive income (loss) and reported as a separate component of
stockholders equity. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in the statement of operations. The cost of securities sold is based on the specific
identification method. Interest on marketable securities is included in interest income.

Fair Value of Financial Instruments

The Companys financial instruments consist principally of cash and cash equivalents, short-term investments and loans payable. The carrying values
of the Companys financial instruments approximate fair value.

Property and Equipment, Net

Property and equipment are recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are recorded using the
straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets.

Stock-Based Compensation

The Company
accounts for its stock-based compensation utilizing the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment(SFAS 123(R)). Under the fair value recognition
provisions for SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service period of the award. We have used the
Black-Scholes valuation model to estimate fair value of our stock-based awards which requires various judgmental assumptions including estimating stock price volatility, forfeiture rates and expected life. Our computation of expected volatility is
based on a combination of peer companies historical volatilities and our market-based implied volatility. In addition, we consider many factors when estimating expected forfeitures and expected life, including types of awards, employee class
and historical experience. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

2. Comprehensive Loss

SFAS No. 130,Reporting Comprehensive Income, requires components of other comprehensive income, including unrealized gains and losses on available-for-sale investments, to be included as part of total comprehensive income. Comprehensive loss for the three
and six months ended June 30, 2007 and 2006 are as follows (in thousands):



|                                                         |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                         |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                         |  | 2007                        |        |   | 2006                      |   |        | 2007 |  |   | 2006    |  
|Net loss                                                 |  | $                           | (1,838 | ) |                           | $ | (5,831 | )    |  | $ | (16,944 | ) |  | $ | (12,966 | )
|Unrealized gains (loss) on available-for-sale securities |  |                             |       |   |                           |   | (21    | )    |  |   | 24      |   |  |   | (30     | )
|                                                         |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  
|Comprehensive loss                                       |  |                             | (1,838 | ) |                           |   | (5,852 | )    |  |   | (16,920 | ) |  |   | (12,996 | )
|                                                         |  |                             |        |   |                           |   |        |      |  |   |         |   |  |   |         |  



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3. Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss by the weighted-average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted net loss per
share is computed by dividing the net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the
Company, preferred stock, options, deferred stock units, and warrants are considered to be common stock equivalents and are only included in the calculation of diluted net loss per share when their effect is dilutive.



|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                          |  | Three Months Ended June 30,                     |            |   | Six Months Ended June 30, |  
|                                                                                          |  | 2007                                            |            |   | 2006                      |   |            | 2007 |  |   | 2006       |  
|                                                                                          |  | (in thousands, except share and per share data) |           
|Historical                                                                                |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Numerator:                                                                                |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                                                  |  | $                                               | (1,838     | ) |                           | $ | (5,831     | )    |  | $ | (16,944    | ) |  | $ | (12,966    | )
|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                                          |  |                                                 |            |  
|Denominator:                                                                              |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding                                                |  |                                                 | 29,612,152 |   |                           |   | 29,257,880 |      |  |   | 29,579,854 |   |  |   | 29,155,611 |  
|Less: Weighted average unvested common shares subject to repurchase                       |  |                                                 | (2,299     | ) |                           |   | (79,713    | )    |  |   | (5,657     | ) |  |   | (77,844    | )
|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic and diluted net loss per share                                      |  |                                                 | 29,609,853 |   |                           |   | 29,178,167 |      |  |   | 29,574,197 |   |  |   | 29,077,767 |  
|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                                                      |  | $                                               | (0.06      | ) |                           | $ | (0.20      | )    |  | $ | (0.57      | ) |  | $ | (0.45      | )
|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                                          |  |                                                 |            |  
|Historical outstanding dilutive securities not included in net loss per share calculation |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Options to purchase common stock                                                          |  |                                                 | 3,877,597  |   |                           |   | 3,759,779  |      |  |   | 3,877,597  |   |  |   | 3,759,779  |  
|Warrants                                                                                  |  |                                                 | 33,358     |   |                           |   | 33,358     |      |  |   | 33,358     |   |  |   | 33,358     |  
|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                                                          |  |                                                 | 3,910,955  |   |                           |   | 3,793,137  |      |  |   | 3,910,955  |   |  |   | 3,793,137  |  
|                                                                                          |  |                                                 |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

4. Collaboration and License Agreements

Pfizer

On May 26, 2005, the Company entered into a collaborative research agreement and
a license and royalty agreement with Pfizer Inc. to research, develop and commercialize small molecule compounds that target the vanilloid receptor (VR1). The collaboration focuses on potential treatments for pain and other diseases and disorders.

Under the agreements, the Company received an upfront license fee of $10.0 million in July 2005. In addition to the upfront license fee,
the agreements with Pfizer also provided the Company with research funding in excess of $7.0 million over an initial two-year research period, subject to Pfizers option to extend for up to two additional years with additional funding
requirements. The initial funded research period ran through June 2007. Under the licensing and royalty agreement with Pfizer, the Company will be eligible to receive research, development, approval and commercialization milestone payments resulting
in total potential payments to the Company of greater than $170.0 million through successful achievement of research development and commercialization milestones for product candidates resulting from the collaboration. Upon commercialization of a
product resulting from the collaboration, the Company would be entitled to receive royalties on net sales by Pfizer.

On April 9,
2007, the Company and Pfizer amended the collaborative research agreement to extend the term of the agreement for an additional twelve months. Under the terms of the extension, Pfizer will continue to fund all aspects of the collaboration, including
the research and preclinical development efforts at the Company through June 30, 2008. Other terms of the collaboration and licensing agreements between Pfizer and Renovis were not changed.

The Company applied EITF Issue No. 00-21 in evaluating the appropriate accounting for the agreements, which became effective on June 28, 2005. In
accordance with this guidance, the Company identified the initial license transfer and the research and development services as the deliverables under the agreements and concluded that they should be accounted for as a single unit of accounting
based upon the determination that these deliverables were linked and did not have stand-alone value. The Company also determined that the achievement of each milestone for which it is eligible for milestone payments represents a separate earnings
process. The Company believes that each of these milestones, such as the commencement of particular clinical trials, the filing of a New Drug Application, or an NDA, or the receipt of regulatory approval is well-defined, substantive, measurable and
reasonable relative to risk and effort. Accordingly, the Company concluded that such payments should be recognized as revenue when the milestone is achieved and collectability is reasonably assured.



In accordance with the initial evaluation discussed above, the Company began
amortizing the upfront payment from Pfizer ratably in the third quarter of 2005 over the estimated research term of two years. As a result of the amended agreement, the Company revised the estimated completion date of the research term from
June 30, 2007 to June 30, 2008. Accordingly, the Company began recognizing the remaining deferred revenue as of December 31, 2006, $2.5 million, on a straight-line basis through the new estimated completion date of the research
period, June 30, 2008.

During the three and six months ended June 30, 2007, the Company recognized $5.8 million and $7.1
million, respectively, in revenue related to these agreements. Revenue recognized during the second quarter of 2007 included milestone revenue of $4.5 million. At June 30, 2007, the Company has recorded a $4.5 million accounts receivable from
collaborative partner related to these milestones achieved in the accompanying balance sheet. The Company received the milestone payment in July 2007. The milestones achieved include the placement of a second product candidate from the VR1 program
into IND-enabling studies as well as completion of certain studies with a previously nominated compound. During the three and six months ended June 30, 2006, the Company recognized $3.7 million and $5.8 million, respectively, in revenue related
to the agreements. Revenue recognized during the second quarter of 2006 included milestone revenue of $1.5 million that we earned in connection with specific progress of the VR1 collaboration into advanced preclinical studies. As of June 30,
2007, deferred revenue under the agreements was $1.7 million.



8



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##### Table of Contents

5. Other Current Accrued Liabilities

Other current accrued liabilities consist of the following (in thousands):



|                          |  |              |       |                  |   |      
|------------------------- |  | ------------ | ----- | ---------------- | - | -----
|                          |  | June 30,2007 |       | December 31,2006
|Facilities related        |  | $            | 551   |                  | $ | 408  
|Professional fees         |  |              | 313   |                  |   | 400  
|Outside services          |  |              | 602   |                  |   | 437  
|Deferred rent             |  |              | 334   |                  |   | 291  
|Accrued other             |  |              | 276   |                  |   | 428  
|                          |  |              |       |                  |   |      
|Other accrued liabilities |  | $            | 2,076 |                  | $ | 1,964
|                          |  |              |       |                  |   |      

6. Loan Payable

In February 2004, the Company entered into a credit facility with a lender that provides up to an aggregate of $5 million to finance the purchase of laboratory and computer equipment and certain leasehold
improvements. In March 2005, the lender provided for a new credit facility of $3.5 million which was available for the Company to draw down through December 31, 2005. The draw down period was extended through December 31, 2006 by the
lender. As of June 30, 2007, the Company had borrowed an aggregate of approximately $8.5 million under these facilities, of which $4.1 million was outstanding at that date. Payments are due in monthly installments over a period ranging from 36
to 48 months at interest rates ranging from 8.80% to 10.67% and are secured by the assets financed.

7. Stock-Based Compensation

Employee Stock Purchase Plan

The Company has
an employee stock purchase plan for all eligible employees. Under the plan, shares of the Companys common stock may be purchased over an offering period with a maximum duration of two years at 85% of the lower of the fair market value on the
first day of the applicable offering period or on the last day of the six-month purchase period. Employees may purchase shares having a purchase price not exceeding 20% of their gross compensation during an offering period. Our employee stock
purchase plan contains an evergreen provision that automatically increases, on each January 1, the number of shares reserved for issuance under the employee stock purchase plan by the lesser of 194,444 or 0.75% of our outstanding
shares on such date, or a lesser amount as determined by our Board of Directors. At June 30, 2007, there were 824,786 shares of common stock available for future issuance under the plan.

Other Equity Incentive Plans

The Company has equity incentive plans for directors, officers, employees and non-employees. Under
the Amended and Restated Renovis, Inc. 2003 Stock Plan (Amended 2003 Plan) the Company is permitted to grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, deferred stock units, dividend
equivalents, performance share awards, stock payments and other stock benefits, or any combination thereof to employees or consultants of the Company. Stock options granted to existing employees under these plans generally vest at the rate of
1/48thper month such that the options will be fully vested after four years. Stock options granted to new employees generally vest 25% one year after the
vesting commencement date and then at a rate of 1/48thper month. Stock options granted to directors generally vest quarterly over one year. All stock
options expire ten years from the date of grant. Stock options granted prior to 2004 were exercisable immediately, subject to repurchase rights held by us, which lapsed over the vesting period. The Amended 2003 Plan contains an evergreen
provision that automatically increases, on each January 15, the number of shares reserved for issuance under such plan, by the lesser of 3.5% of the Companys outstanding shares of common stock on that date, or 1,055,555 shares, or such
lesser amount as determined by our Board of Directors. At June 30, 2007, there were 921,812 shares available for future grant under our equity incentive plans.

Issuance of Deferred Stock Units

During the three and six months ended June 30, 2007, the Company issued approximately 410,000 and 2,195,000 deferred stock units, respectively, also known as restricted stock units, under the Amended 2003 Plan at a weighted average
grant date fair value of $4.03 and $3.53, respectively, to existing employees. The 1,785,000 deferred stock units issued in the three months ended March 31, 2007 generally vest at the rate of 1/36thper month and the 410,000 deferred stock units issued in the three months ended June 30, 2007 generally vest on the one year anniversary of the grant date. In accordance
with SFAS 123(R), the fair value of the restricted stock units were estimated based upon the closing sales price of the Companys common stock on the date of grant.



Repurchase of Outstanding Stock Options

On January 4, 2007, in order to replenish the number of shares available for grant to existing non-executive employees, the Company entered into
stock option cancellation agreements with the officers of the Company. Under the terms of these stock option cancellation agreements, the officers surrendered certain options to purchase shares of the Companys common stock (the Options) to the
Company for cancellation in exchange for $0.001 per share, the par value of the Companys common stock. The officers relinquished all right, title or interest in those Options. In aggregate, Options to purchase 1,005,000 shares were cancelled.
The shares reserved for issuance under the cancelled Options were immediately available for future grants to non-executive employees under the Companys Amended 2003 Plan. As a result of the repurchase of the Options, the Company incurred a
one-time noncash share-based payment charge of $7.3 million in the three months ended March 31, 2007, which represented the amount of the unrecognized compensation cost for the Options repurchased as of the repurchase date. Of the $7.3 million
recognized in the quarter ended March 31, 2007, $1.4 million was recorded as research and development expense and $5.9 million was recorded as general and administrative expense in the accompanying condensed statement of operations. As
this was a one-time charge, no amount was recorded for the three months ended June 30, 2007 or for the three and six months ended June 30, 2006.



9



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##### Table of Contents

Stock-Based Compensation

The Company adopted SFAS 123(R) using the modified prospective transition method beginning January 1, 2006. During periods following adoption of SFAS 123(R), the Company recorded stock-based compensation
expense for awards granted prior to, but not yet vested, as of December 31, 2005, as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes, adjusted for estimated
forfeitures. For stock-based awards granted after January 1, 2006, the Company recognized compensation expense based on the estimated grant date fair value method using the Black-Scholes valuation model. The Company recognizes compensation
expense using a straight-line amortization method. Because SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, stock-based compensation expense has been reduced for estimated
forfeitures. When estimating forfeitures, we consider voluntary termination behaviors as well as trends of actual option forfeitures. The impact on the results of operations of recording stock-based compensation, including the stock-based
compensation expense related to the repurchase of outstanding stock options noted above, for the three and six month periods ended June 30, 2007 was as follows (in thousands, except per share amounts):



|                                            |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   |       |  
|------------------------------------------- |  | -------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ----- | -
|                                            |  | Three MonthsEnded June 30, |       |   | Six Months Ended June 30, |  
|                                            |  | 2007                       |       |   | 2006                      |   |       | 2007 |  |   | 2006   |  
|Research and development                    |  | $                          | 1,069 |   |                           | $ | 1,128 |      |  | $ | 3,476  |   |  | $ | 2,178 |  
|General and administrative                  |  |                            | 926   |   |                           |   | 1,303 |      |  |   | 7,730  |   |  |   | 2,549 |  
|                                            |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   |       |  
|Total stock-based compensation              |  | $                          | 1,995 |   |                           | $ | 2,431 |      |  | $ | 11,206 |   |  | $ | 4,727 |  
|                                            |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   |       |  
|Effect on loss per share, basic and diluted |  | $                          | (0.07 | ) |                           | $ | (0.08 | )    |  | $ | (0.38  | ) |  | $ | (0.16 | )
|                                            |  |                            |       |   |                           |   |       |      |  |   |        |   |  |   |       |  

Due to our net loss position, a tax benefit was not realized for the three and six month periods
ended June 30, 2007.

Valuation Assumptions

The Company calculated the fair value of each option grant on the date of grant using the Black-Scholes option valuation model and the straight-line attribution approach. Option valuation models require the input of
subjective assumptions and these assumptions can vary over time. The weighted-average assumptions used are as follows:



|                                                  |  |                            |   |  |                          |   |  |          |   |  |       |  
|------------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | -------- | - |  | ----- | -
|                                                  |  | Three MonthsEnded June 30, |   |  | Six MonthsEnded June 30, |  
|                                                  |  | 2007                       |   |  | 2006                     |   |  | 2007     |   |  | 2006  |  
|Stock option plan:                                |  |                            |   |  |                          |   |  |          |   |  |       |  
|Expected volatilities                             |  | 80                         | % |  | 67                       | % |  | 80       | % |  | 64    | %
|Risk-free interest rate                           |  | 4.8                        | % |  | 4.99                     | % |  | 4.8      | % |  | 4.43  | %
|Dividend yield                                    |  | 0                          |   |  | 0                        |   |  | 0        |   |  | 0     |  
|Expected life of options (in years)               |  | 4.23                       |   |  | 4.23                     |   |  | 4.23     |   |  | 4.67  |  
|                                                  |  |                            |   | 
|Employee stock purchase plan:                     |  |                            |   |  |                          |   |  |          |   |  |       |  
|Expected volatilities                             |  | 125                        | % |  | 71                       | % |  | 128      | % |  | 72    | %
|Risk-free interest rate                           |  | 5.0                        | % |  | 4.09                     | % |  | 5.0      | % |  | 3.94  | %
|Dividend yield                                    |  | 0                          |   |  | 0                        |   |  | 0        |   |  | 0     |  
|Expected life of options (range of life in years) |  | 0.5 - 2.0                  |   |  | 0.5 -2                   |   |  | 0.5 -2.0 |   |  | 0.5-2 |  

The Companys computation of estimated volatility is based on a combination of historical
volatilities of peer companies and market-based implied volatility from traded options on the Companys common stock. Peer companies historical volatilities are used in the determination of expected volatility due to the short trading
history of the Companys common stock, which began trading on February 5, 2004. In selecting the peer companies, the Company considered the following factors: industry, stage of life cycle, size and financial leverage. The computation of
the expected volatility for our employee stock purchase plan is based upon a combination of our historical volatility and our market-based implied volatility. Our computation of expected life of the options is determined based on historical
experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award is based on
the U.S. Treasury yield curve in effect at the time of grant.

The Company granted 17,600 and 121,988 options during the three and six
months ended June 30, 2007, respectively, to employees and members of the Companys Board of Directors with weighted average exercise prices of $3.69 and $3.44, respectively. The weighted average grant date fair value of options granted
during the three and six month periods ended June 30, 2007 was $2.31 and $2.16 per share, respectively, compared to $8.74 and $9.91 for the options granted during the three and six month periods ended June 30, 2006, respectively. These
weighted average grant date fair values were based on the assumptions in the Black-Scholes option valuation model discussed above.



10



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##### Table of Contents

Non-Employee Stock Compensation

Stock compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123R and EITF Issue No. 96-18,Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring or in Conjunction with Selling, Goods or Services, using a fair value approach. The compensation costs of these arrangements are subject to re-measurement over the vesting
terms as earned. During the three and six months ended June 30, 2007, the Company granted stock options to purchase 0 and 36,111 shares of common stock, respectively, to consultants. During the three and six months ended June 30, 2006, the
Company granted stock options to purchase 0 and 42,111 shares of common stock, respectively, to consultants. Compensation expense related to non-employee stock option grants was $0 and $119,000 for the three and six months ended June 30, 2007,
respectively, compared to $30,000 and $770,000 for the three and six months ended June 30, 2006, respectively.

The weighted average
assumptions for the Black-Scholes model used in determining the fair value of options granted to non-employees are as follows:



|                                                     |  |                            |   |  |                          |   |  |      |   |  |      |  
|---------------------------------------------------- |  | -------------------------- | - |  | ------------------------ | - |  | ---- | - |  | ---- | -
|                                                     |  | Three MonthsEnded June 30, |   |  | Six MonthsEnded June 30, |  
|                                                     |  | 2007                       |   |  | 2006                     |   |  | 2007 |   |  | 2006 |  
|Expected volatilities                                |  | 80                         | % |  | 69                       | % |  | 80   | % |  | 64   | %
|Risk-free interest rate                              |  | 4.70                       | % |  | 5.02                     | % |  | 4.70 | % |  | 4.46 | %
|Dividend yield                                       |  | 0                          |   |  | 0                        |   |  | 0    |   |  | 0    |  
|Maximum contractual life of option (from grant date) |  | 10                         |   |  | 10                       |   |  | 10   |   |  | 10   |  

8. Restructuring

On January 22, 2007, the Company committed to a restructuring plan with the intention of reducing spending while maintaining the research and development capabilities needed to advance the Companys
late-stage preclinical drug discovery programs. The plan was designed to reduce the Companys workforce by approximately 40% and was completed by the end of the first quarter of 2007. For the three and six months ended June 30, 2007, the
Company incurred and paid restructuring costs of approximately $0 and $1.0 million, respectively, primarily associated with one-time termination benefits. Of the $1.0 million recorded in the first six months of 2007, $0.8 million was recorded as
R&D expense and $0.2 million was recorded as G&A expense.



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##### Table of Contents

|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part II, Item 1A, Risk Factors. You should read the following discussion and analysis of our financial condition
and results of operations together with our interim financial statements and the related notes appearing at the beginning of this report. The interim financial statements and this Managements Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2006 and the related Managements Discussion and Analysis of Financial Condition and Results of Operations,
both of which are contained in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2007.

Overview

We are a biopharmaceutical company focused on the discovery and development of drugs to treat major medical needs in the areas of
neurological and inflammatory diseases. Our integrated capabilities in preclinical research and development, including medicinal chemistry, bioinformatics, molecular biology and pharmacology, enable us to identify and select drug candidates that
meet stringent standards for development. This approach has yielded multiple lead candidates in our preclinical programs for pain and inflammation. Our proprietary preclinical programs are focused on identifying antagonists of selected purinergic
receptors as novel potential treatments for a broad spectrum of pain and inflammatory conditions. In addition, we have entered into a collaboration with Pfizer to discover and develop product candidates targeting the vanilloid receptor, VR1, for the
potential treatment of pain and other diseases and disorders.

Our business strategy is to become an integrated biopharmaceutical company
by creating a pipeline of potential first- and best-in-class product candidates for major medical needs, primarily in the areas of neurological and inflammatory diseases. We are pursuing this goal by investing strategically in our internal drug
discovery activities and by applying our expertise to the identification and potential acquisition of external programs that are complementary to our own.

We have a limited history of operations. Since our inception we have generated all of our revenues from agreements with corporate partners. During certain periods in 2004 and 2005, we conducted one or more Phase I and
Phase II clinical trials with three product candidates that we subsequently discontinued based on our review of data generated in the studies. Each of these product candidates was obtained through a license agreement or acquisition from a third
party.

In May 2005, we entered into a collaborative research agreement and a license and royalty agreement with Pfizer to research,
develop and commercialize small molecule compounds that target VR1. The collaboration focuses on treatments for pain and other diseases and disorders. Under the agreements, we received an upfront license fee of $10.0 million in July 2005. In
addition to the upfront license fee, the agreements with Pfizer also provided us with research funding in excess of $7.0 million over a two-year research period ending in June 2007 and subject to Pfizers option to extend up to two additional
years with additional funding requirements. In April 2007, the Company and Pfizer amended the collaborative research agreement to extend the term of the agreement by an additional twelve months, providing us with additional research funding through
June 30, 2008. Other terms of the collaboration and licensing agreements between Pfizer and Renovis were not changed. Under the licensing and royalty agreement, we will be eligible to receive research, development, approval and
commercialization milestone payments resulting in total potential payments to us of greater than $170.0 million through successful achievement of research development and commercialization milestones for product candidates resulting from the
collaboration. In addition to milestone payments, we will be entitled to receive double-digit royalties on net sales by Pfizer upon commercialization of a product generated by the collaboration. We began recognizing revenue under these agreements in
the third quarter of 2005. On June 8, 2007, we announced the achievement of two milestones in this collaboration. The milestones included the placement of a second product candidate from the VR1 program into IND-enabling studies, as well as
completion of certain studies with a previously nominated compound. The achievement of the milestones resulted in the recognition of $4.5 million in milestone revenue for the quarter ended June 30, 2007. During the three and six months ended
June 30, 2007, the Company recognized $5.8 million and $7.1 million, respectively, in revenue related to our agreements with Pfizer.

As of June 30, 2007, we had an accumulated deficit of $199.3 million and approximately $85.8 million in cash, cash equivalents and short-term investments. The cash, cash equivalents and short-term investment balance at June 30,
2007 does not include the $4.5 million in milestone payments earned in the current quarter related to the Pfizer collaboration, which we received in July 2007. Based on current projections, the Company expects current cash, cash equivalents, and
marketable securities to be sufficient to fund projected activities at least through the end of 2009. However, changes to our current operating plan may require us to consume our capital resources sooner than we expect.

We expect to incur substantial losses for the foreseeable future as we:



| |  |  | expand our research and development programs;
| | - |  | ---------------------------------------------



| |  |  | advance new product candidates into clinical development from our existing research; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | acquire, license or otherwise invest in technology, product candidates and businesses that are complementary to our own.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

Revenues

We do not expect to generate revenue from
product sales or royalties in the foreseeable future. We seek to generate revenue from a combination of research funding, upfront fees, milestone payments and royalties in connection with collaborative, strategic and licensing relationships,. We
expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of milestone payments we may receive from our collaborative or strategic relationships, as well as those we may receive upon the sale of
our products, to the extent any are successfully commercialized. Revenue derived from collaborative and strategic relationships helps us fund our operations and may increase in the future if we are successful in achieving milestones in our existing
collaborations, licensing our technology and establishing new collaborations or strategic relationships. If we are unsuccessful in these goals, our revenues will decline and we may be required to limit our research and development, clinical trial,
manufacturing and marketing efforts.



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##### Table of Contents

Research and Development Expenses

Our research and development (R&D) expenses consist primarily of costs associated with research, preclinical development and clinical trials involving product opportunities in the areas of neurological and
inflammatory diseases.

The expenses we incur in connection with our research, preclinical and clinical development consist primarily of:



| |  |  | employee compensation (including non-cash expenses for stock-based compensation);
| | - |  | ---------------------------------------------------------------------------------



| |  |  | supplies and materials;
| | - |  | -----------------------



| |  |  | costs for consultants, contract research and clinical trials (including non-cash expenses for stock-based compensation to non-employees);
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | license fees;
| | - |  | -------------



| |  |  | facilities and overhead costs;
| | - |  | ------------------------------



| |  |  | funded R&D at other companies and research institutions;
| | - |  | --------------------------------------------------------



| |  |  | manufacturing of drug supplies for our programs; and
| | - |  | ----------------------------------------------------



| |  |  | depreciation of equipment.
| | - |  | --------------------------

R&D
costs, including some upfront fees and milestones paid to collaborators, are expensed as incurred. The timing of upfront fees and milestone payments in the future may cause variability in our future R&D expenses.

During the three and six months ended June 30, 2007, we incurred research and development expenses of $5.8 million and $14.2 million, respectively.
During the three and six months ended June 30, 2006, we incurred research and development expenses of $7.0 million and $13.9 million, respectively. All of the research and development expense incurred in 2007 and 2006 related to our preclinical
R&D programs. The decrease in R&D expense for the three months ended June 30, 2007 as compared to the corresponding period in the prior year was primarily a result of the restructuring effort that took place in the first quarter of
2007, which resulted in lower employee compensation expense and related supplies and materials expense in the second quarter of 2007. The increase in R&D expense in the six months ended June 30, 2007 as compared to the six months ended
June 30, 2006 was primarily due to an increase in stock compensation expense as a result of the repurchase and cancellation of certain options in the first quarter of 2007, partially offset by a decrease in supplies and materials expense and
employee compensation as a result of our restructuring in January 2007.

Development timelines and costs are difficult to estimate and may
vary significantly for each product candidate and from quarter to quarter. The process of seeking regulatory approvals, and the subsequent compliance with applicable regulations, requires the expenditure of substantial resources.

General and Administrative Expenses

General and
administrative expenses consist primarily of compensation, including non-cash, stock-based compensation, for employees in executive and operational functions, including finance, legal, human resources and business development. Other significant
costs include facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents and our other intellectual property rights.

Critical Accounting Policies

Our discussion and
analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. We review our estimates on an ongoing basis. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. While our significant accounting policies are described
in more detail in the notes to our financial statements included in this report, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.



Revenue Recognition

Our revenues are generated by complex collaborative research and licensing arrangements. Revenues under such agreements may include upfront payments,
research funding, milestone payments and royalties. In accordance with Emerging Issues Task Force (EITF) Issue No. 00-21,Revenue Arrangements with Multiple Deliverables, we evaluate whether the delivered element under these arrangements has
value to our collaborative partner or licensee on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered element exists. Arrangements with multiple deliverables that do not meet these criteria are treated as
one unit of accounting for purposes of revenue recognition.

Revenues from nonrefundable upfront technology license fees, for product
candidates where we are providing continuing services related to product development, are deferred and recognized as revenues ratably over the estimated period of performance under the research agreement. The performance period is estimated at the
inception of the arrangement and is periodically reevaluated. The reevaluation of the performance period may shorten or lengthen the period during which the deferred revenue is recognized, which would result in an acceleration or delay of expected
revenue recognition.

Research funding is recognized as revenue as the related effort is performed.

Milestone payments we receive under collaborative arrangements are recognized as revenues upon achievement of the milestone events, which represent the
culmination of the earnings process, and when collectability is reasonably assured. Milestone payments are triggered either by the results of our research efforts or by events external to us, such as regulatory approval to market a product or the
achievement of specified sales levels by a marketing partner or licensee. Accordingly, the milestone payments are substantially at risk at the inception of the contract, and the amounts of the payments assigned thereto are commensurate with the
milestone achieved. Upon the achievement of a milestone event, we have no future performance obligations related to that milestone as the milestone payments we receive are nonrefundable.



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##### Table of Contents

Stock Compensation

The Company accounts for its stock-based compensation utilizing the fair value recognition provisions of Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment (SFAS 123
(R)). Under the fair value recognition provisions for SFAS 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the awards expected to vest and recognized as expense ratably over the requisite service
period of the award. We have used the Black-Scholes valuation model to estimate fair value of our stock-based awards which requires various judgmental assumptions including estimating stock price volatility, forfeiture rates and expected life. Our
computation of expected volatility is based on a combination of peer companies historical volatilities and our market-based implied volatility. In addition, we consider many factors when estimating expected forfeitures and expected life,
including types of awards, employee class and historical experience. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the
current period.

Preclinical Study Activities and Other Expenses from Third-Party Contract Research Organizations

Some of our research and development, including certain preclinical study activity, is conducted by various third parties, including contract research
organizations, which may also provide contractually defined administration and management services. We recognize expenses for these contracted activities based upon a variety of factors, including estimated and actual labor hours, actual and
estimated patient enrollment rates, clinical site initiation activities and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made
accordingly.

Results of Operations

Comparison
of the Three and Six Months Ended June 30, 2007 and 2006

Revenue

Total revenue and dollar and percentage changes as compared to the prior period are as follows (dollar amounts are in thousands):



|                        |  |                            |       |                           |      |   |       |  |   |       |   |  |   |      
|----------------------- |  | -------------------------- | ----- | ------------------------- | ---- | - | ----- |  | - | ----- | - |  | - | -----
|                        |  | Three MonthsEnded June 30, |       | Six Months Ended June 30,
|                        |  | 2007                       |       |                           | 2006 |   | 2007  |  |   | 2006 
|Pfizer collaboration    |  | $                          | 5,816 |                           |      | $ | 3,650 |  | $ | 7,133 |   |  | $ | 5,800
|Genentech collaboration |  |                            |      |                           |      |   |      |  |   |      |   |  |   | 328  
|                        |  |                            |       |                           |      |   |       |  |   |       |   |  |   |      
|Total revenue           |  |                            | 5,816 |                           |      |   | 3,650 |  |   | 7,133 |   |  |   | 6,128
|Dollar change           |  | $                          | 2,166 |                           |      |   |       |  | $ | 1,005 |   |  |   |      
|Percentage change       |  |                            | 59    | %                         |      |   |       |  |   | 16    | % |  |   |      

All of the revenue earned in the three and six months ended June 30, 2007 was related to our
agreements with Pfizer. Under the agreements with Pfizer we received an upfront license fee of $10.0 million in July 2005 and receive research funding for the collaborative research term. We recorded the upfront license fee as deferred revenue and
were recognizing it as contract revenue on a straight-line basis over the initially estimated research period of two years. On April 9, 2007, the Company and Pfizer amended the collaborative research agreement to extend the term of the
agreement by an additional twelve months. Under the terms of the extension, Pfizer will provide additional research funding to Renovis through June 30, 2008.

As a result of the amended agreement, the Company revised the estimated completion date of the research term from June 30, 2007 to June 30, 2008. Accordingly, the Company began recognizing the remaining
deferred revenue as of December 31, 2006, $2.5 million, on a straight-line basis through the new estimated completion date of the research period, June 30, 2008. This change in the research term resulted in less revenue related to the
upfront license fee being recognized in the six months ended June 30, 2007 as compared to the prior year. However, the decrease in upfront license fee revenue was offset by the recognition of milestone revenue of $4.5 million in the three and
six months ended June 30, 2007 as compared to milestone revenue of $1.5 million in the corresponding prior year periods. The milestones achieved in 2007 include the placement of a second product candidate from the VR1 program into IND-enabling
studies as well as completion of certain studies with a previously nominated compound.

We expect that any revenue we may earn will
fluctuate from quarter to quarter as a result of the timing and amount of any milestone payments we earn or any new collaborations into which we may enter in the future. For the year ending December 31, 2007, we presently anticipate contract
revenue from existing agreements of $9.0 million to $10.0 million.

Research and Development Expenses

Total research and development (R&D) expenses and dollar and percentage changes as compared to the prior period are as follows (dollar amounts are in
thousands):



|                  |  |                            |        |                           |      |   |       |  |   |        |   |  |   |       
|----------------- |  | -------------------------- | ------ | ------------------------- | ---- | - | ----- |  | - | ------ | - |  | - | ------
|                  |  | Three MonthsEnded June 30, |        | Six Months Ended June 30,
|                  |  | 2007                       |        |                           | 2006 |   | 2007  |  |   | 2006  
|Total R&D expense |  | $                          | 5,780  |                           |      | $ | 6,982 |  | $ | 14,208 |   |  | $ | 13,854
|Dollar change     |  |                            | (1,202 | )                         |      |   |       |  |   | 354    |   |  |   |       
|Percentage change |  |                            | (17    | )%                        |      |   |       |  |   | 3      | % |  |   |       



14



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##### Table of Contents

The decrease in R&D expense between the second quarter of 2007 and the second quarter of 2006 was
attributable to:



| |  |  | lower employee compensation which decreased by $0.7 million primarily due to the fewer number of employees in R&D functions following the restructuring
undertaken in January 2007;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower expense for supplies and materials, which decreased by $0.5 million, also due to our restructuring, as fewer research projects were conducted internally as we
shifted more research work to outside suppliers; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower allocated costs, which decreased by $0.4 million, due to reduced insurance and employee compensation expenses in allocated cost centers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------

This decrease was partially offset by:



| |  |  | higher expenses for outside services, which increased by $0.4 million as we shifted more research projects to outside service providers.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------

The increase in R&D expense between the first half of 2007 and the first half of 2006 was attributable to:



| |  |  | higher non-cash stock compensation related to options granted to employees, which increased by $1.3 million during the six months ended June 30, 2007 as
compared to the corresponding period in 2006 primarily due to the repurchase and cancellation of outstanding stock options from certain officers of the Company in January 2007, which resulted in a one time non-cash charge of $1.4 million in R&D.
The repurchase and cancellation of the outstanding options was undertaken to make additional shares available for the grant of new equity incentives to non-executive employees; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | higher outside service costs, which increased by $0.6 million as we shifted more research projects to outside service providers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------

This increase was partially offset by:



| |  |  | lower expense for supplies and materials which decreased by $0.6 million;
| | - |  | -------------------------------------------------------------------------



| |  |  | lower non-employee stock compensation which decreased by $0.4 million during the six months ended June 30, 2007 as compared to the comparable period of 2006
because fewer options were granted to non-employees and the estimated fair value of each option granted was lower than in the comparable period; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower allocated costs and travel expenses of $0.4 million.
| | - |  | ----------------------------------------------------------

We expect R&D expenses, excluding non-cash stock compensation and approximately $0.8 million in restructuring related expenses, to decrease as compared to 2006 as a result of voluntary attrition and the effect of
our restructuring carried out during the first quarter of 2007.

General and Administrative Expenses

Total general and administrative (G&A) expenses and dollar and percentage changes as compared to the prior period are as follows (dollar amounts are
in thousands):



|                  |  |                            |       |                          |      |   |       |  |   |        |   |  |   |      
|----------------- |  | -------------------------- | ----- | ------------------------ | ---- | - | ----- |  | - | ------ | - |  | - | -----
|                  |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                  |  | 2007                       |       |                          | 2006 |   | 2007  |  |   | 2006  
|Total G&A expense |  | $                          | 2,927 |                          |      | $ | 3,730 |  | $ | 12,018 |   |  | $ | 7,633
|Dollar change     |  |                            | (803  | )                        |      |   |       |  |   | 4,385  |   |  |   |      
|Percentage change |  |                            | (22   | )%                       |      |   |       |  |   | 57     | % |  |   |      

The decrease in G&A expense between the second quarter of 2007 and the second quarter of 2006
was primarily attributable to:



| |  |  | lower non-cash stock based compensation of $0.4 million for options granted to employees and non-employee directors due to the lower estimated fair-value of the
options that vested and were expensed during the period;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower employee compensation which decreased by $0.2 million primarily due to the fewer number of employees in G&A functions following the restructuring
undertaken in January 2007; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower legal expenses which decreased by $0.1 million as we incurred less cost associated with corporate and securities, business development and intellectual
property issues.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The increase in G&A expense between the first half of 2007 and the first half of 2006 was
attributable to:



| |  |  | higher non-cash stock compensation for options granted to employees and non-employee directors which increased by $5.2 million during the six months ended
June 30, 2007 as compared to the corresponding periods in 2006 primarily due the repurchase and cancellation of outstanding stock options from certain officers of the Company in January 2007 which resulted in a one time non-cash charge of $5.9
million in G&A;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This was partially offset by



| |  |  | lower legal expenses which decreased by $0.3 million as we incurred less cost associated with corporate and securities, business development and intellectual
property issues; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lower non-employee stock compensation which decreased by $0.3 million due to a lower estimated fair value of the options granted to date in 2007.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

We expect G&A expenses, excluding non-cash stock compensation and approximately $0.2 million in restructuring
related expense, to decrease as compared to 2006 following our restructuring.



15



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##### Table of Contents

Interest Income

Total interest income and dollar and percentage changes as compared to prior periods are as follows (dollar amounts are in thousands):



|                      |  |                            |       |                          |      |   |       |  |   |       |    |  |   |      
|--------------------- |  | -------------------------- | ----- | ------------------------ | ---- | - | ----- |  | - | ----- | -- |  | - | -----
|                      |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                      |  | 2007                       |       |                          | 2006 |   | 2007  |  |   | 2006 
|Total interest income |  | $                          | 1,159 |                          |      | $ | 1,351 |  | $ | 2,374 |    |  | $ | 2,613
|Dollar change         |  |                            | (192  | )                        |      |   |       |  |   | (239  | )  |  |   |      
|Percentage change     |  |                            | (14   | )%                       |      |   |       |  |   | (9    | )% |  |   |      

The decrease in interest income in the three and six months ended June 30, 2007 as compared
to the corresponding periods in 2006 was primarily attributable to lower average investment balances in 2007.

Interest Expense

Interest expense was nominally higher during the six months ended June 30, 2007 as compared to the corresponding period in 2006. The increase was
primarily due to the higher aggregate debt balances and slightly higher borrowing interest rates in 2007.

2007 Financial Guidance

Financial projections involve a high level of uncertainty due, among many factors, to the variability involved in predicting requirements of drug
discovery and preclinical development activities and the potential for new strategic collaborations and licensing agreements. For the year ending December 31, 2007, the Company continues to anticipate:



| |  |  | total contract revenue from existing agreements of $9.0 million to $10.0 million; and
| | - |  | -------------------------------------------------------------------------------------



| |  |  | total operating expenses of $28.0 million to $32.0 million, excluding non-cash, stock-based compensation to be recognized in accordance with SFAS No. 123R and
$1.0 million in restructuring related expenses.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Liquidity and Capital Resources

To date, we have funded our operations primarily through the sale of equity securities as well as through equipment and leasehold improvement financing. As of June 30, 2007, we had received approximately $222.8
million from the sale of equity securities. In February 2004, we received approximately $71.4 million from our initial public offering of common stock and concurrent private placement with Genentech. In September 2005, we completed a public offering
of common stock under which we received net proceeds of approximately $50.4 million. In addition, since inception to June 30, 2007, we financed the purchase of equipment and leasehold improvements with debt totaling approximately $15.2 million,
of which $4.1 million was outstanding at June 30, 2007. The remaining obligations are secured by the purchased equipment and leasehold improvements, bear interest at rates ranging from approximately 8.8% to 10.67% and are due in monthly
installments through September 2010.

As of June 30, 2007, we had $85.8 million in cash, cash equivalents and short-term investments
as compared to $99.1 million as of December 31, 2006, a decrease of $13.3 million. The decrease resulted primarily from cash used in operating activities, capital purchases and principal payments on outstanding debt related to capital purchases
as well as $1.0 million in non-recurring restructuring costs. Our cash and investments are invested in a diversified portfolio of financial instruments, including money market instruments, corporate notes and bonds, government or governmental agency
securities and other debt securities issued by financial institutions and other issuers with strong credit ratings.

In January 2007 we
implemented a restructuring plan which resulted in the Company reducing its workforce by approximately 40% of its positions. The restructuring was designed to reduce spending while maintaining the research and development capabilities needed to
advance the Companys late-stage preclinical drug discovery programs. As a result of the restructuring and broader efforts to reduce spending on general and administrative activities, we expect to record total operating expenses of
approximately $28.0 million to $32.0 million in 2007, excluding non-cash, stock-based compensation expense to be recognized in accordance with SFAS 123(R) and approximately $1.0 million in restructuring related expense.

Net cash used in operating activities was $12.4 million for the six months ended June 30, 2007 as compared to $12.0 million in the corresponding
period in 2006. The $0.4 million increase in cash used in operations in the six months ended June 30, 2007 as compared to the corresponding period in 2006 primarily reflected the impact of the restructuring as well as an increase in aggregate
variable compensation paid to employees during the first part of 2007 for their efforts in 2006 and higher payments for insurance premiums. In the second quarter of 2007, we recorded $4.5 million in revenue related to the milestones achieved in the
period. This $4.5 million, which was collected in July 2007, was recorded as accounts receivable from collaborative partner in the accompanying balance sheet.

Net cash provided by investing activities was $11.0 million for the six months ended June 30, 2007 as compared to net cash provided by investing activities of $67.6 million for the corresponding period in 2006.
The fluctuation resulted primarily from timing differences in the investment purchases, sales and maturities and the fluctuations in our portfolio mix between cash equivalents and short-term investments. We expect similar fluctuations to continue in
the future. Capital equipment purchases of $0.1 million for the six months ended June 30, 2007 were significantly below the $1.8 million in capital purchases made during the corresponding period in 2006. We currently expect total capital
equipment purchases for 2007 to be below $1.0 million.

Net cash used by financing activities was $0.8 million for the three month period
ended June 30, 2007 compared to net cash of $2.3 million provided by financing activities during the corresponding period in 2006. Cash used by financing activities in the six months ended June 30, 2007 is higher than the comparable period
of 2006 as the Company did not receive proceeds from equipment financing in the first quarter of 2007.

Our future capital uses and
requirements depend on numerous forward-looking factors. These factors include but are not limited to the following:



| |  |  | the progress of preclinical development and laboratory testing and clinical trials;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the time and costs involved in obtaining regulatory approvals;
| | - |  | --------------------------------------------------------------



| |  |  | delays that may be caused by evolving requirements of regulatory agencies;
| | - |  | --------------------------------------------------------------------------



| |  |  | the number of product candidates we pursue;
| | - |  | -------------------------------------------



| |  |  | the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | our plans to establish or acquire sales, marketing and/or manufacturing capabilities;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the acquisition of technologies, products and other business opportunities that require financial commitments; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | our revenues, if any, from successful development and commercialization of our products.
| | - |  | ----------------------------------------------------------------------------------------



Based on current projections, the Company expects current cash, cash
equivalents, and marketable securities to be sufficient to fund projected activities at least through the end of 2009.

Until we can
generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources. We will be required to seek additional sources of funding to complete development and commercialization of our products. When
we raise funds in the future, we may be required to raise those funds through public or private financings, strategic relationships or other arrangements. We cannot assure you that such funding will be available on terms attractive to us, or at all.
Furthermore, any additional equity financing will be dilutive to stockholders, and debt financing, if available, may involve restrictive covenants. Our inability to raise capital as and when needed could have a negative impact on our financial
condition and our ability to pursue our business strategy.

We did not have any relationships with unconsolidated entities or financial
partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
In addition, we do not engage in trading activities involving non-exchange traded contracts. Therefore, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships. We do
not have relationships or transactions with persons or entities that derive benefits from their non-independent relationship with us or our related parties.

In October 2006, we filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $150.0 million of any combination of debt securities, common stock, preferred stock and warrants.
The SEC has not declared this registration statement effective and securities may not be sold, nor may offers to buy the securities be accepted, prior to the time this registration statement becomes effective. The terms of any offering will be
determined at the time of such offering. In 2005 we filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $100.0 million of any combination of debt securities, common stock, preferred stock and warrants.
The SEC declared this registration statement effective in May 2005. In September 2005, we sold 4,000,000 shares of common stock to the public under this registration statement at $13.50 per share for gross proceeds of $54 million. As of
June 30, 2007, $46.0 million remains available under this registration statement.



17



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable securities. Due
to the nature of our short-term investments, we believe that we are not subject to any material market risk exposure. We do not have any foreign currency or other derivative financial instruments.



|Item 4. | Controls and Procedures
|------- | -----------------------

We maintain disclosure
controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Vice President, Finance and Chief Accounting Officer, as appropriate, to allow for timely
decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Vice President, Finance and Chief Accounting Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based
on the foregoing, our Chief Executive Officer and Vice President, Finance and Chief Accounting Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in our internal controls over financial reporting during our most recent quarter that has materially affected, or is reasonably
likely to materially affect, our internal controls over financial reporting.



18



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##### Table of Contents

Part II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

We are not currently a party to
any material legal proceedings. We may from time to time become a party to various legal proceedings arising in the ordinary course of business.



|Item 1A. | Risk Factors
|-------- | ------------

An investment in our common stock
is very risky. You should carefully consider the risks described below, together with all of the other information in this report before making a decision to invest in our common stock. If any of the following risks actually occur, our business,
financial condition, results of operations and growth prospects could be adversely affected. In this case, the trading price of our common stock could decline and you may lose all or part of your investment in our common stock. Additional risks and
uncertainties, not presently known to us, or that we presently deem as immaterial, may also adversely affect our business. If any of these additional risks and uncertainties occur, the trading price of our common stock could decline, and you might
lose all or part of your investment.

Risks Related to Our Company

We are an early stage biopharmaceutical company without commercial products, and we cannot assure you that we will successfully develop and commercialize potential products.

You must evaluate us in light of the uncertainties and complexities inherent in an early stage biopharmaceutical company. All of our product candidates
are in early stages of development and the commercialization of those products will not occur, if at all, for at least the next several years. Our future success is dependent upon, among other factors, our ability to develop viable product
candidates, successfully complete clinical trials and obtain regulatory approval for those product candidates. All of our early stage drug discovery programs are focused on unproven molecular disease targets and will require extensive additional
research and development prior to the commercial introduction of any product candidates. There can be no assurance that any of our research and development and clinical trial efforts, or those of our strategic partners and licensees, will result in
viable new products. For example, in October 2006, AstraZeneca, our exclusive licensee for NXY-059 indicated its intention to discontinue the development of that product candidate following the announcement that it did not meet the primary or
secondary endpoints in a pivotal Phase III study. Also, in August 2005, based on results of our Phase II clinical trials with REN-1654 in patient volunteers with post-herpetic neuralgia and sciatica, we announced that we were discontinuing
development of REN-1654 as an oral medication and, in June 2005, we announced our decision to discontinue efforts to develop REN-850 for the treatment of multiple sclerosis. Finally, in July 2004, we announced our decision to discontinue efforts to
commercialize REN-213, an intravenous drug candidate we were developing for the treatment of acute post-operative pain.

We depend on the efforts of
strategic partners and licensees to develop and commercialize many of our product candidates.

Currently, we depend on the efforts
of Pfizer in connection with our collaborative research agreement and license and royalty agreement to research, develop and commercialize compounds that target the vanilloid receptor (VR1). We may consider additional collaborative arrangements for
certain of our proprietary product candidates. We cannot control the time or resources that Pfizer or any future strategic partners or licensees will devote to our collaborations with those parties, nor can we control their business decisions. In
addition, our collaborators may not perform their obligations as expected. Changes in a collaborators business strategy or business combinations involving a collaborator may adversely affect that partys willingness or ability to
successfully meet its obligations. Disagreements between us and our collaborators may lead to delays in or termination of the research, development or commercialization of product candidates or result in time-consuming and expensive negotiations,
litigation or arbitration. The failure of any strategic partner or licensee to successfully complete their obligations in a timely manner or the termination or breach of agreements by these parties, could materially harm our business, financial
condition and results of operations.

The successful growth of our business may depend, in part, on our ability to find third party collaborators to
assist or share in the costs of product development.

Our strategy for the development and commercialization of our proprietary
product candidates may include the formation of collaborative arrangements with third parties. Potential third parties include pharmaceutical and biotechnology companies, academic institutions and other entities. Third party collaborators may assist
us in:



| |  |  | funding research, preclinical development, clinical trials and manufacturing;
| | - |  | -----------------------------------------------------------------------------



| |  |  | seeking and obtaining regulatory approvals; and
| | - |  | -----------------------------------------------



| |  |  | successfully commercializing existing and future product candidates.
| | - |  | --------------------------------------------------------------------



If we are not able to establish further collaboration agreements, we may be
required to undertake product development and commercialization at our own expense. Such an undertaking may limit the number of product candidates that we will be able to develop, significantly increase our capital requirements and place additional
strain on our internal resources. Our failure to enter into additional collaborations could materially harm our business, financial condition and results of operations.

In addition, our dependence on licensing, collaboration and other agreements with third parties may subject us to a number of risks. These agreements may not be on terms that prove favorable to us and may require us
to relinquish certain rights in our technologies and product candidates. To the extent we agree to work exclusively with one collaborator in a given area, our opportunities to collaborate with other entities could be curtailed. Lengthy negotiations
with potential new collaborators may lead to delays in the research, development or commercialization of product candidates. The decision by our collaborators to pursue alternative technologies or the failure of our collaborators to develop or
commercialize successfully any product candidate to which they have obtained rights from us could materially harm our business, financial condition and results of operations.

The contract research organizations and independent clinical investigators that we and our strategic partners or licensees rely upon to conduct preclinical studies and clinical trials may not be diligent,
careful or timely, and may make mistakes in the conduct of these studies.

We depend on contract research organizations, or CROs,
and independent clinical investigators to conduct certain preclinical studies and clinical trials under agreements with us or our collaborators. In our preclinical research programs, we depend on CROs to conduct certain medicinal chemistry and in
vivo testing activities that we are not staffed to perform ourselves. In addition, we and our collaborators may rely on independent clinical investigators to conduct future clinical trials of our product candidates. For example, before AstraZeneca
decided to discontinue development of NXY-059, we depended on independent clinical investigators and CROs to conduct clinical trials of NXY-059 under their agreements with AstraZeneca. The personnel at these organizations are not our employees and
we cannot control the



19



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##### Table of Contents

amount or timing of resources that they devote to our programs. Our contracts with these entities may involve fixed fees and if the costs of performing the
research activities or clinical trials exceed estimates, they may fail to devote sufficient time and resources to our drug discovery and development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a
satisfactory manner. Failure of the CROs and independent investigators to meet their obligations could adversely affect the development of our product candidates and delay the regulatory approval and commercial introduction of our product
candidates. Moreover, these CROs and independent investigators may also have relationships with other commercial entities, some of which may compete with us. If CROs and independent investigators assist our competitors, it could harm our competitive
position.

Failure to enroll patients for clinical trials may cause delays in developing our product candidates.

We may encounter delays or rejections of our product candidates if we or our strategic partners or licensees are unable to enroll enough patients to
complete clinical trials. Patient enrollment depends on many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical sites, the eligibility criteria for the trial and the number and
size of ongoing clinical trials sponsored by others that seek to enroll similar patients. When one product candidate is evaluated in multiple clinical trials simultaneously, patient enrollment in ongoing trials can be adversely affected by negative
results from completed trials. Any delays in planned patient enrollment may result in increased costs and delays, which could harm our ability to develop products.

Clinical trials have in the past and may in the future fail to demonstrate the safety and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval and may adversely affect our business
and stock price.

Any failure or substantial delay in completing clinical trials for our product candidates may severely harm our
business. Before obtaining regulatory approval for the sale of any of our potential products or the potential products of our current and future strategic partners and licensees, we and our strategic partners or licensees must subject these product
candidates to extensive preclinical and clinical testing to demonstrate their safety and efficacy in humans. The success of this preclinical and clinical testing is critical to achieving our product development goals. If our product development
efforts are unsuccessful, we will not obtain regulatory approval for them, we will not generate sales from them, and our business and results of operations would be adversely affected.

Clinical trials are expensive, time-consuming and typically take years to complete. In connection with clinical trials, we face the risks that:



| |  |  | a product candidate may not prove to be efficacious;
| | - |  | ----------------------------------------------------



| |  |  | we may discover that a product candidate may cause harmful side effects;
| | - |  | ------------------------------------------------------------------------



| |  |  | patients may die or suffer other adverse medical effects for reasons that may not be related to the product candidate being tested;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the results may not confirm the positive results of earlier trials; and
| | - |  | -----------------------------------------------------------------------



| |  |  | the results may not meet the level of statistical significance required by the U.S. Food and Drug Administration, or FDA, or other regulatory agencies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------

The results in early phases of clinical testing are based upon limited numbers of patients and a limited follow-up
period and success in early phase trials may not be indicative of results in a large number of patients or long-term efficacy. A number of companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in late stage
clinical trials even after achieving promising results in earlier development activities, including previous late-stage clinical trials. For example, the results from the Phase III SAINT I trial for our lead product candidate, NXY-059, were not
predictive of results obtained in the second and larger Phase III clinical trial, SAINT II, and following the announcement of the results of the SAINT II clinical trial and the decision by AstraZeneca to discontinue the development of NXY-059, our
stock price declined significantly. Failure to demonstrate the safety and effectiveness of our product candidates in larger patient populations could prevent or significantly delay their regulatory approval and may adversely affect our business and
our stock price.

If we or our strategic partners or licensees fail to obtain U.S. regulatory approvals for product candidates under development, we
will not be able to generate revenue in the U.S. market from the commercialization of product candidates.

We must receive FDA
approval for each of our product candidates before we can commercialize or sell that product candidate in the United States. The FDA can limit or deny its approval for many reasons, including:



| |  |  | a product candidate may be found to be unsafe or ineffective;
| | - |  | -------------------------------------------------------------



| |  |  | regulators may interpret data from preclinical testing and clinical trials differently and less favorably than we interpret it;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulators may not approve the manufacturing processes or facilities that we or our strategic partners or licensees use; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | regulators may change their approval policies or adopt new regulations.
| | - |  | -----------------------------------------------------------------------

Failure to obtain FDA approval or any delay or setback in obtaining such approval could:



| |  |  | adversely affect our ability to market any drugs we develop independently or with strategic partners or licensees;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | impose additional costs and diminish any competitive advantages that we may attain; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | adversely affect our ability to generate royalties or product revenues.
| | - |  | -----------------------------------------------------------------------

Any such failures or delays in the regulatory approval process for any of our product candidates would delay or diminish our receipt of product revenues,
if any, and would materially adversely affect our business, financial condition and results of operations.

Even if we obtain FDA approval,
our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product sales. If FDA approval of a product is granted, such approval may be
subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies. As to any product for which marketing approval is obtained, the labeling, packaging, adverse event reporting,
storage, advertising, promotion and record keeping related to the product will be subject to extensive regulatory requirements. The subsequent discovery of previously unknown problems with the product may result in restrictions on the product,
including withdrawal of the product from the market. We may be slow to adapt, or we may never adapt, to changes in existing requirements or adoption of new requirements or policies.

If we fail to comply with applicable U.S. regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, injunctions, civil penalties and criminal prosecution.



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If we or our strategic partners or licensees fail to obtain regulatory approvals in other countries for product
candidates under development, we will not be able to generate revenue in such countries from the commercialization of product candidates.

In order to market our products outside of the United States, we and our strategic partners and licensees must comply with numerous and varying regulatory requirements of other countries regarding safety and efficacy. Approval procedures
vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that required to obtain FDA approval. The regulatory approval
process in other countries may include all of the risks detailed above regarding FDA approval in the United States. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay in obtaining regulatory
approval in one country may negatively impact the regulatory processes in others. Failure to obtain regulatory approval in other countries or any delay or setback in obtaining such approval could have the same adverse effects detailed above
regarding FDA approval in the United States, including the risks that our product candidate may not be approved for all indications that we request, which could limit the uses of our product and adversely impact our potential royalties and product
sales, and that such approval may be subject to limitations on the indicated uses for which the product may be marketed or require costly, post-marketing follow-up studies.

If we fail to comply with applicable foreign regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals,
product recalls, seizure of products, operating restrictions, injunctions, civil penalties and criminal prosecution.

Even if our product candidates
are approved and commercialized, competitive products may impede market acceptance of our products.

Hospitals, physicians or
patients may conclude that our potential products are less safe or effective or otherwise less attractive than existing drugs. Even if approved and commercialized, any future product candidates may fail to achieve market acceptance with hospitals,
physicians or patients. If our products do not receive market acceptance for any reason, our revenue potential could be diminished which would materially adversely affect our business, financial condition and results of operations. Further, our
competitors may develop new products that could be more effective or less costly, or that may seem more cost-effective, than our products.

Most of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical trials and obtaining regulatory approvals, as well as in manufacturing and marketing
pharmaceutical products. As a result, they may achieve product commercialization or patent protection earlier than we can, if at all. Hospitals, physicians, patients or the medical community in general may not accept and use any products that we may
develop.

We have no experience selling, marketing or distributing products and no internal capability to do so.

If we receive regulatory approval to commence commercial sales of any of our product candidates for which we have retained marketing rights, we will have
to establish a sales and marketing organization with appropriate technical expertise and supporting distribution capability. At present, we have no sales or marketing personnel. Factors that may inhibit our efforts to commercialize our products
without strategic partners or licensees include:



| |  |  | our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the inability of sales personnel to obtain access to or persuade adequate numbers of physicians to prescribe our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage against companies with broader product lines;
and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen costs associated with creating an independent sales and marketing organization.
| | - |  | ------------------------------------------------------------------------------------------

As an alternative to establishing our own sales and marketing organization, we may engage a pharmaceutical or other healthcare company with an existing
distribution system and direct sales organization to assist us. We may not be able to successfully establish sales and distribution capabilities either on our own or in collaboration with third parties or gain market acceptance for our products. To
the extent we enter co-promotion or other licensing arrangements, any revenues we receive will depend on the efforts of third parties, and we may not succeed.

If our partners, licensees or contract manufacturers of our products fail to devote sufficient time and resources to our concerns, or if their performance is substandard, our clinical trials and product introductions may be delayed
and our costs may rise.

We have no manufacturing facilities, and we have no experience in the commercial manufacturing of drugs and
no experience in designing drug manufacturing processes. We depend on our partners, licensees and contract manufacturers to produce our product candidates for clinical trials and to manufacture, supply, store and distribute any resulting products.

While we have not experienced problems with our partners, licensees or contract manufacturers to date, our reliance on these third parties
exposes us to the following risks, any of which could delay or prevent the initiation or completion of our clinical trials, the approval of our product candidates by the FDA or other regulatory agencies, or the commercialization of our products, and
result in higher costs or deprive us of potential product revenues:



| |  |  | Drug manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of any of our partners,
licensees or contract manufacturers to establish and follow cGMPs and to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials and may delay or prevent filing or approval of
marketing applications for our products.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changing contract manufacturers may be difficult and the number of potential manufacturers is limited. Changing manufacturers may require re-validation of the
manufacturing processes and procedures in accordance with FDA-mandated cGMPs. Such re-validation may be costly and time-consuming. It may be difficult or impossible for us to find replacement manufacturers on acceptable terms quickly, or at all.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Drug manufacturers are subject to ongoing periodic unannounced inspections by the FDA and corresponding state and
foreign agencies to ensure strict compliance with cGMPs, other government regulations and corresponding foreign standards. We are not aware of any violations by our partners, licensees or contract manufacturers of any of these regulations or
standards. While we are obligated to audit the performance of our contractor manufacturers, we do not have control over their compliance with these regulations and standards. Failure by our partners, licensees, contract manufacturers or us to comply
with applicable regulations could result in sanctions that would have a material adverse effect on our business, including fines, injunctions, civil penalties, failure of the government to grant premarket approval of drugs, delays, suspension or
withdrawal of approvals, seizures or recalls of product, operating restrictions and criminal prosecutions.



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We or our strategic partners or licensees may not be able to manufacture our product candidates in commercial
quantities, which would prevent us from commercializing our product candidates.

To date, our product candidates have been
manufactured in small quantities for preclinical and clinical trials. If any of these product candidates are approved by the FDA or other regulatory agencies for commercial sale, they will need to be manufactured in larger quantities. We or our
strategic partners or licensees, as applicable, may not be able to successfully increase the manufacturing capacity, whether in collaboration with contract manufacturers or independently, for any of our product candidates in a timely or economic
manner, or at all. Significant scale-up of manufacturing may require additional validation studies, which the FDA must review and approve. If we or our strategic partners or licensees are unable to successfully increase the manufacturing capacity
for a product candidate, the regulatory approval or commercial launch of that product candidate may be delayed or there may be a shortage in supply. Our product candidates require precise, high quality manufacturing. Failure to achieve and maintain
these high manufacturing standards, including the incidence of manufacturing errors, could result in patient injury or death, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that
could seriously hurt our business.

If we are unable to retain and recruit qualified scientists or if any of our key executives, key employees or key
consultants discontinues his or her employment or consulting relationship with us, it may delay our development efforts or otherwise harm our business.

We are highly dependent on the key members of our management and scientific staff, especially our President and Chief Executive Officer, Corey Goodman, Ph.D. and our Senior Vice President of Research and Development,
Michael Kelly, Ph.D. The loss of any of our key employees or key consultants could impede the achievement of our research and development objectives. Furthermore, recruiting and retaining qualified scientific personnel to perform research and
development work in the future is critical to our success. We may be unable to attract and retain personnel on acceptable terms given the competition among biotechnology, pharmaceutical and health care companies, universities and non-profit research
institutions for experienced scientists. We maintain key man insurance on Dr. Goodman. We do not maintain key man insurance policies on any of our other officers or employees. All of our employees are employed at
will and, therefore, each employee may leave our employment at any time.

Among other equity incentive compensation, we have granted
deferred stock units and stock options as a method of attracting and retaining employees, motivating performance and aligning the interests of employees with those of our stockholders. Due to fluctuations in the trading price of our common stock, a
substantial portion of the stock options held by our employees have exercise prices that are significantly higher than the current trading price of our common stock. If we are unable to implement and maintain equity compensation arrangements that
provide sufficient incentives, we may be unable to retain our existing employees and attract additional qualified candidates.

In
January 2007, we announced a restructuring plan, which included a reduction in headcount. The implementation of our restructuring has placed, and may continue to place a strain on our managerial, operational and other resources. In addition,
the restructuring may negatively affect our employee turnover, recruiting and retention, and may not enable us to reduce our costs to the extent anticipated.

If we are unable to retain our existing employees, including qualified scientific personnel, and attract additional qualified candidates, or if we are unable to reduce costs through our restructuring as anticipated,
our business and results of operations could be adversely affected.

We have a history of losses and we may never achieve sustained profitability.

Since our inception, we have incurred significant net losses, including net losses of $28.4 million, $32.0 million, $39.9 million,
$41.9 million and $25.1 million, respectively, for the years ended December 31, 2006, 2005, 2004, 2003 and 2002, and $16.9 million for the six months ended June 30, 2007. As of June 30, 2007, our accumulated deficit was $199.3
million. None of our product candidates has completed development or received required regulatory approvals and, consequently, we have not generated revenues from the sale of products and do not expect to do so for at least the next several years.
Even if one or more of our product candidates is commercialized, we expect to incur substantial losses for the foreseeable future. The development and sale of our products will require completion of clinical trials and significant additional
research and development activities. We expect to continue to incur significant operating expenditures in the foreseeable future as we:



| |  |  | expand our research and development programs; and
| | - |  | -------------------------------------------------



| |  |  | advance new product candidates into clinical development from our existing research programs.
| | - |  | ---------------------------------------------------------------------------------------------



We also expect to experience negative cash flow for the foreseeable future as
we fund our operating losses and capital expenditures. We will need to generate significant revenues to achieve profitability. Our ability to generate revenues and achieve profitability depends on successful completion of clinical trials, our
additional research and development efforts, our ability to successfully commercially introduce our products, market acceptance of our products, the competitive position of our products and the other risk factors set forth in this report. We may not
be able to generate these revenues, and we may never achieve profitability. Our failure to achieve, sustain and/or increase profitability on a quarterly or annual basis could negatively impact the market price of our common stock.



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If we cannot raise additional capital on acceptable terms, we may be unable to complete clinical trials, obtain
regulatory approvals or commercialize our product candidates.

We believe that existing cash reserves will fund our planned
activities for more than the next 12 months. However, we will require substantial future capital in order to continue to conduct the research and development, clinical and regulatory activities necessary to bring our product candidates to market and
to establish commercial manufacturing, sales and marketing capabilities. During the six months ended June 30, 2007, our net cash used in operating activities was $12.4 million and we had capital expenditures of $0.1 million. Our future capital
requirements depend on many factors, including:



| |  |  | the progress of preclinical development and laboratory testing and clinical trials;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the time and costs involved in obtaining regulatory approvals;
| | - |  | --------------------------------------------------------------



| |  |  | delays that may be caused by evolving requirements of regulatory agencies;
| | - |  | --------------------------------------------------------------------------



| |  |  | the number of product candidates we pursue;
| | - |  | -------------------------------------------



| |  |  | the costs involved in filing and prosecuting patent applications and enforcing or defending patent claims;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | our plans to establish sales, marketing and/or manufacturing capabilities;
| | - |  | --------------------------------------------------------------------------



| |  |  | our ability to establish, enforce and maintain selected strategic alliances and activities required for product commercialization;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the acquisition of technologies, products or other companies and other business opportunities that require financial commitments; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our revenues, if any, from successful development and commercialization of our products.
| | - |  | ----------------------------------------------------------------------------------------

We intend to seek additional funding through strategic collaborations. We face intense competition from many other companies in the pharmaceutical and
biotechnology industry for corporate collaborations, as well as for establishing relationships with academic and research institutions and for obtaining licenses to proprietary technology. If we are unable to attract and retain corporate partners to
develop, introduce and market our products, our business may be materially and adversely affected. Our strategy and any reliance on corporate partners, if we are able to establish such collaborative relationships, are subject to additional risks.
Our collaborators may not devote sufficient resources to the development, introduction and marketing of our products or may not pursue further development and commercialization of products resulting from collaborations with us. If a corporate
partner elects to terminate its relationship with us, our ability to develop, introduce and market our products may be significantly impaired and we may be forced to discontinue the product altogether. We may not be able to negotiate alternative
corporate partnership agreements on acceptable terms, if at all. The failure of any collaboration efforts could have a material adverse effect on our ability to develop, introduce and market our products and, consequently, could have a material
adverse effect on our business, results of operations and financial condition.

In addition to strategic collaborations, we may seek
funding through private or public sales of our securities, entering into credit arrangements or licensing all or a portion of our technology. This funding may significantly dilute existing stockholders or may limit our rights to our technology.

In October 2006, we filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $150.0 million of
any combination of debt securities, common stock, preferred stock and warrants.

The SEC has not declared this registration statement
effective and securities may not be sold, nor may offers to buy the securities be accepted, prior to the time this registration statement becomes effective. The terms of any offering will be determined at the time of such offering. In addition, in
2005 we filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $100.0 million of any combination of debt securities, common stock, preferred stock and warrants. The SEC declared this registration statement
effective in May 2005. In September 2005, we sold 4,000,000 shares of common stock to the public under this registration statement at $13.50 per share for gross proceeds of $54.0 million. As of June 30, 2007, $46.0 million remains available
under this registration statement.

We may not be able to obtain additional funding on reasonable terms, or at all. If we cannot obtain
adequate funds, we may:



| |  |  | terminate or delay preclinical development or clinical trials for one or more of our product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | delay establishment, or fail to establish, sales, marketing and/or manufacturing capabilities;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | curtail significant product development programs that are designed to identify new product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | not be in a position to acquire technologies or pursue other business opportunities that require financial commitments; and/or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | relinquish rights to our technologies or product candidates.
| | - |  | ------------------------------------------------------------



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Risks Related to Our Industry

Claims that we infringe a third partys intellectual property may give rise to burdensome litigation, result in potential liability for damages or stop our development and commercialization efforts.

Third parties may assert patent or other intellectual property infringement claims against us or our strategic partners or
licensees with respect to technologies used in our potential products. While we have conducted patent searches to determine whether the technologies used in our products infringe patents held by third parties, we expect that numerous patent
applications are currently pending and may be filed in the future for technologies generally related to our technologies, including many patent applications that remain confidential after filing. Due to these factors and the inherent uncertainty in
conducting patent searches, we may violate third-party patent rights that we have not yet identified.

U.S. and foreign patents have been
issued to third parties in the same fields as some of our product candidates. There may also be patent applications filed by these or other parties in the United States and various foreign jurisdictions that are in the same fields as some of our
product candidates. These patent applications, if issued, could subject us to infringement actions. Although we have received communications from a third party alleging that we may infringe certain patents held by the third party, we do not believe
there is a reasonable basis for an action claiming that we are infringing any valid and enforceable patents of such third party. To date we have not been subject to any infringement actions.

The owners or licensees of these and other patents may file one or more infringement actions against us. Patent litigation can involve complex factual
and legal questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted against us may cause us to pay substantial damages.

Even if we were to prevail, any litigation could be costly and time-consuming and would divert the attention of our management and key personnel from our
business operations. Furthermore, as a result of a patent infringement suit brought against us or our strategic partners or licensees, we or our strategic partners or licensees may be forced to stop or delay developing, manufacturing or selling
potential products that are claimed to infringe a third partys intellectual property unless that party grants us or our strategic partners or licensees rights to use its intellectual property. In such cases, we may be required to obtain
licenses to patents or proprietary rights of others in order to continue to commercialize our products. However, we may not be able to obtain any licenses required under any patents or proprietary rights of third parties on acceptable terms, or at
all. Even if our strategic partners, licensees or we were able to obtain rights to the third partys intellectual property, these rights may be non-exclusive, thereby giving our competitors access to the same intellectual property. Ultimately,
we may be unable to commercialize some of our potential products or may have to discontinue development of a product candidate or cease some of our business operations as a result of patent infringement claims, which could severely harm our
business.

We may be subject to damages resulting from claims that we or our employees have wrongfully used or disclosed alleged trade secrets of
their former employers.

Many of our employees were previously employed at universities or other biotechnology or pharmaceutical
companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets or other
proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to
management. If we fail in defending such claims, in addition to paying money claims, we may lose valuable intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to
commercialize certain product candidates, which could severely harm our business.

If we are unable to protect our intellectual property rights, our
competitors may develop and market products with similar features that may reduce demand for our potential products.

The following
factors are important to our success:



| |  |  | receiving patent protection for our product candidates;
| | - |  | -------------------------------------------------------



| |  |  | not infringing on the intellectual property rights of others;
| | - |  | -------------------------------------------------------------



| |  |  | preventing others from infringing our intellectual property rights; and
| | - |  | -----------------------------------------------------------------------



| |  |  | maintaining our patent rights and trade secrets.
| | - |  | ------------------------------------------------

We will be able to protect our intellectual property rights in patents and trade secrets from unauthorized use by third parties only to the extent that such intellectual property rights are covered by valid and
enforceable patents or are effectively maintained as trade secrets.



We try to protect our proprietary position by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. Because the patent position
of biotechnology and pharmaceutical companies involves complex legal and factual questions, the issuance, scope and enforceability of patents cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented.
U.S. patents and patent applications may also be subject to interference proceedings and U.S. patents may be subject to reexamination proceedings in the U.S. Patent and Trademark Office (and foreign patents may be subject to opposition or comparable
proceedings in the corresponding foreign patent office), which proceedings could result in either loss of the patent or denial of the patent application or loss or reduction in the scope of one or more of the claims of the patent or patent
application. In addition, such interference, reexamination and opposition proceedings may be costly. Thus, any patents that we own or license from others may not provide any protection against competitors. Our pending patent applications, those we
may file in the future or those we may license from third parties may not result in patents being issued. If issued, they may not provide us with proprietary protection or competitive advantages against competitors with similar technology.
Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed. We rely on third-party payment services for the payment of foreign patent annuities and other fees. Non-payment or delay in
payment of such fees, whether intentional or unintentional, may result in loss of patents or patent rights important to our business.

Many
countries, including certain countries in Europe, have compulsory licensing laws under which a patent owner may be compelled to grant licenses to third parties (for example, in cases in which the patent owner has failed to work the
invention in that country, or the third party has patented improvements). In addition, many countries limit the enforceability of patents against government agencies or government contractors. In these countries, the patent owner may have limited
remedies, which could materially diminish the value of the patent. Compulsory licensing of life-saving drugs is also becoming increasingly popular in developing countries either through direct legislation or international initiatives. Such
compulsory licenses could be extended to include some of our product candidates, which could limit our potential revenue opportunities. Moreover, the legal systems of certain countries, particularly certain developing countries, do not favor the
aggressive enforcement of patent and other intellectual property protection which makes it difficult to stop infringement.



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In addition, our ability to enforce our patent rights depends on our ability to detect infringement. It
is difficult to detect infringers who do not advertise the compounds that are used in their products. Any litigation to enforce or defend our patent rights, even if we were to prevail, could be costly and time-consuming and would divert the
attention of our management and key personnel from our business operations.

We also rely on trade secrets, know-how and technology, which
are not protected by patents, to maintain our competitive position. We try to protect this information by entering into confidentiality agreements with parties that have access to it, such as our strategic partners, collaborators, employees and
consultants. Any of these parties may breach these agreements and disclose our confidential information or our competitors might learn of the information in some other way. If any trade secret, know-how or other technology not protected by a patent
were to be disclosed to or independently developed by a competitor, our business, financial condition and results of operations could be materially adversely affected.

Governmental and third-party payors may impose sales and pharmaceutical pricing restrictions or controls on our potential products that could limit our future product revenues and adversely affect profitability.

The commercial success of our potential products is substantially dependent on whether third-party reimbursement is available for
the ordering of our products by the medical profession for use by their patients. Medicare, Medicaid, health maintenance organizations and other third-party payors may not cover or provide adequate payment for our potential products. They may not
view our potential products as cost-effective and reimbursement may not be available to consumers or may not be sufficient to allow our potential products to be marketed on a competitive basis. Likewise, legislative or regulatory efforts to control
or reduce health care costs or reform government health care programs could result in lower prices or rejection of our potential products. Changes in reimbursement policies or health care cost containment initiatives that limit or restrict
reimbursement for our products may cause our future product revenues, if any, to decline.

Competition in the biotechnology and pharmaceutical
industries is intense, and if we fail to compete effectively our financial results will suffer.

Our business is characterized by
extensive research efforts, rapid developments and intense competition. Our competitors may have or may develop superior technologies or approaches to the development of competing products, which may provide them with competitive advantages. Our
potential products may not compete successfully. We believe that successful competition in our industry depends on product efficacy, safety, reliability, availability, timing, scope of regulatory approval, acceptance and price, among other things.
Important factors to our success also include speed in developing product candidates, completing clinical development and laboratory testing, obtaining regulatory approvals and manufacturing and selling commercial quantities of potential products to
the market.

We expect competition to increase as technological advances are made and commercial applications broaden. In commercializing
our initial product candidates and any additional product candidates, we will face substantial competition from pharmaceutical, biotechnology and other companies, universities and research institutions.

Many of our competitors have substantially greater capital resources, research and development staffs, facilities and experience in conducting clinical
trials and obtaining regulatory approvals, as well as in manufacturing and marketing pharmaceutical products. Many of our competitors may achieve product commercialization or patent protection earlier than we achieve commercialization or patent
protection, if at all. Furthermore, we believe that some of our competitors have used, and may continue to use, litigation to gain a competitive advantage.

Rapid technological change could make our products obsolete.

Biopharmaceutical technologies have undergone rapid and
significant change and we expect that they will continue to do so. Any compounds, products or processes that we or our strategic partners or licensees develop may become obsolete or uneconomical before achieving significant revenues. Rapid
technological change could also make our products obsolete or uneconomical.



We face potential product liability exposure far in excess of our limited insurance coverage.

The use of any of our
product candidates in clinical trials, and the sale of any approved products, may expose us to product liability claims. These claims might be made directly by consumers, health care providers, pharmaceutical companies or others selling our
products. We have obtained limited product liability insurance coverage for our clinical trials in the amount of $1 million per occurrence and $1 million in the aggregate. However, our insurance may not reimburse us or may not be sufficient to
reimburse us for expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due
to liability. If we obtain marketing approval for any of our product candidates in development, we intend to expand our insurance coverage to include the sale of commercial products, but we may be unable to obtain commercially reasonable product
liability insurance for any products approved for marketing. On occasion, juries have awarded large judgments in class action lawsuits based on drugs that had unanticipated side effects. In addition, the pharmaceutical and biotechnology industries,
in general, have been subject to significant medical malpractice litigation. A successful product liability claim or series of claims brought against us would decrease our cash reserves and could cause our stock price to fall.

Our activities involve hazardous materials and we may be liable for any resulting contamination or injuries.

Our research activities involve the use of hazardous materials. We cannot eliminate the risk of accidental contamination or injury from these materials.
If an accident occurs, we may be liable for any resulting damages, which may decrease our cash reserves and could cause our stock price to fall.



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If we are unable to complete our assessment as to the adequacy of our internal control over financial reporting
within the required time periods as required by Section 404 of the Sarbanes-Oxley Act of 2002, or in the course of such assessments identify and report material weaknesses in our controls, our investors could lose confidence in the reliability
of our financial statements, which could result in a decrease in the value of our common stock.

As directed by Section 404 of
the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on the companys internal controls over financial reporting in their Annual Reports on Form 10-K. This report is required to
contain an assessment by management of the effectiveness of the companys internal controls over financial reporting. In addition, the independent registered public accounting firm auditing a public companys financial statements must
attest to and report on managements assessment of the effectiveness of the companys internal controls over financial reporting. Although our management has determined, and our independent registered public accounting firm has attested,
that our internal control over financial reporting was effective as of December 31, 2006, and we intend to continue to diligently and vigorously review our internal controls over financial reporting in order to ensure compliance with the
Section 404 requirements, if our independent registered public accounting firm is not satisfied in the future with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or
reviewed, or if said firm interprets the requirements, rules or regulations differently from us, then they may decline to attest to managements assessment or may issue a report that is qualified or has a scope limitation. We anticipate to
continue to expend resources in developing the necessary documentation and testing procedures required by Section 404; however, there is a risk that in the future we will not comply with all of the requirements imposed by Section 404. In
addition, the very limited sized of our organization could lead to conditions that could be considered material weaknesses, such as those related to segregation of duties that is possible in larger organizations but significantly more difficult in
smaller organizations. Also, controls related to our general information technology infrastructure may not be as comprehensive as in the case of a larger organization with more sophisticated capabilities and more extensive resources. It unclear how
such circumstances could be interpreted in the future in the context of an assessment of internal controls over financial reporting. If we fail to implement required new or improved controls, we may be unable to comply with the requirements of
Section 404 in the future. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements, which could cause the market price of our common stock to decline or could
limit our ability to obtain additional financing.



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Risks Related to Our Common Stock

Our stock price has fluctuated significantly and we expect that it may continue to do so.

An
active public market for our common stock may not be sustained. The stock market, particularly in recent years, has experienced significant volatility particularly with respect to pharmaceutical and biotechnology stocks. The volatility of
pharmaceutical and biotechnology stocks often does not relate to the operating performance of the companies represented by the stock. Other price fluctuations are directly attributable to performance. In October 2006, following the announcement of
results from the pivotal Phase III study (SAINT II) of our lead product candidate, NXY-059, and the decision of our exclusive licensee, AstraZeneca, to discontinue development of NXY-059, our stock price declined significantly.

Factors that could cause volatility in the market price of our common stock include:



| |  |  | the results from any future clinical trials we may conduct;
| | - |  | -----------------------------------------------------------



| |  |  | developments in the clinical trials of potentially similar competitive products;
| | - |  | --------------------------------------------------------------------------------



| |  |  | FDA or international regulatory actions;
| | - |  | ----------------------------------------



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



| |  |  | announcements of the introduction of new products by us or our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | market conditions in the pharmaceutical and biotechnology sectors;
| | - |  | ------------------------------------------------------------------



| |  |  | developments concerning intellectual property rights;
| | - |  | -----------------------------------------------------



| |  |  | litigation or public concern about the safety of our potential products;
| | - |  | ------------------------------------------------------------------------



| |  |  | comments by securities analysts;
| | - |  | --------------------------------



| |  |  | actual and anticipated fluctuations in our quarterly operating results;
| | - |  | -----------------------------------------------------------------------



| |  |  | deviations in our operating results from the estimates of securities analysts;
| | - |  | ------------------------------------------------------------------------------



| |  |  | rumors relating to us or our competitors;
| | - |  | -----------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | third party reimbursement policies; and
| | - |  | ---------------------------------------



| |  |  | developments concerning current or future collaborations, strategic alliances or similar relationships.
| | - |  | -------------------------------------------------------------------------------------------------------

These and other external factors may cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of common stock and may otherwise negatively affect the liquidity of our common stock. In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted
securities class action litigation against the company that issued the stock. If any of our stockholders brought a lawsuit against us, we could incur substantial costs defending the lawsuit. Such a lawsuit could also divert the time and attention of
our management.

Future sales of common stock by our existing stockholders may cause our stock price to fall.

The market price of our common stock could decline as a result of sales by our existing stockholders of shares of common stock in the market, or the
perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

Our directors and management exercise significant control over our company.

If acting
together, our directors and executive officers and their affiliates can influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.



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Provisions of Delaware law or our charter documents and stockholder rights plan could delay or prevent an
acquisition of our company, even if the acquisition would be beneficial to our stockholders, and could make it more difficult for stockholders to change management.

Provisions of our certificate of incorporation and bylaws may discourage, delay or prevent a merger, acquisition or other change in control that
stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. This is because these provisions may prevent or frustrate attempts by stockholders to replace or remove our current
management.

These provisions include:



| |  |  | a classified board of directors;
| | - |  | --------------------------------



| |  |  | a prohibition on stockholder action through written consent;
| | - |  | ------------------------------------------------------------



| |  |  | a requirement that special meetings of stockholders be called only by (i) the Chairman of the Board of Directors, (ii) the Chief Executive Officer, or
(iii) the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice requirements for stockholder proposals and nominations;
| | - |  | ----------------------------------------------------------------------

| |  |  | a requirement of approval of not less than 662/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to amend certain provisions of our certificate of incorporation; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the authority of the Board of Directors to issue preferred stock with such terms as the Board of Directors may determine.
| | - |  | -------------------------------------------------------------------------------------------------------------------------

As a result, these provisions and others available under Delaware law could limit the price that investors are willing to pay in the future for shares of
our common stock.

In addition, in March 2005, we adopted a stockholder rights plan. Although the rights plan will not prevent a takeover,
it is intended to encourage anyone seeking to acquire our company to negotiate with our board prior to attempting a takeover by potentially significantly diluting an acquirers ownership interest in our outstanding capital stock. The existence
of the rights plan may also discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.

We have never paid dividends on our capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any of our classes of capital stock to date and we currently intend to retain our future earnings, if any, to fund the development and growth of our businesses. As a result, capital
appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None

Use of Proceeds from Registered Securities

Our Registration Statement on Form S-1 (Reg. No. 333-109806) in connection with our initial public offering was declared effective by the SEC on February 4, 2004. We completed our initial public offering on
February 10, 2004 for gross proceeds of $75.9 million. The Company paid the underwriters a commission of $5.3 million and incurred offering expenses of $2.2 million. After deducting the underwriters commission and the offering expenses,
the Company received net proceeds of approximately $68.4 million.

Our Registration Statement on Form S-3 (Reg. No. 333-122762) was
declared effective by the SEC on May 23, 2005. We completed a public offering under this Registration Statement on September 28, 2005 for gross proceeds of $54.0 million. The Company paid the underwriters a commission of $3.2 million and
incurred offering expenses of $0.3 million. After deducting the underwriters commission and the offering expenses, the Company received net proceeds of approximately $50.4 million.

No payments for such expenses were made directly or indirectly to (i) any of our directors, officers or their associates, (ii) any person(s)
owning 10% or more of any class of our equity securities or (iii) any of our affiliates.

The net proceeds have been invested into
investment grade securities and money market accounts.

We have begun to use, and intend to continue to use, these proceeds for general
corporate purposes, including clinical trials, research and development expenses, general and administrative expenses, manufacturing expenses and potential acquisitions of companies, products and technologies that complement our businesses.

Issuer Purchases of Equity Securities

For the three months ended June 30, 2007 we repurchased 290 shares during the month of April 2007 at an average price per share of $1.35.

None of the repurchases of common stock noted above were made pursuant to a publicly announced plan. The shares repurchased were related to the early exercise of options that had not yet vested upon termination of the
purchasers employment. The repurchase price paid was the exercise price paid by the option holder.



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------



| | (a) | None
| | --- | ----



| | (b) | None
| | --- | ----



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

On June 1, 2007, we held our annual stockholders meeting. Of the 29,577,165 shares of common stock entitled to vote at the meeting a total of 24,611,527 shares were represented at the meeting in person or by proxy, constituting a
quorum. The voting results are as follows:

Proposal I  Election of Class 1 Directors



|                   |  |                   |  |               
|------------------ |  | ----------------- |  | --------------
|Name               |  | Votes forDirector |  | Votes Withheld
|Corey S. Goodman   |  | 23,998,000        |  | 613,527       
|Bruce L. A. Carter |  | 22,670,262        |  | 1,941,285     
|Edward E. Penhoet  |  | 24,001,188        |  | 610,339       

Proposal II  Ratification of Ernst & Young LLP as our Independent Registered Public
Accounting Firm for the Fiscal Year 2007



|           |  |         |  |         |  |                
|---------- |  | ------- |  | ------- |  | ---------------
|For        |  | Against |  | Abstain |  | Broker Non-Vote
|24,482,403 |  | 122,866 |  | 6,258   |  |               



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|Item 5. | Other Information
|------- | -----------------



| | (a) | None
| | --- | ----



| | (b) | None
| | --- | ----



|Item 6. | Exhibits
|------- | --------



|              |  |                                                                                                      
|------------- |  | -----------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                              
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer.                               
|              | 
|31.2          |  | Rule 13a-14(a)/15d-14(a) Certification of Principal Financial and Accounting Officer.                
|              | 
|32            |  | Section 1350 Certification of Chief Executive Officer and Principal Financial and Accounting Officer.



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SIGNATURES

Pursuant to the requirements of the Securities and Exchange
Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 8thday of
August, 2007.



Renovis, Inc./s/ Jeffrey FarrowJeffrey S. FarrowVice President, Finance and Chief Accounting Officer (Principal accounting officer)




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