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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended March 31, 2007



| ̈ | 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 May 2, 2007, there were 29,577,634 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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Renovis, Inc.

INDEX



|           |  |                                                                                                    |  |     
|---------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                                    |  | Page
|Part I.    |  | Financial Information                                                                              |  |     
|           |  | Item 1.      Financial Statements (Unaudited)                                                      |  |     
|           |  | Condensed Balance Sheets  March 31, 2007 and December 31, 2006                                    |  | 3   
|           |  | Condensed Statements of Operations  Three months ended March 31, 2007 and 2006                    |  | 4   
|           |  | Condensed Statements of Cash Flows Three months ended March 31, 2007 and 2006                     |  | 5   
|           |  | Notes to Condensed Financial Statements                                                            |  | 6   
|           |  | Item 2.      Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 13  
|           |  | Item 3.      Quantitative and Qualitative Disclosures About Market Risk                            |  | 20  
|           |  | Item 4.      Controls and Procedures                                                               |  | 20  
|Part II.   |  | Other Information                                                                                  |  |     
|           |  | Item 1.      Legal Proceedings                                                                     |  | 21  
|           |  | Item 1A.   Risk Factors                                                                            |  | 21  
|           |  | Item 2.      Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 31  
|           |  | Item 3.      Defaults Upon Senior Securities                                                       |  | 32  
|           |  | Item 4.      Submission of Matters to a Vote of Security Holders                                   |  | 32  
|           |  | Item 5.      Other Information                                                                     |  | 32  
|           |  | Item 6.      Exhibits                                                                              |  | 32  
|Signatures |  | 33                                                                                                



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RENOVIS, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                 |  | March 31,2007 |          |   | December 31,2006 |  
|Assets                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                  |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                        |  | $             | 45,416   |   |                  | $ | 41,958   |  
|Short-term investments                                                                                                                                                                                           |  |               | 44,683   |   |                  |   | 57,149   |  
|Prepaids and other current assets                                                                                                                                                                                |  |               | 1,513    |   |                  |   | 928      |  
|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                             |  |               | 91,612   |   |                  |   | 100,035  |  
|Property and equipment, net                                                                                                                                                                                      |  |               | 6,581    |   |                  |   | 7,052    |  
|Other assets                                                                                                                                                                                                     |  |               | 234      |   |                  |   | 214      |  
|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                                                 |  | $             | 98,427   |   |                  | $ | 107,301  |  
|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                             |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                             |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                                 |  | $             | 546      |   |                  | $ | 517      |  
|Accrued compensation                                                                                                                                                                                             |  |               | 1,151    |   |                  |   | 2,503    |  
|Loan payable, current portion                                                                                                                                                                                    |  |               | 2,080    |   |                  |   | 2,147    |  
|Deferred revenue                                                                                                                                                                                                 |  |               | 1,667    |   |                  |   | 3,400    |  
|Other accrued liabilities                                                                                                                                                                                        |  |               | 1,820    |   |                  |   | 1,964    |  
|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                        |  |               | 7,264    |   |                  |   | 10,531   |  
|Loan payable, noncurrent portion                                                                                                                                                                                 |  |               | 2,537    |   |                  |   | 3,011    |  
|Deferred revenue, noncurrent portion                                                                                                                                                                             |  |               | 417      |   |                  |   |         |  
|Other long-term liabilities                                                                                                                                                                                      |  |               | 582      |   |                  |   | 673      |  
|Commitments                                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Preferred stock, $0.001 par value; 5,000,000 shares authorized at March 31, 2007 and December 31, 2006; none issued and
outstanding                                                                              |  |               |         |   |                  |   |         |  
|Common stock, $0.001 par value; 100,000,000 shares authorized at March 31, 2007 and December 2006; 29,565,194 and 29,455,058 shares issued and
outstanding at March 31, 2007 and December 31, 2006, respectively |  |               | 30       |   |                  |   | 29       |  
|Additional paid-in capital                                                                                                                                                                                       |  |               | 285,061  |   |                  |   | 275,439  |  
|Accumulated other comprehensive loss                                                                                                                                                                             |  |               | (20      | ) |                  |   | (44      | )
|Accumulated deficit                                                                                                                                                                                              |  |               | (197,444 | ) |                  |   | (182,338 | )
|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                       |  |               | 87,627   |   |                  |   | 93,086   |  
|                                                                                                                                                                                                                 |  |               |          |   |                  |   |          |  
|                                                                                                                                                                                                                 |  | $             | 98,427   |   |                  | $ | 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 March 31, |           
|                                                            |  | 2007                         |            |   | 2006 |  
|Contract revenue                                            |  | $                            | 1,317      |   |      | $ | 2,478      |  
|Operating expenses:                                         |  |                              |            |   |      |   |            |  
|Research and development                                    |  |                              | 8,428      |   |      |   | 6,872      |  
|General and administrative                                  |  |                              | 9,091      |   |      |   | 3,903      |  
|                                                            |  |                              |            |   |      |   |            |  
|Total operating expenses                                    |  |                              | 17,519     |   |      |   | 10,775     |  
|Loss from operations                                        |  |                              | (16,202    | ) |      |   | (8,297     | )
|Interest income                                             |  |                              | 1,215      |   |      |   | 1,262      |  
|Interest expense                                            |  |                              | (119       | ) |      |   | (100       | )
|                                                            |  |                              |            |   |      |   |            |  
|Net loss                                                    |  | $                            | (15,106    | ) |      | $ | (7,135     | )
|                                                            |  |                              |            |   |      |   |            |  
|Basic and diluted net loss per share                        |  | $                            | (0.51      | ) |      | $ | (0.25      | )
|                                                            |  |                              |            |   |      |   |            |  
|Shares used to compute basic and diluted net loss per share |  |                              | 29,538,146 |   |      |   | 28,976,250 |  
|                                                            |  |                              |            |   |      |   |            |  

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)



|                                                                            |  |                              |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Three Months Ended March 31, |        
|                                                                            |  | 2007                         |         |   | 2006 |  
|Cash flows from operating activities                                        |  |                              |         |   |      |   |         |  
|Net loss                                                                    |  | $                            | (15,106 | ) |      | $ | (7,135  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                              |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                              | 524     |   |      |   | 436     |  
|Share-based compensation to employees                                       |  |                              | 9,211   |   |      |   | 2,296   |  
|Share-based compensation to non-employees                                   |  |                              | 376     |   |      |   | 964     |  
|Changes in assets and liabilities:                                          |  |                              |         |   |      |   |         |  
|Prepaids and other current assets                                           |  |                              | (605    | ) |      |   | (223    | )
|Accounts payable                                                            |  |                              | 29      |   |      |   | 239     |  
|Accrued compensation                                                        |  |                              | (1,352  | ) |      |   | (656    | )
|Deferred revenue                                                            |  |                              | (1,316  | ) |      |   | (678    | )
|Other accrued liabilities                                                   |  |                              | (215    | ) |      |   | (235    | )
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                              | (8,454  | ) |      |   | (4,992  | )
|Cash flows from investing activities                                        |  |                              |         |   |      |   |         |  
|Capital expenditures                                                        |  |                              | (59     | ) |      |   | (1,312  | )
|Proceeds from disposal of property                                          |  |                              | 6       |   |      |   |        |  
|Purchases of short-term investments                                         |  |                              | (23,502 | ) |      |   | (23,963 | )
|Sales of short-term investments                                             |  |                              | 3,561   |   |      |   | 87,625  |  
|Maturities of short-term investments                                        |  |                              | 32,431  |   |      |   | 7,400   |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash provided by investing activities                                   |  |                              | 12,437  |   |      |   | 69,750  |  
|Cash flows from financing activities                                        |  |                              |         |   |      |   |         |  
|Principal payments on loan payable                                          |  |                              | (541    | ) |      |   | (403    | )
|Proceeds from loan payable                                                  |  |                              |        |   |      |   | 293     |  
|Proceeds from issuance of common stock, net of repurchases                  |  |                              | 16      |   |      |   | 476     |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                         |  |                              | (525    | ) |      |   | 366     |  
|                                                                            |  |                              |         |   |      |   |         |  
|Net increase in cash and cash equivalents                                   |  |                              | 3,458   |   |      |   | 65,124  |  
|Cash and cash equivalents at beginning of period                            |  |                              | 41,958  |   |      |   | 8,149   |  
|                                                                            |  |                              |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                            | 45,416  |   |      | $ | 73,273  |  

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 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 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.

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.

Business Segments

Statement of Financial Accounting Standards (SFAS) No. 131,Disclosures about Segments of an Enterprise and Related Information, requires an enterprise to report segment information based on how management internally evaluates
the operating performance of its business units (segments). Our operations are confined to one business segment: the discovery and development of pharmaceutical products.

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.



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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.

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.

Concentration of
Credit Risk

Cash and cash equivalents consist of financial instruments that potentially subject the Company to concentrations of
credit risk to the extent recorded on the balance sheets. The Company has established guidelines for investment of its excess cash that it believes maintain safety and liquidity through diversification of counterparties and maturities.

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.

Impairment of
Long-Lived Assets

The Company reviews long-lived assets, including property and equipment, for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its
eventual disposition are less than its carrying amount. The impairment loss, if recognized, would be based on the excess of the carrying value of the impaired asset over its respective fair value. Impairment, if any, is assessed using discounted
cash flows.



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Stock-Based Compensation

The Company accounts for its stock-based compensation utilizing the fair value recognition provision of Statement of Financial Accounting Standards No. 123 (revised 2004),Share-Based Payment
(SFAS 123(R)), which requires the recognition using fair value. 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 gains and losses on
available-for-sale investments, to be included as part of total comprehensive income. Comprehensive loss for the three months ended March 31, 2007 and 2006 are as follows (in thousands):



|                                                        |  |                              |         |   |      |   |        |  
|------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | - | ------ | -
|                                                        |  | Three Months Ended March 31, |        
|                                                        |  | 2007                         |         |   | 2006 |  
|Net loss                                                |  | $                            | (15,106 | ) |      | $ | (7,135 | )
|Unrealized gain (loss) on available-for-sale securities |  |                              | 24      |   |      |   | (8     | )
|                                                        |  |                              |         |   |      |   |        |  
|Comprehensive loss                                      |  | $                            | (15,082 | ) |      | $ | (7,143 | )
|                                                        |  |                              |         |   |      |   |        |  

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 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 March 31,                   |           
|                                                                                          |  | 2007                                           |            |   | 2006 |  
|                                                                                          |  | (in thousands, except share andper share data) |           
|Historical:                                                                               |  |                                                |            |   |      |   |            |  
|Numerator:                                                                                |  |                                                |            |   |      |   |            |  
|Net loss(1)                                                                               |  | $                                              | (15,106    | ) |      | $ | (7,135     | )
|                                                                                          |  |                                                |            |   |      |   |            |  
|Denominator:                                                                              |  |                                                |            |   |      |   |            |  
|Weighted average common shares outstanding                                                |  |                                                | 29,547,198 |   |      |   | 29,052,204 |  
|Less: Weighted average unvested common shares subject to repurchase                       |  |                                                | (9,052     | ) |      |   | (75,954    | )
|                                                                                          |  |                                                |            |   |      |   |            |  
|Denominator for basic and diluted net loss per share                                      |  |                                                | 29,538,146 |   |      |   | 28,976,250 |  
|                                                                                          |  |                                                |            |   |      |   |            |  
|Basic and diluted net loss per share(1)                                                   |  | $                                              | (0.51      | ) |      | $ | (0.25      | )
|                                                                                          |  |                                                |            |   |      |   |            |  
|                                                                                          |  |                                                |            |   |      |   |            |  
|Historical outstanding dilutive securities not included in net loss per share calculation |  |                                                |            |   |      |   |            |  
|Options and restricted stock units                                                        |  |                                                | 4,020,243  |   |      |   | 3,767,002  |  
|Warrants                                                                                  |  |                                                | 33,358     |   |      |   | 33,358     |  
|                                                                                          |  |                                                |            |   |      |   |            |  
|                                                                                          |  |                                                | 4,053,601  |   |      |   | 3,800,360  |  
|                                                                                          |  |                                                |            |   |      |   |            |  

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|(1) | Net losses for the three months ended March 31, 2007 and 2006 include $9.2 million and $2.3 million
of stock-based compensation expense, respectively. The effect of recording stock-based compensation expense on basic and diluted loss per share was $(0.31) and $(0.08) per share for the three months ended March 31, 2007 and 2006, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 which work by targeting the vanilloid receptor (VR1). The collaboration focuses on 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 provide the Company with research funding in excess of $7.0 million over a two-year research period. Under these agreements, the funded research period ends in June 2007 subject to Pfizers options to extend the
research period for up to two additional years subject to additional funding requirements. 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 by 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 Renovis 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 a Phase I clinical trial or the filing of a New Drug Application, or an NDA, 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 months ended March 31, 2007 and 2006, the Company recognized $1.3 million and $2.2 million,
respectively, in revenue related to the research funding and the amortization of the upfront license fee under these agreements. As of March 31, 2007, deferred revenue under the agreements was $2.1 million.

5. Other Current Accrued Liabilities

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



|                          |  |               |       |                  |   |      
|------------------------- |  | ------------- | ----- | ---------------- | - | -----
|                          |  | March 31,2007 |       | December 31,2006
|Facilities-related        |  | $             | 568   |                  | $ | 408  
|Professional fees         |  |               | 335   |                  |   | 400  
|Outside services          |  |               | 328   |                  |   | 437  
|Deferred rent             |  |               | 312   |                  |   | 291  
|Accrued other             |  |               | 277   |                  |   | 428  
|                          |  |               |       |                  |   |      
|Other accrued liabilities |  | $             | 1,820 |                  | $ | 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 March 31, 2007, the Company had



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borrowed an aggregate of approximately $8.5 million under these facilities, of which $4.6 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 March 31, 2007, 908,508 shares of common stock were 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 Companys 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 issued prior to 2004 were exercisable immediately, subject to repurchase rights held by us,
which lapsed over the vesting period. Our Amended and Restated 2003 Stock 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 March 31, 2007, 851,890 shares were available for future grant under
our equity incentive plans.

Issuance of Deferred Stock Units

During the quarter ended March 31, 2007, the Company issued approximately 1,785,000 deferred
stock units, also known as restricted stock units, under the Amended 2003 Plan at a weighted average grant date fair value of $3.42 to existing employees. These restricted stock units vest at the rate of 1/36thper month such the restricted stock units will be fully vested after three years. 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.

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



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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
month period ended March 31, 2007 was as follows (in thousands, except per share amounts):



|                                            |  |                    |       |   |               |   |       |  
|------------------------------------------- |  | ------------------ | ----- | - | ------------- | - | ----- | -
|                                            |  | Three Months Ended |      
|                                            |  | March 31,2007      |       |   | March 31,2006 |  
|Research and development                    |  | $                  | 2,407 |   |               | $ | 1,050 |  
|General and administrative                  |  |                    | 6,804 |   |               |   | 1,246 |  
|                                            |  |                    |       |   |               |   |       |  
|Total stock-based compensation              |  | $                  | 9,211 |   |               | $ | 2,296 |  
|                                            |  |                    |       |   |               |   |       |  
|Effect on loss per share, basic and diluted |  | $                  | (0.31 | ) |               | $ | (0.08 | )
|                                            |  |                    |       |   |               |   |       |  

Due to our net loss position, a tax benefit was not realized for the three month period ended
March 31, 2007 and 2006.

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 months Ended March 31 |  
|                                    |  | 2007                        |   |  | 2006    |  
|Stock option plan:                  |  |                             |   |  |         |  
|Expected stock price volatility     |  | 80 .0                       | % |  | 63.0    | %
|Risk-free interest rate             |  | 4.7                         | % |  | 4.4     | %
|Dividend yield                      |  | 0                           |   |  | 0       |  
|Expected life of options (in years) |  | 4.23                        |   |  | 4.23    |  
|Employee stock purchase plan:       |  |                             |   |  |         |  
|Expected stock price volatility     |  | 114                         | % |  | 75      | %
|Risk-free interest rate             |  | 4.9                         | % |  | 3.6     | %
|Dividend yield                      |  | 0                           |   |  | 0       |  
|Expected life of options (in years) |  | 0.5-2.0                     |   |  | 0.5-2.0 |  

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.

During the quarter ended March 31, 2007, the Company granted
104,388 options to employees and members of the Companys Board of Directors. The weighted average grant date fair value of options granted during the three month periods ended March 31, 2007 and 2006 was $2.13 and $10.07 per share,
respectively, based on the assumptions in the Black-Scholes option valuation model discussed above.

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 months ended March 31, 2007 and 2006, the Company granted stock options to purchase 36,111 and 42,111 shares of common stock, respectively, to consultants. Compensation
expense related to non-employee stock option grants was $119,000 and $740,000 for the three months ended March 31, 2007 and 2006, respectively.



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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 Months Ended March 31, |  
|                                                      |  | 2007                         |   |  | 2006 |  
|Dividend yield:                                       |  | 0                            |   |  | 0    |  
|Risk-free interest rate                               |  | 4.7                          | % |  | 4.43 | %
|Volatility:                                           |  | 80                           | % |  | 64   | %
|Maximum contractual life of options (from grant date) |  | 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 months ended March 31, 2007, the Company
incurred and paid restructuring costs of approximately $1.0 million, primarily associated with one-time termination benefits of which $0.8 was recorded as R&D expense and $0.2 was recorded as G&A expense.



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|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 the vanilloid receptor, 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 provide us with research funding in excess of $7.0 million over a two-year research period. Under these agreements, the initial funded research period ends in June
2007 subject to Pfizers options to extend the research period for up to two additional years with additional funding requirements. Under the licensing and royalty agreement with Pfizer, 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 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. Other terms of the collaboration and licensing agreements between Pfizer and Renovis were not changed. During the three months ended March 31, 2007, and 2006 the Company
recognized $1.3 and $2.2 million, respectively, in revenue related to these our agreements with Pfizer.

As of March 31, 2007, we had
an accumulated deficit of $197.4 million and approximately $90.1 million in cash, cash equivalents and short-term investments. 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
| | - |  | ----------------------------------------------------------------------------------------



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| |  |  | 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, product sales, upfront fees and milestone payments in connection with collaborative or strategic relationships, and royalties
resulting from the license of our intellectual property. 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.

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 month period ended March 31, 2007 R&D expense increased by $1.5 million to $8.4 million from the $6.9 million for the
comparable period in 2006. The increase in R&D expense was primarily related to an increase in stock-based compensation expense of $1.4 million and an increase in employee compensation expense of $0.5 million, primarily related to our
restructuring expenses, partially offset by a reduction in non-employee stock-based compensation expense of $0.4 million. All of the research and development expense incurred in the three month periods ended March 31, 2007 and 2006 related to
our preclinical R&D programs.

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.



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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.

Stock Compensation

The Company accounts for its stock-based compensation utilizing the fair
value recognition provision of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123 (R)), which requires the recognition using fair value. 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.

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

Some of our research and development, including certain preclinical and clinical 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.



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##### Table of Contents

Results of Operations

Comparison of the Three Months Ended March 31, 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 Months EndedMarch 31,
|                        |  | 2007                        |        |    | 2006
|Pfizer collaboration    |  | $                           | 1,317  |    |      | $ | 2,150
|Genentech collaboration |  |                             |       |    |      |   | 328  
|                        |  |                             |        |    |      |   |      
|Total revenue           |  | $                           | 1,317  |    |      | $ | 2,478
|Dollar decrease         |  | $                           | (1,161 | )  |      |   |      
|Percentage decrease     |  |                             | (47    | )% |      |   |      

All of the revenue earned in the quarter ended March 31, 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 a less revenue being recognized
in the current quarter as compared to the prior year quarter.

Additionally, revenue for the quarter ended March 31, 2007 decreased
from the same period in 2006 because the Genentech collaborative agreement revenue was fully recognized in the first quarter of 2006.

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 $5.3 million to $9.8 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 Months EndedMarch 31,
|                    |  | 2007                        |       |   | 2006
|Total R&D expense   |  | $                           | 8,428 |   |      | $ | 6,872
|Dollar increase     |  | $                           | 1,556 |   |      |   |      
|Percentage increase |  |                             | 23    | % |      |   |      

Specific changes in R&D expense between these periods include:



| |  |  | non-cash stock compensation related to options granted to employees increased by $1.4 million during the three months ended March 31, 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee compensation increased by $0.5 million during the three months ended March 31, 2007 as compared to the corresponding period in 2006 primarily due to
one-time employee termination benefits incurred during the current quarter as a result of our restructuring plan partially offset by a decrease in R&D headcount; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | non-employee stock compensation decreased by $0.4 million during the three months ended March 31, 2007 as compared to the prior period because fewer options
were granted to non-employees and the estimated fair value of each option granted was lower than in the comparable period.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16



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##### Table of Contents

We expect R&D expenses, excluding non-cash stock compensation and approximately $0.9 million in
restructuring related expense, to decrease as compared to 2006 as a result of voluntary attrition and the effect of our restructuring carried out during the quarter.

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 EndedMarch 31,
|                    |  | 2007                        |       |   | 2006
|Total G&A expense   |  | $                           | 9,091 |   |      | $ | 3,903
|Dollar increase     |  | $                           | 5,188 |   |      |   |      
|Percentage increase |  |                             | 133   | % |      |   |      

Specific changes in G&A expense between periods include:



| |  |  | non-cash stock compensation for options granted to employees and non-employee directors increased by $5.6 million during the three months ended March 31, 2007
as compared to the corresponding period 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | employee compensation increased by $0.3 million during the three months ended March 31, 2007 as compared to the corresponding period in 2006 primarily due to
one-time employee termination benefits incurred during the current quarter as a result of our restructuring plan partially offset by a decrease in G&A headcount; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | non-employee stock compensation decreased by $0.3 million during the three months ended March 31, 2007 as compared to the prior period primarily due to a lower
estimated fair value of the options granted in the current quarter.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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 EndedMarch 31,
|                      |  | 2007                        |       |    | 2006
|Total interest income |  | $                           | 1,215 |    |      | $ | 1,262
|Dollar decrease       |  | $                           | (47   | )  |      |   |      
|Percentage decrease   |  |                             | (4    | )% |      |   |      

The decrease in interest income in the first quarter of 2007 as compared to the corresponding
quarter in 2006 was primarily attributable to lower average investment balances in 2007.

Interest Expense

Interest expense was nominally higher during the three months ended March 31, 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

For the year ending December 31, 2007, the Company continues to anticipate:



| |  |  | total contract revenue from existing agreements of $5.3 million to $9.8 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
$1.1 million in restructuring related expense.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 March 31, 2007, we had received approximately $222.6
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 March 31, 2007, we financed the purchase of equipment and leasehold improvements with debt totaling approximately $15.2
million, of which $4.6 million was outstanding at March 31, 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 March 31, 2007, we had $90.1 million in cash, cash equivalents and short-term
investments as compared to $99.1 million as of December 31, 2006, a decrease of $9.0 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 $1.1 million in restructuring related expense.

Net cash used in operating activities was $8.5 million for the three months ended March 31, 2007 as compared to $5.0 million in the corresponding
period in 2006. The $3.5 million increase in cash used in operations in the first quarter of 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 quarter of 2007 for their efforts in 2006 and higher payments for insurance premiums. We expect cash used in operating activities during each of the remaining quarters in 2007 to be below the level
reported for the first quarter of the year.

Net cash provided by investing activities was $12.4 million for the three months ended
March 31, 2007 as compared to net cash provided by investing activities of $69.8 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 three months ended March 31, 2007 were
significantly below the $1.3 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 $0.5 million for the three month period ended March 31, 2007 compared to net cash of $0.4 million provided
by financing activities during the corresponding period in 2006. Cash used by financing activities in the first quarter of 2007 is higher than the first quarter 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;
| | - |  | -------------------------------------------------------------------------------------



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| |  |  | 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 offer 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 March 31, 2007, $46.0 million remains available under this registration statement.



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|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 Chief Financial 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 Chief Financial 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 Chief Financial 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.



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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
our strategic partners and licensees to develop and commercialize many of our product candidates.

We cannot control the time or
resources that our strategic partners or licensees devote to our collaborations with those parties, nor can we control our strategic partners or licensees 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 our strategic
partners or licensees 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 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 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



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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 the way we interpret it;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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.

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 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.



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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 completion of our clinical trials, the approval of our product candidates by the FDA or other regulatory agencies, or the commercialization of our products, 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.

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



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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
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 planning and 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 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. As of March 31, 2007, our accumulated deficit was $197.4 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 three months ended March 31, 2007, our net cash used in operating activities was $8.5 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 March 31, 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
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



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

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.
| | - |  | ------------------------------------------------



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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.

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.



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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.

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



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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.

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 our clinical trial programs and any future 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.



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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.

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.



|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.



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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 March 31, 2007 we repurchased
3,907 shares during the month of January 2007 at an average price per share of $2.66.

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
|------- | ---------------------------------------------------

None



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

(a) Effective January 30,
2007, the Company entered into amended and restated employment agreements with each of the Companys executive officers, including Corey S. Goodman, Ph.D., President and Chief Executive Officer, which agreements the Company disclosed in a
report on Form 8-K filed on February 1, 2007. Dr. Goodmans amended and restated employment agreement was filed as an exhibit to that report. The agreements dated January 30, 2007, amended and restated prior employment agreements between the
Company and its executive officers, which were entered into effective September 15, 2006, and disclosed in a report on Form 8-K filed on September 15, 2006.

Due to clerical error, the version of Dr. Goodmans employment agreement that was filed as an exhibit to each of these reports did not completely reflect the arrangement that had been approved by the Compensation
Committee of the Board of Directors of the Company with regard to the lump sum payable to Dr. Goodman if his employment is terminated without cause or by constructive termination following a change of control. Dr. Goodmans employment agreement
should have stated that if at any time within 13 months following a change of control of the Company, Dr. Goodmans employment is terminated by the Company without cause or by constructive termination, then Dr. Goodman is entitled to, among
other benefits, a lump sum payment equal to his annual salary and his annual target bonus opportunity for two years. This description of Dr. Goodmans amended and restated employment agreement is qualified in its entirety by reference to the
terms of the agreement filed as Exhibit 10.4 hereto, which shall replace in its entirety the agreement filed as exhibit 10.1 to the Companys report on Form 8-K filed on February 1, 2007.

(b) None



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



|              |  |                                                                                                                            
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                    
|              | 
|10.1(1)       |  | 2007 Employment Commencement Incentive Plan and form of stock option agreement.                                            
|              | 
|10.2(1)       |  | Confidential Separation Agreement, effective January 3, 2007, by and between the registrant and Tito A. Serafini.          
|              | 
|10.3(2)       |  | Form of Stock Option Cancellation Agreement by and between the registrant and executive officers.                          
|              | 
|10.4          |  | Amended and Restated Employment Agreement dated January 30, 2007, by and between the registrant and Corey S. Goodman, Ph.D.
|              | 
|10.5(3)       |  | Form of Amended and Restated Employment Agreement by and between the registrant and executive officers.                    
|              | 
|10.6(4)       |  | Amendment A to Collaborative Research Agreement, dated as of March 30, 2007, by and between the registrant and Pfizer Inc. 
|              | 
|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 Officer.                                                     
|              | 
|32            |  | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.                                         

---

|(1) | Incorporated by reference to the Companys Current Report on Form 8-K (SEC File No. 000-50564) filed on January 4, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to the Companys Current Report on Form 8-K (SEC File No. 000-50564) filed on January 8, 2007.
|--- | ------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to the Companys Current Report on Form 8-K (SEC File No. 000-50564) filed on February 1, 2007.
|--- | -------------------------------------------------------------------------------------------------------------------------

|(4) | Confidential treatment requested as to certain portions, which portions have been omitted and filed separately with the Securities and Exchange Commission.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



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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 9th day of May, 2007.



Renovis, Inc./s/ John C. DoyleJohn C. DoyleSenior Vice President Corporate Development and Chief Financial Officer(Principal financial and accounting officer)




33