**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

**FORM10-Q**

| **x********QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------------------------------------------------------|
| ** **                                                                                            | ** ** |
| ** **                                                                                            | **For the  quarterly period ended June 30, 2007** |
| ** **                                                                                            | ** ** |
| ** **                                                                                            | **or** |
| ** **                                                                                            | ** ** |
| **o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**    |

 

**Forthe transition periodfrom                         to                         **

**Commissionfile number: 000-25571**

**TORREYPINESTHERAPEUTICS, INC.**

(Exact name ofregistrant as specified in its charter)

| **Delaware**                                  |   | **86-0883978**          |
|-----------------------------------------------|--------|-------------------------|
| (State or other  jurisdiction of              |   | (IRS Employer  Id. No.) |
|  incorporation or organization)          |   |                    |
|                                          |   |                    |
| **11085  North Torrey Pines Road, Suite 300** |   | ** **              |
| **La  Jolla, CA**                             |   | **92037**               |
| (Address of  principal executive offices)     |   | (Zip code)              |

 

Registrant’stelephone number, including area code: **(858-623-5665)**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days. Yes   x   No   o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

| Large Accelerated filer   o |   | Accelerated  Filer   o |   | Non-accelerated  filer   x |
|--------------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|

 

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

As of August 7, 2007, there were 15,733,087 shares of our Common Stockoutstanding.

 

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**TorreyPinesTherapeutics, Inc.**

**INDEX**
| PART I.    |   | FINANCIAL INFORMATION                                                                                         |
|------------|--------|---------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                          |
| Item 1.    |   | Financial Statements                                                                                          |
|       |   |                                                                                                          |
|       |   | Consolidated Balance  Sheets as of June 30, 2007 (Unaudited) and December 31, 2006                            |
|       |   |                                                                                                          |
|       |   | Consolidated  Statements of Operations for the three and six months ended June 30, 2007 and  2006 (Unaudited) |
|       |   |                                                                                                          |
|       |   | Consolidated  Statements of Cash Flows for the six months ended June 30, 2007 and  2006  (Unaudited)     |
|       |   |                                                                                                          |
|       |   | Notes to  Consolidated Financial Statements                                                                   |
|       |   |                                                                                                          |
| Item 2.    |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |
|       |   |                                                                                                          |
| Item 3.    |   | Quantitative  and Qualitative Disclosures About Market Risk                                                   |
|       |   |                                                                                                          |
| Item 4.    |   | Controls and  Procedures                                                                                      |
|       |   |                                                                                                          |
| PART II.   |   | OTHER INFORMATION                                                                                             |
|       |   |                                                                                                          |
| Item 1.    |   | Legal Proceedings                                                                                             |
|       |   |                                                                                                          |
| Item  1A.  |   | Risk  Factors                                                                                                 |
|       |   |                                                                                                          |
| Item 4.    |   | Submission of  Matters to a Vote of Security Holders                                                          |
|       |   |                                                                                                          |
| Item  6.   |   | Exhibits                                                                                                      |
|       |   |                                                                                                          |
| Signatures |

 

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**PART I. FINANCIAL INFORMATION**

**ITEM1.  Financial Statements**

**TorreyPinesTherapeutics, Inc.**

**Consolidated Balance Sheets**
| ** **                                                                                                                                                                          | ** ** | **June 30,   2007** | ** ** | **December 31,   2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **(Unaudited)**               | ** ** | ** **                        | ** ** |
| **Assets**                                                                                                                                                                          | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| Current assets                                                                                                                                                                      |       |                          |       |                              |       |
| Cash and cash  equivalents                                                                                                                                                          |       | $                             | 46,710,565 |                              | $          | 55,382,962 |   |
| Prepaid expenses  and other current assets                                                                                                                                          |       | 502,790                       |       | 581,491                           |       |
| Total current  assets                                                                                                                                                               |       | 47,213,355                    |       | 55,964,453                        |       |
|                                                                                                                                                                                |       |                          |       |                              |       |
| Property and equipment,  net                                                                                                                                                        |       | 673,326                       |       | 795,902                           |       |
| Purchased patents, net                                                                                                                                                              |       | 3,710,061                     |       | 3,905,478                         |       |
| Investment in OXIS  International, Inc.                                                                                                                                        |       | 2,808,209                     |       | 2,719,342                         |       |
| Other assets                                                                                                                                                                        |       | 49,397                        |       | 49,696                            |       |
|                                                                                                                                                                                |       |                          |       |                              |       |
| Total  assets                                                                                                                                                                       |       | $                             | 54,454,348 |                              | $          | 63,434,871 |   |
| ** **                                                                                                                                                                          | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| **Liabilities and stockholders’  equity**                                                                                                                                      | ** ** | ** **                    | ** ** | ** **                        | ** ** |
| Liabilities                                                                                                                                                                         |       |                          |       |                              |       |
| Current liabilities                                                                                                                                                                 |       |                          |       |                              |       |
| Accounts payable  and accrued liabilities                                                                                                                                           |       | $                             | 4,053,253  |                              | $          | 4,254,265 |   |
| Long-term debt,  current portion                                                                                                                                                    |       | 3,382,377                     |       | 3,200,826                         |       |
| Common stock  warrant liability                                                                                                                                                     |       | —                        |       | 4,815,000                         |       |
| Total current  liabilities                                                                                                                                                          |       | 7,435,630                     |       | 12,270,091                        |       |
|                                                                                                                                                                                |       |                          |       |                              |       |
| Long-term debt, net of  current portion                                                                                                                                             |       | 2,724,644                     |       | 4,396,649                         |       |
| Deferred revenue                                                                                                                                                                    |       | 3,783,333                     |       | 2,183,333                         |       |
| Deferred rent                                                                                                                                                                       |       | 18,811                        |       | 15,824                            |       |
| Total liabilities                                                                                                                                                                   |       | 13,962,418                    |       | 18,865,897                        |       |
|                                                                                                                                                                                |       |                          |       |                              |       |
| Commitments and  contingencies                                                                                                                                                      |       |                          |       |                              |       |
|                                                                                                                                                                                |       |                          |       |                              |       |
| Stockholders’ equity                                                                                                                                                           |       |                          |       |                              |       |
| Preferred stock,  $0.001 par value, 15,000,000 shares authorized, 0 shares outstanding at June  30, 2007 and December 31, 2006, respectively                                   |       | —                        |       | —                            |       |
| Common stock,  $0.001 par value, 150,000,000 shares authorized, 15,733,087 and 15,676,964  shares issued and outstanding at June 30, 2007 and December 31, 2006,  respectively |       | 15,733                        |       | 15,677                            |       |
| Additional  paid-in capital                                                                                                                                                         |       | 121,708,930                   |       | 117,417,003                       |       |
| Accumulated  other comprehensive income                                                                                                                                             |       | 237,813                       |       | 168,301                           |       |
| Accumulated  deficit                                                                                                                                                                |       | (81,470,546                   | )          | (73,032,007                       | )          |
| Total stockholders’  equity                                                                                                                                                    |       | 40,491,930                    |       | 44,568,974                        |       |
|                                                                                                                                                                                |       |                          |       |                              |       |
| Total liabilities and stockholders’ equity                                                                                                                                     |       | $                             | 54,454,348 |                              | $          | 63,434,871 |   |

 

*Seeaccompanying notes.*

1

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**TorreyPinesTherapeutics, Inc.**

**Consolidated Statements of Operations**

(Unaudited)
| ** **                                                                                                                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenue                                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| License and option fees                                                                                                       |       | $                                               | 1,700,000  |                                          | $          | 1,700,000 |   | $ | 3,400,000 |   | $ | 3,400,000 |   |
| Research funding                                                                                                              |       | 762,500                                         |       | 762,500                                       |       | 1,525,000 |   | 1,525,000 |   |
| Total revenue                                                                                                                 |       | 2,462,500                                       |       | 2,462,500                                     |       | 4,925,000 |   | 4,925,000 |   |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Research and development                                                                                                      |       | 7,051,673                                       |       | 7,511,612                                     |       | 12,229,074 |   | 13,170,612 |   |
| General and administrative                                                                                                    |       | 1,463,359                                       |       | 633,521                                       |       | 2,857,855 |   | 1,305,782 |   |
| Total operating  expenses                                                                                                     |       | 8,515,032                                       |       | 8,145,133                                     |       | 15,086,929 |   | 14,476,394 |   |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Loss from  operations                                                                                                         |       | (6,052,532                                      | )          | (5,682,633                                    | )          | (10,161,929 | ) | (9,551,394 | ) |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Other income  (expense)                                                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                                                                                                               |       | 587,226                                         |       | 249,900                                       |       | 1,194,980 |   | 473,259 |   |
| Interest expense                                                                                                              |       | (215,755                                        | )          | (298,924                                      | )          | (453,170 | ) | (456,408 | ) |
| Equity in income of OXIS International, Inc.                                                                                  |       | 314,649                                         |       | —                                        |       | 88,868 |   | — |   |
| Warrant valuation adjustment                                                                                                  |       | 208,712                                         |       | —                                        |       | 892,712 |   | — |   |
| Gain on asset disposal                                                                                                        |       | —                                          |       | —                                        |       | — |   | 2,584 |   |
| Total other  income (expense)                                                                                                 |       | 894,832                                         |       | (49,024                                       | )          | 1,723,390 |   | 19,435 |   |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                                                                                                                      |       | (5,157,700                                      | )          | (5,731,657                                    | )          | (8,438,539 | ) | (9,531,959 | ) |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Dividends and  accretion to redemption value of redeemable convertible preferred stock                                        |       | —                                          |       | (1,148,754                                    | )          | — |   | (2,296,491 | ) |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Net loss  attributable to common stockholders                                                                                 |       | $                                               | (5,157,700 | )                                             | $          | (6,880,411 | ) | $ | (8,438,539 | ) | $ | (11,828,450 | ) |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Basic and  diluted net loss per share attributable to common stockholders                                                     |       | $                                               | (0.33      | )                                             | $          | (12.83 | ) | $ | (0.54 | ) | $ | (22.07 | ) |
|                                                                                                                          |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average shares  used in the computation of basic and diluted net loss per share attributable  to common stockholders |       | 15,711,588                                      |       | 536,123                                       |       | 15,699,834 |   | 535,852 |   |

 

*Seeaccompanying notes.*

2

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**TorreyPinesTherapeutics, Inc.**

**Consolidated Statements of Cash Flows**

(Unaudited)
| ** **                                                                   | ** ** | **Six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Operating activities**                                                     | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net loss                                                                     |       | $                                             | (8,438,539 | ) | $ | (9,531,959 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                          |       |   |   |
| Depreciation                                                                 |       | 196,224                                       |       | 345,969 |   |
| Stock-based compensation                                                     |       | 326,280                                       |       | 54,277 |   |
| Amortization of debt discount                                                |       | 65,825                                        |       | 48,102 |   |
| Amortization of purchased patents                                            |       | 195,417                                       |       | — |   |
| Deferred rent                                                                |       | 2,986                                         |       | 7,193 |   |
| Deferred revenue                                                             |       | 1,600,000                                     |       | (3,400,000 | ) |
| Gain on disposal of assets                                                   |       | —                                        |       | (2,584 | ) |
| Equity in income of OXIS International, Inc.                            |       | (88,868                                       | )          | — |   |
| Change in warrant valuation                                                  |       | (892,712                                      | )          | — |   |
| Changes in operating assets and liabilities:                                 |       |                                          |       |   |   |
| Prepaid expenses and other current assets                                    |       | 79,361                                        |       | 214,727 |   |
| Other assets                                                                 |       | 299                                           |       | (175,221 | ) |
| Accounts payable and accrued liabilities                                     |       | (204,471                                      | )          | (215,340 | ) |
| Net cash used in  operating activities                                       |       | (7,158,198                                    | )          | (12,654,836 | ) |
| ** **                                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Investing  activities**                                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Purchases of  property and equipment                                         |       | (73,648                                       | )          | (133,483 | ) |
| Net cash used in  investing activities                                       |       | (73,648                                       | )          | (133,483 | ) |
| ** **                                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Financing  activities**                                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Issuance of  common stock                                                    |       | 43,414                                        |       | 6,000 |   |
| Issuance of  preferred stock, net of issuance costs                          |       | —                                        |       | 6,322,165 |   |
| Proceeds from  long-term debt                                                |       | —                                        |       | 5,000,000 |   |
| Payments on  long-term debt                                                  |       | (1,556,277                                    | )          | (633,566 | ) |
| Net cash  provided by (used in) financing activities                         |       | (1,512,863                                    | )          | 10,694,599 |   |
|                                                                         |       |                                          |       |   |   |
| Effect of  exchange rate changes on cash                                     |       | 72,312                                        |       | 199,589 |   |
|                                                                         |       |                                          |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (8,672,397                                    | )          | (1,894,131 | ) |
|                                                                         |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                            |       | 55,382,962                                    |       | 28,756,888 |   |
|                                                                         |       |                                          |       |   |   |
| Cash and cash  equivalents at end of period                                  |       | $                                             | 46,710,565 |   | $ | 26,862,757 |   |
| ** **                                                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| **Supplemental  disclosure of cash flow information**                        | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Cash paid for  interest                                                      |       | $                                             | 387,345    |   | $ | 408,306 |   |
| Warrant issued  in conjunction with debt                                     |       | $                                             | —     |   | $ | 212,665 |   |
| Noncash purchases of  property and equipment                                 |       | $                                             | —     |   | $ | 2,584 |   |

 

*Seeaccompanying notes.*

3

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**TorreyPinesTherapeutics, Inc.**

**Notes to Consolidated FinancialStatements**

**June30, 2007**

(Unaudited)

**(1) Basisof Presentation**

The accompanyingunaudited consolidated financial statements of TorreyPines Therapeutics, Inc.(together with our wholly-owned subsidiaries, TPTX, Inc. and TorreyPinesTherapeutics Europe NV) should be read in conjunction with the auditedfinancial statements and notes thereto as of, and for the year ended December31, 2006 included in our Annual Report on Form 10-K filed with the Securitiesand Exchange Commission (the “SEC”).  The accompanying financialstatements have been prepared in accordance with United States generallyaccepted accounting principles (“GAAP”) and with the rules and regulations ofthe SEC related to a quarterly report on Form 10-Q.  Accordingly,they do not include all of the information and disclosures required by GAAP forcomplete financial statements.  In the opinion of our management, theaccompanying financial statements reflect all adjustments (consisting of normalrecurring adjustments) that are necessary for a fair presentation of thefinancial position, results of operations and cash flows for the interimperiods presented.  Interim results are not necessarily indicative ofresults for a full year.

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the amounts reported in the financialstatements and the accompanying notes.  Actual results could differ fromthose estimates.

Prior to October 3,2006 we were known as Axonyx Inc. On October 3, 2006, we completed a businesscombination, referred to as the Merger, with TorreyPines Therapeutics, Inc.(now known as TPTX, Inc.).  For accounting purposes, we were deemed to bethe acquired entity in the Merger, and the Merger was accounted for as areverse acquisition. In connection with the Merger, we changed our name toTorreyPines Therapeutics, Inc. and effected an 8-for-1 reverse stock split ofour common stock. Our financial statements reflect the historical results ofTPTX, Inc. prior to the Merger and that of the combined company following theMerger, and do not include the historical results of Axonyx Inc. prior to thecompletion of the Merger. All share and per share disclosures have been retroactivelyadjusted to reflect the exchange of shares in the Merger, and the 8-for-1reverse split of our common stock on October 3, 2006.  References in thisreport to “TorreyPines,” “Company,” “we,” “us” and “our” refer to TorreyPinesTherapeutics, Inc. and its subsidiaries.

** (2) Comprehensive Loss**

Statement ofFinancial Accounting Standards (“SFAS”) No. 130,*Reporting Comprehensive Income,* requires that allcomponents of comprehensive income, including net income or loss and foreigncurrency translation adjustments, be reported in the financial statements inthe period in which they are recognized. Comprehensive income or loss isdefined as the change in equity during a period from transactions and otherevents and circumstances from non-owner sources. Our comprehensive loss is asfollows:
| ** **                                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                                  |       | $                                                   | (5,157,700 | )                                                 | $          | (5,731,657 | ) | $ | (8,438,539 | ) | $ | (9,531,959 | ) |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Foreign currency  translation adjustments |       | 36,090                                              |       | 133,484                                           |       | 69,512 |   | 199,263 |   |
|                                      |       |                                                |       |                                              |       |   |   |   |   |
| Comprehensive  loss                       |       | $                                                   | (5,121,610 | )                                                 | $          | (5,598,173 | ) | $ | (8,369,027 | ) | $ | (9,332,696 | ) |

 

4

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**(3) NetLoss Per Share**

We calculate netloss per share in accordance with SFAS No. 128,*Earnings Per Share*.  Basic net loss per share iscomputed by dividing net loss by the weighted-average number of shares ofcommon stock outstanding during the periods presented.  Diluted net lossper share is computed by dividing net loss by the weighted-average number ofshares of common stock outstanding increased to include potentially dilutivecommon stock equivalents outstanding during the period.  For the three-and six-month periods ended June 30, 2007 and 2006, there is no differencebetween basic and diluted net loss per share attributable to commonstockholders because the effect of common stock equivalents outstanding duringthe periods, including stock options, restricted stock units, warrants andredeemable convertible preferred stock, is antidilutive.

**(4)  Common Stock Warrant Liability**

During the quarter ended June 30, 2007, we obtained letters from theholders of warrants issued in connection with the Merger clarifying the warrantagreement provisions to allow for settlement of these warrants with theissuance of unregistered shares and to further clarify that a net cashsettlement is prohibited.  Prior toobtaining the clarification letters, the provisions of the warrant agreementrequired liability treatment for these instruments under Emerging Issues TaskForce Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexedto, and Potentially Settled in, a Company’s Own Stock.”  On each of the effective dates of theseclarification letters (for which we received no additional consideration), theaggregate fair value of $3,922,288 for these warrants, as calculated using theBlack-Scholes model, was reclassified from current liabilities to additionalpaid-in capital and a warrant valuation adjustment of $208,712 was recorded asother income on the accompanying consolidated statement of operations.  As of June 30, 2007, the common stock warrantliability was $0.

**(5) Commitmentsand Contingencies**

Several lawsuitswere filed against us in February 2005 in the U.S. District Court for theSouthern District of New York asserting claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as amended, or the ExchangeAct and Rule 10b-5 thereunder on behalf of a class of purchasers of Axonyxcommon stock during the period from June 26, 2003, through and includingFebruary 4, 2005, referred to as the class period. Dr. Marvin S.Hausman, M.D., a former director and our former Chief Executive Officer, andDr. Gosse B. Bruinsma, M.D., also a former Chief Executive Officer,were also named as defendants in the lawsuits. These actions were consolidatedinto a single class action lawsuit in January 2006. On April 10,2006, the class action plaintiffs filed an amended consolidated complaint. TheCompany filed its answer to that complaint on May 26, 2006. The Company’smotion to dismiss the consolidated amended complaint was filed on May 26,2006 and was submitted to the court for a decision in September 2006. Themotion to dismiss is pending.

The class actionplaintiffs allege generally that the Company’s Phase III phenserine developmentprogram was subject to alleged errors of design and execution which resulted inthe failure of the first Phase III phenserine trial to show efficacy.Plaintiffs allege the defendants’ failure to disclose the alleged defectsresulted in the artificial inflation of the price of the Company’s sharesduring the class period.

There is also ashareholder derivative suit pending in New York Supreme Court, New York County,against our former directors and officers and one of our current directors. Thenamed defendants are Marvin S. Hausman, M.D., Gosse B.Bruinsma, M.D.,S. Colin Neill, Louis G. Cornacchia, Steven H.Ferris, Ph.D., Gerard J. Vlak, Ralph Snyderman, M.D. and MichaelA. Griffith. Defendants are alleged to have breached their duties to the Companyand misused inside information regarding clinical trials of phenserine. Thisaction has been stayed pending further developments in the federal classaction.

The complaintsseek unspecified damages. Management believes the claims are without merit andplans to defend the claims vigorously. The Company has determined that a lossin connection with these matters is possible, but not probable. Accordingly,the Company has not recorded any liability relating to these matters.

5

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**(6) IncomeTaxes**

Effective January 1,2007, the Company adopted the provisions of Financial Accounting StandardsBoard (“FASB”) Interpretation No. 48, * Accounting for Uncertainty in Income Taxes —an Interpretation of FASB Statement No. 109* (“FIN 48”). FIN 48prescribes a recognition threshold and measurement attribute criteria for thefinancial statement recognition and measurement of tax positions taken orexpected to be taken in a tax return. For those benefits to be recognized, atax position must be more-likely-than-not to be sustained upon examination bytaxing authorities.

The Company hasunrecognized tax benefits of approximately $711,000 which did not changesignificantly during the six months ended June 30, 2007. The application of FIN48 would have resulted in a charge to retained earnings of $603,000, exceptthat the charge was fully offset by the application of a valuation allowance.In addition, future changes in the unrecognized tax benefits will have noimpact on the effective tax rate due to the existence of the valuation allowance.

As of the date ofadoption of FIN 48, no interest or penalties associated with any unrecognizedtax benefits were accrued, nor was any interest expense recognized during thequarter. The Company’s policy is to record interest and penalties related totax positions in income tax expense.

The Company issubject to taxation in the United States and various states and foreignjurisdictions. The Company’s tax years for 2000 and forward are subject toexamination by the United States and various state taxing authorities due tothe carryforward of unutilized net operating losses and credits. Tax years 2004and forward remain open to examination by foreign taxing jurisdictions.

6

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

*Thisdiscussion and analysis should be read in conjunction with our unauditedfinancial statements and notes included in this Quarterly Report on Form 10-Qand the audited financial statements and notes as of and for the year endedDecember 31, 2006 included with  ourAnnual Report on Form 10-K filed with the Securities and Exchange Commission,or SEC, on March 29, 2007. Operating results are not necessarilyindicative of results that may occur in future periods.*

*Thefollowing discussion of our financial condition contains certain statementsthat are not strictly historical and are “forward-looking” statements withinthe meaning of the Private Securities Litigation Reform Act of 1995 and involvea high degree of risk and uncertainty. Our actual results may differ materiallyfrom those projected in the forward-looking statements due to risks anduncertainties that exist in our operations, development efforts and businessenvironment, including those set forth under the Section entitled “Risk Factors”in Part II, Item 1A, and other documents we file with the SEC. Allforward-looking statements included in this report are based on informationavailable to us as of the date hereof, and, unless required by law, we assumeno obligation to update any such forward-looking statement.*

**Overview**

***Company Overview***

We are abiopharmaceutical company committed to the discovery, development andcommercialization of novel small molecules to treat diseases and disorders ofthe central nervous system, or CNS. Our therapeutic focus is in two areas:chronic pain, including migraine and neuropathic pain; and cognitive disorders,including cognitive impairment associated with schizophrenia and Alzheimer’sdisease. Through our in-house discovery programs and strategic in-licensing, wehave built a robust pipeline of seven product candidates for these indications.

We currently havetwo product candidates in clinical development for chronic pain. We initiated aPhase IIb clinical trial of tezampanel, our lead product candidate for chronicpain, in October 2006 and completed enrollment in August 2007. Thisclinical trial will evaluate the use of tezampanel for the abortive treatmentof migraine. We expect to have top-line results from this clinical trial in thefourth quarter of 2007. We are currently conducting a Phase I clinical trialfor our follow-on product candidate for chronic pain, NGX426.

We currently haveone product candidate in clinical development for cognitive disorders. NGX267is our lead product candidate for the treatment of cognitive impairmentassociated with schizophrenia, or CIAS. We have completed two Phase I clinicaltrials of NGX267. We initiated an additional Phase I clinical trial of NGX267in March 2007. Assuming favorable results, we intend to initiate a PhaseII clinical trial in the first half of 2008. The Phase II clinical trial wouldevaluate NGX267 for the treatment of CIAS. We expect that NGX267 would be usedas co-therapy to current antipsychotic therapy to treat schizophrenia. Inaddition, although not the primary indication, we intend to initiate a smallPhase II trial of NGX267 as a potential treatment for dry mouth, or xerostomia,secondary to Sjogren’s Syndrome, and we may also evaluate NGX267 for thepotential treatment of Alzheimer’s disease.

We also have four product candidates in developmentfocused on cognitive disorders: Posiphen® ,NGX292, bisnorcymserine and NGX555.  TwoPhase I clinical trials have been completed for Posiphen. NGX292,bisnorcymserine and NGX555 are currently in preclinical development. Inaddition, we have two drug discovery programs focused on discovering andvalidating small molecules and novel molecular targets for Alzheimer’s disease,and we are conducting both programs in collaboration with Eisai Co., Ltd., orEisai, a leader in Alzheimer’s disease research.

***Financial Overview***

We have incurrednet losses since inception as we have devoted substantially all of ourresources to research and development, including early-stage clinical trials.As of June 30, 2007, our accumulated deficit was $81.5 million. We expect toincur substantial and increasing losses for the next several years as wecontinue to expend resources seeking to successfully research, develop,manufacture, obtain regulatory approval for, and market and sell our productcandidates. We expect that in the near term, we will incur substantial lossesrelating primarily to costs and expenses in our efforts to advance thedevelopment of tezampanel, NGX426, and NGX267.

We have notgenerated any revenue from product sales since inception and do not expect togenerate any revenue from product sales for the next several years. Because ourproduct candidates are at an early stage of clinical and preclinicaldevelopment and the outcome of these efforts is uncertain, we cannot estimatethe actual amounts necessary to successfully complete the development andcommercialization of our product candidates or whether, or when, we may achieveprofitability.

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*Revenue*

All of our revenueto date has been derived from license and option fees and research funding fromour strategic alliance agreements. We will continue to seek partners for someor all of our product candidates and discovery programs. In the future, we willseek to generate revenue from some or all of the following sources:

·      license and option fees frompartners;

·      research funding frompartners;

·      milestone payments frompartners;

·      royalty payments frompartners; and

·      product sales.

We expect that anyrevenue we generate will fluctuate from quarter to quarter as a result of thetiming and amount of payments received under our strategic alliance agreements,and the amount and timing of payments we receive upon the sale of our products,to the extent any are successfully commercialized. If we fail to complete thedevelopment of our product candidates in a timely manner or obtain regulatoryapproval, our ability to generate future revenue, and our financial conditionand results of operations, would be materially adversely affected.

*Research and Development Expense*

Since inception,we have focused on discovery and development of novel small molecules to treatCNS diseases and disorders. We currently have four compounds with openInvestigational New Drug applications, or INDs, three of which are in clinicaltrials:

·      Tezampanel, for thetreatment of migraine, which has been studied in two Phase I clinical trialsand five Phase IIa clinical trials and for which we completed enrollment for aPhase IIb clinical trial in July 2007;

·      NGX426, for the treatment ofmigraine, which has been studied in one Phase I clinical trial and for which webegan a Phase I clinical trial in February 2007;

·      NGX267, for the treatment ofCIAS, which has been studied in two Phase I single dose clinical trials and forwhich we began a Phase I multiple dose clinical trial in March 2007; and

·      Posiphen, for the treatmentof Alzheimer’s disease, which has been studied in two Phase I clinical trials.

We expenseresearch and development costs as incurred. Research and development expenseconsists of expenses incurred in identifying, researching, developing andtesting product candidates. These expenses primarily consist of the following:

·      compensation of personnelassociated with research and development activities, including consultants;

·      fees paid to contractresearch organizations and professional service providers for independentmonitoring, analysis and regulatory services for our clinical trials;

·      laboratory supplies andmaterials;

·      manufacturing of productcandidates for use in our preclinical testing and clinical trials;

·      preclinical costs;

·      depreciation of equipment;and

·      allocated costs offacilities and infrastructure.

Because of therisks inherent in research and development, we cannot reasonably estimate orknow the nature, timing and estimated costs of the efforts necessary tocomplete the development of our programs, the anticipated completion dates ofthese programs, or the period in which material net cash inflows are expectedto commence, if at all, from the programs described above and any potentialfuture product candidates. If either we or any of our partners fail to completeany stage of the development of any potential products in a timely manner, itcould have a material adverse effect on our operations, financial position andliquidity.

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*Generaland Administrative Expense*

General andadministrative expense consists primarily of salaries and other related costsfor personnel in executive, finance, accounting, business development,information technology and human resource functions. Other costs includefacility costs not otherwise included in research and development expense andprofessional fees for legal and accounting services.

**Critical Accounting Policies andEstimates**

Our discussion andanalysis of our financial condition and results of operations are based on ourfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States, or GAAP. The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amounts of assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenue and expenses during the reporting periods. Wereview our estimates on an ongoing basis, including those related to revenue,accrued expenses and stock-based compensation. We base our estimates onhistorical experience, known trends and events, and various other factors thatwe believe to be reasonable under the circumstances, the results of which formour basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. Actual resultsmay differ from these estimates under different assumptions or conditions.

Our managementbelieves the following accounting policies and estimates are most critical toaid you in understanding and evaluating our reported financial results.

***Revenue Recognition***

We recognizerevenue in accordance with the SEC’s Staff Accounting Bulletin, or SAB,No. 104,*Revenue Recognition*,and Emerging Issues Task Force, or EITF, No. 00-21,*Revenue Arrangements with Multiple Deliverables*.To date we have recorded license and option fee revenue and research fundingrevenue from four research agreements with Eisai. The terms of the agreementstypically include up-front payments to us of non-refundable license and/oroption fees and, in some cases, payments for research efforts. Futureagreements could also include milestone payments and royalty payments.

We recognizerevenue from up-front non-refundable license and option fees on a straight-linebasis over the contracted or estimated period of performance, which istypically the research term. Amounts received for research funding for aspecific number of full-time researchers are recognized as revenue as theservices are provided, as long as the amounts received are not refundableregardless of the results of the research project. Milestone payments, if any,will be recognized on achievement of the milestone, unless the amounts receivedare creditable against royalties or we have ongoing performance obligations.Royalty payments, if any, will be recognized on sale of the related product,provided the royalty amounts are fixed and determinable, and collection of therelated receivable is probable.

***Accrued Expenses***

As part of theprocess of preparing financial statements, we are required to estimate accruedexpenses. This process involves identifying services which have been performedon our behalf, and estimating the level of service performed and the associatedcost incurred for such service as of each balance sheet date in our financialstatements. Examples of services for which we must estimate accrued expensesinclude contract service fees paid to contract manufacturers in conjunctionwith the production of clinical drug supplies and to contract researchorganizations in connection with preclinical studies and clinical trials. Inconnection with such service fees, our estimates are most affected by ourunderstanding of the status and timing of services provided. The majority ofour service providers invoice us in arrears for services performed. In theevent that we do not identify certain costs which have been incurred, or weunder- or over-estimate the level of services performed or the costs of suchservices in a given period, our reported expenses for such period would be toolow or too high. The date on which certain services commence, the level ofservices performed on or before a given date, and the cost of such services areoften determined based on subjective judgments. We make these judgments basedupon the facts and circumstances known to us. To date, we have been able toreasonably estimate these costs; however, as we increase the level of servicesperformed on our behalf, it will become increasingly more difficult for us toestimate these costs, which could result in our reported expenses for futureperiods being too high or too low.

***Stock-BasedCompensation***

We estimate thefair value of stock options and non-performance based restricted stock unitsgranted using the Black-Scholes option valuation model and the fair value ofperformance based restricted stock units granted using a Monte-Carlo simulationoption-pricing model. The fair values of stock option and restricted stock unitawards are amortized over the requisite service periods of the awards. Both theBlack-Scholes option valuation model and the Monte-Carlo simulationoption-pricing model require the input of highly subjective assumptions,including the option or restricted stock unit’s expected life, price volatilityof the underlying stock, risk free interest rate and expected dividend rate. Asstock-based compensation expense related to stock options is based on awardsultimately expected to vest, the stock-based compensation expense has beenreduced for estimated forfeitures of stock options. Statement of FinancialAccounting Standards, or SFAS, No. 123R,*Share-Based Payment*, requires forfeitures to be estimated at the

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time of grant andrevised, if necessary, in subsequent periods if actual forfeitures differ fromthose estimates. Stock option forfeitures were estimated based on historicalexperience. We may elect to use different assumptions under both theBlack-Scholes option valuation model or the Monte-Carlo simulationoption-pricing model in the future, which could materially affect our netincome or loss and net income or loss per share.

**RecentlyIssued Accounting Pronouncements**

In September 2006, the FASB issued SFASNo. 157, *Fair Value Measurements*,which provides a single definition of fair value, a framework for measuringfair value, and expanded disclosures concerning fair value. This pronouncementis effective for fiscal years beginning after November 15, 2007. TheCompany is evaluating the impact of the adoption of SFAS No. 157 will haveon its consolidated financial statements.

InFebruary 2007, the FASB issued SFAS No. 159,*The Fair Value Option for Financial Assets andFinancial Liabilities—Including an Amendment of FASB Statement No. 115.*  This standard permits an entity to choose tomeasure many financial instruments and certain other items at fair value. Mostof the provisions in SFAS No. 159 are elective; however, the amendment toSFAS No. 115,*Accounting for CertainInvestments in Debt and Equity Securities,* applies to all entitieswith available-for-sale and trading securities. The fair value optionestablished by SFAS No. 159 permits all entities to choose to measureeligible items at fair value at specified election dates. A business entitywill report unrealized gains and losses on items for which the fair valueoption has been elected in earnings (or another performance indicator if thebusiness entity does not report earnings) at each subsequent reporting date.The fair value option: (a) may be applied instrument by instrument, with afew exceptions, such as investments otherwise accounted for by the equitymethod; (b) is irrevocable (unless a new election date occurs); and (c) isapplied only to entire instruments and not to portions of instruments. SFASNo. 159 is effective as of the beginning of an entity’s first fiscal yearthat begins after November 15, 2007. The Company is evaluating the impactthe adoption of SFAS No. 159 will have on its consolidated financialstatements.

**Resultsof Operations**

***Fluctuations in Operating Results***

Our results ofoperations have fluctuated significantly from period to period in the past andare likely to continue to do so in the future. We anticipate that our quarterlyand annual results of operations will be affected for the foreseeable future byseveral factors, including the timing and amount of payments received pursuantto our current research agreements and future strategic alliance agreements, aswell as the progress and timing of expenditures related to our development anddiscovery efforts.  Due to these fluctuations, we believe that theperiod-to-period comparisons of our operating results are not a good indicationof our future performance.

***Comparison of the Three Months Ended June 30, 2007 and 2006***

The followingtable summarizes the significant components of our results of operations forthe three months ended June 30, 2007 and 2006, in thousands, together with thechange in such items in dollars and as a percentage.
|                                     | ** ** | **For the Three Months Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                              | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenue                             |       | $                                                                     | 2,463      |   | $ | 2,463 |   | $ | — |   | — | % |
| Research and  development expense   |       | 7,052                                                                 |       | 7,512 |   | (460 | ) | (6 | )% |
| General and  administrative expense |       | 1,463                                                                 |       | 634 |   | 829 |   | 131 | % |
| Interest income                     |       | 587                                                                   |       | 250 |   | 337 |   | 135 | % |
| Interest expense                    |       | 216                                                                   |       | 299 |   | (83 | ) | (28 | )% |
|                                     |            |                                                                       |            |  |  |  |  |  |  |  |  |  |

 

*Revenue.  *Revenue for the three months ended June 30, 2007 was unchanged from the sameperiod in 2006.  There were no current quarter changes in our strategicalliance agreements that affected our revenue from license and option fees orresearch funding.

*Researchand development expense.  * Research and developmentexpense decreased to $7.0 million for the three months ended June 30, 2007 from$7.5 million for the same period in 2006. The $0.5 million decrease wasattributable to a decrease in research expense of $1.0 million, offset by anincrease in development expense of $0.5 million.

The $1.0 milliondecrease in research expense was primarily due to lower costs incurred under aresearch agreement with Eisai.  Specifically, lower usage of certain labsupplies accounted for most of the decrease.  The $0.5 million increase indevelopment expense was due to increased clinical trial activity and increasesin personnel costs and related expenses offset by a decrease in license costs.

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*Generaland administrative expense.  *General andadministrative expense increased to $1.5 million for the three months endedJune 30, 2007 from $0.6 million for the same period in 2006. The increase wasattributable to increased professional services costs, including increasedaudit and legal costs, and increased insurance costs. Additionally, personnelcosts and related expenses increased for the three months ended June 30, 2007compared to the same period in 2006.

*Interestincome.  * Interest income increased to $587,000 forthe three months ended June 30, 2007 from $250,000 for the same period in 2006.The increase of $337,000 was due to a higher average cash and cash equivalentsbalance during the second quarter of 2007 compared to the second quarter of2006.

*Interestexpense.  * Interest expense decreased to $216,000for the three months ended June 30, 2007 from $299,000 for the same period in2006. The $83,000 decrease is attributable to a lower average debt balanceduring the second quarter of 2007 compared to the second quarter of 2006.

***Comparison of the Six Months Ended June 30, 2007 and 2006***

The followingtable summarizes the significant components of our results of operations forthe six months ended June 30, 2007 and 2006, in thousands, together with thechange in such items in dollars and as a percentage.
| ** **                          | ** ** | **For the Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                          | ** ** | **2007**                                                            | ** ** | **2006** | ** ** | **$ Change** | ** ** | **% Change** | ** ** |
| Revenue                             |       | $                                                                   | 4,925      |   | $ | 4,925 |   | $ | — |   | — | % |
| Research and  development expense   |       | 12,229                                                              |       | 13,171 |   | (942 | ) | (7 | )% |
| General and  administrative expense |       | 2,858                                                               |       | 1,306 |   | 1,552 |   | 119 | % |
| Interest income                     |       | 1,195                                                               |       | 473 |   | 722 |   | 153 | % |
| Interest expense                    |       | 453                                                                 |       | 456 |   | (3 | ) | (1 | )% |
|                                     |            |                                                                     |            |  |  |  |  |  |  |  |  |  |

 

*Revenue.  *Revenue for the six months ended June 30, 2007 was unchanged from the sameperiod in 2006.  There were no current quarter changes in our strategicalliance agreements that affected our revenue from license and option fees orresearch funding.

*Researchand development expense.  * Research and developmentexpense decreased to $12.2 million for the six months ended June 30, 2007 from$13.2 million for the same period in 2006. The $1.0 million decrease wasattributable to a decrease in research expense of $1.8 million, offset by anincrease in development expense of $0.8 million.

The $1.8 milliondecrease in research expense was primarily due to lower costs incurred under aresearch agreement with Eisai.  Specifically, lower usage of certain labsupplies accounted for most of the decrease.  The $0.8 million increase indevelopment expense was due to increased clinical trial activity offset by adecrease in license costs.

*Generaland administrative expense.  *General andadministrative expense increased to $2.9 million for the six months ended June30, 2007 from $1.3 million for the same period in 2006. The $1.6 millionincrease was attributable to increased professional services costs, includingincreased audit and legal costs and increased personnel costs and relatedexpenses.

*Interestincome.  * Interest income increased to $1.2 millionfor the six months ended June 30, 2007 from $0.5 million for the same period in2006. The increase of $0.7 million was due to an increase in the average cashand cash equivalents balance during the first six months of 2007 compared tothe same period in 2006.

*Interestexpense.  * Interest expense decreased to $453,000for the six months ended June 30, 2007 from $456,000 for the same period in2006. The $3,000 decrease is attributable to a lower average debt balanceduring the first six months of 2007 compared to the same period of 2006.

**Liquidity and Capital Resources**

Since inception wehave funded our operations primarily through sales of our equity securities,payments under our research agreements, debt financings and interestincome.  Through June 30, 2007, we had received approximately $67.5million in net proceeds from the sale of equity securities, $40.3 million inpayments under our research agreements, $18.7 million from debt issuances, and$4.5 million in interest income.  In addition, we received $46.5 millionof cash in connection with the Merger in October 2006.

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At June 30, 2007,we had cash and cash equivalents of $46.7 million as compared to$55.4 million at December 31, 2006. The cash balance at June 30, 2007is $8.7 million lower than the balance at December 31, 2006 duelargely to the current period operating loss, repayments of debt and capitalequipment purchases, offset by proceeds from license and option fee paymentsand research funding payments.

We believe we havesufficient funds to enable us to meet our ongoing working capital requirementsthrough at least December 31, 2008.  For a further discussion of therisks related to the availability of cash to fund our future operations, pleasesee “Risk Factors.”

We expect tocontinue to fund our operations with existing cash resources that wereprimarily generated from equity financings, cash payments under our researchagreements, and debt financing arrangements until we can generate significant cashfrom our operations. In addition, we may finance future cash needs through thesale of equity securities, entering into strategic collaboration agreements anddebt financing. However, we may not be successful in entering into strategiccollaboration agreements, or in receiving research funding under currentagreements or milestone or royalty payments under future agreements. Inaddition, we cannot be sure that our existing funds will be adequate or thatadditional financing will be available when needed or that, if available,financing will be obtained on terms favorable to us or our stockholders. Havinginsufficient funds may require us to delay, scale back or eliminate some or allof our research or development programs or to relinquish greater or all rightsto product candidates at an earlier stage of development or on less favorableterms than we would otherwise choose. Failure to obtain adequate financing alsomay adversely affect our ability to operate as a going concern.

If we raiseadditional capital by issuing equity securities, our existing stockholders’ownership will be diluted. Any debt financing we enter into may involvecovenants that restrict our operations. These restrictive covenants may includelimitations on additional borrowing, specific restrictions on the use of ourassets as well as prohibitions on our ability to create liens, pay dividends,redeem our stock or make investments. In addition, if we raise additional fundsthrough collaboration and licensing arrangements, we may be required torelinquish potentially valuable rights to our product candidates or proprietarytechnologies, or grant licenses on terms that are not favorable to us.

**Off-Balance Sheet Arrangements**

We do not have anyoff-balance sheet arrangements.

**Item3. Quantitative and Qualitative Disclosures About Market Risk**

We are exposed tomarket risk related to changes in interest rates. Our current investment policyis to maintain an investment portfolio consisting mainly of U.S. money marketand high-grade corporate securities, directly or through managed funds, withmaturities of one and a half years or less. We do not enter into investmentsfor trading or speculative purposes. Our cash is deposited in and investedthrough highly rated financial institutions in North America. Our marketablesecurities are subject to interest rate risk and will fall in value if marketinterest rates increase. If market interest rates were to increase immediatelyand uniformly by 10% from levels at June 30, 2007 and 2006, we estimate thatthe fair value of our investment portfolio would decline by an immaterialamount. We have the ability to hold our fixed income investments until maturitytherefore we would not expect our operating results or cash flows to beaffected to any significant degree by the effect of a change in market interestrates on its investments.

We have foreigncurrency accounts that are exposed to currency exchange risk. The functionalcurrency of our European subsidiary, which is based in Belgium, is the localcurrency. Accordingly, the accounts of this subsidiary are translated from thelocal currency to the U.S. dollar using the current exchange rate at thebalance sheet date for the balance sheet accounts, and using the averageexchange rate during the period for revenue and expense accounts. The effectsof translation are recorded in accumulated other comprehensive loss as aseparate component of stockholders’ deficit. Because we did not have anytransactions denominated in foreign currencies during the three months endedJune 30, 2007 and 2006, we did not record exchange gains and losses inoperations for those periods. If the foreign currency rates were to fluctuateby 10% from exchange rates at June 30, 2007 and 2006, the effect on ourfinancial statements would not be material. However, there can be no assurancethere will be not be a material impact in the future.

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**Item4. Controls and Procedures.**

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto our management, including our principal executive officer and principalfinancial officer, as appropriate, to allow timely decisions regarding requireddisclosure.

Under thesupervision and with the participation of our management, including ourprincipal executive officer and principal financial officer, we conducted anevaluation of our disclosure controls and procedures, as such term is definedunder Rule 13a- 15 (e)promulgated under the Exchange Act. Basedon this evaluation, our principal executive officer and our principal financialofficer concluded that our disclosure controls and procedures were designed andoperating effectively as of the end of the period covered by this QuarterlyReport on Form 10-Q.

Our management,including our principal executive officer and our principal financial officer,does not expect that our disclosure controls and procedures or our internalcontrols will prevent all errors and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected.

**Changes in Internal Control OverFinancial Reporting**

There has been nochange in our internal control over financial reporting during the quarterended June 30, 2007 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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**PARTII.  OTHER INFORMATION**

**Item1. Legal Proceedings**

Several lawsuitswere filed against us in February 2005 in the U.S. District Court for theSouthern District of New York asserting claims under Sections 10(b) and20(a) of the Securities Exchange Act of 1934, as amended, or the ExchangeAct and Rule 10b-5 thereunder on behalf of a class of purchasers of ourcommon stock during the period from June 26, 2003, through and includingFebruary 4, 2005, referred to as the class period. Dr. Marvin S.Hausman, M.D., a former director and our former Chief Executive Officer, andDr. Gosse B. Bruinsma, M.D., also a former Chief Executive Officer,were also named as defendants in the lawsuits. These actions were consolidatedinto a single class action lawsuit in January 2006. On April 10,2006, the class action plaintiffs filed an amended consolidated complaint. Wefiled our answer to that complaint on May 26, 2006. Our motion to dismissthe consolidated amended complaint was filed on May 26, 2006 and wassubmitted to the court for a decision in September 2006. The motion todismiss is pending.

The class actionplaintiffs allege generally that our Phase III phenserine development programwas subject to alleged errors of design and execution which resulted in thefailure of the first Phase III phenserine trial to show efficacy. Plaintiffsallege the defendants’ failure to disclose the alleged defects resulted in theartificial inflation of the price of our shares during the class period.

There is also ashareholder derivative suit pending in New York Supreme Court, New York County,against our former directors and officers and one of our current directors. Thenamed defendants are Marvin S. Hausman, M.D., Gosse B.Bruinsma, M.D., S. Colin Neill, Louis G. Cornacchia, Steven H.Ferris, Ph.D., Gerard J. Vlak, Ralph Snyderman, M.D. and MichaelA. Griffith. Defendants are alleged to have breached their duties to thecompany and misused inside information regarding clinical trials of phenserine.This action has been stayed pending further developments in the federal classaction.

The complaintsseek unspecified damages. We believe the complaints are without merit and weintend to defend these lawsuits vigorously. However, we cannot make assurancesthat we will prevail in these actions, and, if the outcome is unfavorable tous, our reputation, operations and share price could be adversely affected.

**Item1A.   Risk Factors**

*Youshould consider carefully the following information about the risks describedbelow, together with the other information contained in this quarterly reporton Form 10-Q and in our other filings with the Securities and ExchangeCommission, before you decide to buy or maintain an investment in our commonstock. We believe the risks described below are the risks that are material tous as of the date of this quarterly report. If any of the following risksactually occur, our business financial condition, results of operations andfuture growth prospects would likely be materially and adverselyaffected.  In these circumstances, the market price of our common stockcould decline, and you may lose all or part of the money you paid to buy ourcommon stock.  The risk factors set forth below with an asterisk (*) nextto the title are new risk factors or risk factors containing changes, includingany material changes from the risk factors set forth in our annual report onForm 10-K for the fiscal year ended December 31, 2006, as filed with theSecurities and Exchange Commission.*

**Risks Related to Our Business**

****We expect to continueto incur net operating losses for the next several years and may never achieveprofitability.***

We have incurrednet operating losses every year since our inception. As of June 30, 2007, wehad an accumulated deficit of approximately $81.5 million. Over the nextseveral years we expect a significant increase in our operating losses as weconduct additional discovery, development, clinical testing and regulatorycompliance activities. All of our revenue to date has been payments received inconnection with our collaboration and licensing agreements. We cannot becertain that we will generate additional revenue through licensing activitiesor that we will receive any of the milestone or royalty payments associatedwith our current collaboration and licensing agreements. Given the risksassociated with discovery, development, clinical testing, manufacturing andmarketing of drug products, we may never be successful in commercializing adrug product that will enable us to be profitable. Our ability to generatesignificant continuing revenue depends on a number of factors, including:

·      successful completion ofongoing and future clinical trials for our product candidates;

·      achievement of regulatoryapproval for our product candidates;

·      successful completion ofcurrent and future strategic collaborations; and

·      successful manufacturing,sales, distribution and marketing of our products.

We do notanticipate that we will generate significant continuing revenue for severalyears. Even if we do achieve profitability, we may not be able to sustain orincrease profitability.

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****All of our product candidates are at an early stage ofdevelopment and only a portion of these are in clinical development. We cannotbe certain that any of our product candidates will be successfully developed,receive regulatory approval, or be commercialized.***

Our productcandidates are at an early stage of development and we do not have any productsthat are commercially available. Our product candidates, tezampanel and NGX426for migraine, and NGX267 for CIAS are currently in clinical development. Ourother product candidates, Posiphen, NGX292, bisnorcymserine, or BNC, and NGX555are in preclinical development. We will need to perform additional developmentwork and conduct further clinical trials for all of our product candidatesbefore we can seek the regulatory approvals necessary to begin commercialsales.

Success inpreclinical testing and early clinical trials does not mean that later clinicaltrials will be successful. Companies frequently suffer significant setbacks inlater stage clinical trials, even after earlier clinical trials have shownpromising results. In future clinical trials with larger or somewhat differentpopulations, results from early clinical trials may not be reproduced andanalysis of new or additional data may not demonstrate sufficient safety andefficacy to support regulatory approval of a product candidate.

Additionally,preclinical studies and clinical trials are expensive, can take many years, andhave an uncertain outcome. Product candidates may not be successful in clinicaltrials for a number of reasons, including, but not limited to, the failure of aproduct candidate to be safe and efficacious, the results of later stageclinical trials not confirming earlier clinical results, or clinical trialresults not being acceptable to the United States Food and Drug Administration,or FDA, or other regulatory agencies.

We do notanticipate that any of our current product candidates will be eligible toreceive regulatory approval and begin commercialization for a number of years,if at all. Even if we were to ultimately receive regulatory approval for one ormore of our product candidates, we may be unable to successfully commercializethem for a variety of reasons including:

·      the availability ofalternative treatments;

·      the product not being costeffective to manufacture and sell;

·      limited acceptance in themarketplace; and

·      the effect of competitionwith other marketed products.

The success of ourproduct candidates may also be limited by the incidence and severity of anyadverse side effects. Additionally, any regulatory approval to market a productmay be subject to the imposition by such regulatory agency of limitations onthe indicated uses. These limitations may reduce the size of the market for theproduct. If we fail to commercialize one or more of our current productcandidates, our business, results of operations, financial condition, andprospects for future growth will be materially and adversely affected.

***Delays in the commencement or completion of clinical testingof our product candidates could result in increased costs to us and delay ourability to generate significant revenues.***

We cannot predictwhether we will encounter problems with any of our planned clinical trials thatwill cause us or regulatory authorities to delay or suspend our clinicaltrials, or delay the analysis of data from our ongoing clinical trials. Any ofthe following factors could delay the clinical development of our product candidates:

·      ongoing discussions with theFDA or comparable foreign authorities regarding the scope or design of one ormore clinical trials;

·   delays in receiving, or theinability to obtain, required approvals from institutional review boards orother reviewing entities at clinical trial sites selected for participation ina clinical trial;

·      delays or slower thananticipated enrollment of participants into clinical trials;

·      lower than anticipatedretention rate of participants in clinical trials;

·      need to repeat clinicaltrials as a result of inconclusive or negative results or unforeseencomplications in testing;

·      inadequate supply ordeficient quality of product candidate materials or other materials necessaryto conduct our clinical trials;

·      unfavorable FDA inspectionand review of a clinical trial site or records of any clinical or preclinicalinvestigation;

·      serious, unexpected orundesirable side effects experienced by participants in the clinical trialsthat delay or preclude regulatory approval or limit the commercial use ormarket acceptance if approved;

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·      findings that the clinicaltrial participants are being exposed to unacceptable health risks;

·      placement by the FDA of aclinical hold on a clinical trial;

·      restrictions on orpost-approval commitments with regard to any regulatory approval we ultimatelyobtain that renders a product candidate not commercially viable; and

·      unanticipated cost overrunsin preclinical studies and clinical trials.

In addition, oncea clinical trial has started, it may be suspended or terminated by us or theFDA or other regulatory authorities due to a number of factors, including:

·      failure to conduct theclinical trial in accordance with regulatory requirements;

·      inspection of the clinicaltrial operations or clinical trial site by the FDA or other regulatoryauthorities resulting in the imposition of a clinical hold;

·      negative clinical trialresults;

·      adverse events or negativeside-effects experienced by the clinical trial participants; or

·      lack of adequate funding tocontinue the clinical trial.

We will need toreach agreement with the FDA on the endpoints for some of our Phase IIIclinical trials where endpoints have not been validated and we may work withthe FDA to potentially design and validate one or more endpoints. The FDA maynot accept any or all of the endpoints and they may ultimately decide that theendpoints are inadequate to demonstrate the safety and efficacy levels requiredfor regulatory approval. Our failure to adequately demonstrate the safety andefficacy of our product candidates would jeopardize our ability to achieveregulatory approval for, and ultimately to commercialize, the productcandidates.

Clinical trialsrequire sufficient participant enrollment, which is a function of many factors,including the size of the target population, the nature of the clinical trialprotocol, the proximity of participants to clinical trial sites, theavailability of effective treatments for the relevant disorder or disease, theeligibility criteria for our clinical trials and the number of competingclinical trials. Delays in enrollment can result in increased costs and longerdevelopment times. Failure to enroll participants in our clinical trials coulddelay the completion of the clinical trials beyond current expectations. Inaddition, the FDA could require us to conduct clinical trials with a largernumber of participants than we may project for any of our product candidates.As a result of these factors, we may not be able to enroll a sufficient numberof participants in a timely or cost-effective manner.

Additionally,enrolled participants may drop out of clinical trials, which could impair thevalidity or statistical significance of the clinical trials. A number offactors can lead participants in a clinical trial to discontinue participatingin the clinical trial, including, but not limited to: the inclusion of aplacebo arm in the clinical trial; possible lack of effect of the productcandidate being tested at one or more of the dose levels being tested; adverseside effects experienced by the participant, whether or not related to theproduct candidate; and the availability of alternative treatment options.

We, the FDA orother applicable regulatory authorities may suspend clinical trials of a productcandidate at any time if we or they believe the participants in such clinicaltrials, or in independent third-party clinical trials for product candidatesbased on similar technologies, are being exposed to unacceptable health risksor for other reasons. In addition, it is impossible to predict whetherlegislative changes will be enacted, or whether FDA regulations, guidance orinterpretations will be changed, or what the impact of such changes, if any,may be.

If we experienceany such problems, we may not have the financial resources to continuedevelopment of the product candidate that is affected or the development of anyof our other product candidates. If we experience significant delays in thecommencement or completion of clinical testing, financial results and thecommercial prospects for the product candidates will be harmed and costs willincrease.  Additionally, any significantdelays in the commencement or completion of clinical testing will delay our abilityto generate significant revenue.

***We expect to complete a Phase IIb clinical trial oftezampanel in 2007, and our stock price could decline significantly if theresults are not favorable or are not viewed favorably.***

In the fourthquarter of 2007, we expect to complete a Phase IIb clinical trial currently inprogress for tezampanel. The results of this clinical trial may not befavorable or viewed favorably by us or third parties, including investors andanalysts. Biopharmaceutical company stock prices have declined significantly incertain instances where clinical results were not favorable, were perceivednegatively or otherwise did not meet expectations. Unfavorable results ornegative perceptions regarding the results of our clinical

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trials of tezampanelcould cause our stock price to decline significantly.

***We rely on third parties to assist us in conducting clinicaltrials. If these third parties do not successfully carry out their contractualduties or meet expected deadlines, we may not be able to obtain regulatoryapproval for or commercialize our product candidates.***

We rely on, andintend to continue to rely on, third parties, such as contract researchorganizations, medical institutions, clinical investigators and contractlaboratories, to conduct clinical trials of our product candidates. Ourreliance on these third parties for development activities reduces our controlover these activities. If these third parties do not successfully carry outtheir contractual duties or obligations or meet expected deadlines, or if thequality or accuracy of the clinical data they obtain is compromised due to thefailure to adhere to our clinical protocols or for other reasons, our clinicaltrials may be extended, delayed or terminated. If these third parties do notsuccessfully carry out their contractual duties or meet expected deadlines, wemay be required to replace them. Although we believe there are a number ofthird party contractors we could engage to continue these activities, replacinga third party contractor may result in a delay of the affected trial.Accordingly, we may not be able to obtain regulatory approval for orsuccessfully commercialize our product candidates.

***We have licensed rights to product candidates tezampanel andNGX426 from Eli Lilly and Company, or Eli Lilly. Eli Lilly has rights oftermination under the license agreement, which if exercised would adverselyaffect our business.***

InApril 2003, we entered into an agreement with Eli Lilly to obtain anexclusive license from Eli Lilly to their AK antagonist assets including tezampanel,as well as NGX426. Pursuant to the license agreement we have obligations tomake payments to Eli Lilly under the agreement and to use commerciallyreasonable efforts to develop and commercialize the product candidates,including achievement of specified development events within specifiedtimeframes. Eli Lilly may terminate the agreement for uncured material breachof the agreement by us, including any breach of our diligence obligations. IfEli Lilly were to terminate the agreement, we would lose rights to the AKantagonist product candidates, and our business would be adversely affected.

***We have licensed rights to product candidates NGX267 andNGX292 from Life Science Research Israel, or LSRI.  LSRI has rights of termination under thelicense agreement, which if exercised would adversely affect our business.***

In May 2004,we entered into an agreement with LSRI to obtain an exclusive license from LSRIto their muscarinic agonist assets NGX267 and NGX292. We have obligations tomake payments to LSRI under the agreement and to use commercially reasonableefforts to develop and commercialize the product candidates subject to theagreement, including achievement of specified development events withinspecified timeframes. LSRI may terminate the agreement for uncured materialbreach of the agreement by us, including any breach of our diligenceobligations. If LSRI were to terminate the agreement, we would lose rights tothe muscarinic agonist product candidates, and our business would be adverselyaffected.

***We depend on Eisai Co. Ltd., or Eisai, for funding for ourgamma-secretase modulator program and Alzheimer’s disease genetics discoveryprogram. Eisai has the first right to obtain rights to gene targets andcompounds resulting from these programs, which could delay or limit our abilityto develop and commercialize these gene targets and compounds.***

InFebruary 2005, we entered into an agreement with Eisai to discover smallmolecule gamma-secretase modulator compounds to treat Alzheimer’s disease. Theagreement had an initial two-year term which Eisai elected to extend for anadditional 12 months. In October 2005, we entered into an agreementwith Eisai to discover gene targets useful in treating or preventing Alzheimer’sdisease in humans. This agreement also has a two-year term and may be extendedby Eisai for up to an additional 12 months. We depend upon Eisai toprovide funding for the research we conduct under each of these agreements. IfEisai were to cease funding these programs for any reason, we would need toprovide our own funding for the programs, seek a strategic partner for furtherwork on the programs, raise additional funding, or curtail or abandon theprograms.

During the term ofthe respective agreements, Eisai has exclusive first rights of negotiation andrefusal with regard to a license, collaboration or other arrangement regardingcompounds discovered and validated in the course of the gamma-secretasemodulator program or gene targets discovered and validated in the course of theAlzheimer’s disease genetics research program, as applicable. These rights heldby Eisai may delay or limit our ability to enter into a license, collaborationor other arrangement with a third party for any compounds resulting from thegamma-secretase modulator program or gene targets resulting from the Alzheimer’sdisease genetic research program.

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***We have an agreement providing Johnson & JohnsonDevelopment Corporation, or JJDC, the first right to obtain rights to our M1agonist program, which could delay or limit our ability to develop andcommercialize these product candidates.***

We have anagreement with JJDC regarding our research and development work into theeffects of using M1 agonists, such as NGX267 and NGX292, in the treatment ofCNS diseases and disorders. Upon completion of a specified level of developmentof our lead M1 agonist, we are obligated to provide results for the compound toJJDC.

For a specifiedperiod following receipt of the results, or at an earlier time as agreed to byboth parties, JJDC has the exclusive right of first negotiation with usregarding our intellectual property rights or products related to our M1agonist program. These rights held by JJDC may delay or limit our ability toenter into a transaction with a third party for our M1 agonist productcandidates.

***If we fail to enter into and maintain collaborations for ourproduct candidates, we may have to reduce or delay product development orincrease expenditures.***

Our strategy fordeveloping, manufacturing, and commercializing potential products includesestablishing and maintaining collaborations with pharmaceutical andbiotechnology companies to advance some of our programs and share expenditureswith partners on those programs. We may not be able to negotiate futurecollaborations on acceptable terms, if at all. If we are not able to establishand maintain collaborative arrangements, we may have to reduce or delay furtherdevelopment of some programs or undertake the development activities at our ownexpense. If we elect to increase capital expenditures to fund developmentprograms on our own, we will need to obtain additional capital, which may notbe available on acceptable terms or at all. Even if we do succeed in securingsuch collaborations, we may not be able to maintain them if, for example,objectives under the agreement are not met, the agreement is terminated or notrenewed, development or approval of a product candidate is delayed or sales ofan approved drug are disappointing. Furthermore, any delay in entering into collaborationscould delay the development and commercialization of our product candidates andreduce their competitiveness, even if they reach the market. Any such delayrelated to our collaborations could adversely affect our business.

***If our strategic partners do not devote adequate resourcesto the development and commercialization of our product candidates, we may notbe able to commercialize our products and achieve revenues.***

We may enter intocollaborations with other strategic partners with respect to our productcandidates. If we enter into any such collaborations, we may have limited or nocontrol over the amount and timing of resources that our partners dedicate tothe development of our product candidates. Our ability to commercializeproducts we develop with our partners and generate royalties from product saleswill depend on the partner’s ability to assist us in establishing the safetyand efficacy of our product candidates, obtaining regulatory approvals andachieving market acceptance of products. Our partners may elect to delay orterminate development of a product candidate, independently develop productsthat could compete with our products, or not commit sufficient resources to themarketing and distribution of products under the collaboration. If our partnersfail to perform as expected under the collaborative agreements, our potentialfor revenue from the related product candidates will be dramatically reduced.In addition, revenue from our future collaborations may consist of contingentpayments, such as payments for achieving development and commercializationmilestones and royalties payable on sales of any successfully developed drugs.The milestone, royalty or other revenue that we may receive under thesecollaborations will depend upon both our ability and our partner’s ability tosuccessfully develop, introduce, market and sell new products. In some cases,we will not be involved in these processes and, accordingly, will dependentirely on our partners.

***We will need substantial additional funding and may beunable to raise capital when needed, which would force us to delay, reduce oreliminate our research and development programs or commercialization efforts.***

We will need toraise substantial additional capital in the future and additional fundingrequirements will depend on, and could increase significantly as a result of,many factors, including:

·      the rate of progress andcost of clinical trials;

·      thescope of our clinical trials and other discovery and development activities;

·      the prioritization andnumber of clinical development and discovery programs we pursue;

·      the terms and timing of anycollaborative, licensing and other arrangements that we may establish;

·      the costs of filing,prosecuting, defending and enforcing any patent claims and other intellectualproperty rights;

·      the costs and timing ofregulatory approvals;

·      the costs of goods andmanufacturing expenses; and

·      the costs of establishing orcontracting for sales and marketing capabilities.

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We do notanticipate that we will generate significant continuing revenue for severalyears, if at all. Until we can generate significant continuing revenue, ifever, we expect to satisfy our future cash needs through public or privateequity offerings, debt financings or corporate collaboration and licensingarrangements, as well as through interest income earned on cash balances. Wecannot be certain that additional funding will be available on acceptableterms, or at all. If adequate funds are not available, we may be required to delay,reduce the scope of, or eliminate one or more of its research and developmentprograms or commercialization efforts.

***We do not have internal manufacturing capabilities. If wefail to develop and maintain supply relationships with collaborators or otherthird party manufacturers, we may be unable to develop or commercialize ourproducts.***

Our ability todevelop and commercialize our products depends in part on our ability tomanufacture, or arrange for future collaborators or other third parties tomanufacture, our products at a competitive cost, in accordance with regulatoryrequirements and in sufficient quantities for clinical testing and eventualcommercialization. None of our current product candidates have beenmanufactured on a commercial scale. We and our third-party manufacturers mayencounter difficulties with the small- and large-scale formulation andmanufacturing processes required to manufacture our product candidates,resulting in delays in clinical trials and regulatory submissions, in the commercializationof product candidates or, if any product candidate is approved, in the recallor withdrawal of the product from the market. Our inability to enter into ormaintain agreements with capable third-party manufacturers on acceptable termscould delay or prevent the commercialization of our products, which wouldadversely affect our ability to generate revenue and could prevent us fromachieving profitability.

We have sufficientsupplies of tezampanel, NGX426 and NGX267 for our current clinical trials. Wewill need to identify and reach agreement with third parties for the supply ofour product candidates for future clinical trials. We do not have long-termsupply agreements with third parties, and we may not be able to enter intosupply agreements with them in a timely manner or on acceptable terms, if atall. These third parties may also be subject to capacity constraints that wouldcause them to limit the amount of our product candidates they can produce orthe chemicals that we can purchase. Any interruption or delay we experience inthe supply of our product candidates may impede or delay such productcandidates’ clinical development and cause us to incur increased expensesassociated with identifying and qualifying one or more alternate suppliers.

In addition, we,our future collaborators or other third-party manufacturers of our productsmust comply with cGMP requirements enforced by the FDA through its facilitiesinspection program. These requirements include quality control, quality assuranceand the maintenance of records and documentation. In addition, productmanufacturing facilities in California are subject to licensing requirements ofthe California Department of Health Services and may be inspected by theCalifornia Department of Health Services at any time. We, our collaborators orother third-party manufacturers of our products may be unable to comply withthese cGMP requirements and with other FDA, state and foreign regulatoryrequirements. A failure to comply with these requirements may result in finesand civil penalties, suspension or delay in product approval, product seizureor recall, or withdrawal of product approval.

***We currently have no marketing or sales staff. If we areunable to enter into or maintain collaborations with marketing partners or ifwe are unable to develop our own sales and marketing capabilities, we may notbe successful in commercializing our potential products and we may be unable togenerate significant revenues.***

We may elect tocommercialize some of the products we are developing on our own, with orwithout a partner, where those products can be effectively marketed and sold inconcentrated markets that do not require a large sales force to be competitive.We currently have no sales, marketing or distribution capabilities. To be ableto commercialize our own products, we will need to establish our ownspecialized sales force and marketing organization with technical expertise andwith supporting distribution capabilities. Developing such an organization isexpensive and time consuming and could delay or limit our ability tocommercialize products.

To commercializeany product candidate that we decide not to market on our own, we will dependon collaborations with third parties that have established distribution systemsand direct sales forces. If we are unable to enter into such collaborations onacceptable terms, we may not be able to successfully commercialize thoseproducts.

To the extent thatwe enter into arrangements with collaborators or other third parties to performsales and marketing services, our product revenue is likely to be lower than ifwe directly marketed and sold our product candidates. If we are unable toestablish adequate sales and marketing capabilities, independently or withothers, we may not be able to generate significant revenue and may not becomeprofitable and the price of our common stock may be negatively affected.

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***Tezampanel, NGX426 and NGX555 belong to new classes ofcompounds. There are no compounds in these classes that have receivedregulatory approval for any indication. Therefore, we do not know whether ourproduct candidates will yield commercially viable products or receiveregulatory approval.***

Tezampanel andNGX426 are antagonists of the AK receptors. They are part of a new class ofcompounds that block the AK receptors and, in turn, stop the transmission ofpain signals. These product candidates may represent a novel approach to themanagement of chronic pain, including migraine and neuropathic pain. There arecurrently no approved products for chronic pain that are AK antagonists. As aresult, we cannot be certain that our product candidates will result incommercially viable drugs that safely and effectively treat chronic painindications such as migraine or neuropathic pain.

NGX555, agamma-secretase modulator, is a product candidate for Alzheimer’s disease. Thisproduct candidate belongs to a class of compounds that have been studied, orare being studied, as a treatment for Alzheimer’s disease, but there are no approvedgamma-secretase modulator products for Alzheimer’s disease. As a result, wecannot be certain that our product candidates will safely and effectivelyimprove the symptoms of Alzheimer’s disease or modify the progression of thedisease or result in commercially viable drugs.

***NGX267and NGX292 are being developed for CIAS, an indication for which there are noproducts approved by the FDA to treat the disorder, and for which no regulatoryprecedents have been established.  Therefore, we donot know whether our product candidates will yield commercially viable productsor receive regulatory approval.***

NGX267 and NGX292are muscarinic agonists with functionally specific M1 receptor activity that weintend to develop for the treatment of CIAS. There are currently no approvedtherapies for the treatment of CIAS. Therefore, in order to successfullycommercialize our product candidates, we will need to agree with the FDA andother applicable regulatory agencies on clinical trial endpoints regardingsafety and efficacy. Given the lack of current treatments for CIAS, we may beunable to agree on the endpoints or successfully complete clinical trials thatdemonstrate that such endpoints, if agreed to, have been met. Any delay inagreeing to clinical trial endpoints or in achieving those endpoints willprevent us from commercializing our product candidates.

***If our product candidates do not achieve market acceptanceamong physicians, patients, health care payors and the medical community, theywill not be commercially successful and our business will be adverselyaffected.***

The degree ofmarket acceptance of any of our approved product candidates among physicians,patients, health care payors and the medical community will depend on a numberof factors, including:

·      acceptable evidence ofsafety and efficacy;

·      relative convenience andease of administration;

·      the prevalence and severityof any adverse side effects;

·      availability of alternativetreatments;

·      pricing and costeffectiveness;

·      effectiveness of sales andmarketing strategies; and

·      ability to obtain sufficientthird-party coverage or reimbursement.

If we are unableto achieve market acceptance for our product candidates, then such productcandidates will not be commercially successful and our business will beadversely affected.

***If our efforts to discover new product candidates do notsucceed, and product candidates that we recommend for clinical development donot actually begin clinical trials, our business will suffer.***

We intend to useour expertise in Alzheimer’s disease and related neurodegenerative diseases anddisorders to discover, develop and commercialize new products for the treatmentand prevention of these diseases and disorders. Once advanced into development,a product candidate undergoes drug substance scale up, preclinical testing,including toxicology tests, and formulation development. If this work issuccessful, an IND would need to be prepared, filed, and approved by the FDAand the product candidate would then be ready for human clinical testing.

The process ofdiscovering and conducting preclinical testing on product candidates isexpensive, time-consuming and unpredictable. If we are unable to advance ourproduct candidates to clinical trials our business will be adversely affected.

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***If we fail to attract and keep key management and scientificpersonnel, we may be unable to develop or commercialize our product candidatessuccessfully.***

Our successdepends on our continued ability to attract, retain and motivate highlyqualified management and scientific personnel. The loss of the services of anyprincipal member of our senior management could delay or prevent thecommercialization of our product candidates. We employ these individuals on anat-will basis and their employment can be terminated by us or them at any time,for any reason and with or without notice, subject to the terms contained intheir respective employment agreements and offer letters.

Competition forqualified personnel in the biotechnology field is intense. We may not be ableto attract and retain quality personnel on acceptable terms given thecompetition for such personnel among biotechnology, pharmaceutical and othercompanies.

***Companies and universities that have licensed productcandidates to us for research, clinical development and marketing aresophisticated competitors that could develop similar products to compete withour products.***

Licensing ourproduct candidates from other companies, universities or individuals does notalways prevent them from developing non-identical but competitive products fortheir own commercial purposes, nor from pursuing patent protection in areasthat are competitive with us. Our partners who created these product candidatesare experienced scientists and business people who may continue to do researchand development and seek patent protection in the same areas that led to thediscovery of the product candidates that they licensed to us. The developmentand commercialization of successful new drug products from our discoveryprogram is likely to attract additional research by our licensors in additionto other investigators who have experience in developing products for the CNSmarket. By virtue of the previous research that led to the discovery of thedrugs or product candidates that they licensed to us, these companies,universities, or individuals may be able to develop and market competitiveproducts in less time than might be required to develop a product with whichthey have no prior experience.

***Changes in, or interpretations of, accounting rules andregulations could result in unfavorable accounting charges or require us tochange our compensation policies.***

Accounting methodsand policies for biopharmaceutical companies, including policies governingrevenue recognition, expenses, accounting for stock options and in-processresearch and development costs are subject to further review, interpretationand guidance from relevant accounting authorities, including the SEC. Changesto, or interpretations of, accounting methods or policies in the future mayresult in unfavorable accounting charges or may require us to change ourcompensation policies to avoid such charges.

***Our management will be required to devote substantial timeto comply with public company regulations.***

As a publiccompany, we will incur significant legal, accounting and other expenses. Inaddition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well asrules subsequently implemented by the SEC and the Nasdaq Global Market,impose various requirements on public companies, including corporate governancepractices. Our management and other personnel will have to meet theserequirements. Moreover, these rules and regulations will increase ourlegal and financial compliance costs and will make some activities more time-consumingand costly.

In addition, theSarbanes-Oxley Act requires, among other things, that we maintain effectiveinternal controls for financial reporting and disclosure controls andprocedures. In particular, we must perform system and process evaluation andtesting of our internal controls over financial reporting to allow managementto report on the effectiveness of its internal controls over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act. Ourcompliance with Section 404 will require that we incur substantialaccounting and related expense and expend significant management efforts. Wewill need to hire additional accounting and financial staff to satisfy theongoing requirements of Section 404. Moreover, if we are not able tocomply with the requirements of Section 404, or if we or our independentregistered public accounting firm identifies deficiencies in our internalcontrols over financial reporting that are deemed to be material weaknesses,the market price of our stock could decline and we could be subject tosanctions or investigations by the Nasdaq Global Market, SEC or otherregulatory authorities.

***We are a defendant in a class action lawsuit and astockholder derivative lawsuit which, if determined adversely, could have amaterial adverse affect on us.***

A class actionsecurities lawsuit and a stockholder derivative lawsuit was filed against us,as described under “Part II, Item 1–Legal Proceedings.” We are defendingagainst these actions vigorously; however, we do not know what the outcome ofthese proceedings will be and, if we do not prevail, we may be required to paysubstantial damages or settlement amounts. Furthermore, regardless of theoutcome, we may incur significant defense costs, and the time and attention ofour management may be diverted from normal business operations. If we areultimately required to pay significant defense costs, damages or settlementamounts, such payments could materially and adversely affect our operations andresults. We have purchased liability insurance, however, if any costs orexpenses associated with the litigation exceed the insurance coverage, we maybe forced to bear some or all of these costs and expenses directly, which couldbe substantial and may have an adverse effect on our business, financialcondition, results of

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operations and cashflows. In any event, publicity surrounding the lawsuits and/or any outcomeunfavorable to us could adversely affect our reputation and share price. Theuncertainty associated with substantial unresolved lawsuits could harm ourbusiness, financial condition and reputation.

We have certainobligations to indemnify our officers and directors and to advance expenses tosuch officers and directors. Although we have purchased liability insurance forour directors and officers, if our insurance carriers should deny coverage, orif the indemnification costs exceed the insurance coverage, we may be forced tobear some or all of these indemnification costs directly, which could besubstantial and may have an adverse effect on our business, financialcondition, results of operations and cash flows. If the cost of our liabilityinsurance increases significantly, or if this insurance becomes unavailable, wemay not be able to maintain or increase our levels of insurance coverage forour directors and officers, which could make it difficult to attract or retainqualified directors and officers.

***Fluctuations in currency exchange rates may negativelyimpact our business.***

We currently haveoperations in Belgium and are conducting clinical trials in Europe. Costsresulting from our operations in Europe are denominated primarily in localcurrencies, including the Euro, and are subject to fluctuations in currencyexchange rates. Further, we incur other operating expenses, including expensesrelated to clinical trials, which are denominated in Euros and other localcurrencies. Significant fluctuations in the currency exchange rates and generaleconomic conditions in the countries in which we do business, could harm ouroperating results.

***The carrying value of our investment in OXIS Internationalmay face future impairment.***

We account for ourinvestment in OXIS under the equity method of accounting following accountingprinciples bulletin (APB) No. 18. Any impairment charge would be requiredif we determined that any reduction in the OXIS market value over the carryingvalue was permanent.

**Risks Related to Our IntellectualProperty**

***Our success depends upon our ability to protect ourintellectual property and proprietary technologies.***

Our commercialsuccess depends on obtaining and maintaining patent protection and trade secretprotection of our product candidates, proprietary technologies and their uses,as well as successfully defending our patents against third-party challenges.We will only be able to protect our product candidates, proprietarytechnologies and their uses from unauthorized use by third parties to theextent that valid and enforceable patents or trade secrets cover them.

The patentpositions of pharmaceutical and biotechnology companies can be highly uncertainand involve complex legal and factual questions for which important legalprinciples remain unresolved. No consistent policy regarding the breadth ofclaims allowed in biotechnology patents has emerged to date in the U.S. Thebiotechnology patent situation outside the U.S. is even more uncertain. Changesin either the patent laws or in interpretations of patent laws in the U.S. andother countries may diminish the value of our intellectual property.Accordingly, we cannot predict the breadth of claims that may be allowed orenforced in our patents or in third-party patents.

The degree offuture protection for our proprietary rights is uncertain because legal meansafford only limited protection and may not adequately protect our rights orpermit us to gain or keep our competitive advantage. For example:

·      we or our licensors mightnot have been the first to make the inventions covered by each of its pendingpatent applications and issued patents;

·      we or our licensors mightnot have been the first to file patent applications for these inventions;

·      others may independentlydevelop similar or alternative technologies or duplicate any of ourtechnologies;

·      it is possible that none ofour pending patent applications will result in issued patents;

·      our issued patents may notprovide a basis for commercially viable products, may not provide us with anycompetitive advantages, or may be challenged by third parties;

·      our issued patents may notbe valid or enforceable;

·      we may not developadditional proprietary technologies that are patentable; and

·      the patents of others mayhave an adverse effect on our business.

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Proprietary tradesecrets and unpatented know-how are also very important to our business. Althoughwe have taken steps to protect our trade secrets and unpatented know-how,including entering into confidentiality agreements with third parties andproprietary information and inventions agreements with employees, consultantsand advisors, third parties may still obtain this information. Enforcing aclaim that a third party illegally obtained and is using our trade secrets orunpatented know-how is expensive and time consuming, and the outcome isunpredictable. In addition, courts outside the U.S. may be less willing toprotect this information. Moreover, our competitors may independently developequivalent knowledge, methods and know-how.

***If we are sued for infringing intellectual property rightsof third parties, it will be costly and time consuming, and an unfavorableoutcome in that litigation would have a material adverse effect on ourbusiness.***

Our commercialsuccess depends upon our ability and the ability of any of our collaborators todevelop, manufacture, market, and sell our product candidates and use ourproprietary technologies without infringing the proprietary rights of thirdparties. Numerous U.S. and foreign issued patents and pending patentapplications, which are owned by third parties, exist in the fields in which weare developing products. Because patent applications can take many years toissue, there may be currently pending applications, unknown to us, which maylater result in issued patents that our product candidates or proprietarytechnologies may infringe. We have not conducted a complete search of existingpatents to identify existing patents that our product candidates or proprietarytechnologies may inadvertently infringe.

We may be exposedto future litigation by the companies holding these patents or other thirdparties based on claims that our product candidates and/or proprietarytechnologies infringe their intellectual property rights. If one of thesepatents was found to cover our product candidates, proprietary technologies ortheir uses, we or our collaborators could be required to pay damages and couldbe unable to commercialize our product candidates or use our proprietarytechnologies unless we obtained a license to the patent. A license to thesepatents may not be available to us or our collaborators on acceptable terms, ifat all.

There is asubstantial amount of litigation involving patent and other intellectualproperty rights in the biotechnology and biopharmaceutical industriesgenerally. If a third party claims that we or our collaborators infringe on itstechnology, it may face a number of issues, including:

·      infringement and otherintellectual property claims which, with or without merit, may be expensive andtime-consuming to litigate and may divert management’s attention from its corebusiness;

·      substantial damages forinfringement, including treble damages and attorneys’ fees, as well as damagesfor products development using allegedly infringing drug discovery tools ormethods which we may have to pay if a court decides that the product orproprietary technology at issue infringes on or violates the third party’srights;

·      a court prohibiting us fromselling or licensing the product or using the proprietary technology unless thethird party licenses its technology to us, which it is not required to do;

·      if a license is availablefrom the third party, we may have to pay substantial royalties, fees and/orgrant cross licenses to its technology; and

·      redesigning our products orprocesses so they do not infringe, which may not be possible or may require substantialfunds and time.

We may also besubject to claims that we or our employees, who were previously employed atuniversities or other biotechnology or pharmaceutical companies, haveinadvertently or otherwise used or disclosed trade secrets or other proprietaryinformation of their former employers. Litigation may be necessary to defendagainst these claims. If we fail in defending such claims, in addition topaying monetary damages, we may lose valuable intellectual property rights orpersonnel. A loss of key research personnel or their work product could hamperor prevent our ability to commercialize certain potential drugs, which couldseverely harm our business. Even if we are successful in defending againstthese claims, litigation could result in substantial costs and be a distractionto management.

**Risks Related to Our Industry**

***Our product candidates are subject to extensive regulation,which can be costly and time consuming, cause unanticipated delays or preventthe receipt of the required approvals to commercialize our product candidates.***

The clinicaldevelopment, manufacturing, labeling, storage, record-keeping, futureadvertising, promotion, export, marketing and distribution of our productcandidates are subject to extensive regulation by the FDA and other regulatoryagencies in the U.S. and by comparable foreign governmental authorities. Theprocess of obtaining these approvals is expensive, often takes many years, andcan vary substantially based upon the type, complexity and novelty of the productsinvolved. Approval policies or regulations may change. In addition, althoughmembers of our management have drug development and regulatory experience, as acompany we have not

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previously filed themarketing applications necessary to gain regulatory approvals for any product.This lack of experience may impede our ability to obtain FDA marketing approvalin a timely manner, if at all, for the product candidates we are developing andcommercializing. We will not be able to commercialize our product candidates inthe U.S. until we obtain FDA approval and in other countries until we obtainapproval by comparable governmental authorities. Any delay in obtaining, orinability to obtain, these approvals would prevent us from commercializing ourproduct candidates.

***Even if any of our product candidates receive regulatoryapproval, they may still face future development and regulatory difficulties.***

If any of ourproduct candidates receive regulatory approval, the FDA and foreign regulatoryauthorities may still impose significant restrictions on the uses or marketingof the product candidates or impose ongoing requirements for post-approvalstudies. In addition, regulatory agencies subject a product, its manufacturerand the manufacturer’s facilities to continuing review and periodicinspections. If previously unknown problems with a product or its manufacturingfacility are discovered, a regulatory agency may impose restrictions on thatproduct, us, or our partners, including requiring withdrawal of the productfrom the market. Our candidates will also be subject to ongoing FDArequirements for submission of safety and other post-market information. If ourproduct candidates fail to comply with applicable regulatory requirements, aregulatory agency may:

·      issue warning letters;

·      impose civil or criminalpenalties;

·      suspend regulatory approval;

·      suspend any ongoing clinicaltrials;

·      refuse to approve pendingapplications or supplements to approved applications filed by us or ourcollaborators;

·      impose restrictions onoperations, including costly new manufacturing requirements; or

·      seize or detain products orrequire a product recall.

In order to marketany products outside of the U.S., we and our partners must establish and complywith numerous and varying regulatory requirements of other countries regardingsafety and efficacy. Approval procedures vary among countries and can involveadditional product testing and additional administrative review periods. Thetime required to obtain approval in other countries might differ from thatrequired to obtain FDA approval. The regulatory approval process in othercountries may include all of the risks detailed above regarding FDA approval inthe U.S. Regulatory approval in one country does not ensure regulatory approvalin another, but a failure or delay in obtaining regulatory approval in onecountry may negatively impact the regulatory process in others. Failure toobtain regulatory approval in other countries or any delay or setback inobtaining such approval could have the same adverse effects described aboveregarding FDA approval in the U.S., including the risk that our productcandidates may not be approved for all indications requested, which could limitthe uses of our product candidates and adversely impact potential royalties andproduct sales, and that such approval may be subject to limitations on theindicated uses for which the product may be marketed or require costly,post-marketing follow-up studies.

If we and ourpartners fail to comply with applicable foreign regulatory requirements, we andour partners may be subject to fines, suspension or withdrawal of regulatoryapprovals, product recalls, seizure of products, operating restrictions andcriminal prosecution.

***If our competitors have products that are approved faster,marketed more effectively or demonstrated to be more effective than ourproducts, then our commercial opportunity will be reduced or eliminated.***

The biotechnologyand biopharmaceutical industries are characterized by rapidly advancingtechnologies, intense competition and a strong emphasis on proprietaryproducts. We face competition from many different sources, including commercialpharmaceutical and biotechnology enterprises, academic institutions, governmentagencies and private and public research institutions. Due to the high demandfor treatments for CNS diseases and disorders, research is intense and newtreatments are being sought out and developed by our competitors.

In addition, manyother competitors are developing products for the treatment of the diseases weare targeting and if successful, these products could compete with ourproducts. If we receive approval to market and sell any of our productcandidates, we may compete with these companies and their products as well as othersin varying stages of development.

Many of ourcompetitors have significantly greater financial resources and expertise inresearch and development, manufacturing, preclinical testing, clinical trials,regulatory approvals and marketing approved products than we do. Smaller orearly-stage companies may also prove to be significant competitors,particularly through collaborative arrangements with large and establishedcompanies. Our competitors may succeed in developing technologies and therapiesthat are more effective, better tolerated or less costly than ours,

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or that would render ourproduct candidates obsolete and noncompetitive. Our competitors may succeed inobtaining approvals from the FDA and foreign regulatory authorities for theirproducts sooner than we do. We will also face competition from these thirdparties in recruiting and retaining qualified scientific and managementpersonnel, establishing clinical trial sites and patient registration forclinical trials, and in acquiring and in-licensing technologies and productscomplementary to our programs or advantageous to our business.

***We are subject to uncertainty relating to health care reformmeasures and reimbursement policies which, if not favorable to our productcandidates, could hinder or prevent the commercial success of our productcandidates.***

The continuingefforts of the government, insurance companies, managed care organizations andother payors of health care costs to contain or reduce costs of health care mayadversely affect our:

·      ability to set a price webelieve is fair for our products;

·      ability to generate revenuesand achieve profitability;

·      future revenues andprofitability of potential customers, suppliers and collaborators; and

·      the availability of capital.

In certain foreignmarkets, the pricing of prescription drugs is subject to government control. Inthe U.S., given recent federal and state government initiatives directed atlowering the total cost of health care, Congress and state legislatures willlikely continue to focus on health care reform, the cost of prescription drugsand the reform of the Medicare and Medicaid systems. For example, a newMedicare prescription drug benefit program began in 2006. While we cannotpredict the full outcome of the implementation of this legislation or whetherany future legislative or regulatory proposals affecting our business will beadopted, the announcement or adoption of these proposals could materially andadversely affect our business, financial condition, and results of operations.

Our ability tocommercialize our product candidates successfully will depend in part on theextent to which governmental authorities, private health insurers and otherorganizations establish appropriate reimbursement levels for the cost of our productsand related treatments. Third-party payors are increasingly challenging theprices charged for medical products and services. Also, the trend towardmanaged health care in the U.S., which could significantly influence thepurchase of health care services and products, as well as legislative proposalsto reform health care or reduce government insurance programs, may result inlower prices for our product candidates or exclusion of its product candidatesfrom reimbursement programs. The cost containment measures that health carepayors and providers are instituting and the effect of any health care reformcould materially and adversely affect our results of operations.

***Product liability claims may harm our business if ourinsurance coverage for those claims is inadequate.***

We face aninherent risk of product liability exposure related to the testing of ourproduct candidates in human clinical trials, and will face an even greater riskif we sell our product candidates commercially. An individual may bring aliability claim against us if one of our product candidates causes, or merelyappears to have caused, an injury. If we cannot successfully defend ourselvesagainst the product liability claim, we will incur substantial liabilities.Regardless of merit or eventual outcome, liability claims may result in:

·      decreased demand for ourproduct candidates;

·      injury to our reputation;

·      withdrawal of clinical trialparticipants;

·      costs of related litigation;

·      substantial monetary awardsto patients or other claimants;

·      loss of revenues; and

·      the inability tocommercialize our product candidates.

We have productliability insurance that covers our clinical trials, up to an annual aggregatelimit of $5.0 million. We intend to expand our insurance coverage toinclude the sale of commercial products if marketing approval is obtained forany of our product candidates. However, insurance coverage is increasinglyexpensive. We may not be able to maintain insurance coverage at a reasonablecost and we may not be able to obtain insurance coverage that will be adequateto satisfy any liability that may arise.

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***We use hazardous chemicals and radioactive and biologicalmaterials in our business. Any claims relating to improper handling, storage ordisposal of these materials could be time-consuming and costly.***

Our research anddevelopment processes involve the controlled use of hazardous materials,including chemicals, radioactive and biological materials. Our operationsproduce hazardous waste products. We cannot eliminate the risk of accidentalcontamination or discharge and any resultant injury from those materials.Federal, state and local laws and regulations govern the use, manufacture,storage, handling and disposal of hazardous materials. We may be sued for any injuryor contamination that results from our use or the use by third parties of thesematerials. Compliance with environmental laws and regulations may be expensive,and current or future environmental regulations may impair our research,development and production efforts.

**Risks Related to our Common Stock**

***Our stock price has been, and is expected to continue to be,volatile.***

The market priceof our common stock could be subject to significant fluctuations. Market pricesfor securities of early-stage pharmaceutical, biotechnology and other lifesciences companies have historically been particularly volatile. Some of thefactors that may cause the market price of our common stock to fluctuateinclude:

·      the results of our currentand any future clinical trials of our product candidates;

·      the results of ongoingpreclinical studies and planned clinical trials of our preclinical productcandidates;

·      the entry into, ortermination of, key agreements, including key strategic alliance agreements;

·      the results and timing ofregulatory reviews relating to the approval of our product candidates;

·      the initiation of, materialdevelopments in, or conclusion of litigation to enforce or defend any of ourintellectual property rights;

·      general andindustry-specific economic conditions that may affect our research anddevelopment expenditures;

·      the results of clinicaltrials conducted by others on drugs that would compete with our productcandidates;

·      issues in manufacturing ourproduct candidates or any approved products;

·      the loss of key employees;

·      the introduction oftechnological innovations or new commercial products by our competitors;

·      failure of any of ourproduct candidates, if approved, to achieve commercial success;

·      changes in estimates orrecommendations by securities analysts, if any, who cover our common stock;

·      future sales of our commonstock;

·      changes in the structure ofhealth care payment systems; and

·      period-to-periodfluctuations in our financial results.

Moreover, thestock markets in general have experienced substantial volatility that has oftenbeen unrelated to the operating performance of individual companies. Thesebroad market fluctuations may also adversely affect the trading price of ourcommon stock.

In the past,following periods of volatility in the market price of a company’s securities,stockholders have often instituted class action securities litigation againstthose companies. Such litigation, if instituted, could result in substantialcosts and diversion of management attention and resources, which couldsignificantly harm our profitability and reputation.

***Anti-takeover provisions in our stockholder rights plan andin our certificate of incorporation and bylaws may prevent or frustrateattempts by stockholders to change the board of directors or current managementand could make a third-party acquisition difficult.***

We are a party toa stockholder rights plan, also referred to as a poison pill, which is intendedto deter a hostile takeover of us by making such proposed acquisition moreexpensive and less desirable to the potential acquirer. The stockholder rightsplan and our

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certificate ofincorporation and bylaws, as amended, contain provisions that may discourage,delay or prevent a merger, acquisition or other change in control thatstockholders may consider favorable, including transactions in whichstockholders might otherwise receive a premium for their shares. Theseprovisions could limit the price that investors might be willing to pay in thefuture for shares of our common stock.

***Our largest stockholders may take actions that are contraryto your interests, including selling their stock.***

A small number ofour stockholders hold a significant amount of our outstanding stock. Thesestockholders may support competing transactions and have interests that aredifferent from yours. In addition, the average number of shares of our stockthat trade each day is generally low. As a result, sales of a large number ofshares of our stock by these large stockholders or other stockholders within ashort period of time could adversely affect our stock price.

***Our management has broad discretion over the use of our cashand we may not use our cash effectively, which could adversely affect ourresults of operations.***

Our management hassignificant flexibility in applying our cash resources and could use theseresources for corporate purposes that do not increase our market value, or inways with which our stockholders may not agree. We may use our cash resourcesfor corporate purposes that do not yield a significant return or any return atall for our stockholders, which may cause our stock price to decline.

***Raising additional funds by issuing securities or throughcollaboration and licensing arrangements may cause dilution to existingstockholders, restrict operations or require us to relinquish proprietaryrights.***

We may raiseadditional funds through public or private equity offerings, debt financings orcorporate collaboration and licensing arrangements. To the extent that we raiseadditional capital by issuing equity securities, our existing stockholders’ownership will be diluted. Any debt financing we enter into may involvecovenants that restrict our operations. These restrictive covenants may includelimitations on additional borrowing, specific restrictions on the use of ourassets as well as prohibitions on our ability to create liens, pay dividends,redeem stock or make investments. In addition, if we raise additional fundsthrough collaboration and licensing arrangements, it may be necessary torelinquish potentially valuable rights to our potential products or proprietarytechnologies, or grant licenses on terms that are not favorable to us.

***There is only a limited trading market for our common stockand it is possible that investors may not be able to sell their shares easily.***

There is currentlyonly a limited trading market for our common stock. Our common stock trades onthe Nasdaq Global Market under the symbol “TPTX” with very limited tradingvolume. We cannot assure investors that a substantial trading market will besustained for our common stock.

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**Item4. Submission of Matters to a Vote of Security Holders**

We held our 2007 Annual Meeting of Stockholders on May 23, 2007.  As of the close of business on April 3, 2007,the record date for the Annual Meeting, there were 15,700,839 sharesoutstanding and entitled to vote, of which there were 12,921,836 shares presentat the Annual Meeting in person or by proxy. At the Annual Meeting, our stockholders approved the following matters:

1.               The election of seven directors to holdoffice for the ensuing year and until their successors are elected.  The vote for the nominees for director was asfollows:
| Nominee                  | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|--------------------------|------------|------------|------------|--------------|------------|
|                     |       |       |       |         |       |
| Peter Davis,  Ph.D.      |       | 12,778,807 |       | 143,029      |       |
|                     |       |       |       |         |       |
| Jean Deleage,  Ph.D.     |       | 12,862,821 |       | 59,015       |       |
|                     |       |       |       |         |       |
| Steven H.  Ferris, Ph.D. |       | 12,864,371 |       | 57,465       |       |
|                     |       |       |       |         |       |
| Jason Fisherman,  M.D.   |       | 12,778,795 |       | 143,041      |       |
|                     |       |       |       |         |       |
| Neil M. Kurtz,  M.D.     |       | 12,864,284 |       | 57,552       |       |
|                     |       |       |       |         |       |
| Steven B. Ratoff         |       | 12,861,298 |       | 60,538       |       |
|                     |       |       |       |         |       |
| Patrick Van Beneden      |       | 12,779,645 |       | 142,191      |       |

 

The authorized number of Board of Directormembers was reduced from ten to seven and Peter Davis, Ph.D., was electedchairman at the Board of Director’s meeting immediately following the 2007Annual Meeting of Stockholders.

2.               The ratification of Ernst & Young LLP asour independent registered public accounting firm for the fiscal year endingDecember 31, 2007.  12,912,028 sharesvoted in favor of the proposal, 8,467 shares voted against the proposal, 1,341 sharesvoted to abstain, and there were no broker non-votes.

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**Item6. Exhibits**
| Number     | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                                                                                              |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                |
| 2.1        |       | Agreement and Plan of Merger and Reorganization,  dated as of June 7, 2006, by and among Axonyx Inc., Autobahn  Acquisition, Inc. and TorreyPines Therapeutics, Inc. (incorporated  by reference to Annex A to Registration Statement No. 333-136018 filed  with the Securities and Exchange Commission on July 25, 2006).                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 2.2        |       | Amendment No. 1 to Agreement and Plan of Merger  and Reorganization, dated as of August 25, 2006, by and among Axonyx  Inc., Autobahn Acquisition, Inc. and TorreyPines Therapeutics, Inc.  (incorporated by reference to Annex A to Amendment No. 1 to Registration  Statement No. 333-136018 filed with the Securities and Exchange  Commission on August 25, 2006). |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.1        |       | Certificate of Incorporation of the Registrant  (incorporated by reference to Exhibit 3.1 to the Registrant’s Current  Report on Form 8-K, filed on October 10, 2006).                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.2        |       | Bylaws of the Registrant (incorporated by reference  to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K,  filed on October 10, 2006).                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.3        |       | Certificate of Amendment filed with the Secretary of  State of the State of Nevada effecting an 8-for-1 reverse stock of the  Registrant’s common stock and changing the name of the Registrant from Axonyx  Inc. to TorreyPines Therapeutics, Inc. (incorporated by reference to  Exhibit 3.3 to the Registrant’s Current Report on Form 8-K, filed  on October 10, 2006). |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.4        |       | Articles of Conversion filed with the Secretary of  State of the State of Nevada changing the state of incorporation of the  Registrant (incorporated by reference to Exhibit 3.4 to the Registrant’s  Current Report on Form 8-K, filed on October 10, 2006).                                                                                                                        |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.5        |       | Certificate of Conversion filed with the Secretary  of State of the State of Delaware (incorporated by reference to  Exhibit 3.5 to the Registrant’s Current Report on Form 8-K, filed  on October 10, 2006).                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 3.6        |       | Amendment to Bylaws of the Registrant (incorporated  by reference to Exhibit 3.6 to the Registrant’s Annual Report on Form 10-K,  filed on March 29, 2007).                                                                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.1        |       | Specimen common stock certificate of the Registrant.                                                                                                                                                                                                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.2        |       | Form of Warrant to Purchase Common Stock issued  to previous holders of TPTX, Inc. redeemable convertible preferred stock  in connection with the business combination between TorreyPines  Therapeutics, Inc. and Axonyx, Inc. (incorporated by reference to  Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K, filed on March  29, 2007).                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.3        |       | Form of Common Stock Purchase Warrant  (incorporated by reference to Exhibit 4.3 to Registrant’s Annual Report on  Form 10-KSB filed on March 13, 2000).                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.4        |       | Form of Registration Rights Agreement 1999  (incorporated by reference to Exhibit 4.4 to the March 13, 2000  10-KSB).                                                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.5        |       | Form of Warrant issued to Stonegate Securities  (incorporated by reference to the corresponding exhibit to Registrant’s  Annual Report on Form 10-KSB filed on March 22, 2001).                                                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                      |
| 4.6        |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on December 6, 2001 (incorporated by  reference to Exhibit 10.2 to Registrant’s Current Report on  Form 8-K filed on December 13, 2001).                                                                                                                                                 |

 

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| Number | ** ** | **Exhibits**                                                                                                                                                                                                                                                                                                                               |
|--------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.7    |       | Form of Warrant issued to SCO Financial Group,  LLC (incorporated by reference to exhibit 4.5 to Registrant’s  Registration Statement on Form S-3 (File No. 333-76234) filed on  January 3, 2002).                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.8    |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on January 6, 2003 (incorporated by  reference to Exhibit 10.2 in Registrant’s Current Report on  Form 8-K filed on January 8, 2003).                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.9    |       | Form of Warrant issued to AFO Advisors, LLC  (incorporated by reference to Exhibit 4.2 in Registrant’s registration  statement on Form S-3 (File No. 333-103130) filed on  February 12, 2003).                                                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.10   |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on September 12, 2003 (incorporated by  reference to Exhibit 10.2 in Registrant’s Current Report on  Form 8-K filed on September 16, 2003).                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.11   |       | Form of Common Stock Purchase Warrant issued to  purchasers in a private placement on January 8, 2004 (incorporated by  reference to Exhibit 4.3 in Registrant’s Current Report on Form 8-K  filed on January 12, 2004).                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.12   |       | Registration Rights Agreement dated as of  January 8, 2004 between Axonyx Inc. and certain investors (incorporated  by reference to Exhibit 4.2 in the current report on Form 8-K  previously filed by Axonyx Inc. on January 12, 2004)                                                                                |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.13   |       | Registration Rights Agreement dated as of  May 3, 2004, between Axonyx Inc. and certain investors (incorporated by  reference to Exhibit 4.2 in the current report on Form 8-K  previously filed by Axonyx Inc. on May 5, 2004)                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.14   |       | Form of Warrant issued to Comerica Bank on  July 1, 2003 (incorporated by reference to Exhibit 4.14 to the  Registrant’s Annual Report on Form 10-K, filed on March 29, 2007).                                                                                                                                              |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.15   |       | Form of Warrant issued to Silicon Valley Bank  on December 8, 2000 (incorporated by reference to Exhibit 4.15 to the  Registrant’s Annual Report on Form 10-K, filed on March 29, 2007).                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.16   |       | Form of Warrant issued to Oxford Financial and  Silicon Valley Bank on September 27, 2005 (incorporated by reference to  Exhibit 4.16 to the Registrant’s Annual Report on Form 10-K, filed on March  29, 2007).                                                                                                            |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.17   |       | Rights Agreement, dated as of May 13, 2005,  between the Registrant and American Stock Transfer and Trust Company  (replacing Nevada Agency and Trust Company), as Rights Agent (incorporated by  reference to Exhibit 99.2 to the Registrant’s Current Report on  Form 8-K, filed on May 16, 2005).              |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.18   |       | Amendment to Rights Agreement, dated as of  June 7, 2006, between the Registrant and American Stock Transfer and  Trust Company (replacing Nevada Agency and Trust Company), as Rights Agent  (incorporated by reference to Exhibit 4.1 to the Registrant’s Current  Report on Form 8-K, filed on June 12, 2006). |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.19   |       | Amendment to Rights Agreement, dated as of  October 3, 2006, between the Registrant and American Stock Transfer and  Trust Company (replacing Nevada Agency and Trust Company), as Rights Agent  (incorporated by reference to Exhibit 4.19 to the Registrant’s Annual Report  on Form 10-K, filed on March 29, 2007).           |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 4.20   |       | Reference is made to Exhibits 3.1 through 3.6.                                                                                                                                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 31.1   |       | Certification of Principal Executive Officer  pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                                                                                                       |
| 31.2   |       | Certification of Principal Financial and Accounting  Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                   |

 

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| Number | ** ** | **Exhibits**                                                                                                                                                         |
|--------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                                                                                 |
| 32.1   |       | Certification of Principal Executive Officer pursuant  to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                |
|   |       |                                                                                                                                                                 |
| 32.2   |       | Certification of Principal Financial and Accounting  Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906  of the Sarbanes-Oxley Act of 2002. |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

Date: August 13, 2007
|        | TorreyPines Therapeutics, Inc.                                                                                                                                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                             |   |
|   | By: /s/ Neil M. Kurtz, M.D.                                                                                                                                                      |   |
|   |                                                                                                                                                                             |   |
|   | Neil M. Kurtz, M.D.     President and Chief Executive Officer     (Principal Executive Officer)                                                              |
|   |                                                                                                                                                                             |   |
|   | By: /s/ Craig Johnson                                                                                                                                                            |   |
|   |                                                                                                                                                                             |   |
|   | Craig Johnson     Vice President, Finance     Chief Financial Officer, and     Secretary    (Principal Financial and Accounting Officer) |
|        |                                                                                                                                                                                  |  |  |

 

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