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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 September 30, 2005



| ̈ | 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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ̈No  x



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



As of November 7, 2005, 28,924,291 shares of our Common Stock, $.001 par value, were
outstanding.



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Renovis, Inc.



INDEX



|           |  |                                                                                               |  |     
|---------- |  | --------------------------------------------------------------------------------------------- |  | ----
|           |  |                                                                                               |  | Page
|Part I.    |  | Financial Information                                                                         |  |     
|           |  |                                                                                              
|           |  | Item 1. Financial Statements (Unaudited)                                                      |  |     
|           |  |                                                                                              
|           |  | Condensed Balance Sheets  September 30, 2005 and December 31, 2004                           |  | 3   
|           |  |                                                                                              
|           |  | Condensed Statements of Operations  Three and Nine Months ended September 30, 2005 and 2004  |  | 4   
|           |  |                                                                                              
|           |  | Condensed Statements of Cash Flows  Nine months ended September 30, 2005 and 2004            |  | 5   
|           |  |                                                                                              
|           |  | Notes to Condensed Financial Statements                                                       |  | 6   
|           |  |                                                                                              
|           |  | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|           |  |                                                                                              
|           |  | Item 3.
Quantitative and Qualitative Disclosures About Market Risk                            |  | 30  
|           |  |                                                                                              
|           |  | Item 4.
Controls and Procedures                                                               |  | 30  
|           |  |                                                                                              
|Part II.   |  | Other Information                                                                             |  | 31  
|           |  |                                                                                              
|           |  | Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 31  
|           |  |                                                                                              
|           |  | Item 5.
Other Information                                                                     |  | 31  
|           |  |                                                                                              
|           |  | Item 6.
Exhibits                                                                              |  | 31  
|           | 
|Signatures |  | 32                                                                                           



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RENOVIS, INC.

CONDENSED BALANCE SHEETS

(unaudited)

(in thousands, except share and per share data)



|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ----------------- | - | -------- | -
|                                                                                                                                                                                                                                            |  | September 30, 2005 |          |   | December 31, 2004 |  
|Assets                                                                                                                                                                                                                                      |  |                    |          |   |                   |   |          |  
|Current assets:                                                                                                                                                                                                                             |  |                    |          |   |                   |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                   |  | $                  | 32,575   |   |                   | $ | 5,580    |  
|Short-term investments                                                                                                                                                                                                                      |  |                    | 90,378   |   |                   |   | 81,379   |  
|Prepaids and other current assets                                                                                                                                                                                                           |  |                    | 2,078    |   |                   |   | 1,831    |  
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|Total current assets                                                                                                                                                                                                                        |  |                    | 125,031  |   |                   |   | 88,790   |  
|Property and equipment, net                                                                                                                                                                                                                 |  |                    | 6,580    |   |                   |   | 6,022    |  
|Intangible assets, net                                                                                                                                                                                                                      |  |                    | 191      |   |                   |   | 1,052    |  
|Other assets                                                                                                                                                                                                                                |  |                    | 213      |   |                   |   | 261      |  
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|                                                                                                                                                                                                                                            |  | $                  | 132,015  |   |                   | $ | 96,125   |  
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                                                        |  |                    |          |   |                   |   |          |  
|Current liabilities:                                                                                                                                                                                                                        |  |                    |          |   |                   |   |          |  
|Accounts payable                                                                                                                                                                                                                            |  | $                  | 874      |   |                   | $ | 1,701    |  
|Accrued compensation                                                                                                                                                                                                                        |  |                    | 1,835    |   |                   |   | 1,418    |  
|Loan payable, current portion                                                                                                                                                                                                               |  |                    | 1,397    |   |                   |   | 1,420    |  
|Deferred revenue                                                                                                                                                                                                                            |  |                    | 5,820    |   |                   |   | 2,625    |  
|Other accrued liabilities                                                                                                                                                                                                                   |  |                    | 1,919    |   |                   |   | 3,146    |  
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|Total current liabilities                                                                                                                                                                                                                   |  |                    | 11,845   |   |                   |   | 10,310   |  
|Loan payable, noncurrent portion                                                                                                                                                                                                            |  |                    | 2,507    |   |                   |   | 2,138    |  
|Deferred revenue, non-current                                                                                                                                                                                                               |  |                    | 3,750    |   |                   |   |         |  
|Other long-term liabilities                                                                                                                                                                                                                 |  |                    | 1,085    |   |                   |   | 901      |  
|Commitments                                                                                                                                                                                                                                 |  |                    |          |   |                   |   |          |  
|Stockholders equity:                                                                                                                                                                                                                       |  |                    |          |   |                   |   |          |  
|Preferred stock, $0.001 par value; 5,000,000 shares authorized, none issued and outstanding                                                                                                                                                 |  |                    |         |   |                   |   |         |  
|Common stock, $0.001 par value; 100,000,000 shares authorized at September 30, 2005 and December 31, 2004, respectively; 28,820,601
and 24,466,314 shares issued and outstanding at September 30, 2005 and December 31, 2004, respectively. |  |                    | 29       |   |                   |   | 24       |  
|Additional paid-in capital                                                                                                                                                                                                                  |  |                    | 266,823  |   |                   |   | 214,283  |  
|Deferred stock compensation                                                                                                                                                                                                                 |  |                    | (5,709   | ) |                   |   | (9,163   | )
|Accumulated other comprehensive loss                                                                                                                                                                                                        |  |                    | (63      | ) |                   |   | (386     | )
|Accumulated deficit                                                                                                                                                                                                                         |  |                    | (148,252 | ) |                   |   | (121,982 | )
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|Total stockholders equity                                                                                                                                                                                                                  |  |                    | 112,828  |   |                   |   | 82,776   |  
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  
|                                                                                                                                                                                                                                            |  | $                  | 132,015  |   |                   | $ | 96,125   |  
|                                                                                                                                                                                                                                            |  |                    |          |   |                   |   |          |  



See accompanying notes.



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RENOVIS, INC.

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except share and per share data)



|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | ------------------------------- | ---------- | - | ------------------------------ | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | Three Months EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                            |  | 2005                            |            |   | 2004                           |   |            | 2005 |  |   | 2004       |  
|Contract revenues                                           |  | $                               | 2,691      |   |                                | $ | 656        |      |  | $ | 4,003      |   |  | $ | 1,969      |  
|Operating expenses:                                         |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Research and development                                    |  |                                 | 6,451      |   |                                |   | 8,577      |      |  |   | 21,623     |   |  |   | 22,192     |  
|General and administrative                                  |  |                                 | 2,013      |   |                                |   | 2,092      |      |  |   | 6,674      |   |  |   | 6,276      |  
|Amortization of employee stock-based compensation           |  |                                 | 1,007      |   |                                |   | 1,177      |      |  |   | 3,062      |   |  |   | 3,610      |  
|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                    |  |                                 | 9,471      |   |                                |   | 11,846     |      |  |   | 31,359     |   |  |   | 32,078     |  
|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Loss from operations                                        |  |                                 | (6,780     | ) |                                |   | (11,190    | )    |  |   | (27,356    | ) |  |   | (30,109    | )
|Interest income                                             |  |                                 | 565        |   |                                |   | 410        |      |  |   | 1,378      |   |  |   | 1,025      |  
|Interest expense                                            |  |                                 | (85        | ) |                                |   | (71        | )    |  |   | (292       | ) |  |   | (276       | )
|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                    |  | $                               | (6,300     | ) |                                | $ | (10,851    | )    |  | $ | (26,270    | ) |  | $ | (29,360    | )
|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                        |  | $                               | (0.25      | ) |                                | $ | (0.45      | )    |  | $ | (1.06      | ) |  | $ | (1.41      | )
|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Shares used to compute basic and diluted net loss per share |  |                                 | 24,850,866 |   |                                |   | 24,265,528 |      |  |   | 24,667,227 |   |  |   | 20,763,786 |  
|                                                            |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  



See accompanying notes.



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RENOVIS, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)



|                                                                            |  |                                 |         |   |      |   |          |  
|--------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | -------- | -
|                                                                            |  | Nine Months Ended September 30, |        
|                                                                            |  | 2005                            |         |   | 2004 |  
|Cash flows from operating activities                                        |  |                                 |         |   |      |   |          |  
|Net loss                                                                    |  | $                               | (26,270 | ) |      | $ | (29,360  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                 |         |   |      |   |          |  
|Loss on disposal of fixed assets                                            |  |                                 | 212     |   |      |   |         |  
|Depreciation and amortization                                               |  |                                 | 2,195   |   |      |   | 2,011    |  
|Amortization of deferred stock compensation                                 |  |                                 | 3,062   |   |      |   | 3,610    |  
|Noncash issuances of equity                                                 |  |                                 | 1,250   |   |      |   | 1,094    |  
|Change in assets and liabilities:                                           |  |                                 |         |   |      |   |          |  
|Prepaids and other current assets                                           |  |                                 | (247    | ) |      |   | (60      | )
|Other assets                                                                |  |                                 | 48      |   |      |   | 673      |  
|Accounts payable                                                            |  |                                 | (827    | ) |      |   | (604     | )
|Accrued compensation                                                        |  |                                 | 417     |   |      |   | 388      |  
|Deferred revenue                                                            |  |                                 | 6,945   |   |      |   | 3,281    |  
|Other accrued liabilities                                                   |  |                                 | (940    | ) |      |   | 1,005    |  
|                                                                            |  |                                 |         |   |      |   |          |  
|Net cash used in operating activities                                       |  |                                 | (14,155 | ) |      |   | (17,962  | )
|                                                                            |  |                                
|Cash flows from investing activities                                        |  |                                 |         |   |      |   |          |  
|Capital expenditures                                                        |  |                                 | (2,144  | ) |      |   | (1,488   | )
|Proceeds from the sale of property and equipment                            |  |                                 | 40      |   |      |   |         |  
|Purchases of short-term investments                                         |  |                                 | (78,077 | ) |      |   | (198,768 | )
|Sales of short-term investments                                             |  |                                 | 49,901  |   |      |   | 102,350  |  
|Maturities of short-term investments                                        |  |                                 | 19,500  |   |      |   | 46,500   |  
|                                                                            |  |                                 |         |   |      |   |          |  
|Net cash used in investing activities                                       |  |                                 | (10,780 | ) |      |   | (51,406  | )
|                                                                            |  |                                
|Cash flows from financing activities                                        |  |                                 |         |   |      |   |          |  
|Principal payments on loan payable                                          |  |                                 | (1,249  | ) |      |   | (1,761   | )
|Proceeds from loan payable                                                  |  |                                 | 1,586   |   |      |   | 2,910    |  
|Proceeds from issuance of common stock, net of repurchases                  |  |                                 | 51,593  |   |      |   | 71,475   |  
|Proceeds from repayment of stockholder notes payable                        |  |                                 |        |   |      |   | 42       |  
|                                                                            |  |                                 |         |   |      |   |          |  
|Net cash provided by financing activities                                   |  |                                 | 51,930  |   |      |   | 72,666   |  
|                                                                            |  |                                 |         |   |      |   |          |  
|Net increase in cash and cash equivalents                                   |  |                                 | 26,995  |   |      |   | 3,298    |  
|Cash and cash equivalents at beginning of period                            |  |                                 | 5,580   |   |      |   | 1,752    |  
|                                                                            |  |                                 |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                  |  | $                               | 32,575  |   |      | $ | 5,050    |  
|                                                                            |  |                                 |         |   |      |   |          |  
|                                                                            |  |                                
|Supplemental schedule of noncash financing activities                       |  |                                 |         |   |      |   |          |  
|Conversion of preferred stock into common stock                             |  | $                               |        |   |      | $ | 123,266  |  
|                                                                            |  |                                 |         |   |      |   |          |  



See accompanying notes.



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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) was incorporated in the State of Delaware on January 5, 2000. Renovis is a biopharmaceutical company primarily focused on the
discovery and development of drugs to treat neurological diseases and disorders. Its facilities are located in South San Francisco, CA.



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
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, 2004.



The condensed balance sheet amounts at December 31, 2004, have been derived from audited
financial statements.



Reclassifications



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



Restricted
Cash



As of September 30, 2005 and December 31, 2004,
prepaids and other current assets included restricted cash of $673,000 related to bank certificates of deposit to collateralize the rent deposit on the Companys former facility located in South San Francisco, California. The lease agreement
for the former facility ended on October 1, 2005. Restriction on the cash expired upon expiration of the lease agreement.



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 development of drugs to treat neurological diseases and
disorders.



Revenue Recognition



The Companys revenues are generated by complex research and licensing collaborative
arrangements. Revenues under such collaborative agreements may include upfront payments, research funding and incentive milestone payments. 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 customer on a stand-alone basis and whether objective and reliable evidence of fair value of the undelivered item exists. Deliverables that do not
meet these criteria are treated as one unit of accounting for the purposes of revenue recognition.



Revenue from nonrefundable upfront technology license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as 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.



Incentive milestone receipts 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. Incentive 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. Accordingly, the incentive milestones 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 an incentive milestone event, we have no future performance obligations related to that milestone as the milestone receipts are nonrefundable.



2. Stock-Based Compensation



The Company accounts for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, and related
interpretations and has adopted the disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation.



6



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RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



The information regarding net loss as required by SFAS No. 123 has been determined as if the Company had
accounted for its employee stock options under the fair value method of that Statement. The resulting effect on net loss pursuant to SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in
future years, since future years are likely to include additional grants and the irregular impact of future years vesting.



The following table illustrates the weighted average assumptions for the Black-Scholes model used in determining the fair value of options granted to employees:



|                        |  |                                  |   |  |                                 |   |  |         |   |  |         |  
|----------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | ------- | - |  | ------- | -
|                        |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                        |  | 2005                             |   |  | 2004                            |   |  | 2005    |   |  | 2004    |  
|Dividend yield:         |  | 0                                |   |  | 0                               |   |  | 0       |   |  | 0       |  
|Risk-free interest rate |  | 4.0                              | % |  | 3.5                             | % |  | 3.8     | % |  | 3.0     | %
|Volatility:             |  | 0.8                              |   |  | 0.8                             |   |  | 0.8     |   |  | 0.8     |  
|Expected life:          |  | 5 years                          |   |  | 5 years                         |   |  | 5 years |   |  | 5 years |  



During the period from January 1,
2003 through January 31, 2004, certain stock options were granted with exercise prices that were below the estimated fair value of the common stock at the date of grant. The deferred compensation balance at September 30, 2005 of $5,709,000
was recorded in accordance with APB Opinion No. 25, and is being amortized on a straight-line basis over the related performance periods of the options. The Company recorded amortization of employee stock-based compensation of $1,007,000 and
$3,062,000 for the three and nine months ended September 30, 2005 and $1,117,000 and $3,610,000 for the three and nine months ended September 30, 2004, respectively.



For purposes of disclosures pursuant to SFAS No. 123, as amended by SFAS No. 148,Accounting for Stock-Based
CompensationTransition and Disclosure, the estimated fair value of options is amortized to expense over the options vesting period. The following table illustrates the effect on net loss and net loss per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock based employee compensation (in thousands, except per share amounts):



|                                                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                                                |  | 2005                             |        |   | 2004                            |   |         | 2005 |  |   | 2004    |  
|Net loss, as reported                                                                           |  | $                                | (6,300 | ) |                                 | $ | (10,851 | )    |  | $ | (26,270 | ) |  |   | (29,360 | )
|                                                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Plus: Employee stock compensation expense based on intrinsic value method                       |  |                                  | 1,007  |   |                                 |   | 1,177   |      |  |   | 3,062   |   |  |   | 3,610   |  
|Less: Employee stock compensation expense determined under the fair value method for all awards |  |                                  | (1,938 | ) |                                 |   | (1,525  | )    |  |   | (5,610  | ) |  |   | (4,246  | )
|                                                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net loss, pro forma                                                                             |  | $                                | (7,231 | ) |                                 | $ | (11,199 | )    |  | $ | (28,818 | ) |  | $ | (29,996 | )
|                                                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net loss per share:                                                                             |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted, as reported                                                                  |  | $                                | (0.25  | ) |                                 | $ | (0.45   | )    |  | $ | (1.06   | ) |  | $ | (1.41   | )
|                                                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted, pro forma                                                                    |  | $                                | (0.29  | ) |                                 | $ | (0.46   | )    |  | $ | (1.17   | ) |  | $ | (1.44   | )
|                                                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  



In December 2004, the Financial
Accounting Standards Board (FASB) issued SFAS No. 123R,Share-Based Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25,Accounting
for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires all
share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



The original effective date of SFAS No. 123R was the first reporting period beginning
after June 15, 2005. However, on April 14, 2005, the Securities and Exchange Commission (SEC) announced the adoption of a new rule that amends the compliance date of SFAS No. 123R. The SECs new rule allows calendar year-end
companies to implement SFAS No. 123R at the beginning of 2006, which makes SFAS No. 123R effective for the Company in the first quarter of 2006. SFAS No. 123R permits public companies to adopt its requirements using one of two
methods:



(1) A modified prospective method in
which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS
No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.



(2) A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.



The Company plans to adopt SFAS No. 123R using the modified prospective method.



7



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



As permitted by SFAS No. 123, the Company currently accounts for share-based payments to employees using APB No.
Opinion 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123Rs fair value method will have a significant impact on our results of
operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of share-based payments granted in the future and the
valuation model we ultimately select. We are currently evaluating option valuation methodologies and assumptions in light of SFAS No. 123R related to employee stock options. However, had we adopted SFAS No. 123R in prior periods, the
impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share above.



Stock compensation arrangements to non-employees are accounted for in accordance with SFAS No. 123, as amended by SFAS No. 148,
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 remeasurement over the vesting terms as earned. During the three months ended September 30, 2005, the Company did not grant any stock options to consultants. During the nine months ended September 30, 2005, the
Company granted stock options to purchase 30,611 shares of common stock to consultants. Compensation expense related to non-employee stock option grants was $444,000 ($358,000 R&D and $86,000 G&A) and $955,000 ($796,000 R&D and $159,000
G&A) for the three and nine months ended September 30, 2005, respectively. During the three and nine months ended September 30, 2004, the Company granted stock options to purchase 2,500 and 42,787 shares of common stock, respectively,
to consultants. Compensation expense related to non-employee stock option grants was $112,000 ($102,000 R&D and $10,000 G&A) and $625,000 ($589,000 R&D and $36,000 G&A) for the three and nine months ended September 30, 2004,
respectively.



The Company also granted fully vested stock awards of 10,000
shares to certain consultants during the three months ended March 31, 2005; the associated compensation expense was $88,000 and was included in research and development expense in the statement of operations in that period.



The following table illustrates the weighted average assumptions for the Black-Scholes model
used in determining the fair value of options granted to non-employees:



|                        |  |                                  |   |  |                                 |   |  |          |   |  |          |  
|----------------------- |  | -------------------------------- | - |  | ------------------------------- | - |  | -------- | - |  | -------- | -
|                        |  | Three Months Ended September 30, |   |  | Nine Months Ended September 30, |  
|                        |  | 2005                             |   |  | 2004                            |   |  | 2005     |   |  | 2004     |  
|Dividend yield:         |  | 0                                |   |  | 0                               |   |  | 0        |   |  | 0        |  
|Risk-free interest rate |  | 4.21                             | % |  | 4.10                            | % |  | 4.34     | % |  | 4.41     | %
|Volatility:             |  | 0.8                              |   |  | 0.8                             |   |  | 0.8      |   |  | 0.8      |  
|Expected life:          |  | 10 years                         |   |  | 10 years                        |   |  | 10 years |   |  | 10 years |  



3. 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. The Companys total comprehensive loss for the three and nine months ended
September 30, 2005 was $6,190,000 and $25,947,000, respectively, and included an unrealized gain on available-for-sale investments of $110,000 and $323,000 for the three and nine months ended September 30, 2005, respectively.



The Companys total comprehensive loss for the three and nine months ended
September 30, 2004 was $10,723,000 and $29,668,000, respectively, and included an unrealized gain of $128,300 and an unrealized loss of $308,000 on available-for-sale investments for the three and nine months ended September 30, 2004,
respectively.



8



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



4. 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, 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 September 30,               |            |   | Nine Months Ended September 30, |  
|                                                                                          |  | 2005                                           |            |   | 2004                            |   |            | 2005 |  |   | 2004       |  
|                                                                                          |  | (in thousands except share and per share data) |           
|Historical:                                                                               |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Numerator:                                                                                |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                                                                  |  | $                                              | (6,300     | ) |                                 | $ | (10,851    | )    |  | $ | (26,270    | ) |  | $ | (29,360    | )
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator:                                                                              |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Weighted average common shares outstanding                                                |  |                                                | 24,965,658 |   |                                 |   | 24,550,597 |      |  |   | 24,803,958 |   |  |   | 21,137,196 |  
|Less: Weighted average unvested common shares subject to repurchase                       |  |                                                | (114,792   | ) |                                 |   | (285,069   | )    |  |   | (136,731   | ) |  |   | (373,410   | )
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Denominator for basic and diluted net loss per share                                      |  |                                                | 24,850,866 |   |                                 |   | 24,265,528 |      |  |   | 24,667,227 |   |  |   | 20,763,786 |  
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Basic and diluted net loss per share                                                      |  | $                                              | (0.25      | ) |                                 |   | (0.45      | )    |  | $ | (1.06      | ) |  |   | (1.41      | )
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Historical outstanding dilutive securities not included in net loss per share calculation |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|Preferred stock                                                                           |  |                                                |           |   |                                 |   |           |      |  |   |           |   |  |   |           |  
|Options to purchase common stock                                                          |  |                                                | 2,770,479  |   |                                 |   | 2,731,238  |      |  |   | 2,770,479  |   |  |   | 2,731,238  |  
|Warrants                                                                                  |  |                                                | 33,358     |   |                                 |   | 57,222     |      |  |   | 33,358     |   |  |   | 57,222     |  
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  
|                                                                                          |  |                                                | 2,803,837  |   |                                 |   | 2,788,460  |      |  |   | 2,803,837  |   |  |   | 2,788,460  |  
|                                                                                          |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |            |  



5. Collaboration Agreements



Genentech



On December 31, 2003, the Company entered into a collaborative research, development
and license agreement (Genentech Agreement) with Genentech, Inc. (Genentech) under which the Company received an upfront payment of $5,250,000. Additionally, as part of the Genentech Agreement and concurrent with the Companys initial public
offering, Genentech purchased 250,000 shares of common stock for an additional $3,000,000, or $12.00 per share. The Genentech Agreement also provides for future milestones and royalties in connection with the development and commercialization of
products that may arise from the collaboration. The Company deferred the $5,250,000 upfront payment and is recognizing it on a straight-line basis over the two-year estimated research period of the agreement. In July 2005, we revised the estimated
completion date of the research period under the agreement by two months to February 2006 from our previous estimate of December 2005. Accordingly, we now expect to recognize the remaining deferred revenue on a straight-line basis from July 2005
through February 2006. We are currently pursuing discussions with Genentech about the future of our joint efforts on this program. During the three and nine months ended September 30, 2005 the Company recognized $492,000 and $1,805,000 in
revenue related to this agreement, respectively. During the three and nine months ended September 30, 2004 the Company recognized $656,000 and $1,969,000 in revenue related to this agreement, respectively.



Pfizer



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



Under the Pfizer Agreement, Pfizer paid a $10 million upfront license fee to
the Company in July 2005, and will provide the Company with research funding in excess of $7,000,000 during the first two years of the collaboration. Pfizer also has the option to extend the agreements for up to two additional years subject to
additional funding requirements. Additionally, the Company will be eligible to receive research, development, approval and commercialization milestone payments resulting in total potential payments to the Company greater than $170 million through
successful achievement of research development and commercialization milestones for each product candidate 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.



The Company applied EITF Issue No.
00-21 in evaluating the appropriate accounting for the Pfizer 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 Pfizer 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 standalone value. The Company also
determined that the achievement of the specific milestones 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 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.



9



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



In accordance with the evaluation discussed above, the Company began amortizing the upfront payment from Pfizer
ratably in the third quarter of 2005 over the estimated initial research term of two years. The Company also began recognition of the research funding as incurred in the third quarter of 2005. During the three and nine months ended
September 30, 2005 the Company recognized $2,200,000 in revenue related to these agreements.



6. Other Current Accrued Liabilities



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



|                                      |  |                    |       |                   |   |      
|------------------------------------- |  | ------------------ | ----- | ----------------- | - | -----
|                                      |  | September 30, 2005 |       | December 31, 2004
|Accrued professional fees             |  | $                  | 556   |                   | $ | 650  
|Rent obligation                       |  |                    | 213   |                   |   | 312  
|Early exercise price payable          |  |                    | 128   |                   |   | 232  
|Clinical trials and preclinical costs |  |                    | 657   |                   |   | 1,427
|Accrued other                         |  |                    | 365   |                   |   | 525  
|                                      |  |                    |       |                   |   |      
|Other current accrued liabilities     |  | $                  | 1,919 |                   | $ | 3,146
|                                      |  |                    |       |                   |   |      



7. Loan Payable



In February 2004, the Company entered into a credit facility with a lender that provides up
to an aggregate of $5,000,000 to finance the purchase of laboratory and computer equipment and certain leasehold improvements. Under this agreement the Company borrowed approximately $3,316,000 during the year ended December 31, 2004. Payments
are due in monthly installments over a period ranging from 42 to 48 months at interest rates ranging from 8.80% to 9.64% and are secured by the assets financed.



During the nine months ended September 2005, the Company borrowed approximately $1,586,000 under the existing 2004 credit facility to finance the purchase of primarily
laboratory equipment and computer software. Payments are due in monthly installments over a period ranging from 42 to 48 months at an interest rate of 9.23% to 9.56% and are secured by the assets financed.



8. Stockholders Equity



Public Offering of Common Stock



On September 28, 2005, the Company sold 4,000,000 shares of common stock through a
public offering and realized net proceeds of approximately $50,600,000.



Amended 2003 Stock Plan



The Board of Directors
approved the Amended and Restated Renovis, Inc. 2003 Stock Plan (Amended 2003 Plan), giving effect to certain amendments to the previously approved Renovis, Inc. 2003 Stock Plan. The Amended 2003 Plan became effective on January 3, 2005. A
total of 333,333 shares of the Companys common stock were initially reserved for issuance under the Amended 2003 Plan. The Amended 2003 Plan also includes additional shares of common stock that have or will have become available for issuance
under the Companys predecessor stock option plans. Additionally, commencing in 2005 and on each January 15 thereafter during the term of the Amended Plan, the number of shares reserved for issuance under the Plan will be increased by the
least of (i) 3.5% of the Companys outstanding shares of common stock on that date, (ii) 1,055,555 shares, or (iii) such lesser number determined by our Board of Directors. On January 19, 2005, the Board authorized and
reserved 863,984 shares of the Companys common stock for replenishment stock option grants under the Amended 2003 Plan.



The Amended 2003 Plan permits the Company to grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock, deferred stock,
dividend equivalents, performance share awards, stock payments and other stock related benefits, or any combination thereof to employees or consultants of the Company. The Amended 2003 Plan provides that the automatic option grants for independent
directors to purchase 11,111 shares and the chairman of the Board of Directors to purchase 22,222 shares shall be granted annually on a date determined by the Board of Directors in its discretion, which date shall, to the extent practicable, be
consistent with the date on which annual replenishment grants of options are made to employees generally (the Annual Grant Date). The Board of Directors in its discretion may change the Annual Grant Date from year to year.
Each eligible member of the Board of Directors must continue to serve through the Annual Grant Date in order to receive an automatic option grant.



Stock options awarded to employees may be granted at an exercise price no less than the fair market value of the common stock on the date of grant. Options become
exercisable as determined by the Board of Directors, generally at the rate of 25% at the end of the first year, with the remaining balance vesting ratably over the next three years, or 1/48thper month such that the options will be fully vested after four years. Options granted under the Amended 2003 Plan expire no more than ten years after
the date of grant.



2005 Employment Commencement
Incentive Plan



The Board of Directors approved the Renovis, Inc. 2005
Employment Commencement Incentive Plan (2005 Plan), effective January 3, 2005. The number of shares of common stock that may be issued pursuant to awards under the 2005 Plan is 250,000.



10



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##### Table of Contents

RENOVIS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS(Continued)



The 2005 Plan provides the Company with the ability to grant specified types of equity awards including non-qualified
stock options, restricted stock, stock appreciation rights, performance shares, dividend equivalents, deferred stock and stock payment awards. Company employees that are otherwise eligible to receive grants under the 2005 Plan may receive all types
of awards approved under the 2005 Plan. A majority of the independent members of the Companys Board of Directors or the compensation committee of the Board of Directors will determine which employees will receive awards under the 2005 Plan and
the terms and conditions of such awards, within certain limitations set forth in the 2005 Plan. The awards granted pursuant to the 2005 Plan are intended to be inducement awards pursuant to NASDAQ Marketplace Rule 4350(i)(1)(A)(iv). The 2005 Plan is
not subject to the approval of the Companys stockholders.



Options
granted under the 2005 Plan have a 10-year term, and are granted at exercise prices equal to the fair market value on the date of grant. These options generally become exercisable at the rate of 25% at the end of the first year, with the remaining
balance vesting ratably over the next three years, or 1/48thper month such that the options will be fully
vested after four years. Only an employee who has not previously been an employee or director of the Company or a subsidiary, or following a bona fide period of non-employment by the Company or a subsidiary, is eligible to participate in the 2005
Plan and only if he or she is granted an award in connection with his or her commencement of employment with the Company or a subsidiary and such grant is an inducement material to his or her entering into employment with the Company or a
subsidiary.



Employee Stock Purchase Plan



On February 4, 2004, the Companys Employee Stock Purchase
Plan (Purchase Plan) became effective. A total of 611,111 shares of the Companys common stock were initially reserved for issuance under the Purchase Plan. The Purchase Plan provides for an annual increase to the shares of common stock
reserved under the Purchase Plan on January 1 each year equal to the least of (i) 194,444 shares, (ii) 0.75% of our outstanding shares on such date, or (iii) a lesser amount determined by our Board of Directors. On
January 1, 2005, an annual increase of 184,747 shares of the Companys common stock was added to the Purchase Plan. Employees scheduled to work more than 20 hours per week for more than five calendar months per year are eligible to
participate in the Purchase Plan.



The Purchase Plan will be implemented by a
series of offerings of approximately 24-months in duration. The initial offering commenced on February 4, 2004. Within the offering, there will be a series of semi-annual purchase periods. The purchase price for shares of common
stock purchased at the end of a purchase period in an offering will be the lesser of 85% of the market price of common stock on a participants entry date into the offering period, or 85% of the market price of common stock on the last business
day of the purchase period.



Participants may contribute up to 20% of their
cash earnings through payroll deductions per offering period and the accumulated deductions will be applied to the purchase of shares on each semi-annual purchase date.



Stockholder Rights Plan



On March 23, 2005, our Board of Directors adopted a Stockholder Rights Plan (Rights Plan). On April 11, 2005, the Company filed
with the Delaware Secretary of State a Certificate of Designations setting forth the terms of the Companys Series A Junior Participating Preferred Stock, par value $0.001 per share (Preferred Shares) in connection with the adoption of the
Rights Plan by our Board of Directors. The Company has agreed to initially reserve 100,000 Preferred Shares for issuance upon exercise of the rights under the Rights Plan from and after the date of distribution.



The rights issued pursuant to the Rights Plan expire on April 12, 2015 and are
exercisable upon the earlier of ten business days after a person or group either (i) announces the acquisition of 15% or more of the Companys outstanding common stock or (ii) commences a tender offer, which would result in ownership
by the person or group of 15% or more of the Companys outstanding common stock. Upon exercise, all rights holders except the potential acquirer will be entitled to acquire the Companys common stock at a discount. The Company is entitled
to redeem the rights in whole at any time on or before the tenth day following acquisition by a person or group of 15% or more of the Companys common stock.



The rights under the Rights Plan are not being distributed in response to any specific effort to acquire control of the Company. The rights
under the Rights Plan are designed to assure that all our stockholders receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against partial tender offers, open market accumulations and other potentially
abusive tactics to gain control of the Company, while not foreclosing a fair acquisition bid for the Company.



11



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##### Table of Contents

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



The following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below under the caption Business  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, 2004 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 28, 2005.



Overview



We are a biopharmaceutical company developing drugs to treat neurological diseases and disorders. We currently focus our research and development programs in the areas of
neuroprotection, pain and neuroinflammatory diseases. Our most advanced product candidate, Cerovive®(NXY-059), is a novel free radical trapping neuroprotectant in development for the treatment of acute ischemic stroke. In May 2003, our exclusive licensee, AstraZeneca, commenced two Phase III clinical trials (SAINT I and II) with
Cerovive®(NXY-059) to determine its effect on disability and neurological recovery in
acute ischemic stroke patients. In August 2004, AstraZeneca initiated a Phase II trial (CHANT) to assess safety and tolerability of Cerovive®(NXY-059) in patients with acute intracerebral hemorrhage. Patient enrollment in the CHANT trial has been completed as of September
2005 and we expect to report data from this trial in coordination with AstraZeneca during the first quarter of 2006. In December 2004, we announced that patient enrollment in the SAINT I trial, one of the two Phase III trials with
Cerovive®(NXY-059), had been completed. In May 2005, we announced that a first analysis
of data from the Phase III SAINT I trial involving more than 1,700 patients and conducted by our exclusive licensee, AstraZeneca, showed that Cerovive®(NXY-059) demonstrated a statistically significant reduction versus placebo on the primary outcome of disability in patients after an
acute ischemic stroke. However, on the National Institute of Health Stroke Scale (NIHSS), there was not a statistically significant difference in measurement of change in neurological impairment between the treatment groups. The clinical
significance of these findings needs to be assessed in light of the outcome of SAINT II and CHANT trials. In July 2005, we announced that following consultations with regulators and the SAINT II trial Steering Committee, AstraZeneca has increased
the planned enrollment of the Phase III SAINT II trial to 3,200 patients from the originally planned 1,700 patients. Based on enrollment trends to date, and recent progress by AstraZeneca adding new centers to the SAINT II trial, regulatory filings
for Cerovive®(NXY-059) are expected to be submitted during the first half of 2007.
AstraZeneca is responsible for funding and conducting all of the clinical trials with Cerovive®(NXY-059).



In addition to Cerovive®(NXY-059), we were independently conducting clinical trials with another product candidate, REN-1654,
an oral drug candidate for neuropathic pain in the first seven months of 2005. REN-1654 was in a Phase II clinical trial for sciatica that we began in 2004. In March 2005, we announced our decision to discontinue development of REN-1654 in
post-herpetic neuralgia (PHN). In August 2005, we announced our decision to discontinue development of REN-1654 as an oral medication. Based upon the modest effectiveness observed at the dose tested in this study, and safety findings that would
limit testing of higher oral doses, the Company decided to end further development of REN-1654 and instead explore alternative routes of administration. In June 2005, we announced that we ended our Phase Ia clinical trial for REN-850, an
investigational small molecule that was being studied for the treatment of multiple sclerosis (MS). The objective of this study was to assess the safety, tolerability and pharmacokinetics of escalating single doses of REN-850 in healthy volunteers.
Based upon the interim data from the Phase Ia study with REN-850 the Company decided to end further development of REN-850.



We expect to incur substantial and increasing losses for the next several years as we:



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



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



In addition, we may acquire or in-license technology and products and may also acquire or invest in businesses 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 2003, we recorded $4.5 million in contract revenue related to milestone payments that we received from AstraZeneca following their receipt of regulatory approval to
commence Phase III trials for Cerovive®(NXY-059). Upon achievement of certain future
milestones involving the filing and approval of marketing applications in the U.S. and E.U. or Japan, AstraZeneca is obligated to make additional payments to us totaling up to $7.5 million. Upon commercialization of Cerovive®(NXY-059), we are entitled to receive mid-teen percentage royalties on worldwide net sales from
AstraZeneca.



On December 31, 2003, we entered into a collaborative
research, development and license agreement with Genentech under which we received an upfront payment of $5.3 million. We have deferred the upfront payment and are recognizing it as contract revenue on a straight-line basis over the estimated
research period of two years. Accordingly, we recognized $0.5, $1.8, $0.7 and $2.0 million respectively in contract revenue related to this agreement during the three and nine months ended September 30, 2005 and 2004. In July 2005, we revised
the estimated completion date of the research period under the agreement to February 2006 from our previous estimate of December 2005. Accordingly, we expect to recognize the remaining deferred revenue on a straight-line basis from July through
February 2006. We are currently pursuing discussions with Genentech about the future of our joint efforts on this program. The agreement with Genentech also provides for future milestones and royalties in connection with the development and
commercialization of products that may arise from the collaboration.



12



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##### Table of Contents

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 which work by targeting the vanilloid receptor, VR1. The collaboration focuses on treatments for pain, urinary incontinence and other diseases and disorders. Under the agreement, we
received an upfront license fee of $10.0 million in July 2005. We have deferred the upfront license fee and are recognizing it as contract revenue on a straight-line basis over the estimated research period of two years. In addition to the upfront
license fee, the agreements with Pfizer also provide the Company with research funding in excess of $7 million which is being recognized as the research efforts is being performed over the estimated research period. Accordingly, we recognized $2.2
million in contract revenue related to these agreements during the three and nine months ended September 30, 2005. Pfizer also has the option to extend the agreement for up to two additional years subject to additional funding requirements.
Additionally, we will be eligible to receive research, development, approval and commercialization milestones resulting in total potential payments to the Company greater than $170 million through successful achievement of research development and
commercialization milestones for each product resulting from the collaboration. Upon commercialization of a product resulting from the collaboration, we will be entitled to receive royalties on net sales by Pfizer.



In addition to partnered programs, we are pursuing drug discovery programs targeted at
next-generation cytoprotectants and certain purinergic receptions that are implicated in a broad spectrum of pain and inflammatory diseases. In our cytoprotectant program, we are pursuing the development of next-generation compounds that act
similarly to Cerovive (NXY-059) for the treatment of myocardial infraction, kidney disease, stroke, neurodegeneration and potentially other diseases and conditions in which ischemia is thought to play a key role. As of September 30, 2005, we had an
accumulated deficit of $148.3 million.



As of September 30, 2005, we had
approximately $123.0 million in cash, cash equivalents and short-term investments. We anticipate that our current cash, cash equivalents and short-term investments will enable us to maintain our currently planned operations for more than another 12
months. However, changes to our current operating plan may require us to consume our capital resources significantly sooner than we expect.



Revenues



To date, all of our revenue has been earned under agreements with AstraZeneca, Genentech and Pfizer. We do not expect to generate revenue from product sales or royalties until at least 2007, if at all. We seek to
generate revenue from a combination of 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 we are pursuing internally in the areas of neuroprotection, pain and neuroinflammatory diseases. We do not incur research and development costs for
Cerovive®(NXY-059), which is licensed to AstraZeneca.



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



| |  |  | employee compensation;
| | - |  | ----------------------



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



| |  |  | costs for consultants, contract research and clinical trials (including non-cash expenses for options and shares granted to non-employees);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



| |  |  | manufacturing of clinical drug supplies; 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.



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##### Table of Contents

Prior to our acquisition of pharmaceutical assets from Centaur Pharmaceuticals, Inc. (Centaur) in December 2002, we had
incurred research and development expenses of approximately $20.8 million to assemble a team of neurobiologists and establish specialized capabilities in assay development, screening, lead optimization, target identification and target validation,
which we used to pursue early stage research in the areas of pain and trauma. We are unable to estimate the portion of costs incurred that are allocable to the individual research activities we conducted during the periods prior to December 31,
2002 because we do not segregate costs among early-stage research programs for both management and external reporting. Moreover, given the early stage nature of these projects and the subsequent integration of intellectual property and product
opportunities that we acquired from Centaur, we are unable to reasonably estimate the cost or timeline required to generate cash inflows from our research efforts.



During the three and nine months ended September 30, 2005 and 2004, we incurred research and development expenses of $6.5 million,
$21.6 million, $8.6 million and $22.2 million, respectively. The total R&D costs related to individual research activities are as follows (in millions):



|                                |  |                                  |     |                                 |   |      |  |      |      |  |   |     
|------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | ---- |  | - | ----
|                                |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                                |  | 2005                             |     | 2004                            |   | 2005 |  | 2004
|Clinical development activities |  | $                                | 0.9 |                                 | $ | 2.6  |  | $    | 4.1  |  | $ | 7.4 
|Preclinical R&D programs        |  |                                  | 5.6 |                                 |   | 6.0  |  |      | 17.5 |  |   | 14.8
|                                |  |                                  |     |                                 |   |      |  |      |      |  |   |     
|                                |  | $                                | 6.5 |                                 | $ | 8.6  |  | $    | 21.6 |  | $ | 22.2
|                                |  |                                  |     |                                 |   |      |  |      |      |  |   |     



The decrease in clinical development
expenses is a result of our decisions to end two clinical development programs, both of which involved multiple Phase II clinical studies that were ongoing throughout the first three quarters of 2004. Preclinical R&D expense, on the other hand,
increased in 2005 from 2004 as a result of our investments in preclinical activities in the areas of neuroprotection, pain and neuroinflammatory diseases. During the 2005 period we made significant new investments in our preclinical programs
primarily to add key personnel in chemistry and pharmacology to support expansion of our preclinical programs, including our program with Pfizer to identify antagonists of the vanilloid receptor, VR1, as well as external studies needed to support
advancement of REN-850 into clinical development during the first half of 2005. We also maintained our effort to identify and advance molecules with properties similar to Cerovive that we believe could be useful in a range of ischemic conditions and
we invested in certain pilot programs to build our pipeline of new investment opportunities within the Company.



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 for employees in executive and operational functions, including finance and business development.
Other significant costs include allocated facilities costs and professional fees for accounting and legal services, including legal services associated with obtaining and maintaining patents. We anticipate incurring increases in general and
administrative expenses, such as increased costs of compliance with certain sections of the Sarbanes-Oxley Act of 2002, insurance and investor relations associated with operating as a publicly-traded company. These increases will also likely include
the hiring of additional personnel.



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 research and licensing collaborative arrangements. Revenues under such collaborative agreements may include upfront payments,
research funding and incentive milestone payments.



Revenue from nonrefundable
upfront technology license fees, for product candidates where we are providing continuing services related to product development, are deferred and recognized as 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.



Incentive
milestone payments 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. Incentive 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. Accordingly, the incentive
milestones 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 an incentive milestone event, we have no future performance
obligations related to that payment and the payments are nonrefundable.



Deferred revenue represents the portion of upfront payments and/or research funding received that is not yet earned.



14



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##### Table of Contents

Stock Compensation



We account for employee stock options using the intrinsic-value method in accordance with Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock
Issued to Employees, Financial Accounting Standards Board (FASB) Interpretation No. 44,Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB Opinion No. 25, and related interpretations and
have adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123,Accounting for Stock-Based Compensationand SFAS No. 148,Accounting for Stock-Based CompensationTransition and
Disclosure. The information regarding net loss as required by SFAS No. 123 has been determined as if we had accounted for our employee stock options under the fair value method of that Statement. The resulting effect on net loss pursuant to
SFAS No. 123 is not likely to be representative of the effects on net loss pursuant to SFAS No. 123 in future years, since future years are likely to include additional grants and the irregular impact of future years vesting.



The preparation of the financial statement footnotes requires us to estimate
the fair value of stock options granted to employees. While fair value may be readily determinable for awards of stock, market quotes are not available for long-term, nontransferable stock options because these instruments are not traded. We
currently use the Black-Scholes option-pricing model to estimate the fair value of employee stock options. Option valuation models require the input of highly subjective assumptions, including but not limited to stock price volatility. We are
currently evaluating our option valuation methodologies and assumptions in light of SFAS No. 123R, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based
on their values no later than the first reporting period beginning after June 15, 2005. However, on April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance date of SFAS No. 123R. The SECs new rule
allows calendar year-end companies to implement SFAS No. 123R at the beginning of 2006, which makes SFAS No. 123R effective for Renovis in the first quarter of 2006.



Acquired In-Process Research and Development



Acquired in-process research and development relates primarily to purchased in-licensed technology, intellectual property and know-how. We
evaluate the stage of development of acquired projects, taking into account the level of effort, time and estimated cost associated with further developing the in-process technology and producing a commercial product. The nature of the remaining
efforts for completion of acquired in-process research and development projects generally include completion of clinical trials, completion of manufacturing validation, interpretation of clinical and preclinical data and obtaining marketing approval
from the FDA and other regulatory bodies, the cost, length and success of which are extremely difficult to determine. Numerous risks and uncertainties exist with respect to the timely completion of development projects, including clinical trial
results, manufacturing process development results and ongoing feedback from regulatory authorities, including obtaining marketing approval. In addition, acquired products under development may never be successfully commercialized due to the
uncertainties associated with the pricing of new pharmaceuticals, the cost of sales to produce these products in a commercial setting, changes in the reimbursement environment or the introduction of new competitive products. As a result of the
uncertainties noted above, we expense such acquired in-process research and development projects when incurred.



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



Some of our research and development, including certain 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 actual and estimated patient enrollment
rates, clinical site initiation activities, labor hours and other activity-based factors. On a regular basis, our estimates of these costs are reconciled to actual invoices from the service providers, and adjustments are made accordingly.



Results of Operations



Comparison of the Three and Nine Months Ended September 30, 2005
and 2004



Revenue



Revenue for the three and nine months ended September 30, 2005 and 2004 was $2.7, $4.0,
$0.7 and $2.0 million, respectively. Revenue in 2004 resulted from a collaborative agreement with Genentech, which was signed at the end of 2003. Under this agreement with Genentech we received an upfront payment of $5.3 million that we are
recognizing as revenue on a straight-line basis over the two-year estimated research period of the agreement. In July 2005, we revised the estimated completion date of the research period under the agreement to February 2006 from December 2005.
Accordingly, we expect to recognize the remaining deferred revenue on a straight-line basis from July 2005 through February 2006. Revenue in 2005 resulted from collaborative agreements with Genentech and Pfizer. We executed the Pfizer agreements in
May 2005 and received an upfront license fee of $10.0 million in July 2005. We recorded the upfront license fee as deferred revenue and are recognizing it as contract revenue on a straight-line basis over the estimated research period of two years
beginning in July 2005. In addition to the upfront license fee, the agreements with Pfizer also provide the Company with research funding of $0.9 million per quarter during the two-year research period. We received the first of these payments during
the quarter ended September 30, 2005.



The increase in revenue in the
three and nine months ended September 30, 2005 over the comparable periods in 2004 reflected the recognition of $2.2 million under the Pfizer agreements, offset by a decrease of $0.2 million recognized under the Genentech agreement due to the
extension of the estimated completion date of the research period from December 2005 to February 2006.



Research and Development Expenses



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



|                    |  |                                  |        |                                 |      |   |       |  |   |        |    |  |   |       
|------------------- |  | -------------------------------- | ------ | ------------------------------- | ---- | - | ----- |  | - | ------ | -- |  | - | ------
|                    |  | Three Months Ended September 30, |        | Nine Months Ended September 30,
|                    |  | 2005                             |        |                                 | 2004 |   | 2005  |  |   | 2004  
|Total R&D expense   |  | $                                | 6,451  |                                 |      | $ | 8,577 |  | $ | 21,623 |    |  | $ | 22,192
|Dollar decrease     |  | $                                | (2,126 | )                               |      |   |       |  | $ | (569   | )  |  |   |       
|Percentage decrease |  |                                  | (25    | )%                              |      |   |       |  |   | (3     | )% |  |   |       



The decrease in R&D expense in the
three and nine months ended September 30, 2005 over the comparable period in 2004 reflected our decisions to end two clinical development programs, both of which involved multiple Phase II clinical studies that were ongoing throughout the first
three quarters of 2004, which was partially offset by investments in our preclinical activities in the areas of neuroprotection, pain and neuroinflammatory diseases. Specific changes include:



| |  |  | External clinical trial costs decreased by $0.9 million in the third quarter of 2005 and $1.6 million year to date in 2005 as compared to 2004 primarily due to our decisions to end
clinical development programs involving REN-1654 and REN-213.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | Costs related to pharmacology, in vivo studies and manufacturing of clinical drug supplies decreased by $1.0 million in the third quarter of 2005 and $1.6 million year to date in
2005 as compared to 2004 as a result of the cancellation of certain clinical projects.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Employee costs increased by $0.3 million in the third quarter of 2005 and $1.7 million year to date in 2005 as compared to 2004 primarily due to the addition of key personnel in our
pre-clinical development operations, merit pay increases and increasing benefit costs through September 30, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Facilities and other shared expenses allocated to R&D increased by $1.1 million year to date in 2005 due to increased headcount in allocated cost centers such as information
technology, as well as increases in depreciation and other miscellaneous expenses. Facilities and other shared expenses allocated to R&D in the third quarter of 2005 remained relatively consistent with the corresponding period in 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | License fees decreased by $0.4 million in the third quarter of 2005 but remained relatively consistent year to date in 2005 as compared to 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------



The table below summarizes the current status of our product candidates:



|                   |  |                       |  |                 |  |                              
|------------------ |  | --------------------- |  | --------------- |  | -----------------------------
|Program            |  | Indication            |  | Clinical Status |  | Commencement of Current
Phase
|Cerovive®(NXY-059) |  | Acute Ischemic Stroke |  | Phase III       |  | Second quarter 2003          



We estimate that typical Phase I
clinical trials generally take 6 to 12 months to complete, Phase II clinical trials are expected to last approximately 12 to 24 months and Phase III clinical trials are expected to last approximately 24 to 48 months. However, the actual length of
clinical trials is based upon factors such as the intended use of the clinical product and the ability to enroll appropriate patients. Additionally, clinical trials of our drug candidates may fail to demonstrate safety and clinically significant
efficacy, which would prevent or significantly delay regulatory approval.



We
expect research and development expenses to increase in future periods as we continue to advance existing product candidates into later stages of clinical trials and move pre-clinical product candidates into clinical trials. However, we currently do
not have estimates of total costs to reach regulatory approval for each product candidate or in the aggregate as our product candidates are subject to an uncertain and lengthy regulatory process which may not result in obtaining the necessary
regulatory approval.



General and Administrative Expenses



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



|                                 |  |                                  |       |                                 |      |   |       |  |   |       |   |  |   |      
|-------------------------------- |  | -------------------------------- | ----- | ------------------------------- | ---- | - | ----- |  | - | ----- | - |  | - | -----
|                                 |  | Three Months Ended September 30, |       | Nine Months Ended September 30,
|                                 |  | 2005                             |       |                                 | 2004 |   | 2005  |  |   | 2004 
|Total G&A expense                |  | $                                | 2,013 |                                 |      | $ | 2,092 |  | $ | 6,674 |   |  | $ | 6,276
|Dollar increase / (decrease)     |  | $                                | (79   | )                               |      |   |       |  | $ | 398   |   |  |   |      
|Percentage increase / (decrease) |  |                                  | (4    | )%                              |      |   |       |  |   | 6     | % |  |   |      



General and administrative expense for
the three months ended September 30, 2005 remained relatively consistent with the corresponding period in 2004. General and administrative expenses increased by $0.4 million for the nine months ended September 30, 2005 compared to the
corresponding period in 2004. This increase in G&A expense during the period is primarily due to professional fees and consulting expense that we incurred as part of our efforts to comply with the Sarbanes-Oxley Act of 2002 and our engagement in
business development activities.



Amortization of Employee Stock-Based
Compensation. In connection with the grant of stock options to employees and directors, we recorded deferred stock compensation of $17.3 million representing the difference between the deemed fair value of the common stock and the option
exercise price at the date of grant. We recorded this amount as a component of stockholders equity (net capital deficiency) and are amortizing the amount, on a straight-line basis, as a non-cash charge to operations over the vesting period of
the options. We recorded amortization of employee stock-based compensation of $1.0 million and $3.1 million for the three and nine months ended September 30, 2005 and $1.2 million and $3.6 million for the three and nine months ended
September 30, 2004, respectively.



As of September 30, 2005, we had
$5.7 million of deferred stock compensation.



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##### Table of Contents

Interest Income.



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



|                      |  |                                  |     |                                 |      |   |      |  |   |       |   |  |   |      
|--------------------- |  | -------------------------------- | --- | ------------------------------- | ---- | - | ---- |  | - | ----- | - |  | - | -----
|                      |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                      |  | 2005                             |     |                                 | 2004 |   | 2005 |  |   | 2004 
|Total interest income |  | $                                | 565 |                                 |      | $ | 410  |  | $ | 1,378 |   |  | $ | 1,025
|Dollar increase       |  | $                                | 155 |                                 |      |   |      |  | $ | 353   |   |  |   |      
|Percentage increase   |  |                                  | 38  | %                               |      |   |      |  |   | 34    | % |  |   |      



The increase in interest income for
the three and nine months ended September 30, 2005 as compared to the corresponding periods in 2004 was primarily attributable to higher rates of return on investment balances.



Interest Expense.



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



|                       |  |                                 |     |   |                                |   |     |      |  |   |      |   |  |   |      |  
|---------------------- |  | ------------------------------- | --- | - | ------------------------------ | - | --- | ---- |  | - | ---- | - |  | - | ---- | -
|                       |  | Three Months EndedSeptember 30, |     |   | Nine Months EndedSeptember 30, |  
|                       |  | 2005                            |     |   | 2004                           |   |     | 2005 |  |   | 2004 |  
|Total interest expense |  | $                               | (85 | ) |                                | $ | (71 | )    |  | $ | (292 | ) |  | $ | (276 | )
|Dollar increase        |  | $                               | 14  |   |                                |   |     |      |  | $ | 16   |   |  |   |      |  
|Percentage increase    |  |                                 | 20  | % |                                |   |     |      |  |   | 6    | % |  |   |      |  



Interest expense for the three and
nine months ended September 30, 2005 remained consistent with the corresponding periods in 2004. Outstanding debt at September 30, 2004 was $0.4 million higher than at September 30, 2005. However, interest expense is slightly higher
in the three and nine months ended September 30, 2005 due to higher interest rates on amounts borrowed under a credit facility for equipment financing in 2005 as compared to 2004.



2005 Financial Guidance



For the year ending December 31, 2005, the Company presently anticipates:



| |  |  | Total contract revenue from existing agreements with Genentech and Pfizer in the range of $6.5 million to $7.0 million; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | Total operating expenses in the range of $40 million to $45 million.
| | - |  | --------------------------------------------------------------------



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
September 30, 2005, we had received approximately $124.8 million from the sale of equity securities. In February 2004, we received approximately $71.4 million from our initial public offering of common stock and concurrent private placement
with Genentech. In July 2005, we received $10.9 million from Pfizer pursuant to a collaborative research agreement executed in May 2005. In September 2005, we completed a public offering of common stock under which we received net proceeds of
approximately $50.6 million. In addition, since inception to September 30, 2005, we had financed through loans the purchase of equipment and leasehold improvements totaling approximately $11.7 million, of which $3.9 million was outstanding as
of September 30, 2005. These obligations are secured by the purchased equipment and leasehold improvements, bear interest at rates ranging from approximately 8.8% to 11.66% and are due in monthly installments through September 2009.



At September 30, 2005, we had $123.0 million in cash, cash equivalents and
short-term investments as compared to $87.0 million at December 31, 2004, an increase of $36.0 million. The increase resulted from the closing of our public offering of common stock in September 2005 through which generated net proceeds of
approximately $50.6 million. This increase was offset by cash used to fund operations. 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.



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##### Table of Contents

Net cash used in operating activities amounted to $14.2 million during the nine months ended September 30, 2005,
compared to $18.0 million during the same period last year and primarily reflected the net loss occurring for this period of $26.3 million, decreases in accounts payable and other accrued liabilities during this period of $0.8 and $0.9 million,
respectively; and an increase in accrued compensation and deferred revenue during this period of $0.4 and $6.9 million, respectively. The change in assets and liabilities was partially offset by noncash charges for amortization of deferred stock
compensation of $3.1 million, noncash issuances of equity of $1.3 million and depreciation and amortization of capital equipments of $2.2 million The decrease in net cash used in operating activities in 2005 as compared to 2004 was primarily due to
the increase in our contract revenue by $2.0 million. In July 2005, we received an upfront payment of $10.0 million and research funding of $0.9 million for the third quarter of 2005 from Pfizer compared with no corresponding amount in 2004.
Furthermore, our operating expense decreased by $0.7 million year to date in 2005 as compared to 2004 primarily as a result of cancellation of certain clinical trial projects.



Net cash used in investing activities was $10.8 million during the nine months ended September 30, 2005 as compared to $51.4 million
during the same period in 2004. Net cash used in investing activities in 2005 resulted primarily from purchases of short-term investments which were offset by proceeds from sales and maturities of short-term investments. Net cash used in investing
activities in 2004 resulted primarily from purchases of short-term investments with the proceeds from our initial public offering, partially offset by sales and maturities of short-term investments.



Net cash provided by financing activities was $51.9 million for the nine months ended
September 30, 2005, compared to $72.7 million during the same period in 2004. Net cash provided by financing activities in 2005 resulted primarily from net proceeds of $50.6 million received from the issuance of common stock through our public
offering in September 2005, $1.0 million in proceeds received from the issuance of common stock upon option exercises and $1.6 million in proceeds received from financing of equipment purchases through our existing credit facilities partially offset
by principal payments of $1.2 million on these financings. Net cash provided by financing activities in 2004 primarily reflected the net proceeds received from the completion of our initial public offering and concurrent private placement with
Genentech and proceeds from our credit facilities, partially offset by principal payments on our credit facilities.



We have entered into a variety of license agreements relating to our research and development efforts, most of which relate to product candidates in the early stage of
preclinical development. We have a cancelable license agreement relating to our product candidate in Phase III clinical trials, Cerovive®(NXY-059). Under this agreement, we could be required to pay $25,000 annually in minimum royalty payments through NDA approval and $100,000 annually in minimum royalty payments after NDA approval.
Additionally, low-single digit royalties are payable on net product sales.



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 sales, marketing and/or manufacturing capabilities;
| | - |  | --------------------------------------------------------------------------



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



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



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



Based upon our current operating plan, we believe that our cash and cash equivalents and short-term investments as of September 30,
2005 will be sufficient to meet our projected operating requirements for more than the next 12 months.



Until we can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources and additional financings. We may be required to seek additional sources of funding
to complete development and commercialization of our products. If we need to 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 the funding, if needed, will be available on terms attractive to us, or at all. Furthermore, any additional equity financing may be dilutive to stockholders and debt financing, if available, may involve restrictive covenants. Our failure to
raise capital as and when needed could have a negative impact on our financial condition and our ability to pursue our business strategy.



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##### Table of Contents

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.



We filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $100 million of any combination of debt securities, common stock,
preferred stock and warrants. The SEC declared this registration statement effective in May 2005. The actual sale will be offered via prospectus in amounts, at prices and at terms determined at the time of an offering and may be sold directly by us
to investors, through agents, or through underwriters or dealers. In September 2005, we sold 4,000,000 shares of common stock to the public at $13.50 per share for an aggregate proceeds of $54 million. As of September 30, 2005, $46 million
worth of securities remains available under this registration statement.



Recent Accounting Pronouncements



In December 2004, the
Financial Accounting Standards Board (FASB) issued SFAS No. 123R,Share-Based Payment, which is a revision of SFAS No. 123,Accounting for Stock-Based Compensation. SFAS No. 123R supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends SFAS No. 95,Statement of Cash Flows. Generally, the approach in SFAS No. 123R is similar to the approach described in SFAS No. 123. However, SFAS No. 123R requires
all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.



The original effective date of SFAS No. 123R was the first reporting period beginning
after June 15, 2005. However, on April 14, 2005, the SEC announced the adoption of a new rule that amends the compliance date of SFAS No. 123R. The SECs new rule allows calendar year-end companies to implement SFAS No. 123R
at the beginning of 2006, which makes SFAS No. 123R effective for Renovis in the first quarter of 2006. SFAS No. 123R permits public companies to adopt its requirements using one of two methods:



(1) A modified prospective method in which compensation cost is
recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to
employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date.



(2) A modified retrospective method which includes the requirements of the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption.



The Company plans to adopt SFAS No. 123R using the modified-prospective method.



As permitted by SFAS No. 123, the Company currently accounts for
share-based payments to employees using APB Opinion No. 25s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of SFAS No. 123Rs fair value
method will have a significant impact on our result of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123R cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future and the valuation model we ultimately select. We are currently evaluating option valuation methodologies and assumptions in light of SFAS No. 123R related to employee stock options. However, had we
adopted SFAS No. 123R in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net loss and net loss per share in Note 2 to our condensed financial
statements.



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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Quarterly Report on Form 10-Q, including the sections entitled Business,
Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements.



Forward-looking statements include, but are not limited to, statements about:



| |  |  | the progress, timing and completion of our research, development and clinical trials for product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | our ability to market, commercialize and achieve market acceptance for product candidates;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our estimates for future performance; and
| | - |  | -----------------------------------------



| |  |  | our estimates regarding anticipated operating losses, future revenues, capital requirements and our needs for additional financing.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



These statements relate to future events or our future financial performance, and involve
known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed
or implied by these forward-looking statements. These risks and other factors include those listed under Risk Factors and elsewhere in this Quarterly Report on Form 10-Q and other risks detailed in our reports filed with the SEC. In some
cases, you can identify forward-looking statements by terminology such as may, will, should, expects, intends, plans, anticipates, believes,
estimates, predicts, potential, continue or the negative of these terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We do not intend to update any of the forward-looking statements after the date of this report or to conform these statements to actual results.



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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, and in our Annual Report on Form 10-K for the year ended December 31, 2004 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



Clinical trials may fail to demonstrate the safety
and efficacy of our product candidates, which could prevent or significantly delay their regulatory approval.



Our future success is dependent upon, among other factors, our ability to develop working products and our ability to successfully complete clinical trials. All of our
potential products currently are in research, preclinical development or clinical testing, and commercialization of those products will not occur for at least the next several years, if at all. All of our potential products will require extensive
additional research and development prior to any commercial introduction. There can be no assurance that any of our research and development and clinical trial efforts will result in viable new products. For example, 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. In March 2005, we announced our decision to discontinue efforts to develop REN-1654 for the
treatment of post-herpetic neuralgia or PHN, and, in August 2005, based on results of our Phase II clinical trial study REN-1654 in patient volunteers with sciatica, we announced that we were discontinuing development of REN-1654 as an oral
medication. In June 2005 we announced our decision to discontinue efforts to develop REN-850 for the treatment of multiple sclerosis (MS).



Any failure or substantial delay in completing clinical trials for our product candidates, including Cerovive®(NXY-059) and REN-1654 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 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 our success 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 early stage development. The results from the Phase III SAINT I trial for Cerovive®(NXY-059) may not be predictive of results obtained in the second Phase III clinical trial, SAINT II. If a larger population of
patients does not experience positive results, or if these results do not have a lasting effect, our products may not receive approval from the FDA. In addition, even if the primary endpoint of the SAINT II trial is achieved, if the SAINT II trial
does not demonstrate positive trends or statistically significant benefits with respect to neurological impairment measured using the NIHSS, the ability of Cerovive (NXY-059) to obtain regulatory approval in certain jurisdictions outside the United
States could be impaired and market acceptance for Cerovive (NXY-059) could be adversely affected. The potential market opportunity for Cerovive (NXY-059) will also likely depend in part on whether Cerovive (NXY-059) may be labeled for
administration prior to a CT scan. Failure to demonstrate the safety and effectiveness of our product candidates in larger patient populations could have a material adverse effect on our business that would cause our stock price to decline
significantly.



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



We may
encounter delays or rejections if we, 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 and the eligibility criteria for the trial. 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. At various times, Cerovive®(NXY-059) has each
been involved in multiple clinical trials that were enrolling patients simultaneously. Any delays in planned patient enrollment may result in increased costs and delays, which could harm our ability to develop products.



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



We depend on independent clinical investigators and contract research organizations (CROs) to conduct our clinical trials under their
agreements with us or, in the case of Cerovive®(NXY-059), with AstraZeneca. We are not
employing these investigators, and we cannot control the amount or timing of resources that they devote to our programs. Our contracts with these investigators involve fixed fees. If the costs of performing the clinical trials exceed estimates,
these investigators may fail to devote sufficient time and resources to our drug development programs, fail to enroll patients as rapidly as expected, or otherwise fail to perform in a satisfactory manner, regulatory approval and our introductions
of new products will be delayed. We contract with CROs for execution of our clinical trials for our product candidates other than Cerovive®(NXY-059). Failure of the CROs to meet their obligations could adversely affect clinical development of our product candidates. Moreover, these independent investigators and CROs may also have
relationships with other commercial entities, some of which may compete with us. If independent investigators and CROs assist our competitors, it could harm our competitive position.



We depend on our licensee, AstraZeneca, for the completion of the Cerovive®(NXY-059) clinical program and for the commercialization of Cerovive®(NXY-059).



Under our exclusive license agreement with AstraZeneca, AstraZeneca is responsible for all aspects of clinical development of Cerovive®. If Cerovive®(NXY-059) receives regulatory approval, AstraZeneca will be responsible for marketing and sales of the commercial product. Because AstraZeneca is responsible for these functions, we have no control
over the development schedule or, if Cerovive®(NXY-059) receives regulatory approval, the
marketing plan for Cerovive®(NXY-059). If the clinical trials for Cerovive®(NXY-059) are not successful, Cerovive®(NXY-059) will not be commercialized. Moreover, if AstraZeneca elects to terminate the clinical program for Cerovive®(NXY-059), the rights to develop and market Cerovive®(NXY-059) will revert to us. If these rights revert to us, we will have to fund the clinical programs for Cerovive®(NXY-059) on our own, seek a strategic partner or licensee for clinical development or abandon
Cerovive®(NXY-059).



Our reliance on AstraZeneca poses a number of risks, including the following:



| |  |  | AstraZeneca has discretion to elect whether to pursue the development of Cerovive®(NXY-059) or to modify or abandon the clinical program at any time;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we cannot control whether AstraZeneca will devote sufficient resources to the clinical program and, if Cerovive®(NXY-059) is approved by the FDA or other regulatory agencies, the marketing plan for the commercial drug product;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | although we have no history of royalty payment disputes, even if Cerovive®(NXY-059) is approved and commercialized, disputes may arise in the future with respect to the calculation of royalty payments based
on net sales related to Cerovive®(NXY-059); and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if AstraZeneca perceives that the market opportunity for Cerovive®(NXY-059) or its profit margin from the sale of Cerovive®(NXY-059) is too small to justify commercialization, the interests and motivations of AstraZeneca may not be, or may not remain, aligned with ours.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If any of these risks materialize, it could delay the development schedule for Cerovive®(NXY-059) and impair its commercialization.



If we or our strategic partners or licensees fail to obtain U.S. regulatory approvals for product candidates under development, including our
lead product candidate, Cerovive®(NXY-059), 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, and AstraZeneca, our licensee for Cerovive®(NXY-059), must receive regulatory approval for Cerovive®(NXY-059) and commercialize or sell Cerovive®(NXY-059) before we will receive royalties. The FDA can limit or deny their 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | regulators may not approve the manufacturing processes or facilities that we 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.
| | - |  | -----------------------------------------------------------------------



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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 regulatory requirements, we may be subject to fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions 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 establish and 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 process 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, Cerovive®(NXY-059), or 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. For example, although we believe that Cerovive®(NXY-059) would not face direct competition from products currently available to stroke victims, a number of organizations are conducting clinical trials of neuroprotectant drug candidates which, if approved and
commercialized, would compete with Cerovive®(NXY-059). Competitors developing such
products include Astellas Pharma, Inc., IVAX Pharmaceuticals, Inc., Vertex Pharmaceuticals Incorporated and D-Pharm Ltd.



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



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



If we receive regulatory approval to commence commercial sales of any of our product candidates other than Cerovive®(NXY-059), 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.



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If third-party 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
have contracted with third-party manufacturers to produce, in collaboration with us, our product candidates for clinical trials. We intend to rely on third-party contract manufacturers to manufacture, supply, store and distribute any resulting
products.



While we have not experienced problems with our third party
manufacturers to date, our reliance on these third-party manufacturers 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:



| |  |  | Contract manufacturers are obliged to operate in accordance with FDA-mandated current good manufacturing practices, or cGMPs. A failure of any of our 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 third-party manufacturers of any
of these regulations or standards. While we are obligated to audit the performance of third-party contractors, we do not have control over our third-party manufacturers compliance with these regulations and standards. Failure by our
third-party manufacturers or us to comply with applicable regulations could result in sanctions being imposed on us, 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 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, we will need to manufacture them in larger quantities. We may not be able to
successfully increase the manufacturing capacity, whether in collaboration with third party manufacturers or on our own, 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 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. Our 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.



We are highly dependent on the key members of our management and scientific staff, especially our chief executive officer, Corey Goodman, Ph.D. The loss of any of our key
employees or key consultants could impede the achievement of our 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.



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



Since our inception, we
have incurred significant net losses, including a net loss of $6.3 million and $26.3 million for the three months and nine months ended September 30, 2005 respectively, and net losses of $10.9 million and $29.4 million for the corresponding
periods ended September 30, 2004, respectively. As of September 30, 2005, our cumulative net loss was $148.3 million. We have not yet completed the development, including obtaining regulatory approvals, of any of our product candidates
and, consequently, 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 we succeed in developing and commercializing one or more of our product candidates, 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
and capital expenditures and anticipate that our expenses will increase substantially 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 profitability could negatively impact the market price of our common stock. Even if we do become profitable, we may not be able to sustain or increase profitability on a quarterly or annual basis.



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If we cannot raise additional capital on acceptable terms, we may be unable to complete planned
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 nine months ended September 30, 2005, our net cash used
in operating activities was $14.2 million and we had capital expenditures of $2.1 million. During nine months ended September 30, 2004, our net cash used in operating activities was $18.0 million and we had capital expenditures of $1.5 million
for the same period. 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 or products 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 partners 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 future 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 by licensing all or a portion of our technology. This funding may
significantly dilute existing stockholders or may limit our rights to our technology.



We filed a registration statement on Form S-3 with the SEC to be able to sell from time to time up to $100 million of any combination of debt securities, common stock, preferred stock and warrants. The SEC declared this registration
statement effective in May 2005. The actual sale will be offered via prospectus in amounts, at prices and at terms determined at the time of an offering and may be sold directly by us to investors, through agents or through underwriters or dealers.
In September 2005, we sold 4,000,000 shares of common stock to the public at $13.50 per share for aggregate proceeds of $54 million. As of September 30, 2005, $46 million worth of securities remains available under the 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;
| | - |  | ----------------------------------------------------------------------------------------------



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



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



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



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, including Cerovive®(NXY-059), 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, such as Cerovive®(NXY-059) or
cease some of our business operations as a result of patent infringement claims, which could severely harm our business.



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



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



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



The following factors are
important to our success:



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



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



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



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



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



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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, 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 revenue to decline.



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



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



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



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



Rapid technological change could make our products obsolete.



Biopharmaceutical technologies have undergone rapid and significant
change and we expect that they will continue to do so. Any compounds, products or processes that we develop may become obsolete or uneconomical before we recover any expenses incurred in connection with their development. Rapid technological change
could 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 $5,000,000 per occurrence and $5,000,000 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.



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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 Securities and Exchange Commission 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. We are required to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 in our December 31, 2005 Form 10-K. 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 we intend 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 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 expending significant resources in developing the necessary documentation and testing procedures required by Section 404; however, there is a significant risk that we
will not comply with all of the requirements imposed by Section 404. In addition, the very limited size of our organization could lead to conditions that could be considered material weaknesses, such as those related to segregation of duties
that is possible in larger organizations but significantly more difficult in smaller organizations. Also, controls related to our general information technology infrastructure may not be as comprehensive as in the case of a larger organization with
more sophisticated capabilities and more extensive resources. It is not clear how such circumstances should be interpreted 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 a timely manner. 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



We expect that our stock price will fluctuate significantly.



Prior to our initial public offering, you could not buy or sell our common stock publicly. An active public market for our common stock may
not develop or 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. Factors that could cause this volatility in the market price of our common stock include:



| |  |  | the results from our clinical trial programs, including the Phase III clinical trials for Cerovive®(NXY-059) and any future trials we may conduct;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------



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



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



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



| |  |  | developments concerning current or future strategic alliances.
| | - |  | --------------------------------------------------------------



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



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



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



Our
directors and management exercise significant control over our company.



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



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 you 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. In addition, the terms of existing debts preclude us from paying these dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.



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|Item 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. We maintain an investment portfolio of investment grade, liquid debt securities that limits the amount of credit exposure to any one issue, issuer or type of instrument. 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 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------



Our Registration Statement on Form S-1 (Reg. No. 333-109806) in connection with our initial public offerings was declared effective by the SEC on February 4,
2004. We completed our initial public offering on February 10, 2004 for gross proceeds of $75,900,000. The Company paid the underwriters a commission of $5,313,000 and incurred offering expenses of $2,187,000. After deducting the
underwriters commission and the offering expenses, the Company received net proceeds of $68,400,000.



Our Registration Statement on Form S-3 (Reg. No. 333-122762) was declared effective by the SEC on May 23, 2005. We completed our public offering under this Registration Statement on September 28, 2005
for gross proceeds of $54,000,000. The Company paid the underwriters a commission of $3,240,000 and incurred offering expenses of $162,000. After deducting the underwriters commission and the offering expenses, the Company received net
proceeds of approximately $50,600,000.



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 in short-term 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



The following table shows our repurchases of common stock during the three months ended
September 30, 2005:



|          |  |                                  |  |                              |     
|--------- |  | -------------------------------- |  | ---------------------------- | ----
|Period    |  | Total Number of Shares Purchased |  | Average Price Paid per Share
|July      |  | 530                              |  | $                            | 1.20
|August    |  | 604                              |  | $                            | 2.33
|September |  | 1,446                            |  | $                            | 2.48
|          |  |                                  |  |                              |     
|Total     |  | 2,580                            |  | $                            | 1.63



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 or services. The repurchase price was
at the exercise price paid by the option holder.



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



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



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



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



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



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SIGNATURES



Pursuant to the requirements of the
Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized as of the 10th day of November 2005.



Renovis, Inc./s/ John C. DoyleJohn C. DoyleChief Financial Officer(Principal financial and accounting officer)




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