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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q







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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2011

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: 1-33428





Pharmasset, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|DELAWARE                                                       |  | 98-0406340                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|303-A College Road East Princeton, New Jersey                  |  | 08540                            
|(Address of registrants principal executive offices)          |  | (Zip Code)                       

(609) 613-4100

(Telephone number, including area code)

N/A

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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.    x  Yes     ̈  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     ̈  Yes     ̈  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  | x
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  |  ̈

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

The number of shares of the registrants common stock, $0.001 par value, outstanding as of April 30, 2011 was 37,184,091.









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PHARMASSET, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2011

INDEX



|           |  |                                                                                                           |    |  |    | 
|---------- |  | --------------------------------------------------------------------------------------------------------- | -- |  | -- | 
|           |  | Page                                                                                                      |   
|PART 1.    |  | FINANCIAL INFORMATION                                                                                     |    |  |    | 
|           |  |                                                                                                          
|Item 1.    |  | Financial Statements                                                                                      |    |  | 4  | 
|           |  |                                                                                                          
|           |  | Condensed Balance Sheets as of March 31, 2011 (Unaudited) and September 30, 2010                          |    |  | 4  | 
|           |  |                                                                                                          
|           |  | Condensed Statements of Operations (Unaudited) for the Three and Six Months Ended March 31, 2011 and 2010 |    |  | 5  | 
|           |  |                                                                                                          
|           |  | Condensed Statements of Cash Flows (Unaudited) for the Six Months Ended March 31, 2011 and 2010           |    |  | 6  | 
|           |  |                                                                                                          
|           |  | Notes to Financial Statements (Unaudited)                                                                 |    |  | 7  | 
|           |  |                                                                                                          
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                     |    |  | 20 | 
|           |  |                                                                                                          
|Item 4.    |  | Controls and Procedures                                                                                   |    |  | 46 | 
|           |  |                                                                                                          
|PART II.   |  | OTHER INFORMATION                                                                                         |    |  |    | 
|           |  |                                                                                                          
|Item 1.    |  | Legal Proceedings                                                                                         |    |  | 46 | 
|           |  |                                                                                                          
|Item 1A.   |  | Risk Factors                                                                                              |    |  | 47 | 
|           |  |                                                                                                          
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                               |    |  | 47 | 
|           |  |                                                                                                          
|Item 6.    |  | Exhibits                                                                                                  |    |  | 47 | 
|           | 
|SIGNATURES |  |                                                                                                           | 49 | 

The Company,
Pharmasset, we, and us as used in this Form 10-Q refer to Pharmasset, Inc., a Delaware corporation. Pharmasset, our logo and Racivir are our trademarks. Other trademarks mentioned in this Form 10-Q are the
property of their respective owners.



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FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. The forward-looking statements are principally contained in the
sections entitled Business and Managements Discussion and Analysis of Financial Condition and Results of Operations. These statements involve known and unknown risks, uncertainties, and other factors that may cause our
actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by the forward-looking statements. For this purpose, any statement that is not a statement of
historical fact should be considered a forward-looking statement. We may, in some cases, use words such as project, believe, anticipate, plan, expect, estimate,
intend, potential, or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. These forward-looking statements include, but are not limited to, statements about the
following:



| |  |  | our product development efforts, primarily with respect to the preclinical studies, clinical trial results and regulatory approvals of PSI-7977,
PSI-938, and mericitabine (or RG7128) for the treatment of hepatitis C virus (HCV);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the initiation, termination, completion, or success of preclinical studies and clinical trials for our product candidates;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | clinical trial initiation and completion dates, anticipated regulatory filing dates, and regulatory approvals for our product candidates;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the commercialization of our product candidates;
| | - |  | ------------------------------------------------



| |  |  | our collaboration agreement with F. Hoffmann-LaRoche Ltd. and Hoffmann-La Roche Inc. (collectively, Roche), including potential milestone
or royalty payments thereunder, and our clinical collaboration agreement with Bristol-Myers Squibb Company (BMS);
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our intentions regarding the establishment of collaborations or the licensing of product candidates or intellectual property;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope and enforceability of our intellectual property rights, including claims that we or our collaborators may infringe third party intellectual
property rights or be otherwise required to pay license fees under such third party rights;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our intentions to expand our capabilities and hire additional employees;
| | - |  | ------------------------------------------------------------------------



| |  |  | anticipated operating losses, future revenues, research and development expenses, and the need for additional financing; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | our financial performance.
| | - |  | --------------------------

Forward-looking statements reflect our current views with respect to future events and are subject to risks and uncertainties. We discuss many of the risks and uncertainties associated with our business
in greater detail in our Annual Report on Form 10-K for the fiscal year ended September 30, 2010 under the heading Risk Factors. Given these risks and uncertainties, you should not place undue reliance on these forward-looking
statements. All forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q.

You should read this Quarterly Report on Form 10-Q and the documents that we reference in it completely and with the understanding that our actual future results may be materially different from what we
expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date on the front cover of this Quarterly Report on Form 10-Q only. Our business, financial condition, results of operations, and
prospects may change. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to
previously disclosed information. The forward-looking statements contained in this Quarterly Report on Form 10-Q are subject to the safe-harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 21E of the
Securities Exchange Act of 1934, as amended (Exchange Act).



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##### Table of Contents

PART 1. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL 
STATEMENTS
|------- | ---------------------

PHARMASSET, INC.

CONDENSED BALANCE SHEETS

(in thousands, except par value, share and per share amounts)



|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------------- | - | -------- | -
|                                                                                                                                                                              |  | As ofMarch 31,2011 |          |   | As ofSeptember 30,2010 |  
|                                                                                                                                                                              |  | (unaudited)        |          |   |                        |  
|ASSETS                                                                                                                                                                        |  |                    |          |   |                        |   |          |  
|CURRENT ASSETS:                                                                                                                                                               |  |                    |          |   |                        |   |          |  
|Cash and cash equivalents                                                                                                                                                     |  | $                  | 208,317  |   |                        | $ | 127,081  |  
|Amounts due from collaboration partner                                                                                                                                        |  |                    |         |   |                        |   | 6        |  
|Prepaid expenses and other current assets                                                                                                                                     |  |                    | 856      |   |                        |   | 718      |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total current assets                                                                                                                                                          |  |                    | 209,173  |   |                        |   | 127,805  |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|                                                                                                                                                                              |  |                   
|EQUIPMENT AND LEASEHOLD IMPROVEMENTS:                                                                                                                                         |  |                    |          |   |                        |   |          |  
|Equipment                                                                                                                                                                     |  |                    | 4,704    |   |                        |   | 4,060    |  
|Leasehold improvements                                                                                                                                                        |  |                    | 1,837    |   |                        |   | 1,837    |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|                                                                                                                                                                              |  |                    | 6,541    |   |                        |   | 5,897    |  
|Less accumulated depreciation and amortization                                                                                                                                |  |                    | (4,465   | ) |                        |   | (4,184   | )
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total equipment and leasehold improvements, net                                                                                                                               |  |                    | 2,076    |   |                        |   | 1,713    |  
|Restricted cash                                                                                                                                                               |  |                    | 100      |   |                        |   | 100      |  
|Other assets                                                                                                                                                                  |  |                    | 140      |   |                        |   | 143      |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total                                                                                                                                                                         |  | $                  | 211,489  |   |                        | $ | 129,761  |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|                                                                                                                                                                              |  |                   
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                          |  |                    |          |   |                        |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                          |  |                    |          |   |                        |   |          |  
|Current portion of long-term debt                                                                                                                                             |  | $                  | 6,081    |   |                        | $ | 8,705    |  
|Accounts payable                                                                                                                                                              |  |                    | 4,163    |   |                        |   | 5,037    |  
|Accrued expenses                                                                                                                                                              |  |                    | 5,775    |   |                        |   | 5,863    |  
|Deferred rent                                                                                                                                                                 |  |                    | 26       |   |                        |   | 25       |  
|Deferred revenue                                                                                                                                                              |  |                    | 985      |   |                        |   | 985      |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total current liabilities                                                                                                                                                     |  |                    | 17,030   |   |                        |   | 20,615   |  
|                                                                                                                                                                              |  |                   
|Deferred rent                                                                                                                                                                 |  |                    | 100      |   |                        |   | 93       |  
|Deferred revenue                                                                                                                                                              |  |                    | 1,478    |   |                        |   | 1,971    |  
|Long-term debt, net of discount of $57 and $150 as of March 31, 2011 and September 30, 2010,
respectively                                                                     |  |                    | 816      |   |                        |   | 2,934    |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total liabilities                                                                                                                                                             |  |                    | 19,424   |   |                        |   | 25,613   |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|                                                                                                                                                                              |  |                   
|Commitments and contingencies                                                                                                                                                 |  |                    |          |   |                        |   |          |  
|                                                                                                                                                                              |  |                   
|STOCKHOLDERS EQUITY:                                                                                                                                                         |  |                    |          |   |                        |   |          |  
|Common stock, $0.001 par value, 100,000,000 shares authorized, 37,172,095 and 34,043,898 shares issued and outstanding at
March 31, 2011 and September 30, 2010, respectively |  |                    | 37       |   |                        |   | 34       |  
|Warrants to purchase 38,727 shares of common stock for $12.05 per share at March 31, 2011, and 127,248 shares of common
stock for $12.05 per share at September 30, 2010      |  |                    | 380      |   |                        |   | 1,230    |  
|Additional paid-in capital                                                                                                                                                    |  |                    | 468,475  |   |                        |   | 336,351  |  
|Accumulated deficit                                                                                                                                                           |  |                    | (276,827 | ) |                        |   | (233,467 | )
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total stockholders equity                                                                                                                                                    |  |                    | 192,065  |   |                        |   | 104,148  |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  
|Total                                                                                                                                                                         |  | $                  | 211,489  |   |                        | $ | 129,761  |  
|                                                                                                                                                                              |  |                    |          |   |                        |   |          |  

See notes to financial statements.



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PHARMASSET, INC.

CONDENSED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except share and per share amounts)



|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|------------------------------------------------------ |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                       |  | Three Months
EndedMarch 31, |            |   | Six Months
EndedMarch 31, |  
|                                                       |  | 2011                        |            |   | 2010                      |   |            | 2011 |  |   | 2010       |  
|Revenues                                               |  | $                           | 247        |   |                           | $ | 251        |      |  | $ | 493        |   |  | $ | 520        |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                       |  |                             |            |  
|COSTS AND EXPENSES:                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Research and development                               |  |                             | 16,995     |   |                           |   | 12,028     |      |  |   | 35,763     |   |  |   | 21,225     |  
|General and administrative                             |  |                             | 3,773      |   |                           |   | 3,647      |      |  |   | 8,849      |   |  |   | 7,887      |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total costs and expenses                               |  |                             | 20,768     |   |                           |   | 15,675     |      |  |   | 44,612     |   |  |   | 29,112     |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                       |  |                             |            |  
|Operating loss                                         |  |                             | (20,521    | ) |                           |   | (15,424    | )    |  |   | (44,119    | ) |  |   | (28,592    | )
|                                                       |  |                             |            |  
|Investment income                                      |  |                             | 1          |   |                           |   | 1          |      |  |   | 4          |   |  |   | 5          |  
|Other income                                           |  |                             |           |   |                           |   |           |      |  |   | 489        |   |  |   |           |  
|Interest expense                                       |  |                             | (310       | ) |                           |   | (638       | )    |  |   | (707       | ) |  |   | (1,344     | )
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Loss before income taxes                               |  |                             | (20,830    | ) |                           |   | (16,061    | )    |  |   | (44,333    | ) |  |   | (29,931    | )
|Provision (benefit) for income taxes                   |  |                             | (973       | ) |                           |   |           |      |  |   | (973       | ) |  |   |           |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Net loss                                               |  | $                           | (19,857    | ) |                           | $ | (16,061    | )    |  | $ | (43,360    | ) |  | $ | (29,931    | )
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                       |  |                             |            |  
|Net loss per share: basic and diluted                  |  | $                           | (0.55      | ) |                           | $ | (0.54      | )    |  | $ | (1.23      | ) |  | $ | (1.04      | )
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|                                                       |  |                             |            |  
|Weighted average shares outstanding: basic and diluted |  |                             | 36,293,898 |   |                           |   | 29,522,630 |      |  |   | 35,188,377 |   |  |   | 28,898,334 |  
|                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  

See notes to financial statements.



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PHARMASSET, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)



|                                                                                                                      |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                      |  | Six Months EndedMarch 31, |        
|                                                                                                                      |  | 2011                      |         |   | 2010 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                                 |  |                           |         |   |      |   |         |  
|Net loss                                                                                                              |  | $                         | (43,360 | ) |      | $ | (29,931 | )
|Adjustments to reconcile net loss to net cash used in operating activities:                                           |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                                                         |  |                           | 281     |   |      |   | 501     |  
|Non-cash stock compensation                                                                                           |  |                           | 3,741   |   |      |   | 3,044   |  
|Non-cash interest expense                                                                                             |  |                           | 113     |   |      |   | 223     |  
|Changes in operating assets and liabilities:                                                                          |  |                           |         |   |      |   |         |  
|Amounts due from collaboration partner, prepaid expenses and other assets                                             |  |                           | (149    | ) |      |   | 1,226   |  
|Accounts payable                                                                                                      |  |                           | (874    | ) |      |   | 1,678   |  
|Accrued expenses                                                                                                      |  |                           | (87     | ) |      |   | (3,535  | )
|Deferred rent                                                                                                         |  |                           | 7       |   |      |   | (62     | )
|Deferred revenue                                                                                                      |  |                           | (493    | ) |      |   | (493    | )
|                                                                                                                      |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                                                                 |  |                           | (40,821 | ) |      |   | (27,349 | )
|                                                                                                                      |  |                           |         |   |      |   |         |  
|                                                                                                                      |  |                          
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                                 |  |                           |         |   |      |   |         |  
|Purchase of equipment                                                                                                 |  |                           | (644    | ) |      |   | (25     | )
|                                                                                                                      |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                                                                 |  |                           | (644    | ) |      |   | (25     | )
|                                                                                                                      |  |                           |         |   |      |   |         |  
|                                                                                                                      |  |                          
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                 |  |                           |         |   |      |   |         |  
|Proceeds from exercise of stock options                                                                               |  |                           | 4,155   |   |      |   | 1,014   |  
|Principal payments on long-term debt                                                                                  |  |                           | (4,835  | ) |      |   | (3,737  | )
|Proceeds from issuance of common stock, net of issuance costs of $6,182 and $1,595 during 2011 and 2010,
respectively |  |                           | 123,381 |   |      |   | 32,725  |  
|                                                                                                                      |  |                           |         |   |      |   |         |  
|Net cash provided by financing activities                                                                             |  |                           | 122,701 |   |      |   | 30,002  |  
|                                                                                                                      |  |                           |         |   |      |   |         |  
|                                                                                                                      |  |                          
|Net increase in cash and cash equivalents                                                                             |  |                           | 81,236  |   |      |   | 2,628   |  
|Cash and cash equivalents - Beginning of period                                                                       |  |                           | 127,081 |   |      |   | 58,408  |  
|                                                                                                                      |  |                           |         |   |      |   |         |  
|Cash and cash equivalents - End of period                                                                             |  | $                         | 208,317 |   |      | $ | 61,036  |  
|                                                                                                                      |  |                           |         |   |      |   |         |  
|                                                                                                                      |  |                          
|SUPPLEMENTAL DISCLOSURES:                                                                                             |  |                           |         |   |      |   |         |  
|Cash paid during the period for:                                                                                      |  |                           |         |   |      |   |         |  
|Interest                                                                                                              |  | $                         | 594     |   |      | $ | 1,121   |  
|                                                                                                                      |  |                          
|Noncash transactions:                                                                                                 |  |                           |         |   |      |   |         |  
|Value of warrants exercised by converting warrants into shares of common stock (net issuance method)                |  | $                         | 850     |   |      | $ |        |  

See notes to financial statements.



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Pharmasset, Inc.

Notes to Financial Statements (Unaudited)

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business - Pharmasset, Inc. is a clinical-stage pharmaceutical company committed to discovering, developing,
and commercializing novel drugs to treat viral infections. The Companys primary focus is on the development of nucleoside/tide analogs as oral therapeutics for the treatment of chronic hepatitis C virus (HCV) infection.
Nucleoside/tide analogs are a class of compounds which act as alternative substrates for the viral polymerase, thus inhibiting viral replication. The Company currently has three clinical-stage product candidates, two of which it is developing itself
and one of which it is developing with a strategic partner. The Company is also advancing certain preclinical candidates in preparation for clinical development. Pharmasset, Inc.s three clinical stage product candidates are:



| |  |  | PSI-7977, an HCV uracil nucleotide analog polymerase inhibitor that is in a 12-week Phase 2b dose-finding study (PROTON) in combination
with Pegasys® (pegylated interferon) plus Copegus® (ribavirin), the standard of care for treating HCV (SOC) in subjects with HCV genotypes 1, 2 or 3. In addition, PSI-7977 is in an exploratory Phase 2
study (ELECTRON) in combination with ribavirin, administered without and with varying durations of pegylated interferon, in subjects with HCV genotypes 2 or 3. We also initiated ATOMIC, a 12/24 week Phase 2b study of PSI-7977
in combination with SOC in subjects with HCV genotypes 1, 4, 5 or 6 during March 2011;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PSI-938, an HCV guanine nucleotide analog polymerase inhibitor that recently reported results from NUCLEAR, Part 2 of a Phase 1 study with
PSI-7977 in subjects with HCV genotype 1; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mericitabine (or RG7128), an HCV cytosine nucleoside polymerase inhibitor the Company is developing through a strategic collaboration with F.
Hoffmann-La Roche Ltd and Hoffmann-La Roche Inc. (collectively, Roche). Mericitabine is in two phase 2b studies, PROPEL and JUMP-C, in combination with SOC in subjects with HCV genotypes 1 or 4. Mericitabine is
also in the INFORM-SVR study in combination with ritonavir-boosted danoprevir with and without
Copegus® (ribavirin). The INFORM-SVR study is part of a series of studies designed to investigate the
combination of two oral, direct acting antivirals (DAAs) in the absence of pegylated interferon. All of the studies involving mericitabine are being conducted by Roche.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company is subject to risks common to companies in the pharmaceutical industry including, but not limited to, risks relating to
product development, protection of proprietary intellectual property, compliance with government regulations, collaboration partners, dependence on key personnel, the need to obtain additional financing, uncertainty of market acceptance of products,
and product liability. (See Part II, Item 1A. - Risk Factors for additional information.)

Basis of
Presentation - The Company was incorporated as Pharmasset, Inc. under the laws of Delaware on June 8, 2004. Management has evaluated subsequent events for disclosure or recognition in the accompanying financial statements up to the
filing of this report.

The accompanying unaudited condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the information and
footnotes required for complete financial statements. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, which include normal recurring adjustments, necessary to present fairly the
Companys interim financial information. The accompanying unaudited condensed financial



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statements and notes to the condensed financial statements should be read in conjunction with the audited financial statements for the fiscal year ended September 30, 2010 included in the
Companys Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) on November 23, 2010.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates - The preparation of the Companys financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents - Cash and cash
equivalents represent cash and highly liquid investments purchased within three months of the maturity date and consist primarily of mutual and/or money market funds.

Investments - The Company invests available cash primarily in mutual and money market funds, bank certificates of deposit and investment-grade commercial paper, corporate notes, and
government securities. All investments are classified as available-for-sale and are carried at fair market value with unrealized gains and losses recorded in accumulated other comprehensive (loss) income. For purposes of determining realized gains
and losses, the cost of securities sold is based on specific identification.

Deferred Offering Costs - Costs
incurred in connection with an equity offering are deferred and, upon completion of the equity offering, are applied against the proceeds from the offering.

Deferred Financing Costs - Costs incurred in connection with debt offerings are deferred (and included in prepaid expenses and other current assets and other long-term assets on the balance
sheet) and amortized as interest expense over the term of the related debt using the effective interest method. The amortization expense is included in interest expense in the statements of operations.

Equipment and Leasehold Improvements - Equipment and leasehold improvements are recorded at cost and are depreciated using
the straight-line method over the following estimated useful lives of the assets: computer equipmentthree years; laboratory and office equipmentseven years; and leasehold improvementsthe lesser of the estimated life of the asset or
the lease term. Expenditures for maintenance and repairs are expensed as incurred. Capital expenditures which improve and extend the life of the related assets are capitalized.

Intangible Assets - Intangible assets are recorded at cost and are amortized on a straight-line basis over the estimated
useful life. The estimated useful life is determined based upon a review of several factors including the nature of the asset, its expected use, length of the agreement and the period over which benefits are expected to be received from the use of
the asset.

Impairment of Long-Lived Assets - The Company continually evaluates whether events or circumstances
have occurred that indicate the estimated remaining useful lives of long-lived assets may require revision or that the carrying value of these assets may be impaired. To determine whether assets have been impaired, the estimated undiscounted future
cash flows for the estimated remaining useful life of the respective assets are compared to the carrying value. To the extent that the undiscounted future cash flows are less than the carrying value, a new fair value of the asset is required to be
determined. If such fair value is less than the current carrying value, the asset is written down to its estimated fair value.

Fair Value of Financial Instruments - The Company categorizes its financial assets based on the priority of the inputs to
the valuation technique into a three-level fair value hierarchy as set forth below. Except for its debt with its lender (See Note 6), the Company does not have any financial liabilities that are required to be measured at fair value on a
recurring basis. If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets recorded on the balance sheets are categorized as follows:



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| |  |  | Level 1  Financial assets whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market which the
company has the ability to access at the measurement date (examples include active exchange-traded equity securities and most U.S. Government and agency securities).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2  Financial assets whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based
on quoted prices of instruments with similar attributes in active markets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3  Financial assets whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant
to the overall fair value measurement. These inputs reflect managements own assumptions about the assumptions a market participant would use in pricing the asset.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of March 31, 2011 and September 30, 2010, the Company did not have any Level 2 or 3 financial assets and the Companys
Level 1 financial assets were as follows:



|                       |  |                |         |  |                   |   |         | 
|---------------------- |  | -------------- | ------- |  | ----------------- | - | ------- | 
|                       |  | Level 1        |        
|                       |  | March 31,2011  |         |  | September 30,2010 |  
|                       |  | (in thousands) |        
|Money Market Funds     |  | $              | 208,317 |  |                   | $ | 127,081 | 
|Certificate of Deposit |  |                | 100     |  |                   |   | 100     | 
|                       |  |                |         |  |                   |   |         | 
|Total                  |  | $              | 208,417 |  |                   | $ | 127,181 | 
|                       |  |                |         |  |                   |   |         | 

The Certificate of Deposit included above as of March 31, 2011 and September 30, 2010 is for a
letter of credit in place to support a performance bond required to ensure payment of import duties on supplies used in the Companys development programs, and is classified as Restricted Cash on the balance sheet as of March 31, 2011 and
September 30, 2010.

Concentrations of Credit Risk, Suppliers, and Revenues - The Companys financial
instruments that potentially subject it to concentrations of credit risk are cash and cash equivalents and investments. The Company invests cash that is not currently being used in operations in accordance with its investment policy. The policy
allows for the purchase of low-risk, investment grade debt securities issued by the United States government and very highly-rated banks and corporations, subject to certain concentration limits. The policy allows for maturities that are not longer
than two years for individual securities and an average of one year for the portfolio as a whole.

The Company relies on
certain materials used in its development process, some of which are procured from a single source. The failure of a supplier, including a subcontractor, to deliver on schedule could delay or interrupt the development process and thereby adversely
affect the Companys operating results.

During the three and six months ended March 31, 2011 and 2010, the Company
derived all of its revenues from one customer (See Note 4).

Revenue Recognition - The Company recognizes
revenues when all of the following four criteria are present: persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.



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The Companys revenues are primarily related to its collaboration agreement with Roche.
This agreement provides for various types of payments to the Company, including non-refundable upfront license fees, research and/or development payments, and milestone payments.

Where the Company has continuing performance obligations under the terms of a collaborative arrangement, non-refundable upfront license
payments received upon contract signing are recorded as deferred revenue and recognized as revenue as the related activities are performed. The period over which these activities are to be performed is based upon managements estimate of the
development period. Changes in managements estimate could change the period over which revenue is recognized. Research and/or development payments are recognized as revenues as the related research and/or development activities are performed
and when the Company has no continuing performance obligations related to the research and development payment received.

Where the Company has no continuing involvement under a collaborative arrangement, the Company records nonrefundable license fee revenues
when the Company has the contractual right to receive the payment, in accordance with the terms of the collaboration agreement, and records milestones upon appropriate notification to the Company of achievement of the milestones by the collaborative
partner.

Effective October, 1, 2010, the Company adopted the new accounting standards for determining whether the milestone
method of revenue recognition is appropriate. The Company recognizes revenue from milestone payments when earned, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the
agreement and (ii) the Company does not have ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment
(a) is commensurate with either the vendors performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the vendors performance to achieve the
milestone, (b) relates solely to past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. Any amounts received under the
agreement in advance of performance, if deemed substantive, are recorded as deferred revenue and recognized as revenue as the Company completes its performance obligations.

Effective October 1, 2010, the Company also adopted the new accounting standards for revenue recognition for multiple deliverable revenue arrangements. Each deliverable within a multiple-deliverable
revenue arrangement is accounted for as a separate unit of accounting under the guidance of the new authoritative guidance if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone
basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

This new authoritative guidance amends previously issued guidance to eliminate the residual method of allocation for multiple-deliverable
revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The new authoritative guidance also establishes a selling price hierarchy
for determining the selling price of a deliverable, which includes (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific objective evidence is not available, and (3) estimated selling price
if neither vendor-specific nor third-party evidence is available. Additionally, it expands the disclosure requirements related to a vendors multiple-deliverable revenue arrangements.

Deferred revenue associated with a non-refundable payment received under a collaborative agreement that is terminated prior to its
completion results in an immediate recognition of the deferred revenue.

Research and Development Expenses -
Research and development expenses consist primarily of costs of clinical trials (including active pharmaceutical ingredients, or API), salaries and related personnel expenses, fees paid to external service providers, costs of preclinical
studies, laboratory supplies, costs for facilities and equipment, and the costs of intangibles that are purchased from others for use in research and development activities, such as in-licensed product candidates, that have no alternative future
uses. Research and development expenses are included in operating expenses when incurred. Reimbursements received from the Companys collaborator(s) for third-party research and development expenses incurred by the Company on their behalf are
recorded as a contra-expense.



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Amounts due from collaborators for reimbursement of research and development expenses are
recorded on the balance sheets as Amounts due from collaboration partner.

Nonrefundable advance payments for
goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the
goods or services are no longer expected to be provided.

Stock-Based Compensation - The Company recognizes
stock compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value of those awards (with limited exceptions). The grant-date fair value of the award is recognized as compensation expense on a
straight-line basis over the requisite service period. Equity instruments granted to consultants are periodically valued and recorded as stock compensation expense as the equity instrument vests.

Stock-based compensation expense is included in both research and development expenses and in general and administrative expenses in the
statements of operations. Since the Companys stock was not publicly traded prior to April 27, 2007, the expected volatility was calculated for each equity award granted based on the peer method. The Company identified
companies that trade publicly within the pharmaceutical industry that have similar SIC codes, employee count and revenues. Prior to October 1, 2006, the Company had chosen the weekly high price volatility for these companies for a period of
five years. Subsequent to October 1, 2006, the Company has used the weekly high price for these companies for a period of six years to coincide with the expected term.

Income Taxes - The Company accounts for income taxes under the asset and liability method. The Company provides deferred tax assets and liabilities for the expected future tax consequences
of temporary differences between the Companys financial statement carrying amounts and the tax bases of assets and liabilities using enacted tax rates expected to be in effect in the years in which the differences are expected to reverse. A
valuation allowance is provided to reduce the deferred tax assets to the amount that is expected to be realized.

The Company
uses a comprehensive model for how it recognizes, measures, presents, and discloses in its financial statements uncertain tax positions that the Company has taken or expects to take on a tax return (including a decision whether to file or not to
file a return in a particular jurisdiction). Under this comprehensive model, the financial statements reflect expected future tax consequences of such positions presuming the taxing authorities full knowledge of the position and all relevant
facts.

As a result of adopting this comprehensive model, there were no changes to the Companys deferred tax assets as
of October 1, 2007. The total amount of unrecognized tax benefits at October 1, 2007 was $0.1 million, all of which would favorably impact the Companys effective tax rate if recognized. Since the unrecognized tax benefit has not been
utilized on the Companys tax returns, there is no liability recorded on the balance sheets. The Company does not have any interest or penalties accrued related to tax positions at adoption. In the event the Company determines that accrual of
interest or penalties are necessary in the future, the amount will be presented as a component of income taxes.

Net
Income (Loss) Per Common Share - Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share
is calculated by dividing net income (loss) by the weighted average number of common shares and other dilutive securities outstanding during the period. Dilutive potential common shares resulting from the assumed exercise of outstanding stock
options and warrants are determined based on the treasury stock method.



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|                                                                                           |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ---------------------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                           |  | Three Months EndedMarch 31,              |         |   | Six Months EndedMarch 31, |  
|                                                                                           |  | 2011                                     |         |   | 2010                      |   |         | 2011 |  |   | 2010    |  
|                                                                                           |  | (In thousands, except per share amounts) |        
|Numerator:                                                                                 |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                                   |  | $                                        | (19,857 | ) |                           | $ | (16,061 | )    |  | $ | (43,360 | ) |  | $ | (29,931 | )
|                                                                                           |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Denominator:                                                                               |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding used in calculation of basic net loss per share |  |                                          | 36,294  |   |                           |   | 29,523  |      |  |   | 35,188  |   |  |   | 28,898  |  
|Effect of dilutive securities:                                                             |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Common stock options                                                                       |  |                                          |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Common stock warrants                                                                      |  |                                          |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|                                                                                           |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Weighted average common shares outstanding                                                 |  |                                          | 36,294  |   |                           |   | 29,523  |      |  |   | 35,188  |   |  |   | 28,898  |  
|                                                                                           |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net loss per share: basic and diluted                                                      |  | $                                        | (0.55   | ) |                           | $ | (0.54   | )    |  | $ | (1.23   | ) |  | $ | (1.04   | )
|                                                                                           |  |                                          |         |   |                           |   |         |      |  |   |         |   |  |   |         |  

The following table summarizes the securities outstanding at the end of each period with the potential to
become common stock that have been excluded from the computation of diluted net income (loss) per share, as their effect would have been anti-dilutive.



|                                 |  |                 |       |  |      |  |       | 
|-------------------------------- |  | --------------- | ----- |  | ---- |  | ----- | 
|                                 |  | As of March 31, |      
|                                 |  | 2011            |       |  | 2010 | 
|                                 |  | (In thousands)  |      
|Options to purchase common stock |  |                 | 3,022 |  |      |  | 2,923 | 
|Common stock warrants            |  |                 | 39    |  |      |  | 127   | 
|                                 |  |                 |       |  |      |  |       | 
|Total                            |  |                 | 3,061 |  |      |  | 3,050 | 
|                                 |  |                 |       |  |      |  |       | 

Segment Reporting - Operating segments are identified as components of an enterprise about
which separate financial information is available for evaluation by the chief operating decision-maker, or decision-making group, in making decisions regarding resource allocation and assessing performance. The Company has determined that it
operates in one segment, which focuses on developing nucleoside/tide analog drugs for the treatment of viral infections.

Recently Adopted Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Multiple-Deliverable Revenue Arrangements. This
ASU provides new accounting standards for determining whether multiple deliverables exist, how the arrangement should be separated, and how the consideration should be allocated. This guidance requires an entity to allocate revenue in an arrangement
using estimated selling prices of deliverables if a vendor does not have vendor-specific objective evidence or third-party evidence of selling price. The update eliminates the use of the residual method and requires an entity to allocate revenue
using the relative selling price method and also significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. The Company adopted these new accounting standards on October 1, 2010 on a prospective basis.
Adoption of these new accounting standards did not have any impact on the Companys financial position or results of operations.

In April 2010, the FASB issued ASU No. 2010-17, Revenue Recognition  Milestone Method. This ASU provides guidance on the criteria that should be met for determining whether the
milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition, consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the
milestone is achieved only if the milestone meets all criteria to be considered substantive. This standard provides the criteria to be met for a milestone to be considered substantive which includes that: a) performance consideration earned by



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achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of the value of the item delivered as a result of a specific outcome resulting from
performance to achieve the milestone; b) relate to past performance; and c) be reasonable relative to all deliverables and payment terms in the arrangement. The Company adopted these new accounting standards on October 1, 2010 on a prospective
basis. Adoption of these new accounting standards did not have any impact on the Companys financial position or results of operations.

3. ACCRUED EXPENSES

Accrued expenses consisted of the following:



|                                |  |                     |       |  |                         |   |       | 
|------------------------------- |  | ------------------- | ----- |  | ----------------------- | - | ----- | 
|                                |  | As ofMarch 31, 2011 |       |  | As ofSeptember 30, 2010 |  
|                                |  | (In thousands)      |      
|Accrued clinical trial expenses |  | $                   | 2,567 |  |                         | $ | 1,771 | 
|Accrued compensation            |  |                     | 1,202 |  |                         |   | 1,801 | 
|Accrued legal fees              |  |                     | 1,055 |  |                         |   | 1,770 | 
|Other accrued expenses          |  |                     | 951   |  |                         |   | 521   | 
|                                |  |                     |       |  |                         |   |       | 
|                                |  | $                   | 5,775 |  |                         | $ | 5,863 | 
|                                |  |                     |       |  |                         |   |       | 

4. CONTRACT REVENUE AGREEMENTS

The following is a reconciliation between cash payments received and receivable under contract revenue agreements and contract revenues reported:



|                         |  |                             |     |  |                           |   |     |      |  |   |      |  |  |   |     | 
|------------------------ |  | --------------------------- | --- |  | ------------------------- | - | --- | ---- |  | - | ---- |  |  | - | --- | 
|                         |  | Three Months EndedMarch 31, |     |  | Six Months EndedMarch 31, |  
|                         |  | 2011                        |     |  | 2010                      |   |     | 2011 |  |   | 2010 | 
|                         |  | (In thousands)              |     |  | (In thousands)            |  
|Cash received/receivable |  | $                           |    |  |                           | $ | 4   |      |  | $ |     |  |  | $ | 27  | 
|Deferred                 |  |                             |    |  |                           |   |    |      |  |   |     |  |  |   |    | 
|Amortization             |  |                             | 247 |  |                           |   | 247 |      |  |   | 493  |  |  |   | 493 | 
|                         |  |                             |     |  |                           |   |     |      |  |   |      |  |  |   |     | 
|Revenues                 |  | $                           | 247 |  |                           | $ | 251 |      |  | $ | 493  |  |  | $ | 520 | 
|                         |  |                             |     |  |                           |   |     |      |  |   |      |  |  |   |     | 

The Company recorded revenues from the collaboration agreement with Roche, comprising 100% of total revenues
during the three and six months ended March 31, 2011 and 2010. Revenues during each period primarily reflect amortization of up-front and subsequent collaborative and license payments received from Roche previously recorded as deferred revenue.

Roche - In October 2004, the Company entered into a collaboration and license agreement with Roche to develop
PSI-6130 and PSI-6130 prodrugs (including mericitabine) for treating chronic HCV infection, and to discover chemically related nucleoside analog polymerase inhibitors pursuant to a research collaboration. The research collaboration ended in December
2006. The Company granted Roche worldwide rights, excluding Latin America and Korea, to PSI-6130 and its prodrugs (including mericitabine). Roche paid the Company an up-front payment of $8.0 million in 2004 and agreed to pay future research and
development costs. The up-front payment has been recorded as deferred revenue and is being amortized over the estimated development period. The portion of the above payments recorded as deferred revenue on the Companys balance sheets as of
March 31, 2011 and September 30, 2010 was approximately $2.5 million and $3.0 million, respectively. Roche is also required to make certain future payments to the Company upon the achievement of predefined mericitabine development and
marketing milestones in Roches territories. In addition, the Company will receive royalties paid as a percentage of total annual net product sales, if any,



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in Roches territories, and the Company will be entitled to receive one time performance payments should net sales from the product exceed specified thresholds.

The Company retained certain co-promotion rights in the United States. The Company will be required to pay Roche royalties on net product
sales, if any, in the territories the Company has retained. Prior to the transfer of the IND for mericitabine to Roche, which occurred during December 2008, Roche funded and the Company was responsible for preclinical work, the IND submission, and
the initial clinical trial, while Roche managed other preclinical studies and clinical development. Roche reimbursed the Company approximately $24 thousand during the three months ended March 31, 2010 under this agreement, and $38 thousand
during the six months ended March 31, 2010. Roche will continue to fund all of the expenses of, and be responsible for, other preclinical studies and future clinical development of mericitabine in the territories licensed to Roche. Roche and
the Company will continue to jointly oversee all development and marketing activities of mericitabine in the territories licensed to Roche.

The agreement will terminate once there are no longer any royalty or payment obligations. Additionally, Roche may terminate the agreement in whole or in part by providing six months written notice
to the Company. Otherwise, either party may terminate the agreement in whole or in part in connection with a material breach of the agreement by the other party that is not timely cured. In the event of termination, Roche must assign or transfer to
the Company all regulatory filings, trademarks, patents, and preclinical and clinical data related to this collaboration.

5. IN-LICENSE AGREEMENTS

In 1998 and 2004, the Company entered into various license agreements with the University of Georgia Research Foundation (UGARF), Emory University and the University of Alabama at Birmingham
Research Foundation, Inc. (collectively, the Universities) to pursue the research, development, and commercialization of certain human antiviral, anticancer, and antibacterial applications and uses of certain specified technologies.
Under each of these agreements, the Universities have granted an exclusive right and license under the related patents to the Company. The Company and the Universities will share in any proceeds received by the Company related to internal
development or sublicensing of the specified technologies, including milestone payments, fees, and royalties.

In April 2002,
the license agreement between UGARF, Emory University, and the Company dated June 16, 1998 was selectively modified to terminate certain technologies and related rights and obligations.

6. DEBT

On September 30, 2007, the Company entered into a Loan Agreement that allowed the Company to borrow up to $30.0 million in $10.0 million increments (Loan Agreement). The Company borrowed
the first and second $10.0 million increments by signing two Secured Promissory Notes (Notes A and B) on October 5, 2007 and March 28, 2008, respectively. Notes A and B bear interest at 12%. On December 12, 2008, the
Company amended the Loan Agreement and borrowed $3.3 million by signing a Secured Promissory Note (Note C). Note C bears interest at 12.5%. Notes A, B and C are to be repaid over a 45-month period with the first 15 monthly payments
representing interest only followed by 30 equal monthly payments of principal and interest. The principal monthly repayments on each of the following notes begin and end as follows:



|       |  |                |  |                
|------ |  | -------------- |  | ---------------
|Note   |  | Begin          |  | End            
|       |  |               
|Note A |  | March 1, 2009  |  | August 1, 2011 
|Note B |  | August 1, 2009 |  | January 1, 2012
|Note C |  | May 1, 2010    |  | October 1, 2012

Prepayment of
the loans made pursuant to the Loan Agreement is subject to penalty and substantially all of the Companys tangible and intangible assets (except for intellectual property) are pledged as collateral for the Loan Agreement. Future total
principal repayments of the three Notes amount to $3.9 million in fiscal 2011, $3.0 million in fiscal 2012, and $0.1 million in fiscal 2013. There are no additional borrowings available under the Loan Agreement.

Under the Loan Agreement, the Company agreed that in the event its market capitalization is below $90.0 million for 15 consecutive days
in which the principal market for its common stock is open for trading to the public,



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the Company will be required to repay 50% of the then outstanding principal balance of the loans. The Company further agreed that in the event its market capitalization is below $40.0 million for
15 consecutive days in which the principal market for its common stock is open for trading to the public, the Company will be required to repay all of the then outstanding principal balance of the loans.

In conjunction with entering into the Loan Agreement, the Company granted warrants to the lender to purchase shares of the Companys
common stock (See Note 8). Since these warrants were granted in conjunction with entering into the Loan Agreement and with the intention of executing promissory notes, the relative fair value of the warrant was recorded as equity and deferred
interest as the warrants became exercisable and the deferred financing costs and debt discount are being amortized over the term of the promissory notes using the effective interest method.

7. STOCK COMPENSATION

The Companys 1998 Stock Plan (1998 Plan), as amended, was originally adopted by its board of directors during 1998 and subsequently amended in 2000, 2004 and 2006. A maximum of 3,517,015
shares of the Companys common stock were authorized for issuance under the 1998 Plan. Upon the closing of the IPO, which occurred on May 2, 2007, the Company adopted the 2007 Equity Incentive Plan (2007 Plan). Upon the
adoption of the 2007 Plan, no additional awards were issued under the 1998 Plan and the shares remaining for future grant under the 1998 Plan were transferred to the 2007 Plan. The purpose of the 2007 Plan is to provide an incentive to officers,
directors, employees, independent contractors, and to other persons who provide significant services to the Company. On September 23, 2009, the Companys stockholders approved amendments to the Revised 2007 Plan to remove a
provision that allowed for repricing stock options without stockholder approval, added certain minimum vesting periods for nonperformance based grants, and increased the number of shares authorized under the Revised 2007 Plan by 1,000,000 shares. On
March 23, 2011, the Companys stockholders approved additional amendments to the Revised 2007 Plan to implement fungible share counting, to clarify repricing provisons, and to increase the number of shares authorized under the 2007 Plan by
2,000,000 shares. As of March 31, 2011, 2,218,491 shares of the Companys common stock were reserved for future grants of stock options, stock appreciation rights, restricted stock, deferred stock, restricted stock units, performance
shares, phantom stock, and similar types of stock awards as well as cash awards. Options granted under the Revised 2007 Plan may be either incentive stock options, as defined under Section 422 of the Internal Revenue Code or
nonstatutory stock options. Options granted under the Revised 2007 Plan shall be at per share exercise prices equal to the fair value of the shares on the dates of grant. The Revised 2007 Plan will terminate in fiscal 2017 unless it is extended or
terminated earlier pursuant to its terms.

Stock Options - The assumptions used and weighted-average information
for employee and director grants for the three months ended March 31, 2011 and 2010 are as follows:



|                                               |  |                             |       |   |                           |   |       |      |  |   |       |   |  |   |       |  
|---------------------------------------------- |  | --------------------------- | ----- | - | ------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                               |  | Three Months EndedMarch 31, |       |   | Six Months EndedMarch 31, |  
|                                               |  | 2011                        |       |   | 2010                      |   |       | 2011 |  |   | 2010  |  
|Risk free interest rate                        |  |                             | 2.50  | % |                           |   | 2.91  | %    |  |   | 1.68  | % |  |   | 2.91  | %
|Expected dividend yield                        |  |                             | 0.0   | % |                           |   | 0.0   | %    |  |   | 0.0   | % |  |   | 0.0   | %
|Expected lives (years)                         |  |                             | 6.11  |   |                           |   | 6.11  |      |  |   | 6.01  |   |  |   | 6.00  |  
|Expected volatility                            |  |                             | 63.09 | % |                           |   | 63.66 | %    |  |   | 62.22 | % |  |   | 64.25 | %
|Weighted-average fair value of options granted |  | $                           | 32.42 |   |                           | $ | 17.56 |      |  | $ | 18.89 |   |  | $ | 13.15 |  

Generally, stock
options granted under these plans have a contractual life of ten years and vest pro rata over three or four year terms. A summary of the Companys stock option activity during the three months ended March 31, 2011 and December 31,
2010 is as follows:



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|                                            |  |                 |           |   |                                |   |       | 
|------------------------------------------- |  | --------------- | --------- | - | ------------------------------ | - | ----- | 
|                                            |  | Number ofShares |           |   | Weighted AverageExercise Price |  
|Outstanding - September 30, 2010            |  |                 | 2,796,289 |   |                                | $ | 12.66 | 
|Granted (unaudited)                         |  |                 | 540,287   |   |                                | $ | 32.46 | 
|Exercised (unaudited)                       |  |                 | (130,633  | ) |                                | $ | 15.39 | 
|Forfeited (unaudited)                       |  |                 | (38,751   | ) |                                | $ | 20.46 | 
|                                            |  |                 |           |   |                                |   |       | 
|Outstanding - December 31, 2010 (unaudited) |  |                 | 3,167,192 |   |                                | $ | 15.83 | 
|Granted (unaudited)                         |  |                 | 12,250    |   |                                | $ | 54.30 | 
|Exercised (unaudited)                       |  |                 | (127,434  | ) |                                | $ | 16.83 | 
|Forfeited (unaudited)                       |  |                 | (29,914   | ) |                                | $ | 26.46 | 
|                                            |  |                 |           |   |                                |   |       | 
|Outstanding - March 31, 2011 (unaudited)    |  |                 | 3,022,094 |   |                                | $ | 15.80 | 
|                                            |  |                 |           |   |                                |   |       | 
|Exercisable - September 30, 2010            |  |                 | 1,788,794 |   |                                | $ | 9.23  | 
|                                            |  |                 |           |   |                                |   |       | 
|Exercisable - December 31, 2010 (unaudited) |  |                 | 1,923,047 |   |                                | $ | 10.25 | 
|                                            |  |                 |           |   |                                |   |       | 
|Exercisable - March 31, 2011 (unaudited)    |  |                 | 1,910,393 |   |                                | $ | 10.20 | 
|                                            |  |                 |           |   |                                |   |       | 

The range of exercise prices of stock options outstanding at March 31, 2011 was $3.00 to
$61.06. The weighted average remaining contractual life of stock options outstanding at March 31, 2011 was 6.87 years. The total intrinsic value of options exercised during the six months ended March 31, 2011 was $8,486,163. The Company
recognized compensation expense of $1,513,100 and $1,174,009 during the three months ended March 31, 2011 and 2010, and $3,649,969 and $2,899,282 during the six months ended March 31, 2011 and 2010, respectively, related to stock options
issued to non-employees and employees. As of March 31, 2011 and September 30, 2010, $13,095,977 and $8,048,915 respectively, of deferred stock-based compensation expense related to non-employee and employee stock options remained
unamortized. The unamortized amount of $13,095,977 as of March 31, 2011 has a weighted-average period of approximately 1.53 years to be recognized.



|                                 |         |  |                                  |               |                                                    |  |      |                              |  |   |                  |  |  |                               |         |  |  |   |       | 
|-------------------------------- | ------- |  | -------------------------------- | ------------- | -------------------------------------------------- |  | ---- | ---------------------------- |  | - | ---------------- |  |  | ----------------------------- | ------- |  |  | - | ----- | 
|Outstanding as of March 31, 2011 |         |  | Exercisable as of March 31, 2011 |              
|Number ofOptions                 |         |  | Exercise Price                   |               | WeightedAverageRemainingContractualLife (in Years) |  |      | WeightedAverageExercisePrice |  |   | Number ofOptions |  |  | WeightedAverageExercise Price |        
|                                 | 912,123 |  |                                  | 3.00 - 4.49   |                                                    |  | 4.40 |                              |  | $ | 3.41             |  |  |                               | 912,123 |  |  | $ | 3.41  | 
|                                 | 6,500   |  |                                  | 4.50 - 5.99   |                                                    |  | 6.00 |                              |  | $ | 5.58             |  |  |                               | 6,198   |  |  | $ | 5.58  | 
|                                 | 6,668   |  |                                  | 6.00 - 7.49   |                                                    |  | 1.54 |                              |  | $ | 6.75             |  |  |                               | 6,668   |  |  | $ | 6.75  | 
|                                 | 86,666  |  |                                  | 7.50 - 10.49  |                                                    |  | 6.11 |                              |  | $ | 8.88             |  |  |                               | 85,416  |  |  | $ | 8.89  | 
|                                 | 526,018 |  |                                  | 10.50 -15.00  |                                                    |  | 6.57 |                              |  | $ | 13.64            |  |  |                               | 404,605 |  |  | $ | 13.63 | 
|                                 | 950,669 |  |                                  | 15.01 - 29.99 |                                                    |  | 8.03 |                              |  | $ | 20.14            |  |  |                               | 470,320 |  |  | $ | 19.59 | 
|                                 | 533,450 |  |                                  | 30.00 - 61.06 |                                                    |  | 9.54 |                              |  | $ | 32.75            |  |  |                               | 25,063  |  |  | $ | 32.33 | 

As of March 31,
2011, after considering estimated forfeitures, there were 2,912,866 options outstanding that were either vested or expected to vest in the future, of which 1,910,393 options were currently exercisable, with weighted average exercise prices of $15.45
and $10.20 per share, aggregate intrinsic values of $184,282,251 and $130,878,807 and weighted average remaining contractual terms of 6.81 and 5.84 years, respectively.

Restricted Stock - Restricted stock has been issued to the Companys non-employee directors and to a consultant. Restricted stock issued to non-employee directors prior to fiscal 2010
vested no later than one year from the date of issuance, as long as the director remained in continuous service to the Company as of the vest date. Restricted stock issued to non-employee directors subsequent to fiscal 2009 vests 50% on the first
anniversary of the date of grant, 25% on the second anniversary, and 25% on the third anniversary, provided that the director is and has remained in



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continuous service to the Company as a director as of such anniversary. Restricted stock issued to a consultant vests equally on a quarterly basis over four years.

With regard to restricted stock granted to non-employee directors, the fair value of the restricted stock issued was determined using the
closing price of the Companys common stock as reported on the Global Market of The NASDAQ Stock Market LLC (NASDAQ) on the date of grant and is recognized as stock-based compensation expense as the shares vest over the vesting
period. With regard to the restricted stock granted to the consultant, stock-based compensation expense equal to the fair value of the restricted shares that vest is recorded on a quarterly basis over the vesting period of four years. The fair value
of each of the restricted shares that vest is equal to the fair value of a share of the Companys common stock as of each vesting date.

A summary of the Companys restricted stock activity during the three months ended March 31, 2011 and December 31, 2010 is as follows:



|                                 |  |                 |        |  
|-------------------------------- |  | --------------- | ------ | -
|                                 |  | Number ofShares |       
|Outstanding - September 30, 2010 |  |                 | 66,666 |  
|Granted                          |  |                 |       |  
|Forfeited                        |  |                 |       |  
|                                 |  |                 |        |  
|Outstanding - December 31, 2010  |  |                 | 66,666 |  
|Granted                          |  |                 | 10,000 |  
|Forfeited                        |  |                 | (1,000 | )
|                                 |  |                 |        |  
|Outstanding - March 31, 2011     |  |                 | 75,666 |  
|                                 |  |                 |        |  

As of March 31, 2011, holders were vested in 60,666 of the 75,666 restricted shares outstanding,
leaving a total of 15,000 restricted shares unvested as of quarter end. The weighted average fair value of the shares granted in fiscal 2011 was $66.24 per share.

The Company recognized compensation expense of $91 thousand and $150 thousand during the six months ended March 31, 2011 and 2010, respectively, related to restricted stock issued to its non-employee
directors and to the consultant. Unrecognized compensation expense for the restricted shares granted to the non-employee directors was $0.8 million at March 31, 2011. This amount will be recognized over the remaining vesting period of the
restricted shares.

8. STOCKHOLDERS EQUITY AND WARRANTS

Common Stock - As of March 31, 2011, the Company had 100,000,000 shares of common stock authorized with a par value of $0.001 per share and the Company had reserved 3,022,094 shares of
common stock for issuance upon the exercise of outstanding common stock options. Also, 2,218,491 shares of the Companys common stock were reserved for future grants of stock options (or other similar equity instruments) under the
Companys Revised 2007 Plan as of March 31, 2011. In addition, 38,727 shares of the Companys common stock were reserved for future exercise of outstanding warrants as of March 31, 2011.

On January 26, 2011, the Company completed an underwritten public offering of 2,795,000 shares of the Companys common stock,
which includes the underwriters exercise in full of its over-allotment option of 495,000 shares and excludes 1,000,000 shares that were sold by selling stockholders, for a price to the public of $46.33 per share. The underwriter purchased the
shares from the Company at a price of $44.25, pursuant to the underwriting agreement. The Companys net proceeds from the sale of the shares, after deducting the underwriters discount and offering expenses, were $123.4 million.

Warrants - In conjunction with entering into a Loan Agreement and with executing three secured promissory notes
(See Note 6), the Company granted warrants to the lender to purchase 127,248 shares of the Companys common stock at an exercise price of $12.05 per share. During the three months ended March 31, 2011, the lender elected to exercise 24,896
warrants using the net issuance method, which resulted in the issuance of 20,282 shares of common stock by the Company. During the three months ended December 31, 2010, the lender elected to exercise



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63,625 warrants using the net issuance method, which resulted in the issuance of 45,848 shares of common stock by the Company. The remaining warrants expire seven years from the date of grant (or
upon a change of control as defined in the Loan Agreement) as follows: 22,130 expire on September 30, 2014 and 16,597 expire on March 28, 2015.

9. INCOME TAXES

The provision (benefit) for income taxes was ($973 thousand) and $0 during the three months ended March 31, 2011 and 2010, respectively and ($973 thousand) and $0 for the six months ended
March 31, 2011 and 2010, respectively. The Companys effective tax rate was (4.7%) and 0% for the three months ended March 31, 2011 and 2010, respectively and (2.2%) and 0% for the six months ended March 31, 2011 and
2010, respectively. The benefit for income taxes recorded and the effective tax rate for the three and six months ended March 31, 2011 solely reflect the reversal of a valuation allowance previously recorded against the Companys New
Jersey State net operating losses (NOL) that resulted from the Companys sale of $12.3 million of its New Jersey State NOLs under the State of New Jerseys Technology Business Tax Certificate Transfer Program (the
Program) for cash of $973 thousand, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell unused amounts of NOLs and defined research and development tax credits for cash. The
remaining net deferred tax asset as of March 31, 2011 remains fully offset by a valuation allowance due to the Companys history of losses.

As of September 30, 2010, the Company had United States federal NOL carryforwards of approximately $219.5 million available to offset future taxable income, if any. Of the federal NOLs, $14.1 million
was generated from windfall tax benefit stock option deductions. The tax benefit of this portion of the NOL will be accounted for directly to equity as additional paid in capital as the stock option related losses are utilized. As of
September 30, 2010, the Company also had research and development tax credits of $0.1 million available to offset future tax liabilities. The loss carryovers and the research and development tax credits expire over a period of 2020 to 2030.

As of September 30, 2010, the Companys unrecognized tax benefits of $0.1 million have not significantly changed
since October 1, 2007. The Company does not expect any significant changes to the unrecognized tax benefits within 12 months of the reporting date.

The Internal Revenue Service (IRS) could challenge tax positions taken by the Company for the periods for which there are open tax years. The Company is open to challenge for the periods of
2004-2009 from federal and state jurisdictions.

Under Section 382 of the Internal Revenue Code (the Code),
utilization of the NOL and research and development tax credit carryforwards may be subject to a limitation if a change in ownership of the Company, as defined in the Code, occurred previously or could occur in the future. The Company completed a
Section 382 analysis regarding limitation of its NOL and research and development tax credit carryforwards that covered the period three years prior to its IPO on May 2, 2007 through a public offering of its common stock on
February 5, 2009, and concluded that a change in control occurred at the Company during the quarter ended September 30, 2008. This change in control limits the future use of the Companys NOL and research and development tax credit
carryforwards from fiscal 2008 and prior years. However, based upon the Companys financial projections, it does not believe that this limitation will result in the expiration of any of these NOL and research and development tax credit
carryforwards before they are able to be utilized. The Company is in the process of assessing whether another change in control occurred since the quarter ended September 30, 2008 and expects to disclose the results of this assessment when it
is complete. Such a change and any future changes in ownership could impact the use of the Companys NOL and research and development tax credit carryforwards generated in the affected years. Any limitation may result in expiration of a portion
of the NOL or research and development tax credit carryforwards before utilization, which would reduce the Companys gross deferred tax assets.

On October 29, 2010, the Company was awarded two grants ($244,479 each) totaling $489 thousand under the IRS Qualifying Therapeutic Discovery Project (QTDP) program, which was created by Congress as
part of the Patient Protection and Affordable Care Act of 2010. The grants were received on November 12, 2010. One of the grants was



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awarded for the development of PSI-7977 and the other grant was awarded for the development of PSI-938 or PSI-661. All three of these product candidates are being developed for the treatment of
HCV and all of the $489 thousand was recorded as Other income in the Statement of Operations during the three months ended December 31, 2010.

10. COMMITMENTS AND CONTINGENCIES

The Company has entered into an operating lease for office and laboratory space located in Princeton, New Jersey through May 22, 2015. The Company has also entered into an operating lease for office
space located in Durham, North Carolina through December 31, 2015.

As of March 31, 2011, minimum future payments
under non-cancellable operating leases are as follows:



|                                |  |                |       | 
|------------------------------- |  | -------------- | ----- | 
|                                |  | March 31, 2011 |      
|                                |  | (In thousands) |      
|Fiscal 2011                     |  |                | 451   | 
|Fiscal 2012                     |  |                | 918   | 
|Fiscal 2013                     |  |                | 920   | 
|Fiscal 2014                     |  |                | 922   | 
|Fiscal 2015                     |  |                | 626   | 
|Thereafter                      |  |                | 22    | 
|                                |  |                |       | 
|Total minimum payments required |  | $              | 3,859 | 
|                                |  |                |       | 

Under a license agreement with Emory University for Racivir, the Company agreed to pay Emory University up
to an aggregate of $1.0 million in future marketing milestone payments. None of these potential future payments are included in the Companys financial statements, as the payments are contingent on the achievement of milestones, which it has
not yet achieved.

On July 28, 2009, Emory University and University of Georgia Research Foundation, Inc.
(Claimants) filed a Demand for Arbitration and Relief (the Demand) with the American Arbitration Association (AAA) in Atlanta, Georgia (the Emory Arbitration), claiming certain payments and seeking
specific performance under the Companys January 8, 2004 license agreement with Claimants (the Emory License).

The Demand alleged that payments Pharmasset had received under the Roche collaboration agreement were subject to the Emory License and that Pharmasset had not paid fees to Claimants based on such
payments. In addition, the Demand alleged that Pharmasset had not complied with certain terms and conditions of the Emory License and that other Pharmasset product candidates were, or will be, covered by the Emory License. The Demand requested,
among other things, specific performance of the Emory License, including the payment of license fees related to past payments received by Pharmasset. The Companys response to the Demand was filed on August 14, 2009.

On December 6, 2010 a final arbitration award (the Award) was issued by a panel of AAA arbitrators. According to the
Award, none of the payments the Company received under the Roche collaboration agreement were subject to the Emory License and, therefore, no license fees were owed to Emory based upon such payments. Furthermore, according to the Award, none of the
other Company product candidates that were subject to the Demand are covered by the Emory License.



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|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis should be read together with our condensed financial statements and the related notes to those
condensed financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are a clinical-stage pharmaceutical company committed to discovering, developing, and commercializing novel drugs to treat viral
infections. Our primary focus is on the development of nucleoside/tide analogs as oral therapeutics for the treatment of chronic hepatitis C virus (HCV) infection. Nucleoside/tide analogs are a class of compounds which act as alternative
substrates for the viral polymerase, thus inhibiting viral replication. We currently have three clinical-stage product candidates, two of which we are developing ourselves and one of which we are developing with a strategic partner. We are also
advancing certain preclinical candidates in preparation for clinical development. Our three clinical stage product candidates are:



| |  |  | PSI-7977, an HCV uracil nucleotide analog polymerase inhibitor that is in a 12-week Phase 2b dose-finding study (PROTON) in combination
with Pegasys® (pegylated interferon) plus Copegus® (ribavirin), the current standard of care for treating HCV (SOC) in subjects with HCV genotypes 1, 2 or 3. In addition, PSI-7977 is in an exploratory
Phase 2 study (ELECTRON) in combination with ribavirin, administered without and with varying durations of pegylated interferon, in subjects with HCV genotypes 2 or 3. We also initiated ATOMIC, a 12/24-week Phase 2b study of
PSI-7977 in combination with SOC in subjects with HCV genotypes 1, 4, 5 and 6 during March 2011;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PSI-938, an HCV guanine nucleotide analog polymerase inhibitor that recently reported results from NUCLEAR, Part 2 of a Phase 1 study with
PSI-7977 in subjects with HCV genotype 1. We plan to initiate QUANTUM, a Phase 2 study of PSI-938 in combination with PSI-7977 during the third calendar quarter of 2011; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mericitabine (or RG7128), an HCV cytosine nucleoside polymerase inhibitor we are developing through a strategic collaboration with F. Hoffmann-La Roche
Ltd and Hoffmann-La Roche Inc. (collectively, Roche). Mericitabine is being evaluated in two Phase 2b studies, PROPEL and JUMP-C, in combination with SOC in subjects with HCV genotypes 1 or 4. Mericitabine is also
being studied in the INFORM-SVR study in combination with ritonavir-boosted danoprevir with and without
Copegus® (ribavirin). The INFORM-SVR study is part of a series of studies designed to investigate the
combination of two oral, direct acting antivirals (DAAs) in the absence of pegylated interferon. All of the studies involving mericitabine are being conducted by Roche.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, we have been progressing PSI-661, an HCV guanine nucleotide analog polymerase inhibitor, through IND-supporting preclinical studies. As
previously disclosed, our plan was to select either PSI-938 or PSI-661 for later-stage clinical development, since both compounds deliver the same active triphosphate. Based on the early antiviral potency, lack of identifiable safety signals, and
lack of clinically relevant interaction with PSI-7977, in addition to the successful completion of 6 month toxicology studies, we have decided to advance PSI-938 into a Phase 2b QUANTUM study and not begin clinical development of PSI-661
at this time.

We are continuing to research nucleoside/tide analogs (both pyrimidines and purines) with the intention of
identifying additional product candidates that can potentially be used in combination with our nucleoside/tides, mericitabine and PSI-7977, in combination with other classes of DAAs, or with pegylated interferon and / or ribavirin for the treatment
of HCV. We have identified proprietary nucleotide prodrugs that are referred to as phosphate prodrugs because they have the ability to deliver the biologically available monophosphate forms of the compounds into infected liver cells, thus bypassing
a rate-limiting step in the metabolic pathway to the active triphosphate form of



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the drug. The goal of these efforts is to identify compounds with improved potency, safety, convenience, oral bioavailability, and increased intrahepatic nucleotide triphosphate levels. Certain
of these compounds have demonstrated exceptional in vitro anti-HCV activity, with up to 100 times greater potency than PSI-6130 (of which mericitabine is a prodrug). Early studies in animals indicate that several of these compounds can
achieve concentrations of the active triphosphate form in the liver up to 1000 times higher than PSI-6130 at equivalent doses.

We are developing PSI-7977 and PSI-938 ourselves. We have a strategic collaboration with Roche for the development of PSI-6130 and its
prodrugs, including mericitabine. Under the collaboration, Roche pays all development costs associated with mericitabine and provides us with potential income from milestone payments that can be used to fund the advancement of our proprietary
product candidates.



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Our Product Candidates

Our research and development programs are primarily focused on discovering and developing drugs that treat HCV. Our product candidates are nucleoside/tide analogs that we believe have potential
competitive advantages with respect to safety, efficacy across all genotypes, drug resistance, and/or convenience of dosing as compared to currently approved drugs and other known investigational agents. The following table summarizes the three
product candidates on which we are focusing:



|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                         
|----------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------
|Product Candidate       |  | Status                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Next Expected Milestone(s)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | CommercializationPartner
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|PSI-7977                |  |     In a 12-week Phase 2b dose-finding study PROTON in
combination with SOC in subjects with HCV genotypes 1, 2, or 3.     In a
Phase 2 exploratory ELECTRON study in combination with ribavirin, administered without and with varying durations of pegylated interferon, in subjects with HCV genotypes 2 or 3.
    In a 12/24 week Phase 2b ATOMIC study in combination with SOC in
subjects with HCV genotypes 1, 4, 5 or 6. |  |     Complete enrollment of approximately 40 subjects in the Phase 2
exploratory ELECTRON study during the second calendar quarter of 2011.
    Initiate proof of concept study of PSI-7977 in combination with BMS-790052 during
the second calendar quarter of 20111.
    Report SVR24 results from the ongoing genotype 2/3 arm of the Phase 2b
PROTON study during the second calendar half of 2011.     Report
SVR12 results from the genotype 1 arms of the Phase 2b PROTON study during the second calendar half of 2011.     Report data from the Phase 2 exploratory study ELECTRON during the second calendar half of 2011. |  |                        
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|PSI-938                 |  |     Recently reported results from NUCLEAR, Part 2 of a Phase 1 study
with PSI-7977 in subjects with HCV genotype 1.     Planning for the Phase 2b
QUANTUM study in combination with PSI-7977 in subjects with multiple HCV genotypes.                                                                                                                                                                                                |  |     Initiate the Phase 2b QUANTUM study during the third calendar quarter of
2011.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                        
|                        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
|mericitabine(or RG7128) |  |     Completing the Phase 2b PROPEL and JUMP C
studies in subjects with HCV genotypes 1 or 4.     In the INFORM-SVR study
in subjects with HCV genotype 1.     All of the studies involving
mericitabine are being conducted by Roche.                                                                                                                                                                                              |  |     Initiate a Phase 2b study to be conducted by Roche in subjects
with HCV genotypes 2 or 3 during the first half of calendar year 2011.
    Roche expects to report final data from the Phase 2b PROPEL and
JUMP-C studies in calendar year 2011.     Roche also expects to
initiate a Phase 3 program in 2011 and submit a marketing application in 2013.                                                                                                                                                                                                                                                                               |  | Roche                   



| | 1 | During January 2011, we entered into a clinical collaboration agreement with Bristol-Myers-Squibb Company (BMS) to evaluate the utility of PSI-7977 in
combination with BMS-790052, BMSs NS5a replication complex inhibitor, for the treatment of HCV. BMS is responsible for all costs of the study, except for the cost of PSI-7977, which will be supplied by Pharmasset. Neither party has licensed
any commercial rights to the other party.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Product Candidates for the Treatment of HCV

HCV Background

HCV is a leading cause of chronic liver disease and liver transplants. The World Health Organization estimates nearly 180 million people worldwide, or approximately three percent of the worlds
population, are infected with HCV. About 130 million of these individuals are chronic HCV carriers who are at an increased risk of developing liver cirrhosis or liver cancer, approximately 15 million of whom are in the United States,
Europe, and Japan. The Centers for Disease Control and Prevention (CDC) has reported that 4.1 million people in the United States have been infected with HCV, of whom 3.2 million are chronically infected. Of those chronically
infected, the majority are undiagnosed and unaware of their HCV infection. Separately, approximately ten percent of diagnosed HCV patients in the United States are treated each year.

At least six major genotypes of HCV have been identified, each with multiple subtypes. Genotypes are designated with numbers (genotypes
1-6) and subtypes with letters. HCV genotypes 1, 2, 3, and 4 have a worldwide distribution, but their prevalence varies from one geographic area to another. Genotype 1 and its subtypes (1a and 1b) are the most common genotype globally,
accounting for approximately 70% of infections. In the United States, approximately 67% and 33% of all of the genotype 1 HCV infections are subtypes 1a and 1b, respectively. Patients with genotype 2 or 3 represent approximately 25% of the worldwide
chronically infected HCV population and the remaining five percent is comprised of genotypes 4 through 6. Worldwide sales of HCV drugs in 2005 were approximately $2.2 billion and are forecasted to reach more than $8.0 billion in 2015. Historically,
sales of HCV drugs increase as new therapies are introduced that improve the sustained virologic response (SVR), defined as the inability to detect HCV RNA in a patients blood six months after discontinuation of therapy, with a
standard polymerase chain reaction (PCR) test, which measures the amount of HCV in the blood.

Limitations of
Current HCV Infection Therapy

The current standard of care for treating HCV is a combination of
pegylated interferon plus ribavirin. Pegylated interferon is a modified version of alpha interferon, a protein that occurs naturally in the human body and boosts the immune systems ability to fight viral infections. Roche, our collaboration
partner in the development of mericitabine, is the market leader in sales of pegylated interferon and branded ribavirin under the brand names Pegasys® and Copegus®, respectively.

Patients currently being treated for HCV are given pegylated interferon as a weekly injection, administered together with
twice daily ribavirin tablets. The current SOC, however, has limitations that result in less than optimal SVR rates. Substantial side effects can render treatment intolerable for many patients. For example, SOC-treated patients can have difficulties
with fatigue, bone marrow suppression, anemia, and neuropsychiatric effects. In addition, genotype 1 patients typically receive 48 weeks of SOC, but less than 50% of these patients achieve an SVR, which many physicians and patients consider a low
rate of success. Between 60% and 80% of the genotype 2 and 3 patients treated with SOC for 24 weeks achieve an SVR. The occurrence of side effects combined with the inconvenient treatment regimen can result in many patients not completing therapy.
Furthermore, a majority of individuals with HCV are unable to be treated with interferon due to contraindications, such as advanced liver disease or psychiatric conditions. The less than optimal antiviral efficacy, potential for dose-limiting side
effects (some of which can be serious), contraindications, and inconvenient dosing regimen illustrate the unmet medical need of the currently available SOC. Current therapies may also not directly target the virus, suggesting additional patient
benefit from agents which directly interfere with HCV replication.

Nucleoside/tide Analogs and Other Direct Acting
Antivirals for HCV

HCV has several viral specific enzymes that are essential for its replication, thus providing multiple
opportunities for therapeutic intervention. Many drug developers have focused on three of the HCV enzymes: protease (NS3), polymerase (NS5b), and more recently, another protein, NS5a. The goal of HCV drug
development is to discover and develop molecules that have a high affinity for binding to these enzymes thereby inhibiting enzymatic activity and, in turn, inhibiting viral replication. These compound classes are often referred to as protease
inhibitors and polymerase inhibitors. There are two types of polymerase inhibitors, each with a different mechanism of action. Nucleoside/tide analog polymerase inhibitors work by acting as alternative substrates that block the synthesis of HCV RNA,
which is essential for the virus to replicate. The other type of polymerase inhibitor,



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non-nucleoside polymerase inhibitors, binds directly to the polymerase enzyme, causing a change in its shape. This conformational change inhibits its enzymatic activity.

Our research efforts focus on blocking HCV replication by discovering and developing nucleoside/tide analog polymerase inhibitors. A
nucleoside is a basic building block of the nucleic acids, DNA and RNA, the genetic material of all living cells and viruses. Nucleosides consist of a molecule of sugar linked to a nitrogen-containing organic ring compound. In the most
important naturally occurring nucleosides, the sugar is either ribose (used to construct RNA) or deoxyribose (used to construct DNA), and the nitrogen-containing organic ring compound, referred to as the base, is either a pyrimidine (cytosine,
thymine, or uracil) or a purine (adenine or guanine). A nucleoside combined with a phosphate group becomes a nucleotide.

In
biological systems, nucleotides are linked by enzymes, including the polymerase, in a specific order to make long, chainlike polynucleotides (DNA or RNA) of defined sequence to pass along genetic information for a specific protein, a gene, or an
entire organism, a genome. A nucleoside analog is a synthetic molecule that resembles a naturally occurring nucleoside. Chemical modifications in either the sugar portion or the base portion allow these compounds, once phosphorylated, to
inhibit or disrupt the activity of the polymerase. When a nucleotide analog is incorporated into viral DNA or RNA during replication, it acts to prevent production of new virus by blocking the complete synthesis of the new viral DNA or RNA genome.

Experimentsin vitro conducted by us and others show that nucleoside/tide analogs have conserved antiviral activity
across all HCV genotypes. This characteristic of the nucleoside/tide analog class relates to its unique mechanism of action. Recent clinical studies of mericitabine, as more fully described below, show comparable anti-HCV activity across HCV
genotypes 1, 2, and 3. Other classes of anti-HCV drugs (i.e., protease inhibitors and non-nucleoside polymerase inhibitors) have not yet shown comparable activity across a broad spectrum of HCV genotypes.

In clinical monotherapy studies with three separate nucleoside/tide analogs (including mericitabine) over 14 days, viral breakthrough
while on therapy did not occur. In studies of non-nucleoside polymerase and protease inhibitors, viral breakthrough was seen as early as three to four days into the 14-day treatment period. The relative rapidity of the breakthrough with these
classes of drugs suggests that the patients may have harbored HCV strains that were not susceptible to at least one component of the therapeutic regimen. With longer exposure to any DAA, drug resistant virus may be selected over time. The rapidity
and frequency with which this occurs may have significant consequences for patients, including not obtaining an SVR.

Summary of Nucleoside/tide Analogs and Their Potential Use as Future Therapy

Current market research identifies the three most important attributes for improving HCV therapy, in order of importance, as: greater
efficacy, improved tolerability, and shorter duration of treatment. Current guidance from regulatory authorities indicates that approval of DAAs for HCV must include their use in combination with SOC. Therefore, most efforts to improve SVR rates
focus on adding a DAA to SOC. It is hoped that the addition of a DAA which directly inhibits viral growth will result in a more efficacious therapy without adding to the intolerability of interferon and ribavirin.

We and other developers of HCV DAAs are also currently investigating combination treatments with two or more DAAs in the absence of
interferon. These DAA combinations may include a nucleoside/tide with a protease inhibitor, such as mericitabine with Roches ritonavir-boosted danoprevir, which are currently in the INFORM studies being conducted by Roche. Or they may include
one nucleoside/tide combined with a second complementary nucleoside/tide, such as PSI-938 and PSI-7977. We believe the use of two DAAs would improve tolerability and may lead to a shorter duration of treatment. Due to the unique attributes of
nucleoside/tides, including their ability to have complementary resistance profiles and to show comparable activity across a broad spectrum of HCV genotypes, we believe that dual nucleoside/tides combinations could possess advantages over other DAA
combinations that do not contain a nucleoside/tide.



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Pyrimidine Nucleoside/tide Product Candidates

PSI-7977 Development

PSI-7977 is an isomer of PSI-7851, a prodrug of a uracil nucleotide analog polymerase inhibitor we are developing for the treatment of chronic HCV infection. PSI-7851 demonstrated potent in vitro
anti-HCV activity with EC90 values of 0.44 +/- 0.21 μM, between 14 and 17-fold more potent than the active metabolite of our cytosine nucleoside polymerase inhibitor, PSI-6130. The in vitro half-life of the triphosphate (the
biologically active form of the molecule) in primary human hepatocytes is approximately 38 hours, which supports the exploration of once-daily dosing in early studies. Like mericitabine, PSI-7851 has demonstrated in vitro activity against HCV
genotypes 1, 2, 3, and 4.

Phase 1 Studies. In March 2009, we initiated a Phase 1 study of PSI-7851, which was a single
ascending dose (SAD) study that assessed the safety, tolerability, and pharmacokinetics of PSI-7851 in 42 healthy subjects at doses ranging from 25mg to 800mg. Results from this study indicated there were:



| |  |  | No dose-limiting toxicity,
| | - |  | --------------------------



| |  |  | No serious adverse events, and
| | - |  | ------------------------------



| |  |  | No clinically significant changes in vital signs or electrocardiograph (ECG) readings.
| | - |  | ----------------------------------------------------------------------------------------

In June 2009, we initiated a Phase 1 multiple ascending dose (MAD) study in HCV-infected subjects. Forty subjects were
enrolled at two U.S. centers and randomized to PSI-7851 (8 per cohort) or placebo (2 per cohort). The primary objective of this study was to assess the safety, tolerability, and pharmacokinetics of PSI-7851 after once-daily dosing for three days.
The secondary objective of this study was to assess antiviral activity by measuring the change in circulating HCV RNA levels. Four dose cohorts of PSI-7851 (50mg QD, 100mg QD, 200mg QD, and 400mg QD) were evaluated. Results from this study
indicated:



| |  |  | PSI-7851 was generally safe and well tolerated across all cohorts with no discontinuations, no serious adverse events, and no dose-related trends in
adverse events or laboratory abnormalities.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PSI-7851 demonstrated potent antiviral activity with a mean HCV RNA change from baseline of -0.49 log10IU/mL in subjects receiving 50mg QD and -0.61 log10IU/mL in subjects receiving 100mg QD.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PSI-7851 200mg QD administered for 3 days resulted in a mean change from baseline HCV RNA of -1.01 log10IU/mL, with 6 of 8 subjects achieving greater than a 1.0 log10IU/mL decline from baseline. This antiviral effect met our threshold of
approximately 1.0 log10IU/mL decline over three days.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | PSI-7851 400mg QD administered for 3 days resulted in a mean change from baseline HCV RNA of -1.95 log10IU/mL, with 6 of 8 subjects achieving greater than a 1.5 log10IU/mL decline from baseline.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selection of PSI-7977. PSI-7851 is a mixture of two molecules of identical chemical composition, PSI-7976 and PSI-7977,
which differ only in the stereo-orientation of one of the atoms on the prodrug. Once inside a liver cell, both molecules are rapidly converted to the same active triphosphate. PSI-7977 demonstrated potent in vitro anti-HCV activity with
EC90 values of 0.42 +/- 0.23 μM, between 14 and 17-fold more potent than the active metabolite of our cytidine nucleoside polymerase inhibitor, PSI-6130. The in vitro half-life of the triphosphate in primary human hepatocytes
is approximately 38 hours, which supported the exploration of once-daily dosing in early studies. Like mericitabine, PSI-7977 has demonstrated in vitro activity against HCV genotypes 1, 2, 3, and 4. Given the regulatory and clinical
desire for development of a single isomer, PSI-7977 was selected for further clinical development based on slightly better in vitro potency and better physicochemical properties. The PSI-7977 tablets were compared with PSI-7851 capsules in a
Phase 1 relative bioavailability study in healthy subjects. In August 2010, we were informed by the FDA that PSI-7977 received fast track designation. Following are results from the Phase 2a study of PSI-7977, along with the design of a Phase 2b
study we initiated in August 2010.



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Phase 2a Study. During January 2010, we initiated a 28-day Phase 2a study of PSI-7977
and enrolled 63 subjects with genotype 1 chronic HCV infection who had not been treated previously. The primary goal of the study was to determine the safety and tolerability of PSI-7977 in combination with SOC. The primary efficacy endpoint of the
trial was the proportion of subjects who achieved HCV RNA below the limit of detection (15IU/mL), or an RVR. Subjects will continue to be followed through an SVR endpoint. Subjects were randomized to receive one of four treatments:



| |  |  | PSI-7977 100mg QD in combination with SOC for 28 days, followed by 44 weeks of SOC alone (n=16)
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | PSI-7977 200mg QD in combination with SOC for 28 days, followed by 44 weeks of SOC alone (n=18)
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | PSI-7977 400mg QD in combination with SOC for 28 days, followed by 44 weeks of SOC alone (n=15)
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | A control arm with placebo in combination with SOC for 48 weeks (n=14)
| | - |  | ----------------------------------------------------------------------

The baseline HCV RNA for subjects enrolled in the study ranged from 6.3 to 6.6 log10IU/mL across the cohorts. Results from this study are summarized in the
following table:



|                        |  |                                                  |  |                                                                    
|----------------------- |  | ------------------------------------------------ |  | -------------------------------------------------------------------
|Study Arm               |  | Mean decrease in HCV 
RNA(log10 IU/mL) at Day 28 |  | Percentage of Subjects withHCV RNA below LLOD1(<15 IU/mL) at Day 28
|100mg PSI-7977 QD + SOC |  | -5.32                                            |  | 88%(14/16)                                                         
|200mg PSI-7977 QD + SOC |  | -5.06                                            |  | 94%(17/18)                                                         
|400mg PSI-7977 QD + SOC |  | -5.33                                            |  | 93%(14/15)                                                         
|Placebo + SOC           |  | -2.80                                            |  | 21%(3/14)                                                          

1 LLOD
means lower limit of detection by Roche Taqman Assay

PSI-7977 treatment in combination with SOC for 28 days was generally safe and well
tolerated with no dose discontinuations due to adverse events and no dose-related laboratory parameter changes.

Phase 2b
Dose-Finding Study (PROTON). In August 2010, we began dosing of PSI-7977 in combination with SOC in a 12-week Phase 2b study PROTON. This study is evaluating PSI-7977 200mg QD and 400mg QD in combination with SOC in 121
treatment-naïve subjects with HCV genotype 1. The primary goal of the study is to assess the safety and tolerability of PSI-7977 in combination with SOC for 12 weeks. The primary efficacy endpoint of the study is the proportion of subjects who
achieve an SVR12 and SVR24, defined as HCV RNA below the limit of detection (<15 IU/ml) 12 and 24 weeks, respectively, after the discontinuation of therapy. Subjects receiving PSI-7977 in combination with SOC for 12 weeks will discontinue
treatment at week 24 if their HCV RNA is below the level of detection at week 4 through week 12; otherwise, subjects are expected to continue on SOC through week 48. Subjects were randomized into one of three arms as follows:



| |  |  | PSI-7977 200mg QD in combination with SOC for 12 weeks, followed by 12 or 36 weeks of SOC (n=48),
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | PSI-7977 400mg QD in combination with SOC for 12 weeks, followed by 12 or 36 weeks of SOC (n=47), and
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | A control arm with placebo in combination with SOC for 48 weeks (n=26).
| | - |  | -----------------------------------------------------------------------

Interim results from the first 12 weeks of treatment for the above three arms of the study included the following:



| |  |  | PSI-7977 200mg and 400mg in combination with SOC demonstrated potent on-treatment antiviral activity as a combined 93 of 95 subjects, or 98%, achieved
an RVR and 91 of 95 subjects, or 96%, had HCV RNA levels below the limit of detection at week 12;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | On-treatment viral kinetics were consistent across all 95 subjects with responses independent of IL28B genotype and other predictors of poor response
to interferon;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No discontinuations due to PSI-7977 were reported and no viral breakthrough was observed in any subject on PSI-7977 in combination with SOC through
week 12;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 90 of 95 randomized (and 90 of 91 evaluable at week 12) subjects had HCV RNA levels below the limit of detection at week 4 through week 12 and are
therefore eligible to discontinue treatment at week 24.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We expect to report SVR12 results from the above arms of the study
during the second half of calendar year 2011.

In a fourth, open label arm of the study, we enrolled 25 treatment-naïve
subjects with HCV genotypes 2 or 3. Twenty-four subjects received 12 weeks of PSI-7977 400mg QD in combination with SOC with no SOC follow-up. One subject was lost to follow-up after the first visit. Preliminary results from this open label arm
indicated:



| |  |  | All 24 subjects had HCV RNA levels below the limit of detection 12 weeks after the discontinuation of all therapy (SVR12);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | All 24 subjects achieved an RVR and remained below the limit of detection through the 12 week treatment period;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | On-treatment viral kinetics were consistent across all 24 subjects with responses independent of IL28B genotype and other predictors of poor response
to interferon;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There was no post-therapy relapse through 12 weeks and no virologic breakthrough during therapy;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | There were no serious adverse events and no discontinuations due to adverse events; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | There were no clinically significant, treatment emergent trends in any clinical laboratory parameters.
| | - |  | ------------------------------------------------------------------------------------------------------

Subjects in the open label arm will continue to be monitored to assess SVR 24 weeks after the discontinuation of all therapy. We expect to report SVR24
results from the HCV genotype 2 or 3 arm of this study during the second calendar half of 2011.

Phase 2 Exploratory Study
(ELECTRON). In December 2010, we began dosing of PSI-7977 400mg QD in combination with ribavirin, administered with and without pegylated interferon, in subjects with HCV genotypes 2 or 3. This study is expected to enroll
approximately 40 treatment-naïve subjects. The primary goal of the study is to assess the safety and tolerability of PSI-7977 in combination with ribavirin for 12 weeks, with and without pegylated interferon. The study is being conducted in New
Zealand and subjects are being randomized into one of four arms as follows:



| |  |  | PSI-7977 400mg QD with ribavirin for 12 weeks (no pegylated interferon);
| | - |  | ------------------------------------------------------------------------



| |  |  | PSI-7977 400mg QD with ribavirin for 12 weeks, with four weeks of pegylated interferon;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | PSI-7977 400mg QD with ribavirin for 12 weeks, with eight weeks of pegylated interferon;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | PSI-7977 400mg QD with ribavirin and pegylated interferon for 12 weeks.
| | - |  | -----------------------------------------------------------------------

We expect to complete enrollment of approximately 40 subjects in this study during the second calendar quarter of 2011 and report data from this exploratory study during the second calendar half of 2011.

Phase 2b Study (ATOMIC). During March 2011, we initiated ATOMIC, a Phase 2b study evaluating PSI-7977
400mg QD and ribavirin with either 12 or 24 weeks of pegylated interferon in approximately 300 treatment-naïve subjects with HCV genotype 1. An additional 25 treatment-naïve subjects with HCV genotype 4, 5, 6 or indeterminate genotype,
will receive PSI-7977 400mg QD with peginterferon and ribavirin for 24 weeks. The primary endpoint of the study will be the safety and tolerability of PSI-7977 in combination with SOC for 12 and 24



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weeks. The study will be conducted in the United States and subjects will be randomized (1:2:3) into the following arms:



| |  |  | PSI-7977 400mg QD with peginterferon and ribavirin for 12 weeks;
| | - |  | ----------------------------------------------------------------



| |  |  | PSI-7977 400mg QD with peginterferon and ribavirin for 24 weeks; or
| | - |  | -------------------------------------------------------------------



| |  |  | PSI-7977 400mg QD with peginterferon and ribavirin for 12 weeks, followed by either PSI-7977 400mg QD monotherapy for 12 weeks or PSI-7977 400mg QD
plus ribavirin for 12 weeks.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

HCV genotype 1 subjects will be stratified by IL28B status and baseline HCV RNA
to ensure balance across cohorts. In addition to the above studies, we are also developing PSI-7977 in combination with other DAAs. (See Combination Treatment with Two or More Direct Acting Antivirals, Nucleotide in
Combination with an NS5a Replication Complex Inhibitor and Pharmassets Proprietary DAA Combinations,Nucleotide in Combination with Another Nucleotide later in this section for additional information
regarding the development of PSI-7977.)

Mericitabine (or RG7128) Development

In October 2004, we entered into a collaboration with Roche for the development and commercialization of PSI-6130 (an oral cytosine
nucleoside analog polymerase inhibitor which we discovered) and its prodrugs, including mericitabine, for the treatment of HCV. A prodrug is a chemically modified form of a molecule designed to enhance the absorption, distribution, and metabolic
properties of that molecule. Roche and we initiated an adaptive Phase 1 clinical trial with mericitabine in October 2006 under an IND filing. On October 12, 2007, we were informed by the FDA that mericitabine received fast track designation.
During December 2008, we completed the Phase 1 clinical trial of mericitabine. Following is a review of the design and results of this trial.

Phase 1 Study. The adaptive Phase 1 study of mericitabine was a multiple center, observer-blinded, randomized, and placebo-controlled study designed to investigate the pharmacokinetics, pharmacodynamics,
safety, tolerability, and food effect of mericitabine in healthy subjects and in subjects chronically infected with HCV genotypes 1, 2, or 3. This study provided antiviral potency data over 14 and 28 days in subjects chronically infected with
HCV genotype 1, and over 28 days of treatment in subjects chronically-infected with HCV genotypes 2 or 3 who had not responded to prior interferon-based therapy. Results from the Phase 1 study indicated mericitabine was generally safe and
well-tolerated, and demonstrated potent, dose-dependent antiviral activity across all cohorts when used in combination with SOC.

Phase 2b Studies. In April 2009, Roche began dosing in a Phase 2b PROPEL study with mericitabine. During May 2010, dosing of mericitabine triple combination therapy (mericitabine plus
SOC) or placebo plus SOC in 408 treatment-naïve, genotype-1 or genotype-4 HCV-infected subjects (cirrhotic and non-cirrhotic) was completed. The trial is evaluating the dose and duration of treatment of mericitabine in combination with SOC. The
primary efficacy endpoint of the trial will be the proportion of subjects that achieve an SVR. Subjects were equally randomized into one of 5 arms of the study:



| |  |  | 24 weeks of total treatment, with mericitabine 500mg BID in combination with SOC for 12 weeks, followed by 12 weeks of SOC (n = 80)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | 24 weeks of total treatment, with mericitabine 1000mg BID in combination with SOC for 12 weeks, followed by 12 weeks of SOC (n = 82)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 24 weeks of total treatment, with mericitabine 1000mg BID in combination with SOC for 8 weeks, followed by 16 weeks of SOC (n = 81)
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



| |  |  | 48 weeks of total treatment, with mericitabine 1000mg BID in combination with SOC for 12 weeks, followed by 36 weeks of SOC (n = 81)
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A control arm with placebo in combination with SOC for 48 weeks (n = 84)
| | - |  | ------------------------------------------------------------------------

Subjects in the 24 week cohorts discontinued treatment at week 24 if they achieved a rapid virologic response (RVR), defined
as HCV RNA below the limit of detection (<15 IU/mL as measured by Roche TaqMan assay) four



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weeks after the initiation of treatment, that is maintained until week 22, a strategy known as response-guided treatment. Subjects who did not meet these virologic criteria will
continue on SOC until week 48.

An interim analysis of all 408 subjects that completed the first 12 weeks of the PROPEL study
presented by Roche at the 2010 Annual Meeting of the American Association for the Study of Liver Diseases indicated the following:



| |  |  | Mericitabine 1000mg BID with SOC for 12 weeks achieved a high rate of complete Early Virologic Response (cEVR, defined as HCV RNA below the
level of detection 12 weeks after the initiation of treatment) of 83% with no on-treatment viral breakthrough,
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The safety and tolerability of mericitabine 1000mg BID with SOC were comparable to placebo/SOC with no renal or hematologic safety signals, and a
discontinuation rate similar to placebo/SOC, and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | No drug resistance was observed in subjects treated with up to 12 weeks of mericitabine.
| | - |  | ----------------------------------------------------------------------------------------

An amendment to the protocol for the PROPEL study has been implemented which allows subjects who were initially randomized to the
placebo/SOC arm and who are non-responders to receive open label mericitabine 1000mg BID in combination with SOC for 24 weeks, followed by an additional 24 weeks of SOC. Non-response is defined as a subject who does not achieve at least a 2 log
decline in HCV RNA by week 12 of therapy, or who has HCV RNA above the limit of detection (15 IU/mL) at week 24 of therapy. This amendment will provide longer-term treatment data on subjects with prior non-response to SOC, including demonstrated
null responders. Final data from the PROPEL study is expected to be available in calendar year 2011.

Roche is also conducting
a 24-week Phase 2b JUMP-C study of mericitabine in combination with SOC in 166 treatment-naïve subjects with HCV genotypes 1 and 4 to evaluate the safety and efficacy of mericitabine in combination with SOC. Subjects with HCV RNA
below the limit of detection at the end of week 4 through week 22 will stop all therapy (mericitabine and SOC) at week 24, while subjects who do not meet this response guideline will receive a full 48 weeks of SOC. Supportive data from this study
could provide the flexibility for longer dosing of mericitabine which may be required in some populations, as well as combinations of mericitabine with other direct acting antivirals currently in development. This study completed enrollment during
the second calendar quarter of 2010 and is being conducted at sites in the U.S. and Canada. Subjects were initially equally randomized into one of two arms of the study:



| |  |  | 24 weeks of treatment, with mericitabine 1000mg BID in combination with SOC (n = 81)
| | - |  | ------------------------------------------------------------------------------------



| |  |  | A control arm with placebo and SOC for 48 weeks (n = 85)
| | - |  | --------------------------------------------------------

An interim analysis of all 81 subjects that completed the first 24 weeks of the JUMP-C study delivered by Roche at the 2011 Annual Meeting of the European Association for the Study of the Liver indicated
the following:



| |  |  | After 24 weeks of treatment of mericitabine 1000mg BID with SOC, 74 of 81 subjects, or 91%, had HCV RNA levels below the limit of detection at week 24,
and 49 of 81 subjects, or 60%, had HCV RNA levels below the limit of detection at week 4 through week 22. Of those 49 subjects, 37 subjects, or 76%, had HCV RNA levels below the limit of detection 12 weeks after the discontinuation of all therapy
(SVR12);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Mericitabine 1000mg BID with SOC were well tolerated up to 24 weeks
| | - |  | -------------------------------------------------------------------



| |  |  | No breakthroughs observed during 24 weeks of treatment and no significant adverse events were observed;
| | - |  | -------------------------------------------------------------------------------------------------------

Final data from the JUMP-C study, including SVR24 results, is expected to be available in calendar year 2011.



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An amendment to the protocol for this 24-week study has been implemented which allows
subjects who were initially randomized to the placebo/SOC arm and who are non-responders to receive open label mericitabine 1000mg BID in combination with SOC for 24 weeks, followed by an additional 24 weeks of SOC. Non-response is defined as a
subject who does not achieve at least a 2 log decline in HCV RNA by week 12 of therapy, or who has HCV RNA above the limit of detection (15 IU/mL) at week 24 of therapy. Subjects from this study as well as the initial Phase 2b PROPEL
study of 12 weeks mericitabine who are randomized to placebo/SOC (described above) will provide longer-term treatment data on subjects with prior non-response to SOC, including demonstrated null responders.

Roche plans to initiate a Phase 2b study of mericitabine in combination with SOC in subjects with HCV genotypes 2 and 3 during the first
half of calendar year 2011. Mericitabine in combination with SOC has previously demonstrated antiviral activity in HCV genotypes 2 and 3 prior non-responders in a 28 day clinical trial, with an RVR of 95% and an SVR of 65%. Roche is also planning to
initiate a Phase 3 program for mericitabine during 2011 and plans to submit a marketing application for mericitabine to one or more regulatory authorities in 2013. (See Combination Treatment with Two or More Direct Acting
Antivirals, Nucleoside in Combination with a Protease Inhibitor, INFORM Studies later in this section for additional information regarding the development of mericitabine).

Combination Treatment with Two or More Direct Acting Antivirals (one of our DAAs and a DAA from a collaboration partner)

The use of interferon in the current standard of care limits the number of patients who can or are willing to undergo
therapy for HCV and may result in less compliance with treatment regimens. We believe that the combination of two or more DAAs may provide an SVR in the absence of interferon. We believe that the selection of the drugs in such combinations should
focus on molecules which provide potent viral suppression, lack metabolic interaction and possess complementary resistance profiles.

The frequent emergence of resistant variants in HCV inhibitor monotherapy trials with some classes of DAAs suggests that combinations of DAAs with potent antiviral activity, complementary resistance
profiles, and differing metabolic pathways may be required to treat HCV. Based on consultations with experts in the field, we believe the combination of at least one nucleoside/tide analog with, for example, a protease inhibitor or NS5a enzyme
inhibitor, or one nucleoside/tide combined with a second complementary nucleoside/tide, present potentially useful therapeutic regimens. These combinations of DAAs possess complementary resistance profiles and differing metabolic pathways,
suggesting that they will not have clinically relevant antagonism. In addition, nucleoside/tide analogs have demonstrated in vitro the ability to suppress the resistant variants that emerge with partially-suppressive concentrations of
protease inhibitors or non-nucleoside polymerase inhibitors. Clinical use of a combination of DAAs may provide improved antiviral activity across multiple HCV genotypes and may lead to interferon-sparing regimens. Following are descriptions of DAA
combination studies involving our product candidates, along with the results of these studies to date.

Nucleoside in
Combination with a Protease Inhibitor

INFORM Studies  (our nucleoside analog polymerase inhibitor, mericitabine, in
combination with Roches protease inhibitor, danoprevir. During November 2008, Roche, InterMune, Inc. (InterMune), and we announced the initiation of a Phase 1 study to investigate the combination of two DAAs in the absence of
interferon and ribavirin. This study, named INFORM-1, combined for the first time in subjects naïve to therapy and in patients who previously failed therapy (TF) two oral DAAs, mericitabine and danoprevir. Danoprevir is an inhibitor
of the HCV NS3/4 protease, which prior to October 2010, was being developed by InterMune in collaboration with Roche. During October 2010, Roche purchased the worldwide development and commercialization rights to danoprevir from InterMune and
simultaneously terminated the exclusive license and collaboration agreement it had entered into with InterMune to develop danoprevir.



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INFORM-1 was a randomized, double-blind, ascending dose Phase 1 trial
that enrolled a total of 86 subjects and was conducted by Roche. The principal objectives were to evaluate safety, tolerability, and antiviral activity of mericitabine and danoprevir administered in combination at increasing doses for up to 13 days.
Results from this study demonstrated for the first time that the combination of an oral protease inhibitor and an oral nucleoside polymerase inhibitor resulted in significant circulating HCV RNA reduction in subjects with HCV, as subjects receiving
the combination of danoprevir and mericitabine for 13 days (without pegylated interferon or ribavirin) experienced a median reduction in HCV RNA of -4.8 to -5.2 log10IU/mL in the highest dose levels tested. In addition, no treatment-related serious adverse events, dose reductions, or
discontinuations were reported during the study. Pharmacokinetic analyses also confirmed that there were no drug-drug interactions between the compounds. Following is a figure that presents by dose regimen the median log10HCV RNA change from baseline over the 13 days of treatment.

LOGO

The antiviral results for each dose regimen are summarized in the following table.



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|                                       |  |   |   |  |                   |  |              |                               |  |                               |  |         
|-------------------------------------- |  | - | - |  | ----------------- |  | ------------ | ----------------------------- |  | ----------------------------- |  | --------
|Regimen (Mericitabine / Danoprevir mg) |  | N |   |  | PatientPopulation |  |              | HCV RNA<LLOQ1(<43 IU/mL)N (%) |  | HCV RNA<LLOD2(<15 IU/mL)N (%)
|500 BID/100 TID                        |  |   | 8 |  |                   |  | Naïve        |                               |  | 1/8(13%)                      |  | 1/8(13%)
|500 BID/200 TID                        |  |   | 8 |  |                   |  | Naïve        |                               |  | 5/8(63%)                      |  | 2/8(25%)
|1000 BID/100 TID                       |  |   | 7 |  |                   |  | Naïve        |                               |  | 5/7(71%)                      |  | 2/7(29%)
|1000 BID/200 TID                       |  |   | 8 |  |                   |  | Naïve        |                               |  | 5/8(63%)                      |  | 2/8(25%)
|1000 BID/600 BID                       |  |   | 8 |  |                   |  | TF (non-null | )                             |  | 4/8(50%)                      |  | 1/8(13%)
|1000 BID/900 BID                       |  |   | 8 |  |                   |  | TF (null     | )                             |  | 4/8(50%)                      |  | 2/8(25%)
|1000 BID/900 BID                       |  |   | 8 |  |                   |  | Naïve        |                               |  | 7/8(88%)                      |  | 5/8(63%)

1 LLOQ
means lower limit of quantification by Roche Taqman Assay

2 LLOD means lower limit of detection by Roche Taqman Assay

The higher dose combination of mericitabine 1000mg and danoprevir 900mg administered twice daily without
pegylated interferon or ribavirin for 13 days resulted in 88% of HCV-positive treatment-naïve subjects achieving HCV RNA below the lower limit of quantification (LLOQ), and 63% of subjects having HCV RNA below the lower limit of
detection (LLOD). The same regimen in null-responders resulted in 50% of subjects with HCV RNA below LLOQ and 25% of subjects with HCV RNA below LLOD. Null responders were defined as patients with a documented
failure to achieve a 1.0 log10or greater decline in HCV RNA
in 4 weeks or a 2.0 log10or greater decline in HCV RNA in 12
weeks of prior treatment with pegylated interferon and ribavirin.

During the quarter ended March 31,
2011, Roche initiated a study of mericitabine in combination with ritonavir-boosted danoprevir with and without
Copegus® (ribavirin) in interferon-naïve subjects with HCV genotype 1. This study, named
INFORM-SVR, is evaluating the safety and efficacy of the combination of mericitabine 1000mg, danoprevir 100mg, and ritonavir 100mg administered twice daily plus either Copegus® (ribavirin) or placebo for 12 weeks. The primary efficacy endpoint of the study is the proportion of subjects who achieve an SVR24, defined as HCV RNA below the limit
of detection (<15 IU/ml) 24 weeks after the discontinuation of therapy. Subjects receiving mericitabine, danoprevir, and ritonavir with Copegus® (ribavirin) will discontinue treatment at week 12 if their HCV RNA is below the level of detection at weeks 2 and 10; otherwise, subjects are expected to receive
another 12 weeks of therapy for a total of 24 weeks.

Roche plans to initiate MATTERHORN, a
study designed to evaluate ritonavir-boosted danoprevir and Copegus® (ribavirin) with mericitabine and/or
Pegasys, during the second calendar quarter of 2011. The study is expected to enroll approximately 420 subjects with HCV genotype 1 who failed previous therapy and the primary efficacy endpoint of the study will be the proportion of subjects that
achieve an SVR.

Nucleotide in Combination with an NS5a Replication Complex Inhibitor

Clinical Collaboration Study  (our nucleotide analog polymerase inhibitor, PSI-7977, in combination with Bristol-Myers Squibb
Companys (BMS) NS5a replication complex inhibitor, BMS-790052). During January 2011, we entered into a clinical collaboration agreement with BMS to evaluate the utility of PSI-7977 in combination with BMS-790052, BMSs
NS5a replication complex inhibitor, for the treatment of chronic HCV. This collaboration represents the first cross-company collaboration combining two oral DAAs to address a significant unmet medical need in the treatment of HCV.



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BMS is planning to initiate a proof of concept study of PSI-7977 in combination with
BMS-790052 to evaluate the potential to achieve an SVR, defined as a level of HCV RNA in a subject that is below the limit of detection (<10 IU/ml) after the discontinuation of therapy, with an all oral, once-daily treatment regimen in subjects
across multiple HCV genotypes. The primary goal of the study is to assess the safety, pharmacokinetics and pharmacodynamics of PSI-7977 in combination with BMS-790052, with and without ribavirin, in treatment-naïve subjects chronically infected
with HCV genotypes 1, 2, and 3. The study is planned to start during the second calendar quarter of 2011. BMS will be conducting the study and is responsible for all costs of the study, except for the cost of PSI-7977, which will be supplied by
Pharmasset. Neither party has licensed any commercial rights to the other party.

Pharmassets Proprietary DAA
Combinations

Our drug discovery efforts are now primarily focused on the identification of purine nucleoside/tides
that have resistance profiles that complement the resistance profiles of our pyrimidine analog product candidates, mericitabine and PSI-7977. Purines are phosphorylated by different enzymes than the pyrimidines, and thus should not antagonize the
antiviral activity of the pyrimidines. In vitro, the combination of a purine analog with a pyrimidine analog provides additive to synergistic antiviral activity, potentially due to the fact that each of these classes of analogs compete with a
different class of naturally occurring nucleotides for incorporation into nascent HCV RNA. Such complementary activities offer the potential for a potent dual nucleoside/tide analog-based combination for the future treatment of HCV.

Due to the unique attributes of nucleoside/tides, we believe a combination of two nucleoside/tides could possess a competitive advantage
over SOC and other DAA combinations which do not contain a nucleoside/tide. We also believe that other combinations including a protease inhibitor or non-nucleoside polymerase inhibitor may be limited in their efficacy due to (1) their limited
utility in genotypes other than Genotype 1, and (2) their lower barriers to resistance. Inclusion of a nucleoside/tide in such a combination may improve its barrier to resistance. A dual nucleoside/tide combination has the potential to provide
therapeutic activity for all genotypes. In addition, since nucleoside/tides possess favorable resistance profiles, we believe that dual nucleoside/tide combinations could possess an advantage over other combinations that incorporate drug classes
with less robust resistance profiles. This strategy of dual nucleoside/tide therapy underpins the current standard of care in HIV. Fixed-dose combinations of nucleoside/tides approved to treat HIV have long provided additional advantages, such as
ease of compliance and reduced emergence of resistance.

Purine Nucleotide Product Candidates

Guanosine Program  PSI-938 and PSI-661

In 2007, we launched a purine nucleotide research and development program and in 2009, we nominated two guanine nucleotide analog polymerase inhibitors, PSI-938 and PSI-661, as development candidates. The
main difference between PSI-938 and PSI-661 is that PSI-661 uses a different prodrug strategy than PSI-938. PSI-938 and PSI-661 have demonstrated potent in vitro anti-HCV activity with EC90 values of 1.43 +/- 0.67 μM and 0.01 +/- 0.005
μM, respectively. PSI-938 and PSI-661 have many of the benefits of our pyrimidine nucleoside/tide analogs, mericitabine and PSI-7977, because we believe that they:



| |  |  | Have demonstrated similar in vitro activity across multiple HCV genotypes,
| | - |  | --------------------------------------------------------------------------



| |  |  | Have a higher barrier to resistance than other classes of HCV small molecules in development, and
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | Have a lower risk of drug interactions when combined with other direct acting antivirals targeting HCV.
| | - |  | -------------------------------------------------------------------------------------------------------

Furthermore, these purines are metabolized to the same active triphosphate form through a different phosphorylation pathway than the pyrimidine analogs,
mericitabine and PSI-7977, thus decreasing the risk of metabolic competition during phosphorylation. The in vitro half-life of the triphosphate in primary human hepatocytes is approximately 12 hours for PSI-938 and PSI-661, which supports the
exploration of once-daily dosing in early development. Importantly, PSI-938 and PSI-661 retain equivalent potency against wild type HCV as well as virus with the S282T mutation associated with in vitro resistance to other nucleoside/tide analogs
under development, such as mericitabine, PSI-7977, IDX184 and INX189. In vitro resistance studies have demonstrated that resistance to PSI-938 and PSI-661 in HCV GT 2a requires three amino acid changes, including S15G, C223H, and V321I. In addition,
we found that the



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C223H change is essentially a lethal mutation for HCV genotype 1 and is consistent with the inability to select HCV genotype 1 replicons resistant to either PSI-938 or PSI-661. PSI-7977 remains
fully active against HCV genotpye 2a with these mutations. Based on these characteristics, PSI-938 has been combined with our pyrimidine analog, PSI-7977, as part of a future regimen and is now the focus of upcoming trials.

PSI-938 Development

Phase 1 Studies. In April 2010, we initiated a Phase 1 study of PSI-938, which was a SAD study to assess the safety, tolerability, and pharmacokinetics of PSI-938 following single oral
administration in healthy subjects. Results from this study include:



| |  |  | Single ascending doses of PSI-938 up to 1600mg were generally safe and well tolerated,
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Based upon the long terminal half-life, once-daily dosing is likely.
| | - |  | --------------------------------------------------------------------

During July 2010, we initiated a Phase 1 MAD study of PSI-938 administered as monotherapy in treatment naïve subjects with HCV
genotype 1. Forty subjects were enrolled and randomized to PSI-938 (8 per cohort) or placebo (2 per cohort). The primary objective of the study was to assess the safety, tolerability, and pharmacokinetics of PSI-938 administered as monotherapy over
seven days. The secondary objective of this study was to assess antiviral activity by measuring the change in circulating HCV RNA levels. Four dose cohorts of PSI-938 (100mg QD, 200mg QD, 300mg QD, and 100mg BID) were evaluated. Results from this
study to date indicated PSI-938 was generally safe and well tolerated across all cohorts with no discontinuations, no serious adverse events, and no dose-related trends in adverse events or laboratory abnormalities. Antiviral results from this study
are summarized in the following table:



|          |  |   |   |         |                                              |  |         |                      |  |                                |  |  |   |  |  |  |   | 
|--------- |  | - | - | ------- | -------------------------------------------- |  | ------- | -------------------- |  | ------------------------------ |  |  | - |  |  |  | - | 
|Dose      |  | n |   |         | Median Changein HCV RNAat Day 8(log10 IU/mL) |  |         | Range (log10 
IU/mL) |  | Number of Subjectswith HCV RNA | 
|          |  |   |   | <LLOD 1 |                                              |  | <LLOQ 2 |                     
|100mg QD  |  |   | 8 |         |                                              |  | -4.31   |                      |  | -2.66 to -5.12                 |  |  | 1 |  |  |  | 3 | 
|200mg QD  |  |   | 8 |         |                                              |  | -4.64   |                      |  | -3.49 to -5.35                 |  |  | 5 |  |  |  | 7 | 
|300mg QD  |  |   | 8 |         |                                              |  | -3.94   |                      |  | -3.43 to -5.29                 |  |  | 4 |  |  |  | 4 | 
|100mg BID |  |   | 8 |         |                                              |  | -4.59   |                      |  | -3.94 to -5.08                 |  |  | 2 |  |  |  | 3 | 
|Placebo   |  |   | 8 |         |                                              |  | -0.05   |                      |  | +0.17 to -0.29                 |  |  | 0 |  |  |  | 0 | 

1 LLOD represents lower limit of detection by Roche Taqman Assay
(<15 IU/mL)

2 LLOQ represents lower limit of quantification by Roche Taqman Assay (<43 IU/mL)

PSI-938 demonstrated potent antiviral activity across all dose cohorts with a median HCV RNA change from baseline of
4.31 log10IU/mL, 4.64 log10IU/mL, 3.94
log10IU/mL, and 4.59 log10IU/mL in subjects receiving 100mg QD, 200mg QD, 300mg QD and 100mg BID
for 7 days, respectively. HCV RNA declined consistently throughout the 7-day dosing period, with no viral breakthrough. For the 16 subjects who received PSI-938 200 mg QD or 300 mg QD for 7 days, more than half (9 of 16) of the subjects on PSI-938
monotherapy achieved HCV RNA below the limit of detection (15 IU/mL) and 11 out of 16 subjects achieved HCV RNA below the limit of quantification (43 IU/mL).

Nucleotide in Combination with Another Nucleotide



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Complementary Nucleotides in Combination Study(our guanine
nucleotide analog polymerase inhibitor, PSI-938, in combination with our uracil nucleotide analog polymerase inhibitor, PSI-7977).In late November 2010, we began dosing PSI-938 in NUCLEAR, Part 2 of a Phase 1 study that included the
first combinations of a purine (PSI-938) and a pyrimidine (PSI-7977) nucleotide analog for the treatment of HCV. The cohorts within NUCLEAR evaluated PSI-938 QD, in the absence of interferon, as monotherapy and in combination with PSI-7977 QD. The
primary objective of NUCLEAR was to assess the safety, tolerability and pharmacokinetics of PSI-938 alone and in combination with PSI-7977 over 14 days of dosing. The secondary objective of NUCLEAR was to evaluate the short-term change in HCV RNA.

Forty subjects with HCV genotype 1 were enrolled into one of four cohorts (10 subjects per cohort, n = 8 and placebo = 2) as
follows:



| |  |  | Cohort 1  PSI-938 300mg QD administered as monotherapy for 14 days,
| | - |  | --------------------------------------------------------------------



| |  |  | Cohort 2  PSI-938 300mg QD for 7 days followed by the combination of PSI-938 300mg QD plus PSI-7977 400mg QD for 7 days,
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Cohort 3  PSI-7977 400mg QD for 7 days followed by the combination of PSI-7977 400mg QD plus PSI-938 300mg QD for 7 days,
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Cohort 4  PSI-938 300mg QD plus PSI-7977 400mg QD for 14 days.
| | - |  | ---------------------------------------------------------------

Results from Part 2 of this Phase 1 study indicated:



| |  |  | PSI-938 and PSI-7977 (individually and in combination) were generally safe and well tolerated across all cohorts;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | There were no serious adverse events and no dose modifications or discontinuations; and
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | There were no clinically significant, treatment-emergent trends in laboratory parameters, vital signs or ECGs;
| | - |  | --------------------------------------------------------------------------------------------------------------



| |  |  | No viral breakthrough was observed during therapy. Antiviral activity for each of the four cohorts is provided in the following table:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



|         |  |                                      |  |                                   |  |              |  |                    |  |                                   |  |              |  |            |  |  |  |  |  |  |     |  |  |  |     | 
|-------- |  | ------------------------------------ |  | --------------------------------- |  | ------------ |  | ------------------ |  | --------------------------------- |  | ------------ |  | ---------- |  |  |  |  |  |  | --- |  |  |  | --- | 
|         |  | Median BaselineHCV 
RNA(log10 IU/ML) |  | At Day 7                          |  | At Day 14    |  | Total1# < LOD /(%) |  |                                   |  |              |  |            |  |  | 
|         |  | # < LOD                              |  | Median Decreasein HCV RNA[Q1, Q3] |  | # < LOQ      |  | # < LOD            |  | Median Decreasein HCV RNA[Q1, Q3] |  |              |  |            |  |  |  |  |  | 
|Cohort 1 |  | 6.9                                  |  | 2/8                               |  | -4.5         |  | 5/8                |  | 4/8                               |  | -5.2         |  | 4/8 (50%)  |  |  |  |  |  |  |     |  |  |  |     | 
|         |  |                                      |  |                                   |  | (-4.3, -4.7) |  |                    |  |                                   |  | (-4.8, -5.8) |  |            |  |  |  |  |  |  |     |  |  |  |     | 
|         |  |                                      |  |                                   |  |              |  |                    |  |                                   |  |              |  |            |  |  |  |  |  |  |     |  |  |  | 92% | 
|Cohort 2 |  | 6.3                                  |  | 2/8                               |  | -4.6         |  | 8/8                |  | 8/8                               |  | -5.2         |  | 8/8 (100%) |  |  |  |  |  |  | 94% |  | 
|         |  |                                      |  |                                   |  | (-4.2, -5.0) |  |                    |  |                                   |  | (-4.8, -5.5) |  |            |  |  |  |  |  | 
|Cohort 3 |  | 6.3                                  |  | 4/8                               |  | -4.7         |  | 8/8                |  | 7/8                               |  | -5.0         |  | 7/8(88%)   |  |  |  |  |  | 
|         |  |                                      |  |                                   |  | (-4.3, -4.8) |  |                    |  |                                   |  | (-4.6, -5.4) |  |            |  |  |  |  |  |  |     |  | 
|Cohort 4 |  | 6.2                                  |  | 1/8                               |  | -4.4         |  | 8/8                |  | 5/8                               |  | -5.0         |  | 7/8(88%)2  |  |  |  |  |  |  |     |  | 
|         |  |                                      |  |                                   |  | (-4.2, -4.8) |  |                    |  |                                   |  | (-4.7, -5.3) |  |            |  |  |  |  |  |  |     |  | 

1 Cumulative total of individuals whose HCV RNA reached < LOD
as a result of the study treatment.

2 Includes 2 additional patients whose HCV RNA reached < LOD on day 16.

In summary, 15 of 16, or 94% of subjects receiving PSI-938 or PSI-7977 for 7 days followed by PSI-938 and PSI-7977 for 7 days had HCV RNA levels below
the limit of detection at day 14. Including cohort 4 where 7 of 8 subjects had HCV RNA levels below the limit of detection after 14 days of dosing (2 of the 7 subjects HCV RNA levels were not



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below the level of detection until day 16), 22 of 24, or 92% of subjects had HCV RNA levels below the limit of detection.

Phase 2b QUANTUM Study. We are planning to initiate a Phase 2b QUANTUM study. Conceptually, this study is expected to be interferon-free and designed to evaluate PSI-938 QD and
PSI-7977 QD in various combinations and potentially as monotherapy, and will likely explore treatment durations, multiple HCV genotypes and have an SVR endpoint.

PSI-661 Development

We have been progressing PSI-661, an HCV guanine
nucleotide analog polymerase inhibitor, through IND-supporting preclinical studies. As previously disclosed, our plan was to select either PSI-938 or PSI-661 for later-stage clinical development, since both compounds deliver the same active
triphosphate. Based on the early antiviral potency, lack of identifiable safety signals, and lack of clinically relevant interaction with PSI-7977, in addition to the successful completion of 6 month toxicology studies, we have decided to advance
PSI-938 into a Phase 2b QUANTUM study and not begin clinical development of PSI-661 at this time.

Financial
History

We have incurred substantial operating losses since our inception because we have devoted substantially all of
our resources to our research and development activities and have not generated any revenue from the sale of approved drugs. As of March 31, 2011, we had an accumulated deficit of $276.8 million. We expect our operating losses to increase
for at least the next few years as we continue to pursue the clinical development of PSI-7977, PSI-938, and potentially PSI-661 and as we expand our discovery and development pipeline.

We have funded our operations primarily through the sale of equity securities, payments received under collaboration agreements,
borrowings under our Loan Agreement, and interest earned on investments. We expect to continue to fund our operations over the next several years through our existing cash resources, potential future milestone payments that we expect to receive from
Roche if certain conditions are satisfied, interest earned on our investments, and additional capital to be raised through public or private equity offerings or debt financings. We will require additional financing in the future to fund our
operations. Additional financing may not be available on acceptable terms, if at all. As of March 31, 2011, we had $208.3 million of cash and cash equivalents.

Revenues

All of our product candidates are currently in development
and, therefore, we do not expect to generate any direct revenues from product sales for at least the next few years, if at all. Our revenues to date have been generated primarily from milestone payments under our collaboration agreements, license
fees, and research funding. We currently have a collaboration agreement with Roche for the development of mericitabine. We entered into our collaboration agreement with Roche in October 2004. Roche subsequently paid us an up-front payment of $8.0
million. As of March 31, 2011, we had received an aggregate of $44.5 million in payments under the Roche collaboration agreement, including research funding and related fees as well as up-front and milestone payments.

Under the current terms of the Roche collaboration agreement, if we and Roche succeed in obtaining all of the regulatory approvals
specified in the agreement for mericitabine, as of March 31, 2011 the maximum future development and commercialization milestone payments payable to us is $105.0 million. Receipt of any additional milestone payments depends on many factors,
some of which are beyond our control. We cannot assure you that we will receive any of these future payments.

We expect our
revenues for at least the next few years to be derived primarily from payments under our current collaboration agreement with Roche and any additional collaboration(s) that we may enter into in the future. In addition to the payments described
above, we may receive future royalties on product sales, if any, under our collaboration agreement with Roche.



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##### Table of Contents

Research and Development Expenses

Our research and development expenses consist primarily of costs of clinical trials (including active pharmaceutical ingredients, or
API), salaries and related personnel expenses, fees paid to external service providers, up-front and milestone payments under our license agreements, patent-related legal fees, costs of preclinical studies, drug and laboratory supplies,
and costs for facilities and equipment. We use external service providers to manufacture our product candidates for clinical trials and for the majority of our preclinical and clinical development work. We charge all research and development
expenses to operations as they are incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an
expense as the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided.

Our research activities are primarily focused on discovering and developing novel drugs to treat HCV. Our development activities are primarily focused on the development of PSI-7977, PSI-938, and
mericitabine (in collaboration with Roche) for the treatment of HCV. We are responsible for all costs incurred in the clinical development of PSI-7977 and PSI-938, as well as the research costs associated with our other internal research programs.

Under our collaboration with Roche, Roche will fund the clinical development and commercialization of mericitabine. Under
this collaboration, Roche reimbursed us for all of the external expenses associated with, and we were responsible for, certain preclinical work, the IND filing, and the proof-of-concept clinical trial. During December 2008, we transferred the IND
application for mericitabine to Roche. Roche will continue to fund all of the expenses of, and be responsible for, other preclinical studies and future clinical development of mericitabine in the territories licensed to Roche. We and Roche will
continue to jointly oversee all development and marketing activities of mericitabine in the territories licensed to Roche. Roche received a license only to PSI-6130 and its pro-drugs, including mericitabine.

Under our clinical collaboration agreement with BMS, BMS will conduct and be responsible for all costs of the proof of concept study of
PSI-7977 in combination with BMS-790052, except for the cost of PSI-7977 to be used in the study, which will be supplied by Pharmasset.

We use our internal research and development resources, including our employees and discovery infrastructure, across various projects. Our related internal expenses are not attributable to a specific
project, but are directed to broadly applicable research activities. Accordingly, we do not account for our internal research and development expenses on a project basis. We use external service providers to manufacture our product candidates for
clinical trials and for the substantial majority of our preclinical and clinical development work. We have tracked some of these external research and development expenses on a project basis. To the extent that expenses are not attributable to a
specific project, they are included in one of the unattributed expenses in the table below.

The following table
summarizes our research and development expenses for our current development programs for the three and six months ended March 31, 2011 and 2010:



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|                                                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|--------------------------------------------------- |  | --------------------------- | ------ |  | ------------------------- | - | ------ | ---------------------- |  | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                    |  | Three months endedMarch 31, |        |  | Six months endedMarch 31, |   |        | CumulativeProjectCosts | 
|                                                    |  | 2011                        |        |  | 2010                      |   |        | 2011                   |  |   | 2010   |  | 
|                                                    |  | (In thousands)              |        |  |                           |  
|Expenses attributed to projects:                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|Mericitabine, or RG7128 Studies (1)                 |  | $                           |       |  |                           | $ |       |                        |  | $ |       |  |  | $ |       |  |  | $ |       | 
|PSI-7977 (including PSI-7851) Studies               |  |                             | 7,338  |  |                           |   | 3,890  |                        |  |   | 17,234 |  |  |   | 6,490  |  |  |   | 41,326 | 
|PSI-938 Studies                                     |  |                             | 3,807  |  |                           |   | 1,667  |                        |  |   | 6,945  |  |  |   | 2,042  |  |  |   | 16,208 | 
|PSI-661 (including PSI-879) Studies                 |  |                             | 426    |  |                           |   | 2,040  |                        |  |   | 1,213  |  |  |   | 2,365  |  |  |   | 6,042  | 
|Clevudine Studies (2)                               |  |                             |       |  |                           |   |       |                        |  |   |       |  |  |   | 1,349  |  |  |   | 72,959 | 
|                                                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|Total attributed expenses                           |  |                             | 11,571 |  |                           |   | 7,597  |                        |  |   | 25,392 |  |  |   | 12,246 |  |  |   |        | 
|                                                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|Unattributed expenses                               |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|Salaries and related personnel expenses             |  |                             | 2,535  |  |                           |   | 2,073  |                        |  |   | 4,668  |  |  |   | 3,987  |  |  |   |        | 
|Non-cash stock compensation expense                 |  |                             | 911    |  |                           |   | 709    |                        |  |   | 2,197  |  |  |   | 1,751  |  |  |   |        | 
|Legal expenses associated with patents              |  |                             | 659    |  |                           |   | 439    |                        |  |   | 1,020  |  |  |   | 833    |  |  |   |        | 
|Preclinical studies and new drug discovery services |  |                             | 482    |  |                           |   | 483    |                        |  |   | 964    |  |  |   | 921    |  |  |   |        | 
|Drug and laboratory supplies                        |  |                             | 306    |  |                           |   | 265    |                        |  |   | 568    |  |  |   | 508    |  |  |   |        | 
|Consulting expense                                  |  |                             | 40     |  |                           |   | 23     |                        |  |   | 42     |  |  |   | 52     |  |  |   |        | 
|Facility and other expenses                         |  |                             | 491    |  |                           |   | 439    |                        |  |   | 912    |  |  |   | 927    |  |  |   |        | 
|                                                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|Total unattributed expenses                         |  |                             | 5,424  |  |                           |   | 4,431  |                        |  |   | 10,371 |  |  |   | 8,979  |  |  |   |        | 
|                                                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 
|Total research and development expenses             |  | $                           | 16,995 |  |                           | $ | 12,028 |                        |  | $ | 35,763 |  |  | $ | 21,225 |  |  |   |        | 
|                                                    |  |                             |        |  |                           |   |        |                        |  |   |        |  |  |   |        |  |  |   |        | 



|(1) | Roche is responsible for all of the expenses associated with the research and development of Mericitabine, or RG7128.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(2) | In April 2009, we voluntarily terminated our Phase 3 registration studies of clevudine for the treatment of hepatitis B virus. We completed the termination process
during the first quarter of fiscal 2010.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We will continue to make determinations as to which programs to pursue
and how much funding to direct to each program on an ongoing basis. These determinations will be made in response to the scientific and clinical success of each product candidate, as well as an ongoing assessment as to the product candidates
commercial potential. We do not believe that it is possible at this time to accurately project total program-specific expenses through commercialization for any of our product candidates, as there are numerous factors associated with the successful
commercialization of any of our product candidates, including future trial design and various regulatory requirements such as competitive final product labeling and reasonable risk management programs, many of which cannot be determined with
accuracy at this time based on our stage of development. Product candidates that may appear promising at early stages of development may not reach the market for a number of reasons. For example, product candidates may be found ineffective or may
cause harmful side effects during clinical trials, may take longer to progress through clinical trials than anticipated, may fail to receive necessary regulatory approvals, or may prove impracticable to manufacture in commercial quantities at
reasonable cost and with acceptable quality. The lengthy process of seeking FDA and other regulatory agency approvals requires the expenditure of substantial resources. Any failure or delay in obtaining regulatory approvals could materially
adversely affect our product development effort and financial condition. Because of these and other risks and uncertainties, we cannot predict when or whether we will successfully complete the development of any of our product candidates or the
ultimate product development cost or whether we will obtain any approval required by the FDA or other regulatory agencies on a timely basis, if at all.

As we obtain results from clinical trials, we may elect to discontinue or delay preclinical studies or clinical trials for a product candidate or development program in order to focus our resources on
more promising product candidates or programs.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation for employees in executive and operational functions, including
accounting, finance, legal, business development, investor relations, information technology, and human resources. Other significant general and administration costs include facilities costs and professional fees for outside accounting and legal
services, travel, insurance premiums, and depreciation.

Results of Operations



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Three and Six Months Ended March 31, 2011 and 2010

Revenues. Revenues were $0.2 million during the quarter ended March 31, 2011, compared to $0.3 million during the quarter
ended March 31, 2010. Revenues were $0.5 million during each of the six month periods ended March 31, 2011 and 2010. Revenues during each three and six month period primarily reflect amortization of up-front and subsequent collaborative
and license payments received from Roche previously recorded as deferred revenue.

The following is a reconciliation between
cash payments received under contract revenue agreements and contract revenues reported:



|                         |  |                             |     |  |                          |   |     |      |  |   |      |  |  |   |     | 
|------------------------ |  | --------------------------- | --- |  | ------------------------ | - | --- | ---- |  | - | ---- |  |  | - | --- | 
|                         |  | Three Months EndedMarch 31, |     |  | Six Months EndedMarch 31 |  
|                         |  | 2011                        |     |  | 2010                     |   |     | 2011 |  |   | 2010 | 
|                         |  | (In thousands)              |     |  | (In thousands)           |  
|Cash received/receivable |  | $                           |    |  |                          | $ | 4   |      |  | $ |     |  |  | $ | 27  | 
|Deferred                 |  |                             |    |  |                          |   |    |      |  |   |     |  |  |   |    | 
|Amortization             |  |                             | 247 |  |                          |   | 247 |      |  |   | 493  |  |  |   | 493 | 
|                         |  |                             |     |  |                          |   |     |      |  |   |      |  |  |   |     | 
|Revenues                 |  | $                           | 247 |  |                          | $ | 251 |      |  | $ | 493  |  |  | $ | 520 | 
|                         |  |                             |     |  |                          |   |     |      |  |   |      |  |  |   |     | 

Research and Development Expenses. Research and development expenses increased to $17.0 million
during the quarter ended March 31, 2011 from $12.0 million during the quarter ended March 31, 2010. This net increase of $5.0 million consists of a $3.4 million increase in preclinical and clinical trial costs for PSI-7977 (including an
increase in active pharmaceutical ingredient (API) manufacturing (and related drug supply) costs and SOC costs of $0.3 million), a $2.1 million increase in preclinical and clinical trial costs for PSI-938, a $0.7 million increase in compensation
expenses ($0.2 million of which was non-cash stock compensation expense), and approximately a $0.4 million increase in other research and development expenses. Partially offsetting this $6.6 million increase was a $1.6 million decrease in
preclinical study costs for PSI-661.

Research and development expenses increased to $35.8 million during the six months
ended March 31, 2011 from $21.2 million during the six months ended March 31, 2010. This net increase of $14.6 million consists of a $10.7 million increase in preclinical and clinical trial costs for PSI-7977 (including an increase in API
manufacturing (and related drug supply) costs and SOC costs of $4.6 million), a $4.9 million increase in preclinical and clinical trial costs for PSI-938 (including an increase in API manufacturing (and related drug supply) costs and SOC costs of
$0.9 million), a $1.1 million increase in compensation expenses ($0.4 million of which was non-cash stock compensation expense), and an approximately $0.4 million increase in other research and development expenses. Partially offsetting this
$17.1 million increase were a $1.3 million decrease in clinical trial expenses for clevudine resulting from our voluntary termination of our Phase 3 registration studies of clevudine, which was completed as of December 31, 2009, and a $1.2
million decrease in preclinical study costs for PSI-661.

General and Administrative Expenses. General and
administrative expenses were $3.8 million during the quarter ended March 31, 2011, an increase of $0.2 million from $3.6 million during the quarter ended March 31, 2010. This net increase of $0.2 million consists of a $0.9 million
aggregate increase in insurance expense, market study costs, and other administrative expenses that were mostly offset by a $0.7 million decrease in legal expenses incurred in connection with our defense against the Demand for Arbitration and Relief
(see Part II., Item 1.Legal Proceedings, for additional information).

General and administrative expenses were
$8.8 million during the six months ended March 31, 2011, an increase of $0.9 million from $7.9 million during the six months ended March 31, 2010. The increase of $0.9 million was due to increases of $0.6 million in compensation
expenses ($0.3 million of which was non-cash stock compensation expense), and a $0.3 million net increase in other administrative expenses.

Other Income. On October 29, 2010, we were awarded two grants ($244,479 each) totaling $489 thousand under the IRS Qualifying Therapeutic Discovery Project (QTDP) program, which was created by
Congress as part of the Patient Protection and Affordable Care Act of 2010. The grants were received on November 12, 2010. One of the grants was awarded for the development of PSI-7977 and the other grant was awarded for the development of
PSI-938



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or PSI-661. All three of these product candidates are being developed for the treatment of HCV and all of the $489 thousand was recorded as Other income in the Statement of Operations
during the three months ended December 31, 2010.

Interest Expense. Interest expense decreased to $0.3 million
during the quarter ended March 31, 2011 from $0.6 million during the quarter ended March 31, 2010, and decreased to $0.7 million during the six months ended March 31, 2011 from $1.3 million during the six months ended March 31,
2010. The decrease in interest expense was due to lower amounts of long-term debt outstanding during 2011 compared to 2010.

Provision (Benefit) for Income Taxes. The provision (benefit) for income taxes was ($973 thousand) and $0 during the three months
ended March 31, 2011 and 2010, respectively and ($973 thousand) and $0 for the six months ended March 31, 2011 and 2010, respectively. The benefit for income taxes recorded for the three and six months ended March 31, 2011 solely
reflects the reversal of a valuation allowance previously recorded against the Companys New Jersey State net operating losses (NOL) that resulted from the Companys sale of $12.3 million of its New Jersey State NOLs under the
State of New Jerseys Technology Business Tax Certificate Transfer Program (the Program) for cash of $973 thousand, net of commissions. The Program allows qualified technology and biotechnology businesses in New Jersey to sell
unused amounts of NOLs and defined research and development tax credits for cash. The remaining net deferred tax asset as of March 31, 2011 remains fully offset by a valuation allowance due to our history of losses.

Liquidity and Capital Resources

Since our inception, we have funded our operations primarily through public and private offerings of our equity securities, payments received under our collaboration agreements, and borrowings under our
Loan Agreement. We have raised approximately $437.5 million in net proceeds from sales of our equity securities and borrowed a total of $23.3 million under our Loan Agreement entered into on September 30, 2007. At March 31, 2011, we held
$208.3 million in cash and cash equivalents and have invested substantially all of our available cash and cash equivalents in a money market fund. Borrowings under our Loan Agreement were $7.0 million as of March 31, 2011.

Net cash used in operating activities was $40.8 million during the six months ended March 31, 2011 compared to $27.3 million during
the six months ended March 31, 2010. The $13.5 million increase in net cash used in operating activities during 2011, as compared to 2010, was due primarily to an increase in cash outflows for operating expenses of $13.1 million, primarily
resulting from the advancement of PSI-7977 into a series of Phase 2 studies during fiscal 2011.

Net cash used in investing
activities of $0.6 million and $25 thousand during the six months ended March 31, 2011 and 2010, respectively, was primarily for the purchase of lab equipment during each period.

Net cash provided by financing activities was $122.7 million during the six months ended March 31, 2011, compared to $30.0 million
during the six months ended March 31, 2010. The net cash provided by financing activities during 2011 consisted of $123.4 million of net proceeds from the issuance of common stock and $4.2 million from the exercise of stock options that were
partially offset by $4.8 million of principal payments on long-term debt. Net cash provided by financing activities during 2010 consisted of $32.7 million of net proceeds from the issuance of common stock and $1.0 million from the exercise of stock
options that were partially offset by $3.7 million of principal payments on long-term debt.

On September 30, 2007, we
entered into a Loan Agreement that allowed us to borrow up to $30.0 million in $10.0 million increments. We borrowed the first and second $10.0 million increments by signing two Secured Promissory Notes (Notes A and B) on October 5,
2007 and March 28, 2008. Notes A and B bear interest at 12%. On December 12, 2008, we amended the Loan Agreement and borrowed $3.3 million by signing a Secured Promissory Note (Note C). Note C bears interest at 12.5%. Notes A,
B, and C are to be repaid over a 45-month period with the first 15 monthly payments representing interest only followed by 30 equal monthly payments of principal and interest. The principal monthly payments on each of the notes begin and end as
follows:



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|       |  |                |  |                
|------ |  | -------------- |  | ---------------
|Note   |  | Begin          |  | End            
|Note A |  | March 1, 2009  |  | August 1, 2011 
|Note B |  | August 1, 2009 |  | January 1, 2012
|Note C |  | May 1, 2010    |  | October 1, 2012

Prepayment of the
loans made pursuant to the Loan Agreement is subject to penalty and substantially all of our tangible and intangible assets (except for intellectual property) are pledged as collateral for the Loan Agreement. Future total principal repayments of the
three Notes amount to $3.9 million in fiscal 2011, $3.0 million in fiscal 2012, and $0.1 million in fiscal 2013. There are no additional borrowings available under the Loan Agreement.

Under the Loan Agreement, we agreed that in the event our market capitalization is below $90.0 million for 15 consecutive days in which
the principal market for our common stock is open for trading to the public, we will be required to repay 50% of the then outstanding principal balance of the loans. We further agreed that in the event our market capitalization is below $40.0
million for 15 consecutive days in which the principal market for our common stock is open for trading to the public, we will be required to repay all of the then outstanding principal balance of the loans.

The Loan Agreement also contains covenants that, among other things, require us to obtain consent from the lender prior to paying
dividends, making certain investments, changing the nature of our business, assuming or guaranteeing the indebtedness of another entity or individual, selling or otherwise disposing of a substantial portion of our assets, or merging or consolidating
with another entity.

Developing drugs, conducting clinical trials and commercializing products is expensive and we will need
to raise additional funds to achieve our strategic objectives. Although we believe our existing cash resources will be sufficient to fund our projected cash requirements for the next 18 months, we will require additional financing in the future to
complete our clinical trials for PSI-7977, PSI-938, and potentially PSI-661, to fund our portion, if any, of the cost of clinical trials for mericitabine completed outside of the territories licensed by Roche, to supply PSI-7977 for the proof of
concept study of PSI-7977 in combination with BMS-790052 under our clinical collaboration agreement with BMS, and to fund our other operations. Additional financing may not be available on acceptable terms, if at all. Our future capital requirements
will depend on many factors, including:



| |  |  | the progress and costs of our preclinical studies, clinical trials, and other research and development activities;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the scope, prioritization, and number of our clinical trials and other research and development programs;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | the amount of cash we receive under our existing collaboration agreement with Roche and any future collaboration agreements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of the development and expansion of our operational infrastructure;
| | - |  | -----------------------------------------------------------------------------



| |  |  | the costs and timing of obtaining regulatory approval of our product candidates;
| | - |  | --------------------------------------------------------------------------------



| |  |  | the ability of our collaborators to achieve development milestones, marketing approval, and other events or developments under our collaboration
agreements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, enforcing, and defending patent claims and other intellectual property rights;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of securing manufacturing arrangements for clinical or commercial production;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales and marketing capabilities or contracting with third parties to provide these capabilities for us;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of acquiring or undertaking development and commercialization efforts for any future product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | the magnitude of our general and administrative expenses; and
| | - |  | -------------------------------------------------------------



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| |  |  | any costs that we may incur under current and future licensing arrangements relating to our product candidates.
| | - |  | ---------------------------------------------------------------------------------------------------------------

Until we can generate significant continuing revenues, we expect to satisfy our future cash needs through equity financings or payments
received under our collaborations. We cannot be certain that additional funding will be available to us on acceptable terms, or at all. If funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our
research or development programs or our commercialization efforts.

Contractual Obligations and Commitments

We entered into an operating lease for office and laboratory space located in Princeton, New Jersey through May 22, 2015. We also
entered into an operating lease for office space located in Durham, North Carolina through December 31, 2015. We executed three secured promissory notes totaling $23.3 million; $10.0 million in October 2007, $10.0 million in March 2008, and
$3.3 million in December 2008. The secured promissory notes require payments of interest only for the first 15 months followed by 30 equal monthly payments of principal and interest. As of March 31, 2011, future payments under the three
promissory notes and minimum future payments under non-cancellable operating leases are as follows:



|                              |  |                |                 |  |                        |           |       |  |           |   |       |              |  |   |     |  |  |   |   | 
|----------------------------- |  | -------------- | --------------- |  | ---------------------- | --------- | ----- |  | --------- | - | ----- | ------------ |  | - | --- |  |  | - | - | 
|                              |  | Total          |                 |  | Payments Due By Period |          
|                              |  |                | Less than1 year |  |                        | 1-3 Years |       |  | 4-5 Years |   |       | After5 Years | 
|                              |  | (In thousands) |                
|Debt obligations              |  |                |                 |  |                        |           |       |  |           |   |       |              |  |   |     |  |  |   |   | 
|Debt maturities               |  | $              | 6,954           |  |                        | $         | 6,081 |  |           | $ | 873   |              |  | $ |    |  |  | $ |  | 
|Contractual interest          |  |                | 423             |  |                        |           | 386   |  |           |   | 37    |              |  |   |    |  |  |   |  | 
|Capital lease obligations     |  |                |                 |  |                        |           |       |  |           |   |       |              |  |   |     |  |  |   |   | 
|Debt maturities               |  |                |                |  |                        |           |      |  |           |   |      |              |  |   |    |  |  |   |  | 
|Contractual interest          |  |                |                |  |                        |           |      |  |           |   |      |              |  |   |    |  |  |   |  | 
|Operating leases              |  |                | 3,859           |  |                        |           | 910   |  |           |   | 2,763 |              |  |   | 186 |  |  |   |   | 
|Purchase obligations          |  |                |                |  |                        |           |      |  |           |   |      |              |  |   |    |  |  |   |  | 
|                              |  |                |                 |  |                        |           |       |  |           |   |       |              |  |   |     |  |  |   |   | 
|Total contractual obligations |  | $              | 11,236          |  |                        | $         | 7,377 |  |           | $ | 3,673 |              |  | $ | 186 |  |  | $ |  | 
|                              |  |                |                 |  |                        |           |       |  |           |   |       |              |  |   |     |  |  |   |   | 

The above contractual obligations table does not include amounts for milestone payments related to
development, regulatory, or commercialization events to licensors or collaboration partners, as the payments are contingent on the achievement of these milestones, which we have not achieved. Under our license agreement with Emory University for
Racivir, we agreed to pay Emory University up to an aggregate of $1.0 million in future marketing milestone payments.

Off-Balance Sheet
Transactions

To date, we have not had any relationships with unconsolidated entities or financial partnerships, such as
entities referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with generally accepted accounting principles
in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and expenses and related disclosures. We review our estimates on an ongoing
basis. We base our estimates on historical experience and on various other assumptions that we believe to be



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reasonable under the circumstances. Our actual results may differ substantially from these estimates under different assumptions or conditions. Our significant accounting policies are described
in more detail in Note 2 of the Notes to Financial Statements included elsewhere in this Quarterly Report on Form 10-Q; however, we believe that the following accounting policies are critical to the judgments and estimates used in the preparation of
our financial statements.

Revenue Recognition

We recognize revenues when all of the following four criteria are present: persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured.

Our
revenues are primarily related to our collaboration agreement with Roche. This agreement provides for various types of payments to us, including non-refundable upfront license fees, research and/or development payments, and milestone payments.

Where we have continuing performance obligations under the terms of a collaborative arrangement, non-refundable upfront
license payments received upon contract signing are recorded as deferred revenue and recognized as revenue as the related activities are performed. The period over which these activities are to be performed is based upon managements estimate
of the development period. Changes in managements estimate could change the period over which revenue is recognized. Research and/or development payments are recognized as revenues as the related research and/or development activities are
performed and when we have no continuing performance obligations related to the research and development payment received.

Where we have no continuing involvement under a collaborative arrangement, we record nonrefundable license fee revenues when we have the
contractual right to receive the payment, in accordance with the terms of the collaboration agreement, and record milestones upon appropriate notification to us of achievement of the milestones by the collaborative partner.

Effective October, 1, 2010, we adopted the new accounting standards for determining whether the milestone method of revenue recognition
is appropriate. We recognize revenue from milestone payments when earned, provided that (i) the milestone event is substantive and its achievability was not reasonably assured at the inception of the agreement and (ii) we do not have
ongoing performance obligations related to the achievement of the milestone earned. Milestone payments are considered substantive if all of the following conditions are met: the milestone payment (a) is commensurate with either the
vendors performance to achieve the milestone or the enhancement of the value of the delivered item or items as a result of a specific outcome resulting from the vendors performance to achieve the milestone, (b) relates solely to
past performance, and (c) is reasonable relative to all of the deliverables and payment terms (including other potential milestone consideration) within the arrangement. Any amounts received under the agreement in advance of performance, if
deemed substantive, are recorded as deferred revenue and recognized as revenue as we complete our performance obligations.

Effective October 1, 2010, the Company also adopted the new accounting standards for revenue recognition for multiple deliverable
revenue arrangements. Each deliverable within a multiple-deliverable revenue arrangement is accounted for as a separate unit of accounting under the guidance of the new authoritative guidance if both of the following criteria are met: (1) the
delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered
probable and substantially in our control.

This new authoritative guidance amends previously issued guidance to eliminate the
residual method of allocation for multiple-deliverable revenue arrangements, and requires that arrangement consideration be allocated at the inception of an arrangement to all deliverables using the relative selling price method. The new
authoritative guidance also establishes a selling price hierarchy for determining the selling price of a deliverable, which includes (1) vendor-specific objective evidence, if available, (2) third-party evidence, if vendor-specific
objective evidence is not available, and (3) estimated selling price if neither vendor-specific nor third-party evidence is available. Additionally, it expands the disclosure requirements related to a vendors multiple-deliverable revenue
arrangements.



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Deferred revenue associated with a non-refundable payment received under a collaborative
agreement that is terminated prior to its completion results in an immediate recognition of the deferred revenue.

Research and Development Expenses - Research and development expenses consist primarily of costs of clinical trials
(including API) salaries and related personnel expenses, fees paid to external service providers, costs of preclinical studies, drug and laboratory supplies, costs for facilities and equipment, and the costs of intangibles that are purchased from
others for use in research and development activities, such as in-licensed product candidates, that have no alternative future uses. Research and development expenses are included in operating expenses when incurred. Reimbursements received from the
Companys collaborator(s) for third-party research and development expenses incurred by the Company on their behalf are recorded as a contra-expense. Amounts due from collaborators for reimbursement of research and development expenses are
recorded on the balance sheets as Amounts due from collaboration partner.

Nonrefundable advance payments for
goods or services that will be used or rendered for future research and development activities are deferred and capitalized. Such amounts are then recognized as an expense as the related goods are delivered or the services are performed, or when the
goods or services are no longer expected to be provided.

Accrued Expenses

We are required to estimate accrued expenses as part of our process of preparing financial statements. This process involves estimating
the level of service performed on our behalf and the associated cost incurred in instances where we have not been invoiced or otherwise notified of actual costs. Examples of areas in which subjective judgments may be required include costs
associated with services provided by contract organizations for preclinical development, clinical trials and manufacturing of clinical materials. We account for expenses associated with these external services by determining the total cost of a
given study based on the terms of the related contract. We accrue for costs incurred as the services are being provided by monitoring the status of the trials and the invoices received from our external service providers. In the case of clinical
trials, the estimated cost normally relates to the projected costs of having subjects enrolled in our trials, which we recognize over the estimated term of the trial according to the number of subjects enrolled in the trial on an ongoing basis,
beginning with subject enrollment. As actual costs become known to us, we adjust our accruals. To date, the number of clinical trials and related research service agreements has been relatively limited and our estimates have not differed
significantly from the actual costs incurred. We expect, however, as clinical trials for PSI-7977, PSI-938, and potentially PSI-661 advance, that our estimated accruals for clinical and research services will be more material to our operations in
future periods.

Stock-based Compensation

We recognize stock compensation expense for awards of equity instruments to employees and directors based on the grant-date fair value of
those awards (with limited exceptions). The grant-date fair value of the award is recognized as compensation expense over the life of the equity instruments issued. Equity instruments granted to consultants are periodically valued and recorded as
stock compensation expense as the equity instrument vests.

Stock-based compensation expense is included in both research and
development expenses and in general and administrative expenses in the statements of operations and comprehensive net income (loss). Since our stock was not publicly traded prior to April 27, 2007, the expected volatility was calculated for
each equity award granted based on the peer method. We identified companies that traded publicly within the pharmaceutical industry that had similar SIC codes, employee count and revenues. Prior to October 1, 2006, we had chosen the
weekly high price volatility for these companies for a period of five years. Subsequent to October 1, 2006, we have used the weekly high price for these companies for a period of six years to coincide with the expected term.

Recently Adopted Accounting Pronouncements

In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements. This ASU provides new accounting standards for determining whether multiple deliverables exist, how
the arrangement should be separated, and how the consideration should be allocated. This guidance requires an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have vendor-specific
objective



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evidence or third-party evidence of selling price. The update eliminates the use of the residual method and requires an entity to allocate revenue using the relative selling price method and also
significantly expands the disclosure requirements for multiple-deliverable revenue arrangements. We adopted these new accounting standards on October 1, 2010 on a prospective basis. Adoption of these new accounting standards did not have any
impact on our financial position or results of operations.

In April 2010, the FASB issued ASU No. 2010-17,
Revenue Recognition  Milestone Method. This ASU provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate. Under the milestone method of revenue recognition,
consideration that is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. This standard
provides the criteria to be met for a milestone to be considered substantive which includes that: a) performance consideration earned by achieving the milestone be commensurate with either performance to achieve the milestone or the enhancement of
the value of the item delivered as a result of a specific outcome resulting from performance to achieve the milestone; b) relate to past performance; and (c) be reasonable relative to all deliverables and payment terms in the arrangement. We
adopted these new accounting standards on October 1, 2010 on a prospective basis. Adoption of these new accounting standards did not have any impact on our financial position or results of operations.



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|ITEM 4. | CONTROLS AND PROCEDURES
|------- | -----------------------

Evaluation of Disclosure Controls and Procedures

Our management, under the supervision and with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures
pursuant to Rule 13a-15 promulgated under the Exchange Act as of March 31, 2011. Our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the rules and forms of the SEC. These disclosure controls and procedures include, among other things, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow
timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives. In addition, management is required to apply its judgment in evaluating the benefits of possible disclosure controls and procedures relative to their costs to implement and maintain.

Based on managements evaluation, our principal executive officer and principal financial officer concluded that our disclosure
controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate,
to allow timely decisions regarding required disclosure. There were no changes in our disclosure controls or procedures identified in connection with the evaluation of such controls or procedures that occurred during our last fiscal quarter, or in
other factors that have materially affected, or are reasonably likely to materially affect, these disclosure controls or procedures.

Changes in Internal Control over Financial Reporting

There were no
changes in our internal control over financial reporting during the three months ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

We are
not a party to any material legal proceedings.

On July 28, 2009, Emory University and University of Georgia Research
Foundation, Inc. (Claimants) filed a Demand for Arbitration and Relief (the Demand) with the American Arbitration Association in Atlanta, Georgia (the Emory Arbitration), claiming certain payments and seeking
specific performance under the Companys January 8, 2004 license agreement with Claimants (the Emory License).

The Demand alleged that payments Pharmasset had received under the Roche collaboration agreement were subject to the Emory License and that Pharmasset had not paid fees to Claimants based on such
payments. In addition, the Demand alleged that Pharmasset had not complied with certain terms and conditions of the Emory License and that other Pharmasset product candidates were, or will be, covered by the Emory License. The Demand requested,
among other things, specific performance of the Emory License, including the payment of license fees related to past payments received by Pharmasset. The Companys response to the Demand was filed on August 14, 2009.

On December 6, 2010 a final arbitration award (the Award) was issued by a panel of AAA arbitrators. According to the
Award, none of the payments the Company received under the Roche collaboration agreement were



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subject to the Emory License and, therefore, no license fees were owed to Emory based upon such payments. Furthermore, according to the Award, none of the other Company product candidates that
were subject to the Demand are covered by the Emory License.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

There have
been no material changes to the risk factors discussed in Part I, Item 1A. Risk Factors, in our Annual Report on Form 10-K for the year ended September 30, 2010 (Form 10-K). You should carefully consider the
risks described in our Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be
negatively affected.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|------- | -----------------------------------------------------------

On September 30, 2007, we entered into the Venture Loan and Security Agreement with Horizon Technology Funding Company V, LLC (the Lender) that allowed us to borrow up to $30.0 million in
$10.0 million increments (Loan Agreement). In conjunction with entering into the Loan Agreement and with executing three secured promissory notes in connection therewith, we granted warrants to the Lender to purchase 127,248 shares of
our common stock at an exercise price of $12.05 per share. During the three months ended March 31, 2011, the Lender elected to exercise 24,896 warrants using the net issuance method, which resulted in the issuance by us of 20,282
shares of our common stock. The remaining warrants expire seven years from the date of grant (or upon a change of control as defined in the Loan Agreement) as follows: 22,130 expire on September 30, 2014 and 16,597 expire on March 28,
2015. We did not receive any consideration from the issuance of shares of common stock to the Lender upon net exercise of the warrants.

The warrants and the common stock underlying the warrants were granted to the Lender in reliance upon the exemption from registration requirements under Regulation D and Rule 506 promulgated under the
Securities Act of 1933, as amended (the Securities Act). In connection therewith, we relied, among other things, upon representations by the Lender regarding its intentions to acquire the securities for investment only and not with a
view to distribute or sell in connection with any distribution. The warrants were affixed with appropriate restrictive legends at the time of grant. Certificates representing the 20,282 shares of common stock issued to the Lender upon net exercise
of the warrants were issued without restrictive legends in accordance with the provisions of Rule 144 promulgated under the Securities Act.



|ITEM 6. | EXHIBITS
|------- | --------



|               |  |                                                              
|-------------- |  | -------------------------------------------------------------
|Exhibit Number |  | Description                                                  
|               | 
|4.1# +         |  | 2007 Equity Incentive Plan, as amended through March 23, 2011
|               | 
|31.1*          |  | Rule 13a-14(a)/15d-14(a) Certification                       
|               | 
|31.2*          |  | Rule 13a-14(a)/15d-14(a) Certification                       
|               | 
|32.1*          |  | Section 1350 Certification                                   
|               | 
|32.2*          |  | Section 1350 Certification                                   

* - Filed herewith.



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# - Contract or compensatory plan or arrangement.

+ - Filed as an Exhibit to our Registration Statement on Form S-8 filed with the SEC on May 9, 2011.



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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.



|      |  |             |  |                  |  |     |  |                                                                                                  
|----- |  | ----------- |  | ---------------- |  | --- |  | -------------------------------------------------------------------------------------------------
|      |  |             |  | PHARMASSET, INC.
|      |  |             |  |                 
|Date: |  | May 9, 2011 |  |                  |  | By: |  | /s/ Kurt Leutzinger                                                                              
|      |  |             |  |                  |  |     |  | Kurt Leutzinger Chief
Financial Officer (duly authorized officer and principal financial officer)



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EXHIBIT INDEX



|               |  |                                       
|-------------- |  | --------------------------------------
|Exhibit Number |  | Description                           
|               | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification
|               | 
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification
|               | 
|32.1           |  | Section 1350 Certification            
|               | 
|32.2           |  | Section 1350 Certification            



50