Inflazyme Pharmaceuticals Ltd.: Shareholder Letter and Financial Results for the Quarter Ended September 30, 2006

Inflazyme Pharmaceuticals Ltd. (TSX: IZP) today announced its second quarter financial results for the period ended September 30, 2006.

Dear Shareholder:

As part of my commitment to keep you informed of corporate events, I want to take this opportunity to give you a personal update on Inflazyme and to provide guidance on our future plans. Included also are our financials for the quarter.

Patient enrolment completed for Phase IIb asthma study with IPL512,602

Last week, on November 8, we announced the successful completion of enrolment for our international Phase IIb clinical trial in asthma with our lead compound IPL512,602. We enrolled 218 male and female patients, and the study is an eight week, randomized, double-blind, placebo-controlled, parallel group trial. I am pleased to say that the study continues to be on track, as projected, when we announced its start earlier in the year on May 9. This event represents a key milestone for our company. It is the first time we have undertaken and led a large sophisticated Phase IIb clinical study. Also, the study has the added complexity of being conducted in five different countries.

The purpose of the Phase IIb trial is to evaluate the safety and efficacy of 20 mg IPL512,602 given once a day as an oral pill to patients with moderate to severe asthma who, despite taking current medications, do not gain adequate relief from their asthma.

What does this mean in the real world to asthma sufferers? Asthma is a complex and varied disease with a range of symptoms such as breathlessness, wheezing, chest tightness and cough. Not all asthma sufferers find their symptoms are adequately controlled by the medications currently available. Indeed, a recent (2006) survey by the American College of Allergy, Asthma and Immunology found that less than 50% of asthma patients could manage or prevent their symptoms with current therapies. Inadequate control of the disease can have a significant impact on daily life. Uncontrolled symptoms can cause patients to awaken during the night and prevent them from exercising or participating in sports or games. It can even cause them to be concerned about going outside. Asthma sufferers often become over-reliant on short term rescue medications and when episodes of uncontrolled asthma become very severe it can result in emergency room visits, hospitalization and even death.

The objective of therapy today is to bring about "asthma control". This is defined as controlling symptoms and minimizing the impact of the disease on a patient, and their quality of life. In the last few days, new guidelines have been issued by GINA (the Global Initiative for Asthma) which reinforce this concept stressing the importance of symptom control and enhancing quality of life in defining and treating this disease. We believe that Inflazyme is well positioned to take advantage of the changing asthma therapy landscape with the clinical profile of IPL512,602 observed to date, and the design of the Phase IIb trial.

Our Phase IIb CAPSICS study is evaluating patients with poor asthma control. The objective is to determine whether the addition of IPL512,602 to the patient's normal anti-asthma drug regimen can help bring their asthma under control. A number of measures will be used to assess "control" including a questionnaire specifically developed to measure disease related quality of life (the AQLQ), and another questionnaire specifically measuring asthma control (called the ACQ). These are FDA-endorsed disease specific questionnaires that permit the objective assessment of a patient's asthma and the benefits of any treatment. Symptoms, incidence of night-time awakenings, and the need for additional rescue medication will also be assessed. Taken together, these endpoints will enable us to evaluate the profile of IPL512,602 as a therapy to aid in the control of asthma in moderate to severe asthmatics who remain symptomatic despite taking inhaled steroids.

Future clinical trials with IPL512,602

In general, the clinical evaluation of any new drug is divided into three phases. Phase I evaluates the safety and tolerability of the product in healthy volunteers. The purpose of Phase II trials is to determine the safety of the drug in the patient population, to define the efficacy profile and to establish the effective dose range. When taking a new drug into Phase II clinical studies the full beneficial profile on the disease is not known and cannot be predicted, hence a number of endpoints and patient groups (for example, patients with differing severities of disease) are evaluated. The goal is to define the profile of the drug, the target patient population and the appropriate doses for the larger and longer treatment duration Phase III studies.

IPL512,602 is mid-way through this clinical development path. To date, six Phase I studies and a Phase IIa study in mild to moderate asthmatics have been completed. Upon completion of the current Phase IIb study, the next step will be to complete a dose-ranging study. Based on these results, we will then select the best dose(s) to proceed into Phase III clinical testing. It is our goal to have the program Phase III ready by the end of 2007 or early in 2008, when we would likely seek a partner for its continued development and commercialization.

Research agreement with BioSeek

In June this year, we announced a collaboration with BioSeek, Inc. to characterize the mechanism of action of our Leukocyte Selective Anti-Inflammatory Drugs (LSAIDs(tm)) which include IPL512,602. Our collaboration is making good progress, and if successful, we expect to gain a better understanding of the biological pathways affected by our products. This, in turn, would guide identification of new clinical opportunities beyond asthma. Here it is appropriate to recall that Inflazyme has advanced three LSAIDs(tm) into clinical development, IPL512,602, IPL576,092 and IPL550,260. The latter two compounds have completed Phase IIa and Phase I clinical studies, respectively. No resources are directed towards these products at this time, as we focus on IPL512,602. We are well positioned to capitalize on any successes with both IPL512,602 and the BioSeek collaboration, and have the potential to move rapidly into Phase II clinical trials expanding our franchise in respiratory diseases, subject to obtaining additional financial resources.

IPL455,903 in learning and memory disorders

IPL455,903 is a PDE4 inhibitor discovered and patented by Inflazyme. Inflazyme entered into a Limited License with Helicon Therapeutics, Inc. which allows Helicon to develop the compound in the areas of learning and memory disorders in accordance with the terms of the Limited License. Helicon has advised us to expect the results of the Phase IIa proof of concept study with IPL455,903 (called HT-0712 by Helicon) in Age Associated Memory Impairment (AAMI) in Q1, 2007.

This Phase IIa study is a four week, randomized, double-blind, placebo-controlled, parallel group trial evaluating the efficacy and safety of several doses of IPL455,903 given orally once a day to male and female subjects aged 60 to 80 years, with documented AAMI. Long term memory is evaluated by established computer-based testing methods.

In accordance with the terms of the Limited License with Helicon, we have the option of participating in the future development of IPL455,903. This option must be exercised within 90 days after receiving certain information from Helicon, including, but not limited to, the results of this Phase IIa study. If we exercise our right under the Limited Licence to participate in the future development of IPL455,903, we are obliged to reimburse Helicon for 50% of the development costs incurred from the start of Phase I to the date we exercised our option and we will then be responsible for 50% of all future development costs. Through this option, we will also be entitled to receive 50% of the revenues derived from the commercialization of IPL455,903. If we elect not to exercise this option we will receive certain royalties on any product commercialized. Our decision to participate in the future development of IPL455,903 together with Helicon will depend upon the results of the Phase IIa study and our ability to finance the option.

Other PDE4 inhibitors

The Phase I studies completed with IPL455,903 in 2005 clinically validated Inflazyme's discovery of a unique class of PDE4 inhibitors which do not cause nausea or emesis (vomiting) in human subjects. These side effects are common to other PDE4 inhibitors which have hindered their clinical development. We have filed patents on these distinctive characteristics of our compounds; these characteristics were predicted by our pre-clinical results.

Our research team has now identified several new PDE4 inhibitors with the same unique characteristics, but targeted towards respiratory indications for potential development by Inflazyme. We expect to identify a compound to be advanced towards clinical development by the end of 2006, and we expect to file an Investigational New Drug application during the 2H, 2007.

Future Corporate Plans

When I took the role of CEO in April 2005, I committed the Company would have two products in Phase II clinical trials in a year. Thirteen months later we accomplished that goal. Now we stand to reap the results of those studies. However, getting to this point has been more than executing on our clinical plans. In April 2005 we did not have the financial resources to complete another asthma study. We have steadily and prudently decreased our intrinsic burn rate (financial expenditures excluding the clinical trial), while a corporate reorganization and sale of a subsidiary last October brought in close to $7 million in non-dilutive funds. These activities have enabled us to reach this point where we are on the verge of having three or four key events reach fruition - the results of the Phase IIb asthma study, the Phase IIa results with the memory compound, the outcome of our collaboration with BioSeek, and identification of a new PDE4 inhibitor for clinical development in respiratory disease.

Our financial statements indicate that we have sufficient cash reserves to take us through to end of April 2007 based on our current expenditures. Clearly this is insufficient to build on the progress we are making and to be in a position to take advantage of any successes in the clinical programs. Consequently, we have appointed Pacific Growth Equities LLC of San Francisco and Canaccord Adams Inc. of Toronto as our financial advisors to assist us with identifying and executing the optimum strategy to secure and realize value in our assets. This exercise will review a variety of transactions to understand the landscape of opportunities available to the company. We are committed to executing on a decision that is in the best interests of our shareholders.

Thank you for your continuing support.

Yours sincerely,

Kevin Mullane, Ph.D., President and Chief Executive Officer

Results of Operations for the quarter ended September 30 2006

The net loss for the second quarter ended September 30, 2006 was $2,939,000 ($0.03 per common share) compared to a net income of $535,000 ($0.00 per common share), that was mainly attributed from the gain on sale of the subsidiary, in the corresponding quarter of the prior year.

Loss from operations in the second quarter ended September 30, 2006 was $3,042,000 compared to $2,855,000 in the same quarter of the prior year. The increase in the loss of $187,000 or 6.5% resulted from higher research and development costs offset by lower amortization expenses incurred this quarter as compared to the same quarter of last year.

Research and development expenses

Research and development expenses for the quarter ended September 30, 2006 were $2,027,000 compared to $1,243,000 for the quarter ended September 30, 2005 for an increase of $784,000 or 63%. Contracted research activity increased by $927,000 or 344%. This increase was partially offset by a reduction of $146,000 or 23% in personnel related expenses during the second quarter compared to the corresponding quarter last year. For the remainder of the fiscal year, the Company expects fluctuations in its research and development expenses as contracted research expenses change during those quarters.

General and administration expenses

General and administration expenses for the quarter ended September 30, 2006 of $848,000 were consistent with the corresponding quarter of the prior year of $847,000.

Amortization expenses

The Company recorded $177,000 in amortization expense during the quarter ended September 30, 2006 compared to $775,000 during the corresponding quarter of the prior year.

The amortization amounts have decreased in the current quarter and mainly due to write-downs of the acquired intangible asset balances to $nil in the fourth quarter of fiscal 2006 that resulted in a lower depreciable net asset base for the current quarter and the six months period.

Liquidity and capital resources

At September 30, 2006 the Company's cash and cash equivalents totaled $8,474,000 compared to $12,809,000 at March 31, 2006. Working capital at September 30, 2006 was $7,044,000 compared to $12,511,000 at March 31, 2006. The decrease in working capital reflects the use of capital resources in the on-going operations of the business and an increase in accounts payable and accrued liabilities. Included in accounts payable and accrued liabilities at September 30, 2006 is $1.2 million related to the CAPSICS study.

The Company will continue to have negative cash flows from operations into the future and the Company will endeavor to reduce and control its operating expenses.

Conference Call

Inflazyme will host a conference call to discuss this announcement on Wednesday, November 15, 2006 at 8:00 am PST/11:00 am EST. To access the live call, please dial 416-695-5259 or 1-877-888-4210. Audio replay of the conference call will be available until November 29, 2006 by calling 416-695-5275 or 1-888-509-0081 and entering passcode 635121.

About Inflazyme

Inflazyme Pharmaceuticals is a biopharmaceutical company pioneering medical breakthroughs to transform the lives of patients with respiratory and inflammatory diseases worldwide. Further information on the Company may be obtained from its website at

This news release contains certain "forward-looking statements" and "forward-looking information" which may include but is not limited to statements in respect of our future financial position or operations. Words like "believe", "intend", "may", "expect", "anticipate", "plan", "should" and other similar expressions are forward-looking statements that involve a number of risks and uncertainties. By their nature, forward-looking statements involve numerous factors, assumptions and estimates, some but not all of the factors that could cause actual results to differ materially from those projected in our forward-looking statements include among others: risks associated with the completion of clinical trials and obtaining regulatory approval to market our products, market acceptance of our technologies and products; our ability to obtain financing; our financial and technical resources relative to those of our competitors; our ability to enforce our intellectual property rights and protect our proprietary technologies; the ability to obtain and develop partnership opportunities; and other risk factors identified from time to time in the Company's regulatory filings. For a further description of the principal risks affecting the Company, see our regulatory filings. These factors should be considered carefully and readers are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements.

                                           September 30,       March 31,
                                                   2006            2006
                                          -------------   -------------

Current assets
Cash and cash equivalents                 $   8,474,395   $  12,809,087
Interest receivable                              12,048          26,603
Other receivables                                39,575         189,935
Prepaid expenses                                233,035         455,610
Tax credits recoverable                          52,287          52,233
                                          -------------   -------------
                                              8,811,340      13,533,468

Property and equipment                        1,495,581       1,759,884
Patents and licenses                          1,930,823       1,930,043
                                          -------------   -------------
                                          $  12,237,744   $  17,223,395
                                          -------------   -------------
                                          -------------   -------------


Current liabilities
Accounts payable and accrued
 liabilities                              $   1,767,510   $   1,022,510

Deferred licensing revenue                      249,113         268,275
                                          -------------   -------------
                                              2,016,623       1,290,785
                                          -------------   -------------

Shareholders' equity

Capital stock
 Common shares                              138,910,033     138,910,033
                                          -------------   -------------
                                            138,910,033     138,910,033
Contributed surplus                           1,726,921       1,669,796
Deficit                                    (130,415,833)   (124,647,219)
                                          -------------   -------------
                                             10,221,121      15,932,610

                                          -------------   -------------
                                          $  12,237,744   $  17,223,395
                                          -------------   -------------
                                          -------------   -------------

On behalf of the board

 Kevin Mullane (signed)       Louis Drapeau (signed)
 President and CEO            Director

Inflazyme Pharmaceuticals Ltd.
Consolidated Statements of Operations and Deficit

                 For the Three Months Ended     For the Six Months Ended
               ----------------------------  ---------------------------
                September 30,  September 30, September 30,  September 30,
                        2006           2005          2006           2005
               ----------------------------  ---------------------------

 revenue       $       9,627  $       9,581 $      19,246  $      19,162


Research and
 development       2,026,942      1,242,984     3,656,043      2,445,477
General and
 administration      848,243        847,172     1,999,891      1,959,082
Amortization         176,926        774,733       353,177      1,627,246
               ----------------------------  ---------------------------

Total expenses     3,052,111      2,864,889     6,009,111      6,031,805

Loss from
 operations       (3,042,484)    (2,855,308)   (5,989,865)    (6,012,643)

Interest income      103,283         79,762       221,251        173,158

Gain on sale of
 subsidiary                -      3,310,101             -      3,310,101

 for the period   (2,939,201)       534,555    (5,768,614)    (2,529,384)

 beginning of
 period         (127,476,632)  (116,027,315) (124,647,219)  (112,963,376)
               ----------------------------  ---------------------------

Deficit, end of
 period        $(130,415,833) $(115,492,760)$(130,415,833) $(115,492,760)

Basic and
 diluted loss
 per common
 share         $       (0.03) $        0.00 $       (0.05) $       (0.02)

 average number
 of common
 outstanding     113,534,375    113,534,375   113,534,375    110,814,663

Inflazyme Pharmaceuticals Ltd.
Consolidated Statements of Cash Flows

                 For the Three Months Ended    For the Six Months Ended
               ----------------------------  ---------------------------
                September 30,  September 30, September 30,  September 30,
                        2006           2005          2006           2005
               ----------------------------  ---------------------------

Cash flows from
 for the
 period        $  (2,939,201) $     534,555 $  (5,768,614) $  (2,529,384)
Items not
 affecting cash:
 Amortization        176,926        774,733       353,177      1,627,246
 Gain on sale of
  subsidiary               -     (3,310,101)            -     (3,310,101)
  revenue             (9,582)        (9,581)      (19,163)       (19,162)
  compensation        14,751            842        57,125        126,674
               ----------------------------  ---------------------------
                  (2,757,106)    (2,009,552)   (5,377,475)    (4,104,727)

Changes in
 working capital   1,035,732        747,619     1,132,435        574,062
               ----------------------------  ---------------------------
                  (1,721,374)    (1,261,933)   (4,245,040)    (3,530,665)
               ----------------------------  ---------------------------

Cash flows from
Repayment of
 long-term debt            -       (13,151)             -        (38,045)
 expenses                  -      (109,899)             -       (109,899)
               ----------------------------  ---------------------------
                           -      (123,050)             -       (147,944)

Cash flows from
 investments               -      (845,838)             -       (844,669)
Purchase of
 property and
 equipment                 -        (1,366)        (4,235)        (7,197)
Patents and
 licenses            (24,823)      (63,352)       (85,417)      (108,553)
Net proceeds on
 sale of
 subsidiary                -      3,310,101             -      3,310,101
               ----------------------------  ---------------------------
                     (24,823)     2,399,545       (89,652)     2,349,682

               ----------------------------  ---------------------------
 (decrease) in
 cash and cash
 equivalents      (1,746,197)     1,014,562    (4,334,692)    (1,328,927)

Cash and cash
 beginning of
 period           10,220,592     13,306,845    12,809,087     15,650,334
               ----------------------------  ---------------------------
Cash and cash
 end of period $   8,474,395  $  14,321,407 $   8,474,395  $  14,321,407
               ----------------------------  ---------------------------
               ----------------------------  ---------------------------

 disclosure of
 cash flow
Interest paid              -          1,445             -          3,436
 received            108,901         71,444       209,203        163,533
Issuance of
 common shares
 on conversion
 of Series 1,
 Class A
 shares                    -              -             -     21,957,676

Inflazyme Pharmaceuticals Ltd.
Julie Rezler
Sr. Director, Corporate Development
(604) 279-8511 or 1-800-315-3660
(604) 279-8711 (FAX)

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