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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549



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FORM 10-Q



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(Mark One)



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

For the quarterly period ended March 31, 2007

OR



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

For the transition period from  to
.

Commission file number 000-31141



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INFINITY
PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 33-0655706                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)

780 Memorial Drive, Cambridge, Massachusetts 02139

(Address of principal executive offices) (zip code)

(617) 453-1000

(Registrants telephone number, including area code)



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

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

Number of shares of the registrants Common Stock, $0.001 par value, outstanding on March 31, 2007: 19,632,924



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##### Table of Contents

INFINITY PHARMACEUTICALS, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2007

TABLE OF CONTENTS



|         |  |                                                                                                    |  |         
|-------- |  | -------------------------------------------------------------------------------------------------- |  | --------
|         |  |                                                                                                    |  | Page No.
|         |  |                                                                                                   
|PART I   |  | FINANCIAL INFORMATION                                                                              |  | 1       
|         |  |                                                                                                   
|Item 1.  |  | Condensed Consolidated Financial Statements                                                        |  | 1       
|         |  |                                                                                                   
|         |  | Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                   |  | 1       
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006 |  | 2       
|         |  |                                                                                                   
|         |  | Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2007 and 2006 |  | 3       
|         |  |                                                                                                   
|         |  | Notes to Condensed Consolidated Financial Statements                                               |  | 4       
|         |  |                                                                                                   
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 10      
|         |  |                                                                                                   
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                         |  | 17      
|         |  |                                                                                                   
|Item 4.  |  | Controls and Procedures                                                                            |  | 18      
|         |  |                                                                                                   
|PART II  |  | OTHER INFORMATION                                                                                  |  | 19      
|         |  |                                                                                                   
|Item 1A. |  | Risk Factors                                                                                       |  | 19      
|         |  |                                                                                                   
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                        |  | 30      
|         |  |                                                                                                   
|Item 6.  |  | Exhibits                                                                                           |  | 30      
|         |  |                                                                                                   
|         |  | Signatures                                                                                         |  | 31      



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

INFINITY PHARMACEUTICALS, INC.

Condensed Consolidated Balance Sheets



|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------------ | - | ----------------- | - | ------------ | -
|                                                                                                                                                                                                                                 |  | March 31, 2007 |              |   | December 31, 2006 |  
|                                                                                                                                                                                                                                 |  | (unaudited)    |              |   |                   |  
|Assets                                                                                                                                                                                                                           |  |                |              |   |                   |   |              |  
|Current assets:                                                                                                                                                                                                                  |  |                |              |   |                   |   |              |  
|Cash and cash equivalents                                                                                                                                                                                                        |  | $              | 26,309,877   |   |                   | $ | 74,147,479   |  
|Available-for-sale securities                                                                                                                                                                                                    |  |                | 101,361,636  |   |                   |   | 27,549,305   |  
|Accounts receivable                                                                                                                                                                                                              |  |                | 2,697,421    |   |                   |   | 1,409,646    |  
|Unbilled accounts receivable                                                                                                                                                                                                     |  |                | 3,740,883    |   |                   |   | 40,725,164   |  
|Notes receivable from employees                                                                                                                                                                                                  |  |                | 84,362       |   |                   |   | 87,257       |  
|Prepaid expenses and other current assets                                                                                                                                                                                        |  |                | 1,890,540    |   |                   |   | 2,179,702    |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Total current assets                                                                                                                                                                                                             |  |                | 136,084,719  |   |                   |   | 146,098,553  |  
|                                                                                                                                                                                                                                 |  |               
|Property and equipment, net                                                                                                                                                                                                      |  |                | 6,688,091    |   |                   |   | 6,539,930    |  
|Notes receivable from employees                                                                                                                                                                                                  |  |                | 85,553       |   |                   |   | 104,642      |  
|Restricted cash                                                                                                                                                                                                                  |  |                | 1,599,274    |   |                   |   | 1,578,699    |  
|Other assets                                                                                                                                                                                                                     |  |                | 276,156      |   |                   |   | 326,058      |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Total assets                                                                                                                                                                                                                     |  | $              | 144,733,793  |   |                   | $ | 154,647,882  |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Liabilities and stockholders equity                                                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Current liabilities:                                                                                                                                                                                                             |  |                |              |   |                   |   |              |  
|Accounts payable                                                                                                                                                                                                                 |  | $              | 454,662      |   |                   | $ | 892,184      |  
|Accrued expenses                                                                                                                                                                                                                 |  |                | 5,247,035    |   |                   |   | 8,829,206    |  
|Deferred revenue                                                                                                                                                                                                                 |  |                | 13,750,000   |   |                   |   | 13,750,000   |  
|Current portion of long-term debt and capital leases                                                                                                                                                                             |  |                | 1,053,164    |   |                   |   | 1,362,930    |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Total current liabilities                                                                                                                                                                                                        |  |                | 20,504,861   |   |                   |   | 24,834,320   |  
|                                                                                                                                                                                                                                 |  |               
|Deferred revenue, less current portion                                                                                                                                                                                           |  |                | 61,354,167   |   |                   |   | 64,791,667   |  
|Other liabilities                                                                                                                                                                                                                |  |                | 2,074,608    |   |                   |   | 2,222,735    |  
|Long-term debt and capital leases, less current portion                                                                                                                                                                          |  |                | 194,273      |   |                   |   | 374,205      |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Total liabilities                                                                                                                                                                                                                |  |                | 84,127,909   |   |                   |   | 92,222,927   |  
|                                                                                                                                                                                                                                 |  |               
|Stockholders equity:                                                                                                                                                                                                            |  |                |              |   |                   |   |              |  
|                                                                                                                                                                                                                                 |  |               
|Preferred Stock, $.001 par value; 1,000,000 shares authorized, no shares issued and outstanding at March 31, 2007 and December 31,
2006                                                                                          |  |                |             |   |                   |   |             |  
|Common Stock, $.001 par value; 100,000,000 shares authorized, and 19,632,924 shares issued and outstanding, at March 31, 2007;
100,000,000 shares authorized, and 19,523,243 shares issued and outstanding, at December 31, 2006 |  |                | 19,633       |   |                   |   | 19,523       |  
|Additional paid-in capital                                                                                                                                                                                                       |  |                | 219,148,833  |   |                   |   | 219,110,907  |  
|Accumulated deficit                                                                                                                                                                                                              |  |                | (158,538,088 | ) |                   |   | (155,305,106 | )
|Treasury stock, at cost                                                                                                                                                                                                          |  |                |             |   |                   |   | (1,323,810   | )
|Accumulated other comprehensive loss                                                                                                                                                                                             |  |                | (24,494      | ) |                   |   | (76,559      | )
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Total stockholders equity                                                                                                                                                                                                       |  |                | 60,605,884   |   |                   |   | 62,424,955   |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  
|Total liabilities and stockholders equity                                                                                                                                                                                       |  | $              | 144,733,793  |   |                   | $ | 154,647,882  |  
|                                                                                                                                                                                                                                 |  |                |              |   |                   |   |              |  

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



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##### Table of Contents

INFINITY PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Operations

(unaudited)



|                                                                       |  |                              |            |   |      |   |             |  
|---------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                       |  | Three Months Ended March 31, |           
|                                                                       |  | 2007                         |            |   | 2006 |  
|Collaborative research and development revenue                         |  | $                            | 6,115,750  |   |      | $ | 718,750     |  
|Operating expenses:                                                    |  |                              |            |   |      |   |             |  
|Research and development                                               |  |                              | 7,476,403  |   |      |   | 9,678,019   |  
|General and administrative                                             |  |                              | 3,293,031  |   |      |   | 1,972,700   |  
|                                                                       |  |                              |            |   |      |   |             |  
|Total operating expenses                                               |  |                              | 10,769,434 |   |      |   | 11,650,719  |  
|                                                                       |  |                              |            |   |      |   |             |  
|Loss from operations                                                   |  |                              | (4,653,684 | ) |      |   | (10,931,969 | )
|Other (expense)/income:                                                |  |                              |            |   |      |   |             |  
|Interest expense                                                       |  |                              | (102,466   | ) |      |   | (141,880    | )
|Interest and investment income                                         |  |                              | 1,866,442  |   |      |   | 194,244     |  
|                                                                       |  |                              |            |   |      |   |             |  
|Net other income                                                       |  |                              | 1,763,976  |   |      |   | 52,364      |  
|                                                                       |  |                              |            |   |      |   |             |  
|Net loss                                                               |  | $                            | (2,889,708 | ) |      | $ | (10,879,605 | )
|                                                                       |  |                              |            |   |      |   |             |  
|Basic and diluted net loss per common share                            |  | $                            | (0.15      | ) |      | $ | (4.55       | )
|                                                                       |  |                              |            |   |      |   |             |  
|Basic and diluted weighted average number of common shares outstanding |  |                              | 19,388,131 |   |      |   | 2,393,401   |  

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



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INFINITY PHARMACEUTICALS, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)



|                                                                                |  |                                  |             |   |                                  |   |             |  
|------------------------------------------------------------------------------- |  | -------------------------------- | ----------- | - | -------------------------------- | - | ----------- | -
|                                                                                |  | Three Months EndedMarch 31, 2007 |             |   | Three Months EndedMarch 31, 2006 |  
|Operating activities                                                            |  |                                  |             |   |                                  |   |             |  
|Net loss                                                                        |  | $                                | (2,889,708  | ) |                                  | $ | (10,879,605 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                  |             |   |                                  |   |             |  
|Depreciation                                                                    |  |                                  | 690,620     |   |                                  |   | 867,230     |  
|Stock-based compensation                                                        |  |                                  | 1,135,208   |   |                                  |   | 482,486     |  
|Loan forgiveness                                                                |  |                                  | 24,728      |   |                                  |   | 36,025      |  
|Gain on sale of property and equipment                                          |  |                                  | (7,500      | ) |                                  |   |            |  
|Net accretion of available-for-sale securities                                  |  |                                  | (461,273    | ) |                                  |   | (20,672     | )
|Amortization of warrants                                                        |  |                                  | 17,808      |   |                                  |   | 26,575      |  
|Interest income on restricted cash                                              |  |                                  | (20,575     | ) |                                  |   | (15,220     | )
|Interest income on employee loans                                               |  |                                  | (1,092      | ) |                                  |   | (1,936      | )
|Changes in operating assets and liabilities:                                    |  |                                  |             |   |                                  |   |             |  
|Accounts receivable and unbilled accounts receivable                            |  |                                  | 35,696,506  |   |                                  |   | (406,250    | )
|Prepaid expenses and other assets                                               |  |                                  | 331,329     |   |                                  |   | (652,251    | )
|Accounts payable                                                                |  |                                  | (437,522    | ) |                                  |   | (391,627    | )
|Accrued expenses and other liabilities                                          |  |                                  | (4,026,435  | ) |                                  |   | 410,853     |  
|Deferred revenue                                                                |  |                                  | (3,437,500  | ) |                                  |   | 14,687,500  |  
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Net cash provided by operating activities                                       |  |                                  | 26,614,594  |   |                                  |   | 4,143,108   |  
|                                                                                |  |                                 
|Investing activities                                                            |  |                                  |             |   |                                  |   |             |  
|Purchases of property and equipment                                             |  |                                  | (838,781    | ) |                                  |   | (44,696     | )
|Proceeds from sale of property and equipment                                    |  |                                  | 7,500       |   |                                  |   |            |  
|Purchases of available-for-sale securities                                      |  |                                  | (78,640,084 | ) |                                  |   | (1,728,535  | )
|Sales and maturities of available-for-sale securities                           |  |                                  | 5,341,091   |   |                                  |   | 1,500,000   |  
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Net cash used in investing activities                                           |  |                                  | (74,130,274 | ) |                                  |   | (273,231    | )
|                                                                                |  |                                 
|Financing activities                                                            |  |                                  |             |   |                                  |   |             |  
|Proceeds from sale of Series D Convertible Preferred Stock                      |  |                                  |            |   |                                  |   | 5,000,000   |  
|Proceeds from issuances of common stock                                         |  |                                  | 179,502     |   |                                  |   | 33,796      |  
|Repurchase of common stock                                                      |  |                                  |            |   |                                  |   | (2,813      | )
|Proceeds from equipment loan and other debt                                     |  |                                  |            |   |                                  |   | 5,000,000   |  
|Payments on equipment loan and other debt                                       |  |                                  | (473,083    | ) |                                  |   | (1,107,974  | )
|Capital lease payments                                                          |  |                                  | (26,688     | ) |                                  |   | (34,952     | )
|Repayment of employee loans                                                     |  |                                  | 8,347       |   |                                  |   | 2,133       |  
|New employee loans                                                              |  |                                  | (10,000     | ) |                                  |   | (95,000     | )
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Net cash (used in) provided by financing activities                             |  |                                  | (321,922    | ) |                                  |   | 8,795,190   |  
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Net (decrease) increase in cash and cash equivalents                            |  |                                  | (47,837,602 | ) |                                  |   | 12,665,067  |  
|Cash and cash equivalents at beginning of period                                |  |                                  | 74,147,479  |   |                                  |   | 9,442,756   |  
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Cash and cash equivalents at end of period                                      |  | $                                | 26,309,877  |   |                                  | $ | 22,107,823  |  
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Supplemental cash flow disclosure                                               |  |                                  |             |   |                                  |   |             |  
|Interest paid                                                                   |  | $                                | 92,393      |   |                                  | $ | 123,038     |  
|                                                                                |  |                                  |             |   |                                  |   |             |  
|Income taxes                                                                    |  | $                                | 1,100,000   |   |                                  | $ |            |  
|                                                                                |  |                                  |             |   |                                  |   |             |  

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



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Infinity Pharmaceuticals, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization

On September 12, 2006, we completed our reverse merger in which a wholly-owned subsidiary of Discovery Partners International, Inc., or DPI, merged
with Infinity Pharmaceuticals, Inc., or IPI, such that IPI became a wholly-owned subsidiary of DPI. We refer to this transaction as the merger. Immediately following the merger, IPI changed its name to Infinity Discovery, Inc., which we refer to as
Old Infinity. In addition, DPI changed its name to Infinity Pharmaceuticals, Inc., or Infinity, and its ticker symbol on the NASDAQ Global Market to INFI. As used throughout these unaudited, condensed consolidated financial statements,
Infinity, we, us, or our refers to the business of the combined company after the merger and the business of Old Infinity prior to the merger. As used throughout these unaudited, condensed consolidated
financial statements, DPI refers to the business of Discovery Partners International, Inc. prior to completion of the merger.

Upon completion of the merger, Infinity common stock was issued to Old Infinity stockholders, and Infinity assumed all of the stock options, stock warrants and restricted stock of Old Infinity outstanding as of September 12, 2006.
Immediately following the closing of the merger, former Old Infinity stockholders, option holders and warrant holders owned approximately 69% of the combined company on a fully-diluted basis and former DPI stockholders, option holders and warrant
holders owned approximately 31% of the combined company on a fully-diluted basis. In addition, after completion of the merger, the business conducted by the combined company became the one operated by Old Infinity prior to completion of the merger.

Since former Old Infinity security holders owned, immediately following the merger, approximately 69% of the combined company on a
fully-diluted basis and as a result of certain other factors, including that former Old Infinity directors constituted a majority of the combined companys board of directors and all members of the combined companys executive management
were from Old Infinity, Old Infinity was deemed to be the acquiring company for accounting purposes and the transaction was accounted for as a reverse acquisition of assets and a recapitalization in accordance with accounting principles generally
accepted in the United States. These financial statements reflect the historical results of Old Infinity prior to the merger and that of the combined company following the merger, and do not include the historical financial results of DPI prior to
the completion of the merger. Stockholders equity has been retroactively restated to reflect the number of shares of common stock received by former Old Infinity security holders in the merger, after giving effect to the difference between the
par values of the capital stock of Old Infinity and Infinity common stock, with the offset to additional paid-in capital. In addition, the pre-merger financial information has been restated to reflect the 1-for-4 reverse split of DPI common stock
that became effective immediately prior to the closing of the merger, the closing of the merger, and the related conversion of all of the capital stock of Old Infinity into Infinity common stock.

Infinity is a drug discovery and development company that is utilizing its strength in small molecule drug technologies to discover and develop medicines
for the treatment of cancer and related conditions.

2. Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals and revisions of estimates, considered necessary for a fair presentation of the accompanying condensed consolidated financial statements
have been included. Interim results for the three months ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 31, 2007. For further information, refer to the consolidated
financial statements and accompanying footnotes included in our annual report on Form 10-K for the fiscal year ended December 31, 2006, which was filed with the U.S. Securities and Exchange Commission (SEC) on March 14,
2007.

The information presented in the condensed consolidated financial statements and related footnotes at March 31, 2007, and for
the three months ended March 31, 2007 and 2006, is unaudited and the condensed consolidated balance sheet amounts and related footnotes at December 31, 2006 have been derived from our audited financial statements.



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3. Significant Accounting Policies

Cash Equivalents and Available-For-Sale Securities

Cash equivalents and available-for-sale
securities primarily consist of money market funds, asset-backed securities, corporate obligations and U.S. government agency obligations. We consider all highly liquid investments with maturities of three months or less at the time of purchase
to be cash equivalents. Cash equivalents, which consist primarily of money market funds, are stated at cost, which approximates market value.

We determine the appropriate classification of available-for-sale securities at the time of purchase and reevaluate such designation at each balance sheet date. We have classified all of our marketable securities at March 31, 2007
and December 31, 2006 as available-for-sale. We carry available-for-sale securities at fair value, with the unrealized gains and losses reported in a separate component of stockholders equity. The fair value of these
securities is based on quoted market prices.

We adjust the cost of available-for-sale debt securities for amortization of premiums and
accretion of discounts to maturity. We include such amortization and accretion in interest and investment income. Realized gains and losses and declines in value, if any, that we judge to be other-than-temporary on available-for-sale
securities are reported in interest and investment income. The cost of securities sold is based on the specific identification method. We include interest and dividends on securities classified as available-for-sale in investment
income. There are no realized gains or losses for the three months ended March 31, 2007 and 2006.

Reclassifications

Certain prior year amounts in net cash provided by operating activities and net cash used in investing activities have been
reclassified to conform to the current year presentation. This reclassification has no impact on previously reported financial position or net loss.

Segment Information

SFAS No. 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS 131), establishes standards for the way that companies report information about operating segments in their financial statements. SFAS No. 131 also establishes standards for related
disclosures about products and services. We make operating decisions based upon performance of the enterprise as a whole and utilize our consolidated financial statements for decision making. We operate in one business segment, which focuses on drug
discovery and development.

All of our revenues to date have been generated under research collaboration agreements. During the three
months ended March 31, 2007 and 2006:



| |  |  | revenues associated with the up-front license fees, reimbursable research and development services and compound delivery fees we received from Novartis Institutes
for BioMedical Research, Inc. (Novartis) and Novartis International Pharmaceutical Ltd. (Novartis International) accounted for approximately 59% and 100% of our revenue for the three months ended March 31, 2007 and 2006,
respectively, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | revenues associated with the up-front license fee we received from MedImmune, Inc. (MedImmune) accounted for approximately 41% and 0% of our revenue for
the three months ended March 31, 2007 and 2006, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Further, payments due from Novartis represented 100%
of our accounts receivable balance as of March 31, 2007. Payments from MedImmune and Novartis represented 68% and 32% of our accounts receivable balance, respectively, as of December 31, 2006. Payments from MedImmune and Novartis
represented 89% and 11% of our unbilled accounts receivable balance, respectively, as of March 31, 2007. Payments from MedImmune and Novartis represented 93% and 7% of our unbilled accounts receivable balance, respectively, as of
December 31, 2006.

Basic and Diluted Net Loss per Common Share

Basic net loss per share is based upon the weighted average number of common shares outstanding during the period, excluding restricted stock that has
been issued but is not yet vested. Diluted net loss per share is based upon the weighted average number of common shares outstanding during the period, plus the effect of additional weighted average common equivalent shares outstanding during the
period when the effect of adding such shares is dilutive. Common equivalent shares result from the assumed exercise of outstanding stock options (the proceeds of which are then assumed to have been used to repurchase outstanding stock using the
treasury stock method), the assumed conversion of preferred stock, the exercise of outstanding warrants and the vesting of unvested restricted shares of common stock. Common equivalent shares have not been included in the net loss per share
calculations because the effect of including them would have been anti-dilutive. Total potential gross common equivalent shares consisted of the following:



|                           |  |              |  |           
|-------------------------- |  | ------------ |  | ----------
|                           |  | At March 31,
|                           |  | 2007         |  | 2006      
|Preferred stock            |  |             |  | 10,038,222
|Stock options              |  | 2,950,055    |  | 1,186,195 
|Warrants                   |  | 246,629      |  | 207,936   
|Unvested restricted shares |  | 149,828      |  | 329,607   



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##### Table of Contents

Stock-Based Compensation Expense

We adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment (SFAS
No. 123(R)) as of January 1, 2006. SFAS No. 123(R) revises FAS Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), supersedes Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), and amends FAS Statement No. 95, Statement of Cash Flows. SFAS No. 123(R) requires
companies to expense the fair value of employee stock options and other equity compensation. We apply the recognition provisions of SFAS No. 123(R) and EITF No. 96-18, Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring or in Connection with Selling Goods or Services, (EITF No. 96-18) for all stock option grants to non-employees.

Revenue Recognition

To date,
all of our revenue has been generated under research collaboration agreements and, accordingly, we recognize revenue in accordance with the SECs Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in
Financial Statements, as amended by SAB No. 104, Revenue Recognition, and Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements With Multiple Deliverables.

The terms of these research collaboration agreements may include payment to us of non-refundable up-front license fees, funding or reimbursement of
research and development efforts, milestone payments if specified objectives are achieved, and/or royalties on product sales. We divide agreements containing multiple elements into separate units of accounting if certain criteria are met, including
whether the delivered element has stand-alone value to the collaborative partner and whether there is objective and reliable evidence of fair value of the undelivered obligation(s). For these agreements, we allocate the consideration we receive
among the separate units based on their respective fair values or the residual method, and we apply the applicable revenue recognition criteria to each of the separate units.

We recognize revenues from non-refundable, up-front license fees on a straight-line basis over the contracted or estimated period of performance, which
is typically the research or development term. We recognize research and development funding as earned over the period of effort.

We
recognize milestone payments as revenue upon achievement of the milestone only if (1) the milestone payment is non-refundable, (2) substantive effort is involved in achieving the milestone and (3) the amount of the milestone is
reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these conditions is not met, we defer the milestone payment and recognize it as revenue over the estimated period of performance under
the contract as we complete our performance obligations.

We will recognize royalty revenue, if any, based upon actual and estimated net
sales of licensed products in licensed territories as provided by the licensee and in the period the sales occur. We have not recognized any royalty revenues to date.

Research and Development Expense

Research and development expense consists of expenses
incurred in performing research and development activities, including salaries and benefits, facilities expenses, overhead expenses, materials and supplies, pre-clinical expenses, clinical trial and related clinical manufacturing expenses,
stock-based compensation expense, contract services, and other outside expenses. We expense research and development costs as they are incurred. We have entered into certain collaboration agreements in which expenses are shared with the
collaborator, and others in which we are reimbursed for work performed on behalf of the collaborator. We record all of our expenses related to these collaboration arrangements as research and development expense. If the arrangement is a cost-sharing
arrangement and there is a period during which we receive payments from the collaborator, we record payments from the collaborator for its share of the development effort as a reduction of research and development expense. If the arrangement is a
cost-sharing arrangement and there is a period during which we make payments to the collaborator, we will record our payments to the collaborator for its share of the development effort as additional research and development expense. If the
arrangement provides for reimbursement of research and development expenses, we record the reimbursement as revenue. Our collaboration with MedImmune is a cost-sharing arrangement; our collaboration with Novartis provides for the reimbursement of
our research and development expenses.



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Accounting for Sabbatical Leave

We adopted EITF 06-2, Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43 (EITF
06-2) on January 1, 2007. In EITF 06-2, the task force reached a consensus that an employees right to a compensated absence under a sabbatical or other similar benefit arrangement (a) that requires the completion of a minimum
service period and (b) in which the benefit does not increase with additional years of service, accumulates pursuant to paragraph 6(b) of SFAS No. 43, Accounting for Compensated Absences, for arrangements in which the
individual continues to be a compensated employee and is not required to perform duties for the entity during the absence. Therefore, the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the
requisite service period. We applied EITF 06-2 as a change in accounting principle through a cumulative-effect adjustment to accumulated deficit.

Income Taxes

We adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an
Interpretation of FASB Statement No. 109 (FIN 48) on January 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS
No. 109, Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax
return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. In accordance with FIN 48, we will recognize any interest and penalties related to unrecognized
tax benefits in income tax expense.

New Accounting Pronouncement

In February 2007, FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS No.
159). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility
in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We have not
completed our evaluation of SFAS No. 159, but we do not currently believe that it will have a material impact on our financial position or results of operations.

4. Stock-Based Compensation

SFAS No. 123(R) Compensation Expense

Under SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized
as expense over the employees requisite service period. We have no awards with market or performance conditions. We adopted the provisions of SFAS No. 123(R) on January 1, 2006, using the modified prospective method. Under the
modified prospective method, prior periods have not been restated. The provisions of SFAS No. 123(R) apply to new awards, unvested awards that were outstanding on the effective date, and awards subsequently modified or cancelled. Estimated
compensation expense for unvested awards outstanding at the date of adoption will be recognized over the remaining service period on a straight-line basis using the compensation cost previously calculated for pro forma disclosure purposes under SFAS
No. 123. Upon the adoption of SFAS No. 123(R), we elected to continue to use the Black-Scholes valuation model in determining the fair value of equity awards.

In March 2006, we forgave certain outstanding nonrecourse loans that were given to certain of our employees in previous years in order for these employees to exercise stock options. This forgiveness constituted a
modification of the awards under SFAS

No. 123(R), and resulted in compensation expense of $510,000, of which $347,000 was recognized immediately since
portions of the awards were vested. We recognized $26,054 and $347,000 of compensation expense related to these nonrecourse loans for the three months ended March 31, 2007 and 2006, respectively.

Total stock-based compensation expense, related to all equity awards, recognized under SFAS No. 123(R) for the three months ended March 31,
2007 and 2006, respectively, comprised the following (unaudited):



|                                                             |  |                                  |         |                                  |   |        
|------------------------------------------------------------ |  | -------------------------------- | ------- | -------------------------------- | - | -------
|                                                             |  | Three Months EndedMarch 31, 2007 |         | Three Months EndedMarch 31, 2006
|Effect of stock-based compensation on net loss by line item: |  |                                  |         |                                  |   |        
|Research and development                                     |  | $                                | 548,817 |                                  | $ | 239,182
|General and administrative                                   |  |                                  | 586,391 |                                  |   | 243,304

As of March 31, 2007, there was approximately $13.8 million of total unrecognized compensation cost, net of
estimated forfeitures, related to unvested options and restricted stock granted, including $58,784 of unrecognized compensation expense associated with the forgiveness of the nonrecourse loans. Total cost for all unrecognized compensation is
expected to be recognized over a weighted-average period of 3.4 years.



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As a result of the adoption of SFAS No. 123(R), our basic and diluted loss per share for the three
months ended March 31, 2007 and 2006 is greater by $0.06 and $0.20, respectively.

SFAS No. 123(R) Valuation Assumptions

The fair value of the options under SFAS No. 123(R) at March 31, 2007 and 2006 was estimated using the Black-Scholes
valuation model using the following assumptions:



|                                |  |                                          |   |  |                                          |  
|------------------------------- |  | ---------------------------------------- | - |  | ---------------------------------------- | -
|                                |  | For the Three Months EndedMarch 31, 2007 |   |  | For the Three Months EndedMarch 31, 2006 |  
|Risk-free interest rate         |  | 4.81                                     | % |  | 4.80                                     | %
|Expected annual dividend yield  |  |                                         |   |  |                                         |  
|Expected stock price volatility |  | 61.40                                    | % |  | 65.10                                    | %
|Expected term of options        |  | 5.05 years                               |   |  | 5.06 years                               |  

The valuation assumptions were determined as follows:



| |  |  | Risk-free interest rate: The yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected term of the awards.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected annual dividend yield: The estimate for annual dividends is zero, because we have not historically paid a dividend and do not intend to do so in the
foreseeable future.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected stock price volatility: We determine the expected volatility by using an average historical volatility from comparable public companies with an
expected term consistent with ours.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Expected term: The expected term of the awards represents the period of time that the awards are expected to be outstanding. We use historical data and
expectations for the future to estimate employee exercise and post-vest termination behavior. We believe that all groups of employees exhibit similar exercise and post-vest termination behavior and therefore do not stratify employees into multiple
groups.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

SFAS No. 123(R) requires the application of an estimated forfeiture rate to current period expense to
recognize compensation expense only for those awards expected to vest. We estimate forfeitures based upon historical data, adjusted for known trends, and will adjust the estimate of forfeitures if actual forfeitures differ or are expected to differ
from such estimates. Subsequent changes in estimated forfeitures will be recognized through a cumulative adjustment in the period of change and will also impact the amount of stock-based compensation expense in future periods. As of March 31,
2007 and 2006, the forfeiture rate was estimated to be 3.1% and 21.6%, respectively.

A summary of our stock option activity for the three
months ended March 31, 2007 is as follows:



|                                             |  |               |   |  |                                |       |                                         |      |                                       |   |    
|-------------------------------------------- |  | ------------- | - |  | ------------------------------ | ----- | --------------------------------------- | ---- | ------------------------------------- | - | ---
|                                             |  | Stock Options |   |  | Weighted-AverageExercise Price |       | Weighted-AverageContractual Life(years) |      | AggregateIntrinsic Value(in millions)
|Outstanding at January 1, 2007               |  | 1,889,572     |   |  | $                              | 7.47  |                                         |      |                                       |   |    
|Granted                                      |  | 1,190,403     |   |  |                                | 13.62 |                                         |      |                                       |   |    
|Exercised                                    |  | (109,681      | ) |  |                                | 1.64  |                                         |      |                                       |   |    
|Forfeited                                    |  | (20,239       | ) |  |                                | 10.01 |                                         |      |                                       |   |    
|                                             |  |               |   |  |                                |       |                                         |      |                                       |   |    
|Outstanding at March 31, 2007                |  | 2,950,055     |   |  | $                              | 10.07 |                                         | 8.99 |                                       | $ | 5.8
|                                             |  |               |   |  |                                |       |                                         |      |                                       |   |    
|Vested or expected to vest at March 31, 2007 |  | 813,926       |   |  | $                              | 5.69  |                                         | 7.81 |                                       | $ | 5.2
|                                             |  |               |   |  |                                |       |                                         |      |                                       |   |    
|Exercisable at March 31, 2007 (1)            |  | 1,373,706     |   |  | $                              | 5.67  |                                         | 8.16 |                                       | $ | 8.7
|                                             |  |               |   |  |                                |       |                                         |      |                                       |   |    

---

|(1) | Options exercisable at March 31, 2007 include: (a) vested or expected to vest options from the Infinity Pharmaceuticals, Inc. 2000 Stock Incentive Plan; and (b) both
unvested and vested or expected to vest options from the Infinity Pharmaceuticals, Inc. Pre-Merger Stock Incentive Plan (the 2001 Plan), which allowed early exercises of options into restricted stock. The 2001 Plan was not assumed by us
following the DPI merger; therefore, no further grants may be made under the 2001 Plan.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The aggregate intrinsic value was calculated based on the positive difference between the closing fair
market value of our common stock on March 31, 2007 and the exercise price of the underlying options. The aggregate intrinsic value of options exercised during the three months ended March 31, 2007 was $1,050,936. The total cash received
from employees and non-employees as a result of stock option exercises during the three months ended March 31, 2007 was approximately $179,502.

The weighted-average fair value per share of options granted during the three months ended March 31, 2007 was $7.72.

All options granted to employees during the three months ended March 31, 2007 were granted with exercise prices equal to the fair market value of our common stock on the date of grant.

No related income tax benefits were recorded during the three months ended March 31, 2007 and 2006.

We settle employee stock option exercises with newly issued common shares.

5. Comprehensive Loss

SFAS No. 130, Reporting Comprehensive Income,
establishes rules for the reporting and display of comprehensive income (loss) and its components. The components of our comprehensive loss include our net loss and the change in unrealized gains and losses on our available-for-sale securities. For
the three months ended March 31, 2007 and 2006, comprehensive loss was as follows:



|                                                          |  |                              |            |   |      |   |             |  
|--------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                          |  | Three Months Ended March 31, |           
|                                                          |  | 2007                         |            |   | 2006 |  
|Net loss                                                  |  | $                            | (2,889,708 | ) |      | $ | (10,879,605 | )
|Unrealized holding gains on available-for-sale securities |  |                              | 52,065     |   |      |   | 1,784       |  
|                                                          |  |                              |            |   |      |   |             |  
|Total comprehensive loss                                  |  | $                            | (2,837,643 | ) |      | $ | (10,877,821 | )
|                                                          |  |                              |            |   |      |   |             |  

Accumulated other comprehensive loss consists of unrealized losses on available-for-sale
securities.

6. Accounting for Sabbatical Leave

On January 1, 2007, we adopted EITF 06-2 to account for sabbatical leaves. All of our regular, full-time employees are eligible to receive four paid weeks of sabbatical leave after five years of continuous employment. The cumulative
effect of a change in accounting principle as a result of adoption of EITF 06-2 was $343,273, which was recorded to accumulated deficit and accrued expenses as of January 1, 2007. During the three months ended March 31, 2007, we recorded
additional compensation expense of $8,097. Prior to the adoption of EITF 06-2, we did not accrue for the sabbatical leaves.

7. Income Taxes

On January 1, 2007, we adopted FIN 48 to account for uncertainty in income taxes. In connection with the adoption of FIN 48,
interest expense and penalties associated with unrecognized tax benefits will be accrued when appropriate, and reported in the income tax expense line on our statement of operations. We will calculate interest by applying the applicable tax
jurisdiction statutory rate of interest in effect at the time the exposure arose and adjusted accordingly as the interest rates change. We file income tax returns in the U.S. federal and Massachusetts jurisdictions and are subject to examinations by
those authorities for all tax years from 2001 to the present. We have not recorded a liability for unrecognized tax benefits prior to the adoption of FIN 48, as a result of adopting FIN 48, or during the three months ended March 31, 2007.
Accordingly, we have not recognized any corresponding interest or penalties for the three months ended March 31, 2007.



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

Forward-Looking Information

The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. Some of the information contained in this discussion and analysis and set forth elsewhere in this report,
including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the section titled Risk Factors in Part II of this report for a
discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

DPI Merger

On September 12, 2006, Discovery
Partners International, Inc., or DPI, completed a merger with Infinity Pharmaceuticals, Inc., or IPI, pursuant to which a wholly-owned subsidiary of DPI merged with and into IPI. IPI was the surviving corporation in the merger, changed its name to
Infinity Discovery, Inc., or Old Infinity, and became a wholly-owned subsidiary of DPI. In addition, we changed our name from Discovery Partners International, Inc. to Infinity Pharmaceuticals, Inc. and our ticker symbol on the NASDAQ Global Market
to INFI.

Upon completion of the merger, our common stock was issued to Old Infinity stockholders, and we assumed all of the
stock options, stock warrants and restricted stock of Old Infinity outstanding as of September 12, 2006. Immediately following the closing of the merger, former Old Infinity stockholders, option holders and warrant holders owned approximately
69% of the combined company on a fully-diluted basis and former DPI stockholders, option holders and warrant holders owned approximately 31% of the combined company on a fully-diluted basis. In addition, after completion of the merger, the business
conducted by the combined company became the one operated by Old Infinity prior to completion of the merger.

Since former Old Infinity
security holders owned, immediately following the merger, approximately 69% of the combined company on a fully-diluted basis and as a result of certain other factors, including that former Old Infinity directors constituted a majority of the
combined companys board of directors and all members of the combined companys executive management were from Old Infinity, Old Infinity was deemed to be the acquiring company for accounting purposes and the transaction was accounted for
as a reverse acquisition of assets and a recapitalization in accordance with accounting principles generally accepted in the United States. Accordingly, for all purposes, including SEC reporting, our financial statements for periods prior to the
merger reflect the historical results of Old Infinity, and not DPI, and our financial statements for all subsequent periods reflect the results of the combined company. In addition, because the business conducted by the combined company became the
one operated by Old Infinity prior to the completion of the merger, the discussion below describes the business of Old Infinity prior to completion of the merger and the business of the combined company after the merger.

Unless specifically noted otherwise, as used herein, the terms Infinity, we, us and our refer to the
combined company after the merger and the business of Old Infinity prior to the merger, and DPI refers to the business of Discovery Partners International, Inc. prior to completion of the merger.

Business Overview

Our mission is to discover,
develop, and deliver to patients best-in-class medicines for the treatment of cancer and related conditions. We have built a pipeline of innovative product candidates for multiple cancer indications, all of which represent proprietary applications
of our expertise in small molecule drug technologies. In the near term, the key driver of our success will be our ability to successfully commence and complete clinical trials for our product candidates and advance the development of our
discovery-stage research programs. In the longer term, the key driver of our success will be our ability to commercialize products based upon our proprietary technologies, either alone or together with our collaboration partners.

Our lead product candidate, IPI-504, is currently being studied in a Phase I clinical trial in
patients with Gleevec®-refractory gastrointestinal stromal tumors, or GIST, and other soft
tissue sarcomas, as well as a Phase I/II clinical trial in patients with advanced non-small cell lung cancer, or NSCLC. We also have completed enrollment in and are analyzing data from our Phase I clinical trial of IPI-504 in patients with
refractory multiple myeloma. To date, IPI-504 has been well-tolerated and we have seen promising evidence of biological activity in patients with GIST. We currently expect to initiate additional clinical trials of IPI-504 during 2007, including one
or more Phase II clinical trials in the second half of the year in indications to be determined based on the preclinical and clinical data we generate, Phase I studies combining IPI-504 with existing approved therapies in earlier-line disease, and a
human clinical trial of an oral formulation of IPI-504. IPI-504 is an inhibitor of heat shock protein 90, or Hsp90. Hsp90 is a molecule that maintains the structure and activity of specific proteins, known as client proteins of Hsp90.
Many cancers result from specific mutations in these client proteins; Hsp90 enables those cancers to survive by allowing the client proteins to continue functioning.



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Our next most advanced program is directed against the Hedgehog cell signaling pathway, which we refer to
as the Hedgehog pathway. Normally, the Hedgehog pathway regulates tissue and organ formation during embryonic development. When abnormally activated during adulthood, however, the Hedgehog pathway is believed to play a central role in allowing the
proliferation and survival of certain cancer-causing cells, and is implicated in many of the most deadly cancers. Our Hsp90 and Hedgehog pathway inhibitor programs are being pursued in collaboration with MedImmune, Inc., or MedImmune. In April 2007,
MedImmune announced that it had entered into a definitive agreement to be acquired by AstraZeneca PLC. In accordance with the terms of our agreement with MedImmune, our collaboration continues after a change of control of MedImmune on the same
terms.

The goal of our third program, which is being undertaken in collaboration with the Novartis Institutes for BioMedical Research, or
Novartis, is to identify small molecule compounds that inhibit the Bcl-2 family of proteins. These proteins are key regulators of programmed cell death, or apoptosis. Cancers that have higher than normal levels of Bcl-2 are believed to evade
apoptosis and become increasingly resistant to chemotherapy. Using our proprietary small molecule drug discovery technologies, we have identified selective inhibitors of Bcl-2 and its related protein family member, Bcl-xL, and are performing lead
optimization activities on these compounds.

We also have other research programs that target cancer and related conditions.

We have incurred net losses since inception as we have devoted substantially all of our resources to research and development, including early-stage
clinical trials. We expect to incur substantial and increasing losses for the next several years as we continue to expend substantial resources seeking to successfully research, develop, manufacture, obtain regulatory approval for, market and sell
any product candidates. We expect that, in the near term, we will incur substantial losses relating primarily to costs and expenses relating to our efforts to advance the development of IPI-504, including those related to an oral formulation of the
compound, and our Hedgehog pathway inhibitor program.

Collaboration Agreements

We have entered into a product development and commercialization agreement with MedImmune to jointly develop and commercialize novel small molecule cancer
drugs, including IPI-504, targeting Hsp90, as well as those targeting the Hedgehog pathway. Under the terms of our agreement with MedImmune, we will share equally with MedImmune all development costs, as well as potential profits and losses, from
any future marketed products. MedImmune made a non-refundable, up-front payment totaling $70 million to us in order to obtain co-exclusive rights to the Hsp90 and Hedgehog pathway development programs. In addition, we could receive up to $430
million in milestone payments if certain late-stage development and sales objectives are achieved for products resulting from the collaboration, such that total payments to us could equal $500 million. If any products are successfully developed
under the collaboration, we have the right to co-promote these products in the United States, with our promotional costs being included among those that are shared under the collaboration. We may opt-out of a program under the collaboration, in
which case we would receive a royalty on sales of products arising from the program, if any, instead of a share of profits and losses.

We
have also entered into an alliance with Novartis to discover, develop and commercialize drugs targeting the Bcl-2 family of proteins. Under our agreement with Novartis, Novartis has paid us a $15 million up-front license fee, an affiliate of
Novartis has made a $5 million equity investment in us, and Novartis has committed to provide us research funding of approximately $10 million over the initial two-year research term, which expires in February 2008. Novartis has also agreed to
make aggregate milestone payments of over $370 million if certain research, development and commercialization milestones are met for multiple products for multiple indications, such that total payments to us could exceed $400 million. In
addition, we are entitled to receive royalties upon successful commercialization of any products developed under the alliance. The two companies will conduct joint research to identify molecules for clinical development. Once a clinical candidate is
identified, we can participate in the clinical development of the candidate under specified conditions. This clinical development will be led and paid for by Novartis. Upon commercialization of any products developed under the collaboration, we have
an option to co-detail Bcl-2 family inhibitors in the United States, with our detailing costs to be reimbursed by Novartis.

We have also
entered into three technology access alliances relating to our diversity oriented synthesis technologies that have provided us with over $65 million in up-front license fees, equity payments and other near-term committed revenues and, with respect
to one such alliance, potential milestone and royalty payments upon successful commercial development of select products resulting from the alliance partners use of the compounds to develop drug candidates. Pursuant to these alliances,
Novartis International Pharmaceutical Ltd., or Novartis International, Amgen Inc., or Amgen, and Johnson & Johnson Pharmaceutical Research & Development, a division of Janssen Pharmaceutica N.V., or J&J, have each been granted
non-exclusive rights to use subsets of our collection of diversity oriented synthesis compounds for use in their respective internal drug discovery programs.

Financial Overview

Revenue

All of our revenue to date has been derived from license fees, the reimbursement of research and development costs, and contract service revenue received from our collaboration partners. Where the agreement with a
collaboration partner, such as our agreement with Novartis, provides that the partner will provide research funding for our research and development efforts, we



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recognize this cost reimbursement as revenue in the period earned. In the future, we may generate revenue from a combination of product sales, research and
development support services and milestone payments in connection with strategic relationships, and royalties resulting from the sales of products developed under licenses 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 license fees, research and development reimbursement, milestone and other payments received under our collaborative or strategic relationships, and the amount and timing of
payments that we receive upon the sale of our products, to the extent any are successfully commercialized. If we fail to complete the development of our drug candidates in a timely manner or obtain regulatory approval for them, our ability to
generate future revenue, and our results of operations and financial position, would be materially adversely affected.

Research & Development Expense

Since inception, we have focused on drug discovery and development programs,
with particular emphasis on cancer drugs. We currently have three lead programs in research and development:



| |  |  | IPI-504, which is currently being studied in Phase I clinical trials for the treatment of refractory GIST and other soft tissue sarcomas, and advanced NSCLC;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a program seeking to develop candidate compounds directed against the Hedgehog pathway; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | our Bcl-2 program.
| | - |  | ------------------

The IPI-504 and
Hedgehog pathway inhibitor programs are being conducted in collaboration with MedImmune and the Bcl-2 program is being conducted in collaboration with Novartis.

Research and development expense primarily consists of the following:



| |  |  | compensation of personnel associated with research activities, including consultants and contract research organizations;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



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



| |  |  | manufacturing drug candidates for preclinical testing and clinical studies;
| | - |  | ---------------------------------------------------------------------------



| |  |  | preclinical testing costs, including costs of toxicology studies;
| | - |  | -----------------------------------------------------------------



| |  |  | fees paid to professional service providers for independent monitoring and analysis of our clinical trials;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | depreciation of equipment; and
| | - |  | ------------------------------



| |  |  | allocated costs of facilities.
| | - |  | ------------------------------

We
expense research and development costs as they are incurred.

Under our collaboration with MedImmune, we share research and development
expenses for our Hsp90 and Hedgehog pathway inhibitor programs equally with MedImmune. Because this is a cost-sharing arrangement, we will record payments we receive from MedImmune for its share of the development effort as a reduction of research
and development expense.

General & Administrative Expense

General and administrative expense consists primarily of salaries and other related costs for personnel in executive, finance, accounting, legal, business
development, information technology infrastructure, corporate communications and human resources functions. Other costs include facilities costs not otherwise included in research and development expense and professional fees for legal and
accounting services. General and administrative expense also consists of the costs of maintaining and overseeing our intellectual property portfolio, which include the salaries of in-house patent counsel, the cost of external counsel and the
associated filing and maintenance fees.

Other Income & Expense

Interest expense and other interest and investment income consist primarily of interest earned on cash, cash equivalents and available-for-sale
securities, net of interest expense, and amortization of warrants.

Critical Accounting Policies and Significant Judgments and Estimates

The following discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been
prepared in accordance with United States generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and
accompanying notes. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, accrued



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drug development costs and assumptions in the valuation of stock-based compensation. We base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates. Interim results are not necessarily indicative of results for a full year or for any subsequent interim period.

We believe that the following accounting policies and estimates are most critical to aid you in understanding and evaluating our reported financial
results.

Revenue Recognition

To date, our revenues have been generated under research collaboration agreements and, accordingly, we recognize revenue in accordance with the SECs Staff Accounting Bulletin (SAB) No. 101, Revenue
Recognition in Financial Statements, as amended by SAB No. 104, Revenue Recognition, and Emerging Issues Task Force (EITF) No. 00-21, Revenue Arrangements With Multiple Deliverables.

The terms of these research collaboration agreements may include payment to us of non-refundable up-front license fees, funding or reimbursement of
research and development efforts, milestone payments if specified objectives are achieved, and/or royalties on product sales. We divide agreements containing multiple elements into separate units of accounting if certain criteria are met, including
whether the delivered element has stand-alone value to the collaborative partner and whether there is objective and reliable evidence of fair value of the undelivered obligation(s). For these agreements, we allocate the consideration that we receive
among the separate units based on their respective fair values or the residual method, and we apply the applicable revenue recognition criteria to each of the separate units.

We recognize revenues from non-refundable, up-front license fees on a straight-line basis over the contracted or estimated period of performance, which
is typically the research or development term. We recognize research and development funding as earned over the period of effort. We regularly consider whether events warrant a change in the estimated period of performance under an agreement. Such a
change would cause us to modify the period of time over which we recognize revenues from the up-front license fees paid to us under that agreement and would, in turn, result in changes in our quarterly and annual results. To date, we have not made
any such changes.

We recognize milestone payments as revenue upon achievement of the milestone only if (1) the milestone payment is
non-refundable, (2) substantive effort is involved in achieving the milestone and (3) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these
conditions is not met, we defer the milestone payment and recognize it as revenue over the estimated period of performance under the contract as we complete our performance obligations.

We will recognize royalty revenue, if any, based upon actual and estimated net sales of licensed products in licensed territories as provided by the
licensee, and in the period the sales occur. We have not recognized any royalty revenues to date.

We exercise our judgment in determining
whether an agreement contains multiple elements and, if so, how much revenue is allocable to each element. In addition, we exercise our judgment in determining when our significant obligations have been met under such agreements and the specific
time periods over which we recognize revenue, such as non-refundable, up-front license fees. To the extent that actual facts and circumstances differ from our initial judgments, our revenue recognition with respect to such transactions would change
accordingly and any such change could affect our reported operating results.

Research and Development Expense

Research and development expense consists of expenses incurred in performing research and development activities. We expense research and development
costs as they are incurred. We have entered into certain collaboration agreements in which expenses are shared with the collaborator, and others in which we are reimbursed for work performed on behalf of the collaborator. We record all of these
expenses as research and development expense. If the arrangement is a cost-sharing arrangement and there is a period during which we receive payments from the collaborator, we record payments from the collaborator for its share of the development
effort as a reduction of research and development expense. If the arrangement is a cost-sharing arrangement and there is a period during which we make payments to the collaborator, we will record our payments to the collaborator for its share of the
development effort as additional research and development expense. If the arrangement provides for reimbursement of research and development expenses, we record the reimbursement as revenue. Our collaboration with MedImmune is a cost-sharing
arrangement; our collaboration with Novartis provides for the reimbursement of our research and development expenses.

Accrued Drug
Development Costs

As part of the process of preparing financial statements, we are required to estimate accrued expenses. This
process involves identifying services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for such service as of each balance sheet date. Examples of services for which we must
estimate accrued expenses include contract service fees paid to contract manufacturers in conjunction with the production of clinical drug supplies and to contract research organizations in connection with preclinical studies and clinical trials. In
connection with these service fees, our



13



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estimates are most affected by our understanding of the status and timing of services provided. The majority of our service providers invoice us in arrears
for services performed. In the event that we do not identify certain costs that have been incurred by our service providers, or if we over- or under-estimate the level of services performed or the costs of such services in any given period, our
reported expenses for such period would be too low or too high. We often rely on subjective judgments to determine the date on which certain services commence, the level of services performed on or before a given date, and the cost of such services.
We make these judgments based upon the facts and circumstances known to us. To date, we have been able to reasonably estimate these costs, but our estimates of expenses in future periods may be over- or under-accrued.

Stock-Based Compensation

We
adopted Financial Accounting Standards Board Statement No. 123(R), Share-Based Payment (SFAS No. 123(R)), as of January 1, 2006 using a modified prospective application, which provides for certain
changes in the method for valuing stock-based compensation. SFAS No. 123(R) revises FAS Statement No. 123, Accounting for Stock-Based Compensation (SFAS 123), supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and amends FAS Statement No. 95, Statement of Cash Flows. SFAS No. 123(R) requires companies to expense the fair value of
employee stock options and other equity compensation.

We use our judgment in determining the fair value of our common stock, including in
selecting the inputs we use in the Black-Scholes valuation model. Equity instrument valuation models are by their nature highly subjective. Any significant changes in any of our judgments, including those used to select the inputs for the
Black-Scholes valuation model, could have a significant impact on the fair value of the equity instruments granted or sold and the associated compensation charge, if any, we record in our financial statements.

Results of Operations

The following tables summarize
our results of operations for each of the three-month periods ended March 31, 2007 and 2006, in thousands, together with the change in these items in dollars and as a percentage:



|                                   |  |                                      |        |   |      |   |        |          |  |   |          |   |  |     |   
|---------------------------------- |  | ------------------------------------ | ------ | - | ---- | - | ------ | -------- |  | - | -------- | - |  | --- | --
|                                   |  | For the Three Months Ended March 31, |       
|                                   |  | 2007                                 |        |   | 2006 |   |        | $ Change |  |   | % Change |  
|Revenue                            |  | $                                    | 6,116  |   |      | $ | 719    |          |  | $ | 5,397    |   |  | 751 | % 
|Research and development expense   |  |                                      | (7,476 | ) |      |   | (9,678 | )        |  |   | 2,202    |   |  | (23 | )%
|General and administrative expense |  |                                      | (3,293 | ) |      |   | (1,973 | )        |  |   | (1,320   | ) |  | 67  | % 
|Interest expense                   |  |                                      | (102   | ) |      |   | (142   | )        |  |   | 40       |   |  | (28 | )%
|Interest and investment income     |  |                                      | 1,866  |   |      |   | 194    |          |  |   | 1,672    |   |  | 862 | % 

Revenue

Our revenue during the three-month period ended March 31, 2007 consisted of approximately:



| |  |  | $2.5 million associated with the amortization of the up-front license fee we received from MedImmune upon entry into our strategic alliance in August 2006;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $0.9 million related to the amortization of the non-refundable license fee, and $1.2 million in revenue related to the reimbursable research and development
services we performed, under our Bcl-2 collaboration entered into with Novartis in February 2006; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | $1.5 million related to the delivery of compounds to Novartis International under our technology access agreement.
| | - |  | ------------------------------------------------------------------------------------------------------------------

Our revenue during the three-month period ended March 31, 2006 consisted of approximately $0.3 million related to the amortization of the
non-refundable license fee from, and $0.4 million related to the reimbursable research and development services we performed for, Novartis under our Bcl-2 collaboration.

Research and Development Expense

Research and development expense represented approximately
69% and 83% of our total operating expenses for the three months ended March 31, 2007 and 2006, respectively.

The decrease in
research and development expense in the three-month period ended March 31, 2007 as compared to the same period in 2006 is primarily attributable to $3.3 million in reimbursable amounts from MedImmune under the cost-sharing provisions of our
collaboration agreement which is recorded as a credit to research and development expense, partially offset by:



| |  |  | an increase of $0.9 million in salaries and benefits, including SFAS No. 123(R) stock option expenses, for our research and development personnel due primarily
to new hires and yearly salary increases, larger annual stock option grants, and a contingent cash compensation program effective in the fourth quarter of 2006; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | an increase of $0.1 million in external costs for clinical trials of IPI-504 as that program has progressed.
| | - |  | ------------------------------------------------------------------------------------------------------------



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During the three-month periods ended March 31, 2007 and 2006, we estimate that we incurred the
following expenses by program. These expenses relate primarily to payroll and related expenses for personnel working on the programs, drug development and manufacturing, preclinical toxicology studies and clinical trial costs. In addition, for the
IPI-504 and Hedgehog pathway inhibitor programs, these expenses for the three months ended March 31, 2007 include a credit of approximately $3.3 million attributable to amounts reimbursable by MedImmune following entry into our collaboration
agreement in August 2006.



|                            |  |                                  |             |                                   |   |            
|--------------------------- |  | -------------------------------- | ----------- | --------------------------------- | - | -----------
|Program                     |  | Three Months EndedMarch 31, 2007 |             | Three Months Ended March 31, 2006
|Hsp90 Inhibitors            |  | $                                | 2.3 million |                                   | $ | 1.4 million
|Hedgehog Pathway Inhibitors |  | $                                | 1.2 million |                                   | $ | 3.2 million
|Bcl-2                       |  | $                                | 1.3 million |                                   | $ | 1.1 million

We do not believe that the historical costs associated with our lead drug development programs are
indicative of the future costs associated with these programs or represent what any other future drug development program we initiate may cost. For example, while we expect our research and development expenses to increase as our programs progress
through preclinical and clinical development, those expenses attributable to the IPI-504 and Hedgehog pathway inhibitor programs will be shared equally with MedImmune in future periods. Further, there is significant uncertainty regarding our ability
to successfully develop any drug candidates. These risks include the uncertainty of:



| |  |  | the scope, rate of progress and cost of our clinical trials of IPI-504, planned clinical trials of product candidates in the Hedgehog pathway inhibitor program, and
any other clinical trials we may commence in the future;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope, rate and progress of our preclinical studies and other research and development activities;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | clinical trial results;
| | - |  | -----------------------



| |  |  | the cost of filing, prosecuting, defending and enforcing any patents and other intellectual property rights relating to our research and development programs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the cost and timing of regulatory approvals;
| | - |  | --------------------------------------------



| |  |  | the cost of establishing clinical supplies of any product candidates; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the effect of competing technological and market developments.
| | - |  | --------------------------------------------------------------

A further discussion of some of the risks and uncertainties associated with completing our drug development programs on schedule, or at all, and the potential consequences of failing to do so, are set forth in Part II
of this report under the section entitled Risk Factors.

Because of the risks inherent in drug discovery and development, we
cannot reasonably estimate or know:



| |  |  | the nature, timing or estimated costs of the efforts necessary to complete the development of our programs;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the anticipated completion dates of these programs; or
| | - |  | ------------------------------------------------------



| |  |  | the period in which material net cash inflows are expected to commence, if at all, from the programs described above or from any potential future drug candidates.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Any failure by us or our strategic alliance partners to complete any stage of the development of any potential products in a timely
manner could have a material adverse effect on our results of operations and financial position.

General and Administrative Expense

The increase in general and administrative expense for the three months ended March 31, 2007 as compared to the three months
ended March 31, 2006 is primarily attributable to:



| |  |  | an increase of $1.0 million in salaries and benefits, including SFAS No. 123(R) stock option expense for general and administrative employees, due primarily to
new hires and yearly salary increases, larger annual stock option grants and a contingent cash compensation program effective in the fourth quarter of 2006; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | an increase of $0.3 million in patent and non-income tax expenses, including state franchise taxes, state use taxes and local taxes.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------

Interest Expense

Interest
expense decreased in the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 primarily as a result of borrowings outstanding in 2006 under our debt facilities with Oxford Finance Corporation, or Oxford.
We repaid in full all of our outstanding debt to Oxford in December 2006.

Interest and Investment Income

Interest and investment income increased in the three months ended March 31, 2007 as compared to the three months ended March 31, 2006 primarily
as a result of our higher balance of cash and available-for-sale securities. The increase in cash and available-for-sale securities balance is primarily attributable to amounts we received upon completion of the DPI merger, and the up-front license
fee received from MedImmune in connection with our collaboration.

Liquidity and Capital Resources

We have not generated any revenue from the sale of drugs to date, and we do not expect to generate any such revenue for the next several years, if at all.
We have instead relied on the proceeds from sales of equity securities, interest on investments, license fees, expense reimbursement under our collaborations, contract service payments and debt to fund our operations. Because our product candidates
are at an early stage of clinical and preclinical development and the outcome of these efforts is uncertain, we cannot estimate the actual amounts necessary to successfully complete the development and commercialization of our product candidates or
whether, or when, we may achieve profitability.

Our cash, cash equivalents, available-for-sale securities and working capital are as
follows:



|                                                              |  |                              |             |   |                   |   |             |  
|------------------------------------------------------------- |  | ---------------------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                              |  | March 31, 2007               |             |   | December 31, 2006 |  
|Cash, cash equivalents and available-for-sale securities      |  | $                            | 127,671,513 |   |                   | $ | 101,696,784 |  
|Working capital                                               |  |                              | 115,579,858 |   |                   |   | 121,264,233 |  
|                                                              | 
|                                                              |  | Three Months Ended March 31, |            
|                                                              |  | 2007                         |             |   | 2006              |  
|Cash provided by (used in):                                   |  |                              |             |   |                   |   |             |  
|Operating activities                                          |  | $                            | 26,614,594  |   |                   | $ | 4,143,108   |  
|Investing activities                                          |  |                              | (74,130,274 | ) |                   |   | (273,231    | )
|Financing activities                                          |  |                              | (321,922    | ) |                   |   | 8,795,190   |  
|Capital expenditures (included in investing activities above) |  |                              | (838,781    | ) |                   |   | (44,696     | )

Cash Flows

The principal use of cash in operating activities in all of the periods presented was the funding of our net loss. Cash flows from operations can vary
significantly due to various factors, including changes in accounts receivable and unbilled accounts receivable, as well as changes in accounts payable, accrued expenses and deferred revenue. In January 2007, we received $35.0 million from
MedImmune, representing the second half of the up-front license payment related to our collaboration agreement.

Cash flow from operations
includes a decrease in the accrued expenses and other liabilities resulting from payments of $1.7 million in connection with our contingent cash compensation program, representing payments made during the three months ended March 31, 2007 for
amounts earned in 2006, as well as $1.1 million for federal income taxes and $1.0 million to J&J to refund a portion of the upfront license fee paid in connection with our technology access agreement.

Net cash used in investing activities includes the purchase of $78.6 million of short term corporate obligations in accordance with our investment
policy.

We believe that our existing cash and cash equivalents, will be sufficient to support our current operating plan, including
planned increases in research and development and general and administrative expenses, through at least December 31, 2009. Our currently-planned operating and capital requirements primarily include the need for working capital to, among other
things:



| |  |  | continue clinical development of an intravenous formulation of IPI-504;
| | - |  | -----------------------------------------------------------------------



| |  |  | perform preclinical work on, and commence clinical development of, an oral formulation of IPI-504;
| | - |  | --------------------------------------------------------------------------------------------------



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| |  |  | perform preclinical work on, and commence clinical development of, compounds from our Hedgehog pathway inhibitor program; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | advance our additional discovery programs.
| | - |  | ------------------------------------------

Our future operating plan may change, however, as a result of many factors, including:



| |  |  | the progress and results of clinical trials of IPI-504 and preclinical studies of an oral formulation of IPI-504;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the results of discovery-stage research and preclinical studies of potential Hedgehog pathway inhibitors, the results of discovery-stage research for Bcl-2
inhibitor compounds and other programs, and our decision to initiate clinical trials if supported by preclinical results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain our strategic alliances with MedImmune and Novartis;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our ability to meet our compound delivery obligations to Novartis International;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals for our drug candidates;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the cost of acquiring raw materials for, and of manufacturing, our drug candidates;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents, and other patent-related costs, including litigation costs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of increasing our clinical research, medical and regulatory affairs functions;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales and marketing functions and of establishing commercial manufacturing arrangements if any drug candidates are approved;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our needs for office and laboratory facilities and our ability to continue subleasing excess space;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the costs required to satisfy our obligations under our alliance with MedImmune;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the timing and receipt of milestone payments under our collaboration agreements; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the timing, receipt and amount of sales, profits or royalties on future products, if any.
| | - |  | -----------------------------------------------------------------------------------------

We will require substantial additional cash to fund expenses that we expect to incur in the long term in connection with planned preclinical and clinical
testing, regulatory review, manufacturing and sales and marketing efforts. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic alliance and licensing arrangements. Such
additional financing may not be available when we need it or may not be available on terms that are favorable to us. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders
ownership interests will be diluted, and the terms may include liquidation or other preferences that adversely affect their rights as stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting
our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic alliances and licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us. If we are unable to obtain adequate financing on a timely basis, we could be required to:



| |  |  | curtail significant discovery-stage drug discovery programs that are designed to identify new drug candidates; and/or
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | relinquish rights to product candidates or development programs that we may otherwise seek to develop or commercialize ourselves or jointly with our collaborative
partners.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Contractual Obligations and Off-Balance Sheet Arrangements

There have been no material changes in our contractual obligations from those disclosed in our annual report on Form 10-K filed on March 14, 2007.

Since inception, we have not engaged in any off-balance sheet financing activities, including the use of structured finance, special
purpose entities or variable interest entities.



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

Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since a significant portion of our investments are in money market funds, asset-backed securities, corporate obligations and U.S.
government agency obligations. We do not enter into investments for trading or speculative purposes. Our cash is deposited in and invested through highly rated financial institutions in North America. Our marketable securities are subject to
interest rate risk and will fall in value if market interest rates increase.



17



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A hypothetical 100 basis point increase in interest rates would result in an approximate $312,598
decrease in the fair value of our investments as of March 31, 2007. We have the ability to hold our fixed income investments until maturity and, therefore, we do not expect our operating results or cash flows to be affected to any
significant degree by the effect of a change in market interest rates on our investments.



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

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

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



18



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##### Table of Contents

PART II. OTHER INFORMATION



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

You should carefully consider the
following risk factors, in addition to other information included in this quarterly report on Form 10-Q, in evaluating Infinity and our business. If any of the following risks occur, our business, financial condition and operating results could be
materially adversely affected.

Risks Related to Our Business and Our Stage of Development as a Company

Our limited operating history may make it difficult for you to evaluate our business and assess our future viability effectively.

Our operations to date have been limited to organizing and staffing the company, developing, and securing our technology and undertaking preclinical
studies and initial clinical trials of our drug candidates. We have not yet demonstrated our ability to obtain regulatory approval for, or to formulate and manufacture at commercial-scale, any of our drug candidates, nor do we have the sales and
marketing infrastructure necessary to successfully commercialize any products that may ultimately be approved for sale, if any. Consequently, any predictions you make about our future success or viability may not be as accurate as they could be if
we had a longer operating history.

We have a history of net losses and may never become profitable.

We have incurred significant losses since inception. At March 31, 2007, our accumulated deficit was approximately $158.5 million. Our net losses for
the three months ended March 31, 2007 and the fiscal years ending December 31, 2006, 2005 and 2004 were $2.9 million, $28.4 million, $36.4 million and $34.1 million, respectively. We have not generated any revenues from the sale of drugs
to date and we do not expect to generate revenues from the sale of drugs, or achieve profitability, for several years, if ever. We expect that our annual operating losses will increase substantially over the next several years as we seek to:



| |  |  | complete Phase I clinical trials for IPI-504 and, if supported by the Phase I clinical trial results, initiate larger scale Phase II clinical trials, as well as
additional clinical trials, for IPI-504;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | perform preclinical work on, and commence clinical development of, an oral formulation of IPI-504;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | advance our Hedgehog pathway inhibitor program into preclinical development and clinical trials, if supported by positive data;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | discover and develop additional drug candidates, including Bcl-2 inhibitor compounds;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | obtain regulatory approval for any drug candidates we successfully develop;
| | - |  | ---------------------------------------------------------------------------



| |  |  | commercialize any drug candidates for which the necessary regulatory approvals are obtained;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | prosecute and maintain our intellectual property rights relating to our drug candidates and future products, if any;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | hire additional clinical, scientific and management personnel and upgrade our operational, financial and management information systems and facilities; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | identify and acquire rights from third parties to additional compounds, drug candidates or drugs.
| | - |  | -------------------------------------------------------------------------------------------------

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

We will need
substantial additional capital to fund our operations, and our business may be threatened if that capital is not available on acceptable terms.

We anticipate that our current cash, cash equivalents and available-for-sale securities will be sufficient to support our current operating plan through at least December 31, 2009. Our currently-planned operating
and capital requirements primarily include the need for working capital to, among other things:



| |  |  | continue clinical development of an intravenous formulation of IPI-504;
| | - |  | -----------------------------------------------------------------------



| |  |  | perform preclinical work on, and commence clinical development of, an oral formulation of IPI-504;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | perform preclinical work on, and commence clinical development of, compounds from our Hedgehog pathway inhibitor program; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



19



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##### Table of Contents

| |  |  | advance our additional discovery programs.
| | - |  | ------------------------------------------

Our
future operating plan may change, however, as a result of many factors, including:



| |  |  | the progress and results of clinical trials of IPI-504 and preclinical studies of an oral formulation of IPI-504;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the results of discovery-stage research and preclinical studies of potential Hedgehog pathway inhibitors, the results of discovery-stage research for Bcl-2
inhibitor compounds and other programs, and our decision to initiate clinical trials if supported by preclinical results;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to maintain our strategic alliances with MedImmune and Novartis;
| | - |  | ----------------------------------------------------------------------------



| |  |  | our ability to meet our compound delivery obligations to Novartis International;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the timing of, and the costs involved in, obtaining regulatory approvals for our drug candidates;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the cost of acquiring raw materials for, and of manufacturing, our drug candidates;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the costs involved in preparing, filing, prosecuting, maintaining and enforcing patents, and other patent-related costs, including litigation costs;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of increasing our clinical research, medical and regulatory affairs functions;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales and marketing functions and of establishing commercial manufacturing arrangements if any of our drug candidates are approved;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our needs for office and laboratory facilities and our ability to continue subleasing excess space;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the costs required to satisfy our obligations under our alliance with MedImmune;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the timing and receipt of milestone payments under our collaboration agreements; and
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the timing, receipt and amount of sales, profits or royalties on future products, if any.
| | - |  | -----------------------------------------------------------------------------------------

We will require substantial additional cash to fund expenses that we expect to incur in the long term in connection with planned preclinical and clinical
testing, regulatory review, manufacturing and sales and marketing efforts. We may seek additional capital through a combination of private and public equity offerings, debt financings and strategic alliance and licensing arrangements. Such
additional financing may not be available when we need it or may not be available on terms that are favorable to us. To the extent that we raise additional capital through the sale of equity or convertible debt securities, our stockholders
ownership interests will be diluted, and the terms may include liquidation or other preferences that adversely affect their rights as stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting
our ability to take specific actions such as incurring additional debt, making capital expenditures or declaring dividends. If we raise additional funds through strategic alliances and licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies or drug candidates, or grant licenses on terms that are not favorable to us. If we are unable to obtain adequate financing on a timely basis, we could be required to:



| |  |  | curtail significant discovery-stage drug discovery programs that are designed to identify new drug candidates; and/or
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | relinquish rights to drug candidates or development programs that we may otherwise seek to develop or commercialize ourselves or jointly with our collaborative
partners.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our alliances with MedImmune and Novartis are important to our business. If these alliances are unsuccessful or if
conflicts result with our alliance partners, our research and development efforts could be delayed, curtailed or terminated, our revenues could significantly decrease, and our operations may be adversely affected.

We have entered into an alliance with MedImmune to jointly develop and commercialize novel drugs targeting Hsp90 and the Hedgehog pathway. We have also
entered into an alliance with Novartis for the development and commercialization of Bcl-2 protein family members in the field of cancer. In these alliances, our collaborators have committed to provide substantial funding, as well as significant
capabilities in clinical development, regulatory affairs, marketing and sales.

In April 2007, MedImmune announced that it had entered into
a definitive agreement to be acquired by AstraZeneca PLC. In accordance with our agreement with MedImmune, our collaboration continues in effect after a change of control of MedImmune on the same terms. Nevertheless, the announcement of the proposed
merger may have an impact on MedImmunes ability to retain and motivate key personnel, or may divert management attention and resources. These events may result in delays in our development programs and have an adverse effect on our results of
operations.



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If, for any reason, MedImmune or Novartis does not devote sufficient time and resources to the applicable
alliance arrangement, we may not realize the potential commercial benefits of the arrangement, and our results of operations may be adversely affected. In addition, if MedImmune or Novartis were to breach or terminate its arrangement with us, the
development and commercialization of the affected drug candidate could be delayed, curtailed or terminated because we may not have sufficient financial resources or capabilities to continue development and commercialization of the drug candidate on
our own.

Under our agreement with MedImmune, MedImmune may opt out of a project by giving us six months prior written notice, and
has the right to terminate the agreement under other circumstances, including if it believes there are safety concerns with respect to a drug being developed under the collaboration. Under our alliance agreement with Novartis, Novartis may terminate
the alliance at any time upon 60 days notice to us. If either MedImmune or Novartis were to exercise its right to opt out of a program or to terminate the applicable alliance, the development and commercialization of products from our Hsp90,
Hedgehog pathway inhibitor or Bcl-2 programs could be adversely affected, our potential for generating revenue from these programs may be adversely affected and attracting new alliance partners would be made more difficult.

Much of the potential revenue from our existing and future alliances will consist of contingent payments, such as payments for achieving development and
commercialization milestones, royalties payable on sales of any successfully developed drugs, and profit-sharing arrangements. The milestone, royalty and other revenue that we may receive under these alliances will depend upon our, and our alliance
partners, ability to successfully develop, introduce, market and sell new products. In some cases, we will not be involved in these processes and, accordingly, will depend entirely on our alliance partners. Our alliance partners may fail to
develop or effectively commercialize products using our products or technologies because they:



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



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



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

In addition, an alliance partner may decide to pursue a competitive drug candidate developed outside of the alliance.

If our
alliance partners fail to develop or effectively commercialize our drug candidates or for any of the other reasons described above, we may not be able to develop and commercialize that drug independently, or replace the alliance partner with another
suitable partner in a reasonable period of time and on commercially reasonable terms, if at all.

If we are not able to attract and retain key
personnel and advisors, we may not be able to operate our business successfully.

We are highly dependent on our management team,
particularly Steven Holtzman, Julian Adams, Adelene Perkins and the other members of our executive leadership team. All of these individuals are employees-at-will, which means that neither Infinity nor such employee is obligated to a fixed term of
service and that the employment relationship may be terminated by either Infinity or the employee at any time, without notice, and whether or not cause or good reason exists for such termination. Although we do not have any reason to believe that we
may lose the services of any of these persons in the foreseeable future, the loss of the services of any of these persons might impede the achievement of our research, development and commercialization objectives. We do not maintain key
person insurance on any of our employees.

Recruiting and retaining qualified scientific and business personnel will also be critical
to our success. We may not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies for similar personnel. We also experience competition for the hiring of
scientific personnel from universities and research institutions. In addition, we rely on consultants and advisors, including scientific and clinical advisors, to assist us in formulating our research and development strategy. Our consultants and
advisors may be employed by other entities, have commitments under consulting or advisory contracts with third parties that limit their availability to us, or both.

Risks Related to the Development and Planned Commercialization of Our Drug Candidates

All of our drug
candidates are still in the early stages of development and remain subject to clinical testing and regulatory approval. This process is highly uncertain and we may never be able to obtain marketing approval for any of our drug candidates.

To date, we have not obtained approval from the U.S. Food and Drug Administration, or FDA, or any foreign regulatory authority to
market or sell any of our drug candidates. Our success depends primarily upon our, and our strategic alliance partners, ability to develop and commercialize our drug candidates successfully. Our most advanced drug candidate is IPI-504, which
is currently in Phase I clinical trials and is the subject of a broad product development and commercialization agreement with MedImmune. Our other drug candidates are in various stages of preclinical development and discovery research.



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Our drug candidates are subject to extensive governmental regulations relating to development, clinical
trials, manufacturing and commercialization. Rigorous preclinical testing and clinical trials and an extensive regulatory approval process are required in the United States and in many foreign jurisdictions prior to the commercial sale of medicinal
products like our drug candidates. Satisfaction of these and other regulatory requirements is costly, time consuming, uncertain and subject to unanticipated delays. It is possible that none of the drug candidates we are developing, or may in the
future develop, either alone or in collaboration with our strategic alliance partners, will obtain marketing approval. In connection with the clinical trials of IPI-504 and any other drug candidate we may seek to develop in the future, we face risks
that:



| |  |  | the drug candidate may not prove to be safe and/or effective;
| | - |  | -------------------------------------------------------------



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



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

We have limited experience in conducting and managing the clinical trials necessary to obtain regulatory approvals, including approval by the FDA and/or
comparable foreign regulatory agencies. The time required to complete clinical trials and for regulatory review by the FDA and other countries regulatory agencies is uncertain and typically takes many years. Some of our drug candidates may be
eligible for the FDAs programs that are designed to facilitate the development and expedite the review of certain drugs, but we cannot provide any assurance that any of our drug candidates will qualify for one or more of these programs. Even
if a drug candidate qualifies for one or more of these programs, the FDA may later decide that the drug no longer meets the conditions for qualification.

Our analysis of data obtained from preclinical and clinical activities is subject to confirmation and interpretation by regulatory authorities, which could delay, limit or prevent regulatory approval. We may also
encounter unanticipated delays or increased costs due to government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical trials and FDA regulatory review.

Any delay in obtaining or failure to obtain required approvals could materially adversely affect our ability to generate revenues from the particular
drug candidate. Furthermore, the uses for which any regulatory authority may grant approval to market a product may be limited, thus placing limitations on the manner in which we may market the product and limiting its market potential.

We are also subject to numerous foreign regulatory requirements governing the conduct of clinical trials, manufacturing and marketing authorization,
pricing and third party reimbursement. The foreign regulatory approval process includes all of the risks associated with FDA approval described above, as well as risks attributable to the satisfaction of foreign regulations. Approval by the FDA does
not ensure approval by regulatory authorities outside the United States, and vice versa. Foreign jurisdictions may have different approval procedures than those required by the FDA and may impose additional testing requirements for our drug
candidates.

If clinical trials of our drug candidates are prolonged, delayed or suspended, it may take significantly longer and cost substantially
more to obtain marketing approval for our drug candidates and achieve profitability, if at all.

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



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



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



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



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



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



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



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



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



| |  |  | a finding that the trial participants are being exposed to unacceptable health risks;
| | - |  | -------------------------------------------------------------------------------------



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



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| |  |  | any restrictions on or post-approval commitments with regard to any regulatory approval we ultimately obtain that render the drug candidate not commercially viable.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Clinical trials require sufficient patient enrollment, which is a function of many factors, including the size of the
patient population, the nature of the trial protocol, the proximity of patients to clinical sites, the availability of effective treatments for the relevant disease, the eligibility criteria for our clinical trials and competing studies or trials.
Delays in patient enrollment can result in increased costs and longer development times. Our failure to enroll patients in our clinical trials could delay the completion of the clinical trial beyond current expectations. In addition, the FDA could
require us to conduct clinical trials with a larger number of subjects than has been projected for any of our drug candidates. As a result of these factors, we may not be able to enroll a sufficient number of patients in a timely or cost-effective
manner.

Furthermore, enrolled patients may drop out of clinical trials, which could impair the validity or statistical significance of the
clinical trials. A number of factors can influence the patient discontinuation rate, including, but not limited to: the inclusion of a placebo arm in a trial; possible inactivity or low activity of the drug candidate being tested at one or more of
the dose levels being tested; adverse side effects experienced, whether or not related to the drug candidate; and the availability of numerous alternative treatment options that may induce patients to discontinue their participation in the trial.

We may suspend, or the FDA or other applicable regulatory authorities may require us to suspend, clinical trials of a drug candidate at
any time if we or they believe the patients participating in such clinical trials, or in independent third party clinical trials for drugs based on similar technologies, are being exposed to unacceptable health risks or for other reasons.

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

We rely on third parties to conduct our clinical trials, and those third parties may not perform satisfactorily.

We rely on third parties such as medical institutions and external investigators to enroll qualified patients, conduct our clinical trials and provide
services in connection with such clinical trials. We intend to rely on these institutions and investigators, as well as contract research organizations and other similar entities, in the future. Our reliance on these third parties for clinical
development activities reduces our control over these activities. Accordingly, these third party contractors may not complete activities on schedule, or may not conduct our clinical trials in accordance with regulatory requirements or the trial
design. If these third parties do not successfully carry out their contractual duties or meet expected deadlines, we may be required to replace them. Although we believe there are a number of third party contractors we could engage to continue these
activities, replacing a third party contractor may result in a delay of the affected trial. If this were to occur, our efforts to obtain regulatory approvals for and commercialize our drug candidates may be delayed.

In addition, we are responsible for ensuring that each of our clinical trials is conducted in accordance with the general investigational plan and
protocols for the trial. The FDA requires us to comply with certain standards, referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and
accurate and that the rights, integrity and confidentiality of trial participants are protected. Our reliance on third parties that we do not control does not relieve us of these responsibilities and requirements. If any of our trial investigators
or third party contractors does not comply with good clinical practices, we may not be able to use the data and reported results from the trial. If this were to occur, our efforts to obtain regulatory approvals for and commercialize our drug
candidates may be delayed.

Even if any of our drug candidates receives regulatory approval, we may still face significant development and regulatory
difficulties.

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



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Manufacturing difficulties could delay or preclude commercialization of our drug candidates and substantially
increase our expenses.

Our drug candidates require precise, high quality manufacturing. The third party manufacturers on which we
rely may not be able to comply with the FDAs current good manufacturing practices, or cGMPs, and other applicable government regulations and corresponding foreign standards. These regulations govern manufacturing processes and procedures and
the implementation and operation of systems to control and assure the quality of products. The FDA may, at any time, audit or inspect a manufacturing facility to ensure compliance with cGMPs. Any failure by our contract manufacturers to achieve and
maintain high manufacturing and quality control standards could result in patient injury or death; product liability claims; penalties or other monetary sanctions; the failure of regulatory authorities to grant marketing approval of our drug
candidates; delays, suspension or withdrawal of approvals; license revocation; seizures or recalls of drug candidates or products; operating restrictions and/or criminal prosecution, any of which could significantly and adversely affect supply of
our drug candidates and seriously hurt our business. Contract manufacturers may also encounter difficulties involving production yields or delays in performing their services. We do not have control over third party manufacturers performance
and compliance with these applicable regulations and standards. If, for some reason, our manufacturers cannot perform as agreed, we may be unable to replace such third party manufacturers in a timely manner and the production of our drug candidates
would be interrupted, resulting in delays in clinical trials and additional costs. Switching manufacturers may be difficult because the number of potential manufacturers is limited and, depending on the type of material manufactured at the contract
facility, the change in contract manufacturer must be submitted to and/or approved by the FDA and comparable regulatory authorities outside of the United States. In addition, a new manufacturer would have to be educated in, or develop substantially
equivalent processes for, production of our drug candidates after receipt of regulatory approval. It may be difficult or impossible for us to find a replacement manufacturer on acceptable terms quickly, or at all.

To date, our drug candidates have been manufactured in quantities for preclinical testing and clinical trials by third party manufacturers. If the FDA or
other regulatory agencies approve any of our drug candidates for commercial sale, we expect that we would continue to rely, at least initially, on third party manufacturers to produce commercial quantities of our approved drug candidates. These
manufacturers may not be able to successfully increase the manufacturing capacity for any approved drug candidates in a timely or economical manner, or at all. Significant scale-up of manufacturing might entail changes in the manufacturing process
that have to be submitted to and/or approved by the FDA or other regulatory agencies. If contract manufacturers engaged by us are unable to successfully increase the manufacturing capacity for a drug candidate, or we are unable to establish our own
manufacturing capabilities, the commercial launch of any approved products may be delayed or there may be a shortage in supply.

If physicians and
patients do not accept our future drugs, we may not be able to generate significant revenues from product sales.

Even if our
current drug candidates, or drug candidates we may develop or acquire in the future, obtain regulatory approval, they may not gain market acceptance among physicians, patients and the medical community for a variety of reasons including:



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



| |  |  | lower demonstrated clinical safety and efficacy compared to other drugs;
| | - |  | ------------------------------------------------------------------------



| |  |  | lack of cost-effectiveness;
| | - |  | ---------------------------



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



| |  |  | inconvenient and/or difficult administration;
| | - |  | ---------------------------------------------



| |  |  | prevalence and severity of adverse side effects;
| | - |  | ------------------------------------------------



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



| |  |  | safety concerns with similar drugs marketed by others;
| | - |  | ------------------------------------------------------



| |  |  | the reluctance of the target population to try new therapies and of physicians to prescribe these therapies; and
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | ineffective sales, marketing and distribution support.
| | - |  | ------------------------------------------------------

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

Any drugs we successfully develop may become subject to unfavorable pricing regulations, third party reimbursement practices or healthcare reform initiatives that could harm our business.

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



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



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



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



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



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

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

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

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

Risks Related to Our Field

The market for cancer therapeutics is intensely competitive. If we are unable to compete effectively, our drug candidates and any drugs that we
may in the future develop may be rendered noncompetitive or obsolete.

We are engaged in seeking to develop drugs in the cancer
therapeutic segment of the pharmaceutical industry, which is highly competitive and rapidly changing. Many large pharmaceutical and biotechnology companies, academic institutions, governmental agencies and other public and private research
organizations are pursuing the development of novel drugs that target various forms of cancer. We currently face, and expect to continue to face, intense and increasing competition as new products enter the market and advanced technologies become
available. Moreover, there are a number of large pharmaceutical companies currently marketing and selling products to treat cancer, including Bristol-Myers Squibb Company, F. Hoffmann-La Roche Ltd., Novartis Pharma AG and Genentech, Inc. In addition
to currently approved drugs, there are a significant number of drugs that are currently under development and may become available in the future for the treatment of various forms of cancer. We are also aware that there are a number of companies
that are currently seeking to develop drug candidates directed to the same biological targets that our own drug candidates are designed to inhibit. Specifically, we believe that Kosan Biosciences, Biogen Idec Inc., Serenex, Inc., Vernalis plc (in
collaboration with Novartis), Synta Pharmaceuticals Corp. and Abraxis Bioscience Inc. have preclinical and clinical stage development programs seeking to develop compounds that target Heat Shock Protein 90, or Hsp90, which is the target of our lead
compound IPI-504. Curis, Inc. and Genentech have an early-stage clinical development collaboration seeking to develop drugs that target the Hedgehog signaling pathway, which is also being targeted by compounds we are developing. Abbott Laboratories,
Gemin-X Biosciences and Ascenta Therapeutics are believed to be in early-stage development of compounds to target the Bcl-2 family of proteins, which is the target of one of our discovery programs.

Many of our competitors have:



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



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



| |  |  | drug candidates that have been approved or are in later-stage clinical development than our own drug candidates; and/or
| | - |  | -----------------------------------------------------------------------------------------------------------------------



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| |  |  | collaborative arrangements with leading companies and research institutions in our fields of interest.
| | - |  | ------------------------------------------------------------------------------------------------------

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

Our business
has a substantial risk of product liability claims. The defense of any product liability claim brought against us will divert management time and require significant expense.

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

We work with hazardous materials. Any claims relating to the improper handling, storage or disposal of these materials could be time consuming, costly, and affect how we conduct our business.

Our activities involve the controlled storage, use and disposal of hazardous materials, including infectious agents, corrosive, explosive and flammable
chemicals, various radioactive compounds and compounds known to cause birth defects. We are subject to certain federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials.
Although we believe that our safety procedures for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental contamination or injury from these materials.

In the event of an accident, state or federal authorities may curtail our use of these materials, and we could be liable for any civil
damages that result. These damages may exceed our financial resources and may seriously harm our business. While we believe that the amount of insurance we carry is sufficient for typical risks regarding the handling of these materials, it may not
be sufficient to cover pollution conditions or other extraordinary or unanticipated events. Additionally, an accident could damage, or force us to shut down, our operations. In addition, if we were to manufacture our products or drug candidates
ourselves, we may incur substantial costs to comply with environmental regulations and would be subject to the risk of accidental contamination or injury from the use of hazardous materials in our manufacturing processes.

Risks Related to Intellectual Property

Our inability to
protect our proprietary technologies could significantly harm our business and ability to commercialize our drug candidates successfully.

We own or hold exclusive licenses to a number of U.S. and foreign patent applications directed to our drug candidates. Our success depends in part on our ability to obtain patent protection both in the United States and in other countries
for our drug candidates, their methods of manufacture and their methods of use. Our ability to protect our drug candidates from unauthorized or infringing use by third parties depends in substantial part on our ability to obtain and maintain valid
and enforceable patents.

Due to evolving legal standards relating to the patentability, validity and enforceability of patents covering
pharmaceutical inventions and the claim scope of these patents, our ability to maintain, obtain and enforce patents that may issue from any pending or future patent application is uncertain and involves complex legal, scientific and factual
questions. The standards which the United States Patent and Trademark Office, or PTO, and its foreign counterparts use to grant patents are not always applied predictably or uniformly and are ultimately subject to change. To date, no consistent
policy has emerged regarding the breadth of claims allowed in biotechnology and pharmaceutical patents. Thus, we cannot guarantee that any patents will issue from any pending or future patent applications owned by or licensed to us. Even if patents
do issue, we cannot guarantee that the claims of these patents will be held valid or enforceable by a court of law or will provide us with any significant protection against competitive products or otherwise be commercially valuable. Accordingly,
rights under any issued patents may not provide us with sufficient protection to afford us a commercial advantage against competitive products or processes.



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

In addition, we rely on
intellectual property assignment agreements with our corporate partners, employees, consultants, scientific advisors and other collaborators to grant us ownership of new intellectual property that is developed. These agreements may not result in the
effective assignment to us of that intellectual property. As a result, our ownership of key intellectual property could be compromised.

Patent
interference, opposition or similar proceedings relating to our intellectual property portfolio are costly, and an unfavorable outcome could prevent us from commercializing our drug candidates.

Patent applications in the United States are maintained in confidence for up to 18 months after their filing. In some cases, however, patent applications
remain confidential in the PTO for the entire time prior to issuance as a U.S. patent. Similarly, publication of discoveries in the scientific or patent literature often lags behind actual discoveries. Consequently, we cannot be certain that we were
the first to invent, or the first to file patent applications on, our drug candidates or their use as anti-cancer drugs or for other indications. In the event that a third party has also filed a U.S. patent application relating to our drug
candidates or a similar invention, we may have to participate in interference proceedings declared by the PTO or the third party to determine priority of invention in the United States.

For example, we are aware of third parties who are actively researching ansamycin analogs that are similar to our lead candidate, IPI-504. These third
parties have pending applications related to these analogs, but we have the first published application covering IPI-504. It is possible that an interference proceeding could be declared between our application covering IPI-504 and one or more of
these third party applications. An adverse decision in an interference proceeding may result in the loss of rights under a patent or patent application. In addition, the cost of interference proceedings could be substantial.

Claims by third parties of intellectual property infringement would require us to spend time and money and could deprive us of valuable rights needed to develop or
commercialize our drug candidates.

Our commercial success will depend on whether there are third party patents, patent applications
and other intellectual property relevant to our potential products that may block or hinder our ability to develop and commercialize our drug candidates or processes. Furthermore, we may not have identified all U.S. and foreign patents or published
applications that may affect our business either by blocking our ability to commercialize our drugs or by covering similar technologies that affect the applicable market. In addition, we may undertake research and development with respect to
potential products even when we are aware of third party patents that may be relevant to such potential products, on the basis that we may challenge or license such patents. Although we are not currently aware of any litigation or other proceedings
or third party claims of intellectual property infringement related to our drug candidates, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain
patents and claim that the use of our technologies infringes these patents or that we are employing their proprietary technology without authorization. We could incur substantial costs and diversion of management and technical personnel in defending
against any claims that the use of our technologies infringes upon any patents, or defending against any claim that we are employing any proprietary technology without authorization. The outcome of patent litigation is subject to uncertainties that
cannot be adequately quantified in advance, including the demeanor and credibility of witnesses and the identity of the adverse party, especially in biotechnology related patent cases that may turn on the testimony of experts as to technical facts
upon which experts may reasonably disagree. In the event of a successful claim of infringement against us, we may be required to:



| |  |  | pay substantial damages;
| | - |  | ------------------------



| |  |  | stop developing, commercializing and selling the infringing drug candidates or approved products;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | develop non-infringing products, technologies and methods; and
| | - |  | --------------------------------------------------------------



| |  |  | obtain one or more licenses from other parties, which could result in our paying substantial royalties or the granting of cross-licenses to our technologies.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

If this were to occur, we may be unable to commercialize the affected products, or we may elect to cease certain of our
business operations, which could severely harm our business.

We may undertake infringement or other legal proceedings against third parties, causing
us to spend substantial resources on litigation and exposing our own intellectual property portfolio to challenge.

Competitors may
infringe our patents or successfully avoid them through design innovation. To prevent infringement or unauthorized use, we may need to file infringement suits, which are expensive and time-consuming. In an infringement proceeding, a court may decide
that one or more of our patents is not valid. Even if the validity of our patents is upheld, a court may refuse to stop the other party from using the technology at issue on the ground that the other partys activities are not covered by our
patents. In this case, third parties may be able to use our patented technology without paying licensing fees or royalties. Policing unauthorized use



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of our intellectual property is difficult, and we may not be able to prevent misappropriation of our proprietary rights, particularly in countries where the
laws may not protect such rights as fully as in the United States. Furthermore, it is unclear how much protection, if any, will be given to our patents if we attempt to enforce them and they are challenged in court or in other proceedings. Although
third parties may challenge our rights to, or the scope or validity of, our patent rights, we have not received any communications from third parties challenging our patent applications covering our drug candidates.

We may be subject to claims that we or our employees have wrongfully used or disclosed alleged trade secrets of their former employers, which could result in
substantial costs to defend such claims and may divert managements attention from the operation of our business.

As is
commonplace in our industry, we employ individuals who were previously employed at 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 we or these employees 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.

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

In order to protect our proprietary technology and processes, we rely in part on confidentiality agreements with our corporate partners, employees,
consultants, outside scientific collaborators and sponsored researchers and other advisors. We require each of these individuals and entities to execute a confidentiality agreement at the commencement of a relationship with us. These agreements may
not effectively prevent disclosure of confidential information, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information or other breaches of the agreements.

In addition, we rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. Trade
secrets are, however, difficult to protect. Others may independently discover our trade secrets and proprietary information, and in such case we could not assert any trade secret rights against such party. Enforcing a claim that a party illegally
obtained and is using our trade secrets is difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Costly and time-consuming litigation
could be necessary to seek to enforce and determine the scope of our proprietary rights and could result in a diversion of managements attention, and failure to obtain or maintain trade secret protection could adversely affect our competitive
business position.

If the owners of intellectual property we have licensed do not properly maintain or enforce the licensed intellectual property,
our competitive position and business prospects may be harmed.

We have entered into license agreements that give us rights to third
party intellectual property, and we may enter into similar agreements in the future. Our success will depend in part on the ability of any key licensors to obtain, maintain and enforce patent protection for their intellectual property, in particular
those patents to which we have secured exclusive rights. Our licensors may not successfully prosecute the patent applications to which we are licensed. Even if patents issue in respect of these patent applications, our licensors may fail to maintain
these patents, may decide not to pursue litigation against other companies that are infringing these patents, or may pursue such litigation less aggressively than we would. Without protection for the intellectual property we license, other companies
might be able to offer substantially identical products for sale, which could adversely affect our competitive business position and harm our business prospects.

If we fail to obtain necessary or useful licenses to intellectual property, we could encounter substantial delays in the research, development and commercialization of our drug candidates.

We may decide to in-license technology that we deem necessary or useful for our business. We may not be able to obtain these licenses at a reasonable
cost, or at all. If we do not obtain necessary licenses, we could encounter substantial delays in developing and commercializing our drug candidates while we attempt to develop alternative technologies, methods and drug candidates, which we may not
be able to accomplish. Furthermore, if we fail to comply with our obligations under our third party license agreements, we could lose license rights that are important to our business.

Risks Associated with Our Common Stock

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

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



| |  |  | the results of our current and any future clinical trials of IPI-504 and our other drug candidates;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the results of preclinical studies and planned clinical trials of our discovery-stage and preclinical programs;
| | - |  | ---------------------------------------------------------------------------------------------------------------



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| |  |  | the entry into, or termination of, key agreements, including key strategic alliance agreements;
| | - |  | -----------------------------------------------------------------------------------------------



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



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



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



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



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



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



| |  |  | the loss of key employees;
| | - |  | --------------------------



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



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



| |  |  | future sales of, and the trading volume in, our common stock;
| | - |  | -------------------------------------------------------------



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



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

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

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

We do not anticipate paying cash dividends. Therefore, you must rely on stock appreciation for any return on your investment.

We anticipate retaining our earnings, if any, for future growth. Therefore, we do not anticipate paying cash dividends in the
future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.

Anti-takeover provisions in our stockholder rights plan and in our charter and bylaws may prevent or frustrate attempts by stockholders to change the board of directors or current management and could make a
third party acquisition of us difficult.

We are a party to a stockholder rights plan, also referred to as a poison pill, which is
intended to deter a hostile takeover by making any proposed acquisition of us more expensive and less desirable to the potential acquirer. The stockholder rights plan and our certificate of incorporation and bylaws, each as amended, contain
provisions that 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. These
provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.



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

(b) The registration statement (File No. 333-36638) for DPIs initial public offering was declared effective by the SEC on July 27, 2000. DPI received net proceeds from the offering of approximately $94.7 million. From that
date through the completion of the merger on September 12, 2006, DPI used approximately $18.5 million of the net proceeds for acquisitions of companies, $6.0 million for prepaid μARCS royalties, $16.8 million for capital expenditures and
$4.3 million for costs associated with restructuring. Following the completion of the merger through March 31, 2007, we used approximately $9.2 million on our Hsp 90 and Hedgehog pathway inhibitor programs and for general corporate purposes.



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



| | (a) | Exhibits
| | --- | --------

The exhibits listed in the
Exhibit Index are included in this report.



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SIGNATURES

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



|                   |  |                                |  |                                                                                     
|------------------ |  | ------------------------------ |  | ------------------------------------------------------------------------------------
|                   |  | INFINITY PHARMACEUTICALS, INC.
|                   |  |                               
|Dated: May 9, 2007 |  | By:                            |  | /s/ Adelene Q. Perkins                                                              
|                   |  |                                |  | Adelene Q. Perkins Chief Financial Officer &
Treasurer (Principal Financial Officer)



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EXHIBIT INDEX



|            |  |                                                                                                                                                                                                                                                                                                                                                     
|----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                         
|3.1         |  | Certificate of Incorporation of the Registrant. Previously filed as Exhibit 3.2 to the Registrants Registration Statement on Form S-1 filed on June 23, 2000 (File No. 333-36638) and
incorporated herein by reference.                                                                                                                            
|            | 
|3.2         |  | Amendment to the Registrants Certificate of Incorporation, effecting a 1-to-4 reverse stock split of Discovery Partners common stock. Previously filed as Exhibit 3.2 to the
Registrants Current Report on Form 8-K filed on September 18, 2006 (File No. 000-31141) and incorporated herein by reference.                                        
|            | 
|3.3         |  | Amendment to the Registrants Certificate of Incorporation, changing the name of the corporation from Discovery Partners International, Inc. to Infinity Pharmaceuticals, Inc. Previously
filed as Exhibit 3.3 to the Registrants Current Report on Form 8-K filed on September 18, 2006 (File No. 000-31141) and incorporated herein by reference.
|            | 
|3.4         |  | Bylaws of the Registrant. Previously filed as Exhibit 3.4 to the Registrants Registration Statement on Form S-1 filed on June 23, 2000 (File No. 333-36638) and incorporated herein by
reference.                                                                                                                                                  
|            | 
|3.5         |  | Amendment to the Registrants Amended and Restated Bylaws. Previously filed as Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on September 18, 2006 (File No.
000-31141) and incorporated herein by reference.                                                                                                                    
|            | 
|31.1        |  | Certification of principal executive officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                               
|            | 
|31.2        |  | Certification of principal financial officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                                                                                                                                                                                                               
|            | 
|32.1        |  | Certification of principal executive officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     
|            | 
|32.2        |  | Certification of principal financial officer pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                     



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