##### Table of Contents



UNITED
    STATES SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.
    20549
    Form 10-K
 þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended
    December 31, 2006oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the transition period from
    
    to   Commission File Number
    000-51329
      XenoPort, Inc.
 (Exact name of registrant as
    specified in its charter)
      Delaware

94-3330837(State or other Jurisdiction
    of
    Incorporation or Organization)

(IRS Employer
    Identification No.)3410 Central Expressway,
    Santa Clara, California

95051(Zip Code)(Address of principal executive
    offices)   (408) 616-7200 (Registrants
    telephone number, including area code):
  Securities registered pursuant to Section 12(b) of the
    Act:
   Title of Each Class

Name of Each Exchange on Which RegisteredCommon stock, par value
    $0.001 per share
    Preferred share purchase rights

The NASDAQ Stock Market LLC    Securities registered pursuant to Section 12(g) of the
    Act:
 None
  o þ
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
  Rule 12b-2
 o þ o
  Rule 12b-2 o þ
      Class

Outstanding at February 1, 2007Common Stock, $0.001 par
    value per share

24,718,427 shares   DOCUMENTS
    INCORPORATED BY REFERENCE
  Document

Parts Into Which IncorporatedDefinitive Proxy Statement for the
    Annual Meeting of Stockholders to be held May 30, 2007
    (Proxy Statement)

Part III




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##### 



XENOPORT,
    INC.
  TABLE OF
    CONTENTS
  
  PagePART I.Item 1.


Business


2Overview


2Transported
    Prodrugs


4Our Product
    Candidates


5Future Applications
    for Our Transported Prodrugs


16Our Strategic
    Alliances


17Patents and
    Proprietary Rights


18Manufacturing


19Marketing and
    Sales


20Competition


21Government
    Regulation


22Pharmaceutical
    Pricing and Reimbursement


25Facilities


25Employees


25Executive Officers
    of the Registrant


26About
    XenoPort


27Available
    Information


27Item 1A.


Risk
    Factors


27Item 1B.


Unresolved Staff
    Comments


47Item 2.


Properties


47Item 3.


Legal
    Proceedings


47Item 4.


Submission of
    Matters to a Vote of Security Holders


47PART II.Item 5.


Market for
    Registrants Common Equity, Related Stockholder Matters and
    Issuer Purchases of Equity Securities


47Item 6.


Selected Financial
    Data


50Item 7.


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


51Item 7A.


Quantitative and
    Qualitative Disclosures About Market Risk


61Item 8.


Financial
    Statements and Supplementary Data


61Item 9.


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


61Item 9A.


Controls and
    Procedures


61Item 9B.


Other
    Information


63PART III.Item 10.


Directors,
    Executive Officers and Corporate Governance


63Item 11.


Executive
    Compensation


63Item 12.


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


64Item 13.


Certain
    Relationships and Related Transactions, and Director
    Independence


65Item 14.


Principal
    Accounting Fees and Services


65PART IV.Item 15.


Exhibits, Financial
    Statement Schedules


66Signatures


69Index to
    Exhibits


71EXHIBIT 10.4.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   1




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This Annual Report on
    Form 10-K
    contains forward-looking statements within the meaning of
    Section 27A of the Securities Act of 1933, as amended, and
    Section 21E of the Securities Exchange Act of 1934, as
    amended, which are subject to the safe harbor
    created by those sections. Forward-looking statements are based
    on our managements beliefs and assumptions and on
    information currently available to our management. In some
    cases, you can identify forward-looking statements by terms such
    as may, will, should,
    could, would, expect,
    plan, anticipate, believe,
    estimate, project, predict,
    potential and similar expressions intended to
    identify forward-looking statements. These statements involve
    known and unknown risks, uncertainties and other factors, which
    may cause our actual results, performance, time frames or
    achievements to be materially different from any future results,
    performance, time frames or achievements expressed or implied by
    the forward-looking statements. We discuss many of these risks,
    uncertainties and other factors in this Annual Report on
    Form 10-K
    in greater detail under the heading Risk Factors.
    Given these risks, uncertainties and other factors, you should
    not place undue reliance on these forward-looking statements.
    Also, these forward-looking statements represent our estimates
    and assumptions only as of the date of this filing. You should
    read this Annual Report on
    Form 10-K
    completely and with the understanding that our actual future
    results may be materially different from what we expect. We
    hereby qualify our forward-looking statements by these
    cautionary statements. Except as required by law, we assume no
    obligation to update these forward-looking statements publicly,
    or to update the reasons actual results could differ materially
    from those anticipated in these forward-looking statements, even
    if new information becomes available in the future.
 PART I. Item 1.  Business. Overview    and/or
     2




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
    XP13512 for RLS.  XP13512 is a Transported
    Prodrug of gabapentin. XP13512 is currently being evaluated in a
    Phase 3 clinical program for the treatment of RLS. RLS is
    characterized by an irresistible urge to move ones legs,
    usually accompanied by unpleasant sensations or pain in the
    legs. A study published in the May 2004 issue of Sleep
    Medicinehas indicated that approximately 10% of patients
    visiting primary care physicians in the United States and four
    European countries experience RLS symptoms at least weekly, with
    approximately 2% of patients visiting primary care physicians
    suffering from symptoms severe enough to disrupt their quality
    of life.
    XP13512 for Neuropathic Pain, Including
    PHN.  We have also shown in a Phase 2a
    clinical trial that XP13512 is effective for the management of
    PHN, a chronic type of neuropathic pain that can follow the
    resolution of shingles. About 500,000 cases of shingles occur in
    the United States annually, and the estimated prevalence of PHN
    in 2003 was 272,000 patients in the United States and six
    other major pharmaceutical markets, collectively.
    XP19986 for GERD and Spasticity.  XP19986 is a
    Transported Prodrug of R-baclofen that is in development for the
    treatment of GERD, which is a digestive system disorder caused
    primarily by inappropriate relaxations of the lower esophageal
    sphincter, which is a combination of muscles that controls the
    junction between the esophagus and the stomach. GERD is
    characterized by the frequent, undesirable passage of stomach
    contents into the esophagus that results in discomfort and
    potential damage to the lining of the esophagus. Approximately
    $10.0 billion is spent worldwide each year on GERD and
    heartburn medications, and approximately 6% of the global
    population experiences GERD symptoms daily. XP19986 has
    generated positive data in a Phase 2a clinical trial
    indicating that single doses of XP19986 were well tolerated and
    produced statistically significant reductions in the number of
    reflux episodes and episodes of heartburn associated with reflux
    in patients with GERD. XP19986 is also a potential treatment for
    the symptoms of spasticity. The prevalence of spasticity due to
    multiple sclerosis, stroke and cerebral palsy in 2002 was
    approximately 5.2 million patients in the United States and
    six other major pharmaceutical markets, collectively.
    XP21279 for Parkinsons Disease.  XP21279
    is a Transported Prodrug of levodopa, or L-Dopa, that is in
    preclinical development for the treatment of Parkinsons
    disease. Approximately 1% of the U.S. population over
    65 years old has been diagnosed with Parkinsons
    disease. According to the IMS National Prescription Audit Report
    and the IMS National Disease and Therapeutic Index Report, it is
    estimated that there were approximately 6.5 million
    prescriptions written in the United States in 2005 for treating
    the symptoms of Parkinsons disease. We plan to file an
    investigational new drug application, or IND, for XP21279 in the
    second half of 2007.
    XP20925 for Migraine and Chemotherapy-Induced Nausea and
    Vomiting.  XP20925 is a Transported Prodrug of
    propofol that is in preclinical development for the treatment of
    migraine and chemotherapy-induced nausea and vomiting. According
    to Datamonitor, in 2002, the commercial market for migraine, the
    most common neurological disorder in the developed world, was
    estimated to be $2.5 billion. In 2000, global sales of
    anti-nausea drugs were approximately $1.8 billion, and the
    incidence of cancer, the treatment of which is a major cause of
    nausea and vomiting, was approximately 3.1 million patients
    in the United States and six other major pharmaceutical markets,
    collectively. We plan to continue development of XP20925 at an
    appropriate time in the future depending on the availability of
    resources. 3




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Transported
    Prodrugs           4




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Our
    Product Candidates    XenoPortProduct



ParentCandidate

Commercialization Rights

Compound

Target Indications

Development StatusXP13512

 Astellas: six Asian
    countries

Gabapentin

 Restless legs syndrome
    (RLS)

 Phase 3 clinical
    trials ongoing GSK: worldwide,
    excluding the Astellas territory



 Neuropathic pain,
    including post-herpetic neuralgia (PHN)

 Phase 2a clinical
    trial successfully completed XenoPort:
    U.S. co-promotion option with GSKXP19986

Retained by XenoPort

R-baclofen

 Gastroesophageal
    reflux disease (GERD)

 Phase 2a clinical
    trial successfully completed Spasticity

 Phase 1 clinical
    trialsXP21279

Retained by XenoPort

L-Dopa

 Parkinsons
    disease

 PreclinicalXP20925

Retained by XenoPort

Propofol

 Migraine

 Preclinical Chemotherapy-induced
    nausea and vomiting

 Preclinical   XP13512 
    A Transported Prodrug of Gabapentin
  composition-of-matter
  Parent
    Drug Background
       5




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Our
    Transported Prodrug
      Phase 1
    Clinical Trials
    
    In a single rising-dose, safety, tolerability and
    pharmacokinetic trial in 49 healthy subjects, an
    immediate-release capsule formulation of XP13512 taken orally
    was shown to produce dose-proportional blood levels of
    gabapentin. At the four highest doses, XP13512 produced higher
    gabapentin levels in the blood in all subjects when compared to
    a near equivalent oral dose of Neurontin taken by the same
    subject one week after taking XP13512.
    In a multiple rising-dose, safety, tolerability and
    pharmacokinetic trial in 38 healthy subjects, oral doses of 350,
    700, 1400 and 2100 mg of an immediate-release capsule
    formulation of XP13512 were administered twice a day for seven
    days. Pharmacokinetic results were similar to the single-dose
    clinical trial described above.
    In a single-dose, crossover, pharmacokinetic trial in 24 healthy
    subjects, three different 600 mg sustained-release
    formulations of XP13512 were compared to the immediate-release
    formulation of XP13512 in order to facilitate development of a
    sustained-release formulation.
    In a single-dose, crossover, pharmacokinetic trial in 12 healthy
    subjects, two 600 mg sustained-release tablets of XP13512
    were compared to 600 mg of Neurontin. These doses are
    nearly equivalent in terms of the number of gabapentin molecules
    present. XP13512 was studied when given with and without food,
    while Neurontin was studied without food. Compared to Neurontin,
    XP13512 sustained-release tablets produced higher gabapentin
    blood levels for a longer period of time. Gabapentin levels in
    blood were greatest when XP13512 was taken with food.
    In a single-dose, crossover, safety, tolerability and
    pharmacokinetic trial in 12 healthy subjects, sustained-release
    XP13512 tablets used in previous clinical trials were compared
    to tablets produced on a larger scale by Patheon
    Pharmaceuticals, Inc. XP13512 was given as a 1200 mg dose
    with food. Results from this clinical trial suggest that the new
    tablets from Patheon produce blood levels of gabapentin that are
    similar to those produced by tablets used in the previous
    clinical trials. The Patheon sustained-release tablets are being
    used in our Phase 3 clinical program.
    In a double-blind, randomized, placebo-controlled,
    dose-escalation, crossover trial in 32 healthy subjects, 2400,
    3600, 4800 or 6000 mg of sustained-release tablets of
    XP13512 were compared at each dose level to placebo to assess
    the safety, tolerability and pharmacokinetics of XP13512.
    Preliminary results indicate that XP13512 produced
    dose-proportional gabapentin levels in the blood across the
    entire dose range, and there was no evidence of saturation of
    drug absorption. 6




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Initial
    Target Indications
  Restless
    Legs Syndrome
  Background on RLS.
  Potential Market. Sleep Medicine
  Current Treatments. moderate-to-severe moderate-to-severe
  Neurology
  Phase 2a Clinical Trial Results.
   7




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Phase 2b Clinical Trial Results. 24-hour
  24-hour
    Planned Clinical Development and Regulatory
    Filing. 12-week,
   8




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12-week
    Neuropathic
    Pain, Including PHN
  Background on Neuropathic Pain.
  Potential Market.
  Current Treatments.
  Phase 2a Clinical Trial Results.
   9




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Development,
    Commercialization and Partnering Strategy
     10




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60-days 120-days
  XP19986 
    A Transported Prodrug of R-baclofen
  composition-of-matter
  Parent
    Drug Background
    Our
    Transported Prodrug
      and/or
  Phase 1
    Clinical Trials
   11




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
    In a two-stage safety, tolerability and pharmacokinetics trial
    in healthy adult volunteers, we administered three different
    capsule formulations of XP19986. One of the formulations was an
    immediate-release formulation, while the other two formulations
    were intended to release XP19986 in a more sustained fashion.
    Results from this initial Phase 1 trial indicated that
    XP19986 was well tolerated under the tested conditions. Subjects
    reported few adverse events. All reported adverse effects were
    mild in nature and have been reported previously for racemic
    baclofen. One of these formulations produced a pharmacokinetic
    profile suitable for
    twice-a-day
    dosing and was selected for further studies.
    In a safety, tolerability and pharmacokinetics trial of XP19986
    in healthy adult volunteers, a controlled-release capsule
    formulation of XP19986 taken orally was shown to produce
    dose-proportional blood levels of R-baclofen. XP199886 was well
    tolerated with few reports of drug-related adverse effects at
    doses below 80 mg. At the 80 mg dose level, subjects
    receiving XP19986 reported a number of central nervous system
    side effects that have been previously reported for baclofen,
    with somnolence being reported by three of eight subjects. There
    were no serious adverse events in the trial.
    In a safety, tolerability and pharmacokinetics trial of novel
    formulations of XP19986 in healthy adult volunteers, three
    different sustained-release tablet formulations of XP19986 were
    administered with or without food. One of these formulations
    produced sustained exposure to R-baclofen in blood, consistent
    with requirements for dosing once daily in the treatment of
    patients with GERD. A second formulation produced a profile that
    would be potentially suited to twice daily treatment of patients
    with spasticity. Results from this Phase 1 trial also
    indicated that XP19986 was well tolerated under the tested
    conditions. Subjects reported few adverse events. All reported
    adverse effects were mild in nature and have been reported
    previously for racemic baclofen.  peak-to-trough
  Initial
    Target Indications
  Gastroesophageal
    Reflux Disease
  Background on GERD.
  Potential Market.
  Current Treatments. over-the-counter
   12




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Phase 2a Clinical Trial Results. pH/impedance
  12-hour
  12-hour
  12-hour
  Planned Clinical Development. once-a-day
 13




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Spasticity
  Background on Spasticity.
  Potential Market.
    Development,
    Commercialization and Partnering Strategy
    XP21279 
    A Transported Prodrug of L-Dopa
    Parent
    Drug Background
      Our
    Transported Prodrug
   14




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L-Dopa
  Initial
    Target Indication
  Parkinsons
    Disease
  Background on Parkinsons
    Disease.
  Potential Market.
  Current Treatments.
    Planned Clinical Development. L-Dopa
  XP20925 
    A Transported Prodrug of Propofol
    Parent
    Drug Background
   15




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Our
    Transported Prodrug
    Planned
    Clinical Development
    Initial
    Target Indications
  Migraine.
  Chemotherapy-Induced Nausea and
    Vomiting.
 Future
    Applications for Our Transported Prodrugs    and/or
 16




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Blood
    Brain Barrier
    Third-Party
    Compounds
   Our
    Strategic Alliances  Astellas
    Pharma Inc.
    Glaxo
    Group Limited
  co-promote
 17




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Patents
    and Proprietary Rights    composition-of-matter composition-of-matter
    composition-of-matter
   18




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Manufacturing            scale-up
 19




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scale-up
  R-baclofen
    scale-up
     Marketing
    and Sales   20




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Competition    
    discover and develop products that are superior to other
    products in the market;
    attract and retain qualified scientific, product development and
    commercial personnel;
    obtain patent
    and/or other
    proprietary protection for our products and technologies;
    obtain required regulatory approvals; and
    successfully collaborate with pharmaceutical companies in the
    discovery, development and commercialization of new products.      and/or
  and/or
  XP13512. and/or
 21




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moderate-to-severe
  XP19986.
 Government
    Regulation    
    preclinical laboratory tests and animal tests;
    the submission to the FDA of an investigational new drug
    application, or IND, for human clinical testing, which must
    become effective before human clinical trials commence;
    adequate and well-controlled human clinical trials to establish
    the safety and efficacy of the product;
    the submission to the FDA of a new drug application, or NDA;
    FDA review and approval of the NDA; and
    satisfactory completion of an FDA inspection of the
    manufacturing facilities at which the product is made to assess
    compliance with current Good Manufacturing Practices, or cGMPs.       22




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Phase 1.
  Phase 2.
  Phase 3.
           23




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and/or
       24




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Pharmaceutical
    Pricing and Reimbursement  cost-containment
     Facilities   Employees   25




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Executive
    Officers of the Registrant    Name

Age

PositionRonald W. Barrett, Ph.D.


51


Chief Executive Officer and
    DirectorWilliam J. Rieflin


46


PresidentKenneth C. Cundy, Ph.D.


47


Senior Vice President of
    Preclinical DevelopmentMark A. Gallop, Ph.D.


44


Senior Vice President of ResearchWilliam G. Harris


48


Senior Vice President of Finance
    and Chief Financial OfficerDavid R. Savello, Ph.D.


61


Senior Vice President of
    DevelopmentPierre V. Trân, M.D.,
    M.M.M.


47


Senior Vice President and Chief
    Medical Officer   Ronald W. Barrett
  William J. Rieflin
  Kenneth C. Cundy
  Mark A. Gallop
  William G. Harris
  David R. Savello
 26




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Pierre V. Trân
 About
    XenoPort  (408) 616-7200. Form 10-K. Form 10-K Form 10-K
 Available
    Information  Form 10-K, Form 10-Q, Form 8-K 1-800-SEC-0330.
  Item 1A.
    Risk
    Factors.  The following risks and uncertainties may have a material
    adverse effect on our business, financial condition or results
    of operations. Investors should carefully consider the risks
    described below before making an investment decision. The risks
    described below are not the only ones we face. Additional risks
    not presently known to us or that we currently believe are
    immaterial may also significantly impair our business
    operations. Our business could be harmed by any of these risks.
    The trading price of our common stock could decline due to any
    of these risks, and investors may lose all or part of their
    investment.
  Risks
    Related to Our Business and Industry
  We have incurred operating losses since inception and
    expect to continue to incur substantial and increasing losses
    for the foreseeable future. We may never achieve or sustain
    profitability.
   27




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Our success depends substantially on our most advanced
    product candidates, which are still under development. If we or
    our collaborative partners are unable to bring any or all of
    these product candidates to market, or experience significant
    delays in doing so, our ability to generate product revenue and
    our likelihood of success will be harmed.
    
    does not demonstrate acceptable safety and efficacy in
    preclinical studies or clinical trials or otherwise does not
    meet applicable regulatory standards for approval;
    does not offer therapeutic or other improvements over existing
    or future drugs used to treat the same conditions;
    is not capable of being produced in commercial quantities at
    acceptable costs; or
    is not accepted in the medical community or by third-party
    payors.    If we or our partners are not able to obtain required
    regulatory approvals, we or our partners will not be able to
    commercialize our product candidates, our ability to generate
    revenue will be materially impaired and our business will not be
    successful.
   28




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and/or
      We depend on collaborations to complete the development
    and commercialization of some of our product candidates. These
    collaborations may place the development of our product
    candidates outside our control, may require us to relinquish
    important rights or may otherwise be on terms unfavorable to
    us.
  Hart-Scott-Rodino
  
    we may not be able to control the amount and timing of resources
    that our collaborators may devote to the development or
    commercialization of product candidates or to their marketing
    and distribution;
    collaborators may delay clinical trials, provide insufficient
    funding for a clinical trial program, stop a clinical trial or
    abandon a product candidate, repeat or conduct new clinical
    trials or require a new formulation of a product candidate for
    clinical testing;
    disputes may arise between us and our collaborators that result
    in the delay or termination of the research, development or
    commercialization of our product candidates or that result in
    costly litigation or arbitration that diverts managements
    attention and resources;
    our collaborators may experience financial difficulties;
    collaborators may not properly maintain or defend our
    intellectual property rights or may use our proprietary
    information in such a way as to invite litigation that could
    jeopardize or invalidate our proprietary information or expose
    us to potential litigation; 29




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
    business combinations or significant changes in a
    collaborators business strategy may also adversely affect
    a collaborators willingness or ability to complete its
    obligations under any arrangement;
    a collaborator could independently move forward with a competing
    product candidate developed either independently or in
    collaboration with others, including our competitors; and
    the collaborations may be terminated or allowed to expire, which
    would delay the development and may increase the cost of
    developing our product candidates.    If we do not establish collaborations for XP19986 or our
    product candidates other than XP13512, we will have to alter our
    development and commercialization plans.
    We will need additional funding and may be unable to raise
    capital when needed, which would force us to delay, reduce or
    eliminate our product development programs or commercialization
    efforts.
    
    the scope, rate of progress, results and cost of our preclinical
    testing, clinical trials and other research and development
    activities;
    the terms and timing of any collaborative, licensing and other
    arrangements that we may establish;
    the cost of manufacturing clinical and establishing commercial
    supplies of our product candidates and any products that we may
    develop:
    the cost, timing and outcomes of regulatory approvals;
    the number and characteristics of product candidates that we
    pursue;
    the cost and timing of establishing sales, marketing and
    distribution capabilities;
    the timing, receipt and amount of sales or royalties, if any,
    from our potential products; 30




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
    the cost of preparing, filing, prosecuting, defending and
    enforcing any patent claims and other intellectual property
    rights; and
    the extent to which we acquire or invest in businesses, products
    or technologies, although we currently have no commitments or
    agreements relating to any of these types of transactions.          
    terminate or delay clinical trials for one or more of our
    product candidates;
    delay our establishment of sales and marketing capabilities or
    other activities that may be necessary to commercialize our
    product candidates; or
    curtail significant drug development programs that are designed
    to identify new product candidates.  If our preclinical studies do not produce successful
    results or our clinical trials do not demonstrate safety and
    efficacy in humans, we will not be able to commercialize our
    product candidates.
    
    regulators or institutional review boards may not authorize us
    to commence a clinical trial at a prospective trial site;
    our preclinical testing or clinical trials may produce negative
    or inconclusive results, which may require us to conduct
    additional preclinical or clinical testing or to abandon
    projects that we expect to be promising;
    we may suspend or terminate our clinical trials if the
    participating patients are being exposed to unacceptable health
    risks;
    regulators or institutional review boards may suspend or
    terminate clinical research for various reasons, including
    noncompliance with regulatory requirements; and
    the effects of our product candidates may not be the desired
    effects or may include undesirable side effects. 31




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Any failure or delay in commencing or completing clinical
    trials for our product candidates could severely harm our
    business.
    
    our inability or the inability of our collaborators or licensees
    to manufacture or obtain from third parties materials sufficient
    for use in preclinical studies and clinical trials;
    delays in patient enrollment, which we have experienced in the
    past, and variability in the number and types of patients
    available for clinical trials;
    difficulty in maintaining contact with patients after treatment,
    resulting in incomplete data;
    poor effectiveness of product candidates during clinical trials;
    unforeseen safety issues or side effects; and
    governmental or regulatory delays and changes in regulatory
    requirements, policy and guidelines.    We rely on third parties to conduct our clinical trials.
    If these third parties do not perform as contractually required
    or expected, we may not be able to obtain regulatory approval
    for, or commercialize, our product candidates.
   32




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##### Table of Contents



If some or all of our patents expire, are invalidated or
    are unenforceable, or if some or all of our patent applications
    do not yield issued patents or yield patents with narrow claims,
    competitors may develop competing products using our
    intellectual property and our business will suffer.
      
    we might not have been the first to make the inventions covered
    by each of our pending patent applications and issued patents;
    we might not have been the first to file patent applications for
    these inventions;
    others may independently develop similar or alternative
    technologies or duplicate any of our technologies;
    it is possible that none of our pending patent applications will
    result in issued patents;
    any patents issued to us or our collaborators may not provide a
    basis for commercially viable products or may be challenged by
    third parties; or
    the patents of others may have an adverse effect on our ability
    to do business.      and/or
  non-U.S. patent composition-of-matter non-U.S. patent
 33




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##### Table of Contents



and/or
  Third-party claims of intellectual property infringement
    would require us to spend significant time and money and could
    prevent us from developing or commercializing our
    products.
  and/or and/or
   34




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and/or
  If third parties do not manufacture our product candidates
    in sufficient quantities or at an acceptable cost, clinical
    development and commercialization of our product candidates
    would be delayed.
       35




---



##### Table of Contents



If we are required to obtain alternate third-party
    manufacturers, it could delay or prevent the clinical
    development and commercialization of our product
    candidates.
      Any failure or delay in developing or manufacturing a new
    sustained-release tablet formulation of XP19986 could delay the
    clinical development and commercialization of this product
    candidate.
   36




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##### Table of Contents



Use of third-party manufacturers may increase the risk
    that we or our partners will not have adequate supplies of our
    product candidates.
    
    could encounter difficulties in achieving volume production,
    quality control and quality assurance or suffer shortages of
    qualified personnel, which could result in their inability to
    manufacture sufficient quantities of drugs to meet clinical
    schedules or to commercialize our product candidates;
    could terminate or choose not to renew manufacturing agreements,
    based on their own business priorities, at a time that is costly
    or inconvenient for us;
    could fail to establish and follow FDA-mandated current good
    manufacturing practices, or cGMPs, which are required for FDA
    approval of our product candidates, or fail to document their
    adherence to cGMPs, either of which could lead to significant
    delays in the availability of material for clinical study and
    delay or prevent marketing approval for our product candidates;
    could encounter financial difficulties that would interfere with
    their obligations to supply our product candidates; and
    could breach, or fail to perform as agreed under, manufacturing
    agreements.         37




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Safety issues with the parent drugs or other components of
    our product candidates, or with approved products of third
    parties that are similar to our product candidates, could give
    rise to delays in the regulatory approval process, restrictions
    on labeling or product withdrawal.
        We may not be successful in our efforts to identify or
    discover additional Transported Prodrug candidates.
  and/or
  
    the research methodology used may not be successful in
    identifying potential product candidates; or
    potential product candidates may, on further study, be shown to
    have inadequate efficacy, harmful side effects, suboptimal
    pharmaceutical profile or other characteristics suggesting that
    they are unlikely to be effective products. 38




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Our product candidates will remain subject to ongoing
    regulatory review, even if they receive marketing approval. If
    we or our collaborative partners fail to comply with continuing
    regulations, these approvals could be rescinded and the sale of
    our products could be suspended.
      
    restrictions on the products, manufacturers or manufacturing
    processes;
    warning letters;
    civil or criminal penalties or fines;
    injunctions;
    product seizures, detentions or import bans;
    voluntary or mandatory product recalls and publicity
    requirements;
    suspension or withdrawal of regulatory approvals;
    total or partial suspension of production; and
    refusal to approve pending applications for marketing approval
    of new drugs or supplements to approved applications.  Because we have a number of product candidates and are
    considering a variety of target indications, we may expend our
    limited resources to pursue a particular candidate or indication
    and fail to capitalize on candidates or indications that may be
    more profitable or for which there is a greater likelihood of
    success.
   39




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##### Table of Contents



The commercial success of any products that we or our
    partners may develop will depend upon the degree of market
    acceptance among physicians, patients, healthcare payors and the
    medical community.
    
    demonstration of efficacy and safety in clinical trials;
    the prevalence and severity of any side effects;
    potential or perceived advantages over alternative treatments;
    perceptions about the relationship or similarity between our
    product candidates and the parent drug upon which each
    Transported Prodrug candidate was based;
    the timing of market entry relative to competitive treatments;
    the ability to offer product candidates for sale at competitive
    prices;
    relative convenience and ease of administration;
    the strength of marketing and distribution support;
    sufficient third-party coverage or reimbursement; and
    the product labeling or product insert required by the FDA or
    regulatory authorities in other countries.  If we are unable to establish sales and marketing
    capabilities or enter into additional agreements with third
    parties to market and sell our product candidates, we may be
    unable to generate product revenues.
    co-promotion
    
    our inability to recruit and retain adequate numbers of
    effective sales and marketing personnel;
    the inability of sales personnel to obtain access to or persuade
    adequate numbers of physicians to prescribe our products;
    the lack of complementary products to be offered by sales
    personnel, which may put us at a competitive disadvantage
    relative to companies with more extensive product lines; and
    unforeseen costs and expenses associated with creating an
    independent sales and marketing organization. 40




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Our ability to generate revenue from any products that we
    may develop will depend on reimbursement and drug pricing
    policies and regulations.
        If our competitors are able to develop and market products
    that are more effective, safer or less costly than any products
    that we may develop, our commercial opportunity will be reduced
    or eliminated.
     41




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##### Table of Contents



moderate-to-severe moderate-to-severe moderate-to-severe
    Off-label sale or use of generic gabapentin products could
    decrease sales of XP13512 and could lead to pricing pressure if
    such products become available at competitive prices and in
    dosages that are appropriate for the indications for which we or
    our collaborative partners are developing XP13512.
    composition-of-matter
  If we fail to attract and keep senior management and key
    scientific personnel, we may be unable to successfully develop
    or commercialize our product candidates.
   42




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##### Table of Contents



We will need to hire additional employees in order to
    commercialize our product candidates. Any inability to manage
    future growth could harm our ability to commercialize our
    product candidates, increase our costs and adversely impact our
    ability to compete effectively.
      If product liability lawsuits are brought against us, we
    will incur substantial liabilities and may be required to limit
    commercialization of any products that we may develop.
    
    decreased demand for any product candidates or products that we
    may develop;
    injury to our reputation;
    withdrawal of clinical trial participants;
    costs to defend the related litigation;
    substantial monetary awards to clinical trial participants or
    patients;
    loss of revenue; and
    the inability to commercialize any products that we may develop.    If we use biological and hazardous materials in a manner
    that causes contamination, injury or violates laws, we may be
    liable for damages.
   43




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Our facility is located near known earthquake fault zones,
    and the occurrence of an earthquake, extremist attack or other
    catastrophic disaster could cause damage to our facilities and
    equipment, which could require us to cease or curtail
    operations.
    Risks
    Related to Ownership of our Common Stock
  Our
    stock price is volatile, and purchasers of our common stock
    could incur substantial losses.
    
    adverse results or delays in our clinical trials;
    the timing of achievement of our clinical, regulatory,
    partnering and other milestones, such as the commencement of
    clinical development, the completion of a clinical trial, the
    receipt of regulatory approval or the establishment of
    commercial partnerships for one or more of our product
    candidates;
    announcement of FDA approval or non-approval of our product
    candidates or delays in the FDA review process;
    actions taken by regulatory agencies with respect to our product
    candidates, our clinical trials or our sales and marketing
    activities;
    the commercial success of any of our products approved by the
    FDA or its foreign counterparts;
    regulatory developments in the United States and foreign
    countries;
    changes in the structure of healthcare payment systems;
    any intellectual property infringement lawsuit involving us;
    announcements of technological innovations or new products by us
    or our competitors; 44




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
    market conditions for the biotechnology or pharmaceutical
    industries in general;
    changes in financial estimates or recommendations by securities
    analysts;
    sales of large blocks of our common stock;
    sales of our common stock by our executive officers, directors
    and significant stockholders;
    restatements of our financial results
    and/or
    material weaknesses in our internal controls; and
    the loss of any of our key scientific or management personnel.    Failure to maintain effective internal controls in
    accordance with Section 404 of the Sarbanes-Oxley Act of
    2002 could have a material adverse effect on our stock
    price.
    Fluctuations in our operating results could cause our
    stock price to decline.
    
    adverse results or delays in our clinical trials;
    the timing and achievement of our clinical, regulatory,
    partnering and other milestones, such as the commencement of
    clinical development, the completion of a clinical trial, the
    receipt of regulatory approval or the establishment of a
    commercial partnership for one or more of our product candidates;
    announcement of FDA approval or non-approval of our product
    candidates or delays in the FDA review process;
    actions taken by regulatory agencies with respect to our product
    candidates, our clinical trials or our sales and marketing
    activities;
    the commercial success of any of our products approved by the
    FDA or its foreign counterparts;
    regulatory developments in the United States and foreign
    countries;
    changes in the structure of healthcare payment systems;
    any intellectual property infringement lawsuit involving
    us; and
    announcements of technological innovations or new products by us
    or our competitors. 45




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period-to-period
  Because a small number of existing stockholders own a
    large percentage of our voting stock, they may be able to
    exercise significant influence over our affairs, acting in their
    best interests and not necessarily those of other
    stockholders.
    Our stockholder rights plan and anti-takeover provisions
    in our charter documents and under Delaware law could make an
    acquisition of us, which may be beneficial to our stockholders,
    more difficult and may prevent attempts by our stockholders to
    replace or remove our current management.
    
    a classified board of directors;
    a prohibition on actions by our stockholders by written consent;
    the ability of our board of directors to issue preferred stock
    without stockholder approval, which could be used to make it
    difficult for a third party to acquire us;
    notice requirements for nominations for election to the board of
    directors; and
    limitations on the removal of directors.      If there are large sales of our common stock, the market
    price of our common stock could drop substantially.
   46




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##### Table of Contents



Item 1B.
    Unresolved
    Staff Comments.    Item 2.
    Properties.    Item 3.
    Legal
    Proceedings.    Item 4.
    Submission
    of Matters to a Vote of Security Holders.   PART II.  Item 5.
    Market
    for Registrants Common Equity, Related Stockholder Matters
    and Issuer Purchases of Equity Securities.    High


Low20064th Quarter

$
27.48


$
20.913rd Quarter


22.00



16.662nd Quarter


24.79



16.521st Quarter


25.77



14.2520054th Quarter

$
19.00


$
12.693rd Quarter


16.99



10.302nd Quarter (beginning
    June 2, 2005)


10.64



10.20     Recent
    Sales of Unregistered Securities
   47




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##### Table of Contents



Use of
    Proceeds from the Sale of Registered Securities
  Form S-1, No. 333-122156),
  Issuer
    Purchases of Equity Securities
    Approximate DollarTotal Number of


Value of SharesTotal Number


Average


Shares Purchased as


that may yet beof Shares


Price Paid


Part of Publicly


Purchased UnderPeriod

Purchased(1)


per Share


Announced Program


the ProgramOctober 1, 2006 
    October 31, 2006





$




N/A



N/ANovember 1, 2006 
    November 30, 2006





$




N/A



N/ADecember 1, 2006 
    December 31, 2006





$




N/A



N/ATotal





$




N/A



N/A     (1)
    
    No shares of our common stock were repurchased by the company
    from employees upon termination of services pursuant to the
    terms and conditions of our 1999 stock option plan, which
    permits us to elect to purchase such shares at the original
    issuance price. 48




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##### Table of Contents



Performance
    Measurement
    Comparison1
    Comparison
    of Cumulative Total Return on Investment
  
    1
 49




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##### Table of Contents



Item 6.
    Selected
    Financial Data.  You should read the following selected financial data
    together with our audited financial statements and related notes
    and the Managements Discussion and Analysis of
    Financial Condition and Results of Operations section and
    other financial information included in this Annual Report on
    Form 10-K.
  Year Ended December 31,2006


2005


2004


2003


2002(In thousands, except per share amounts)Statement of Operations
    Data:Revenues:Collaboration revenue

$
10,606


$
4,667


$
8,882


$
5,157


$
Grant revenue






86



1,073



1,074



673Total revenues


10,606



4,753



9,955



6,231



673Operating expenses:Research and development


65,434



38,698



33,384



25,718



17,653General and administrative


14,834



10,989



8,154



5,852



5,597Total operating expenses


80,268



49,687



41,538



31,570



23,250Loss from operations


(69,662
)


(44,934
)


(31,583
)


(25,339
)


(22,577
)Interest income


5,634



2,258



674



527



898Interest and other expense


(285
)


(233
)


(333
)


(519
)


(581
)Net loss


(64,313
)


(42,909
)


(31,242
)


(25,331
)


(22,260
)Convertible preferred stock
    dividend






(969
)


(97
)






Loss applicable to common
    stockholders

$
(64,313
)

$
(43,878
)

$
(31,339
)

$
(25,331
)

$
(22,260
)Basic and diluted loss per share
    applicable to common stockholders

$
(2.91
)

$
(3.69
)

$
(25.51
)

$
(26.79
)

$
(33.20
)Shares used to compute basic and
    diluted loss per share applicable to common stockholders


22,101



11,898



1,229



946



670Balance Sheet Data:Cash, cash equivalents and
    short-term investments

$
118,854


$
91,918


$
60,245


$
28,318


$
47,872Working capital


101,527



84,602



51,997



21,451



46,844Restricted investments


1,699



3,205



3,169



3,020



3,030Total assets


128,665



101,908



71,693



39,636



62,714Current portion of equipment
    financing and capital lease obligations


500



714



1,068



2,416



2,370Non current portion of equipment
    financing obligations


181



680



1,325



668



2,010Accumulated deficit


204,256



139,943



96,065



64,726



39,395Total stockholders equity
    (deficit)


83,285



65,642



(91,379
)


(63,694
)


(38,470
)  50




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##### Table of Contents



Item 7.
    Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations.  Overview
    
    XP13512 for RLS.  XP13512 is a Transported
    Prodrug of gabapentin. XP13512 is currently being evaluated in a
    Phase 3 clinical program for the treatment of RLS. RLS is
    characterized by an irresistible urge to move ones legs,
    usually accompanied by unpleasant sensations or pain in the legs.
    XP13512 for Neuropathic Pain, Including
    PHN.  We have also shown in a Phase 2a
    clinical trial that XP13512 is effective for the management of
    PHN, a chronic type of neuropathic pain that can follow the
    resolution of shingles.
    XP19986 for GERD and Spasticity.  XP19986 is a
    Transported Prodrug of R-baclofen that is in development for the
    treatment of GERD, which is a digestive system disorder caused
    primarily by inappropriate relaxations of the lower esophageal
    sphincter, which is a combination of muscles that controls the
    junction between the esophagus and the stomach. GERD is
    characterized by the frequent, undesirable passage of stomach
    contents into the esophagus that results in discomfort and
    potential damage to the lining of the esophagus. We have
    successfully completed a Phase 2a clinical trial indicating
    that single doses of XP19986 were well tolerated and produced
    statistically significant reductions in the number of reflux
    episodes in patients with GERD. XP19986 is also a potential
    treatment for the symptoms of spasticity.
    XP21279 for Parkinsons Disease.  XP21279
    is a Transported Prodrug of levodopa, or L-Dopa, that is in
    preclinical development for the treatment of Parkinsons
    disease. We plan to file an investigational new drug
    application, or IND, for XP21279 in the second half of 2007.
    XP20925 for Migraine and Chemotherapy-Induced Nausea and
    Vomiting.  XP20925 is a Transported Prodrug of
    propofol that is in preclinical development for the treatment of
    migraine and chemotherapy-induced nausea and vomiting. We plan
    to continue development of XP20925 at an appropriate time in the
    future depending on the availability of resources.     51




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co-promotion
 52




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##### Table of Contents



Critical
    Accounting Policies and Significant Judgments and
    Estimates
    Revenue
    Recognition
        Accrued
    Expenses
    
    fees paid to contract research organizations in connection with
    preclinical and toxicology studies and clinical trials;
    fees paid to investigative sites in connection with clinical
    trials;
    fees paid to contract manufacturers in connection with the
    production of clinical trial materials; and
    professional service fees. 53




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##### Table of Contents



Stock-Based
    Compensation
  Share-Based Payment Accounting for Stock
    Issued to Employees Accounting for Stock Compensation.
  Accounting for Stock-Based
    Compensation  Transition and Disclosures.
         54




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No. 96-18, Accounting for Equity Instruments That Are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling,
    Goods or Services
  Research
    and Development Expenses
  project-by-project
    Estimated


Related R&D ExpensesCompletion of


Year Ended December 31,Product Candidate

Description

Phase of Development

Current Phase


2006


2005


2004(In thousands)Clinical developmentXP13512

RLS

Phase 3


2008PHN

Completed Phase 2a


2005


$
31,834


$
13,508


$
10,816XP19986

GERD

Phase 2a


2006Spasticity

Phase 1


2005



4,112



3,857



2,278Other(1)


13,502



6,362



3,265Total clinical development


49,448



23,727



16,359Research and preclinical(2)


15,986



14,971



17,025Total research and development

$
65,434


$
38,698


$
33,384     (1)
    
    Other constitutes internal clinical development
    costs for our product candidates that are not directly allocated
    to XP13512 or XP19986. For the year ended December 31,
    2006, other expenses consisted primarily of
    personnel costs of $7.5 million, external consulting costs
    of $1.9 million, facilities overhead costs of
    $2.1 million, equipment and services costs of
    $0.4 million and travel costs of $0.5 million. 55




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(2)
    
    For the year ended December 31, 2006, research and
    preclinical expenses consisted primarily of personnel
    costs of $9.3 million, office and facilities overhead costs
    of $3.5 million and laboratory supplies of
    $2.3 million.      Results
    of Operations
  Years
    Ended December 31, 2006, 2005 and 2004
  Revenues
  2005 to 2006


2004 to 2005Year Ended December 31,


Change


Change2006


2005


2004


$


%


$


%(In thousands, except percentages)Revenues

$
10,606


$
4,753


$
9,955


$
5,853



123
%

$
(5,202
)


(52
)%       
    $10.5 million increase in revenues in 2006 due to the
    commencement of our collaboration with Astellas in December
    2005; partially offset by
    $1.9 million decrease in revenues due to the conclusion of
    the ALZA collaboration in March 2005;
    $2.6 million decrease in revenues due to the conclusion of
    the Pfizer collaboration in November 2005; and
    $0.1 million decrease in grant revenues due to the
    conclusion of SBIR grant in February 2005.    
    $3.2 million decrease in revenues due to the conclusion of
    the ALZA collaboration in March 2005;
    $1.1 million decrease in revenues due to timing differences
    in the recognition of revenue under the Pfizer agreement and its
    conclusion in November 2005;
    $1.0 million decrease in grant revenues due to the
    conclusion of the ATP and SBIR grants in October 2004 and
    February 2005, respectively; partially offset by 56




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##### Table of Contents




    $0.1 million increase in revenues due to the commencement
    of our Astellas collaboration in December 2005.    
    timing of certain development milestone payments payable under
    the terms of our Astellas and GSK collaborations; and
    extent to which we enter into additional collaborations.  Research
    and Development Expenses
    2005 to 2006


2004 to 2005Year Ended December 31,


Change


Change2006


2005


2004


$


%


$


%(In thousands, except percentages)Research and preclinical

$
15,986


$
14,971


$
17,025


$
1,015



7
%

$
(2,054
)


(12
)%Clinical development


49,448



23,727



16,359



25,721



108
%


7,368



45
%Total research and development

$
65,434


$
38,698


$
33,384


$
26,736



69
%

$
5,314



16
%     
    clinical trial costs of $15.0 million, manufacturing costs
    of $4.7 million and consulting costs of $0.6 million,
    offset by a $2.0 million decrease in toxicology costs, for
    XP13512;
    clinical trial costs of $0.6 million and manufacturing
    costs of $0.5 million, offset by a $0.7 million
    decrease in toxicology costs, for XP19986;
    manufacturing costs of $0.5 million, $0.9 million
    increase in toxicology costs and $0.6 million increase in
    preclinical costs, for XP21279; and
    personnel costs of $5.0 million, including non-cash
    stock-based employee compensation of $1.9 million, as well
    as service and travel costs of $0.6 million and
    $0.4 million in consulting costs.    
    toxicology costs of $1.3 million and manufacturing costs of
    $2.1 million, offset by a $0.6 million decrease in
    clinical trials costs, for XP13512;
    clinical trials costs of $1.4 million for XP19986; and
    personnel costs of $2.6 million, including non-cash
    stock-based employee compensation of $0.6 million,
    partially offset by decreased supplies and equipment costs of
    $0.8 million, preclinical costs of $0.3 million and
    facilities costs of $0.4 million.   57




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##### Table of Contents



General
    and Administrative Expenses
  2005 to 2006


2004 to 2005Year Ended December 31,


Change


Change2006


2005


2004


$


%


$


%(In thousands, except percentages)General and administrative

$
14,834


$
10,989


$
8,154


$
3,845



35
%

$
2,835



35
%     
    increased personnel costs of $2.7 million, including an
    increase in non-cash stock-based employee compensation of
    $0.9 million;
    increased marketing costs of $0.5 million in 2006; and
    increased office and facility related costs of $0.6 million.      
    increased personnel, expanded infrastructure and increased
    consulting, legal, accounting and investor relations expenses
    associated with being a public company;
    increased expenses incurred to seek additional collaborations
    with respect to any of our product candidates; and
    increased expenses incurred to support pre-commercialization and
    marketing activities.  Interest
    Income and Interest Expense
  2005 to 2006


2004 to 2005Year Ended December 31,


Change


Change2006


2005


2004


$


%


$


%(In thousands, except percentages)Interest income

$
5,634


$
2,258


$
674


$
3,376



150
%

$
1,584



235
%Interest and other expense


285



233



333



52



22
%


(100
)


(30
)%      58




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##### Table of Contents



Dec. 31,


Sept. 30,


June 30,


March 31,


Dec. 31,


Sept. 30,


June 30,


March 31,2006


2006


2006


2006


2005


2005


2005


2005Selected Quarterly
    Data:Total revenues

$
3,106


$
3,106


$
3,106


$
1,288


$
437


$
711


$
812


$
2,793Net loss


(18,617
)


(16,337
)


(14,381
)


(14,978
)


(11,519
)


(10,056
)


(11,665
)


(9,669
)Convertible preferred stock dividend


























(406
)


(563
)Loss applicable to common
    stockholders

$
(18,617
)

$
(16,337
)

$
(14,381
)

$
(14,978
)

$
(11,519
)

$
(10,056
)

$
(12,071
)

$
(10,232
)Basic and diluted loss per share
    applicable to common stockholders

$
(0.76
)

$
(0.67
)

$
(0.72
)

$
(0.77
)

$
(0.59
)

$
(0.52
)

$
(1.67
)

$
(5.82
)   Financial
    Condition, Liquidity and Capital Resources
  Year Ended December 31,2006


2005


2004Cash provided by (used in):Operating activities

$
(49,851
)

$
(14,859
)

$
(27,188
)Investing activities


(32,380
)


(46,942
)


(8,886
)Financing activities


75,000



47,335



61,335Capital expenditures (included in
    investing activities above)


(1,355
)


(872
)


(1,483
)          59




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##### Table of Contents




    the scope, rate of progress, results and cost of our preclinical
    testing, clinical trials and other research and development
    activities;
    the terms and timing of any other collaborative, licensing and
    other arrangements that we may establish;
    the cost of manufacturing clinical and establishing commercial
    supplies of our product candidates and any products that we may
    develop;
    the cost, timing and outcomes of regulatory approvals;
    the number and characteristics of product candidates that we
    pursue;
    the cost and timing of establishing sales, marketing and
    distribution capabilities;
    the timing, receipt and amount of sales or royalties, if any,
    from our potential products;
    the cost of preparing, filing, prosecuting, defending and
    enforcing any patent claims and other intellectual property
    rights; and
    the extent to which we acquire or invest in businesses, products
    or technologies, although we currently have no commitments or
    agreements relating to any of these types of transactions.    Contractual
    Obligations
    Less Than


1-3


3-5Contractual Obligations

Total


1 Year


Years


YearsEquipment financing obligations

$
724


$
536


$
188


$
Operating lease obligations


20,072



3,832



8,041



8,199Total fixed contractual obligations

$
20,796


$
4,368


$
8,229


$
8,199   Recent
    Accounting Pronouncements
  Accounting for Uncertainty in
    Income Taxes  an interpretation of FASB Statement
    No. 109
 60




---



##### Table of Contents



Item 7A.
    Quantitative
    and Qualitative Disclosures About Market Risk.       Item 8.
    Financial
    Statements and Supplementary Data.  Form 10-K.
   Item 9.
    Changes
    in and Disagreements with Accountants on Accounting and
    Financial Disclosure.     Item 9A.
    Controls
    and Procedures.  Evaluation
    of Disclosure Controls and Procedures
  Rules 13a-15(e) 15d-15(e)
  Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f).
     61




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  The Board
    of Directors and Stockholders of XenoPort, Inc.
                
    62




---



##### Table of Contents



Changes
    in Internal Controls over Financial Reporting
    Item 9B.
    Other
    Information.   PART III.  Form 10-K Form 10-K,
  Item 10.
    Directors,
    Executive Officers and Corporate Governance.  Form 10-K.
    Item 11.
    Executive
    Compensation.   63




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##### Table of Contents



Item 12.
    Security
    Ownership of Certain Beneficial Owners and Management and
    Related Stockholder Matters.  Equity
    Compensation Plan Information
    Number of Securities


Weighted-Averageto be Issued Upon


Exercise Price ofExercise of


Outstanding


Number of SecuritiesOutstanding Options,


Options, Warrants


Remaining Available forPlan Category

Warrants and Rights


and Rights


Future IssuanceEquity compensation plans
    approved by security holders:1999 Stock Option Plan(1)


970,855


$
3.87



2005 Equity Incentive Plan(2)


1,163,034


$
17.24



1,395,2022005 Non-Employee Directors
    Stock Option Plan(3)


120,000


$
18.94



80,0002005 Employee Stock Purchase
    Plan(4)










313,842Equity compensation plans not
    approved by security holders:None










Total


2,253,889


$
12.51



1,789,044     (1)
    
    In December 1999, we adopted the 1999 Stock Option Plan, or the
    1999 Plan, which was terminated in June 2005 in connection with
    our initial public offering so that no further awards may be
    granted under the 1999 Plan. Although the 1999 Plan has
    terminated, all outstanding options will continue to be governed
    by their existing terms.(2)
    
    In January 2005, we adopted the 2005 Equity Incentive Plan, or
    the 2005 Incentive Plan, which became effective in June 2005 in
    connection with our initial public offering. A total of
    2,000,000 shares of common stock were initially authorized
    for issuance under the 2005 Incentive Plan. Our board of
    directors may increase the share reserve as of each
    January 1, from January 1, 2006 through
    January 1, 2015, by an amount determined by our board;
    provided, however that the increase for any year may not exceed
    the lesser of (1) 2.5% of the total number of shares of our
    common stock outstanding on the December 31st of the
    preceding calendar year or (2) 2,000,000 shares.
    During the year ended December 31, 2006, the annual
    increase to the 2005 Incentive Plan reserve was
    496,224 shares.(3)
    
    In January 2005, we adopted the 2005 Non-Employees
    Directors Stock Option Plan, or Directors Plan,
    which became effective in June 2005 in connection with our
    initial public offering. The Directors Plan provides for
    the automatic grant of options to purchase shares of our common
    stock to non-employee directors. A total of 150,000 shares
    of our common stock were initially authorized for issuance under
    the Directors Plan. Our board of directors may increase
    the share reserve as of each January 1, from
    January 1, 2006 through January 1, 2015, by an amount
    determined by our board; provided, however that the increase for
    any year may not exceed the excess of (1) the number of
    shares of our common stock subject to options granted under the
    plan during the preceding calendar year over (2) the number
    of shares added back to the share reserve during the preceding
    calendar year. During the year ended December 31, 2006, the
    annual increase to the Directors Plan reserve was
    50,000 shares.(4)
    
    In January 2005, we adopted the 2005 Employee Stock Purchase
    Plan, or the ESPP, which became effective in June 2005 in
    connection with our initial public offering. The ESPP allows for
    qualified employees (as defined in the ESPP) to purchase shares
    of our common stock at a price equal to the lower of 85% of the
    closing price of our common stock at the beginning of the
    offering period or 85% of the closing price of our common stock
    on the date of purchase. A total of 250,000 shares of our
    common stock were initially authorized for issuance under the
    ESPP. Our board of directors may increase the share reserve as
    of each January 1, from January 1, 2006 64




---



##### Table of Contents



through January 1, 2015, by an amount determined by our
    board; provided, however that the increase for any year may not
    exceed the lesser of (1) 1% of the total number of shares
    of our common stock outstanding on the December 31st of the
    preceding calendar year or (2) 250,000 shares. During
    the year ended December 31, 2006, the annual increase to
    the ESPP reserve was 198,490 shares.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accounting Fees and Services.   65




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##### Table of Contents



PART IV.   Item 15.
    Exhibits,
    Financial Statement Schedules.  Index to Financial Statements
    PageNumberReport of
    Independent Registered Public Accounting Firm


73Balance Sheets as
    of December 31, 2006 and 2005


74Statements of
    Operations for each of the three years ended December 31,
    2006, 2005 and 2004


75Statements of
    Convertible Preferred Stock and Stockholders Equity
    (Deficit) for each of the three years ended December 31,
    2006, 2005 and 2004


76Statements of Cash
    Flows for each of the three years ended December 31, 2006,
    2005 and 2004


78Notes to Financial
    Statements


79   Index to Financial Statement Schedules
      Exhibits  The following exhibits are
    included herein or incorporated herein by reference:
  ExhibitNumber

Description of Document3
.1

Amended and Restated Certificate
    of Incorporation(1)3
.2

Amended and Restated Bylaws(1)3
.3

Certificate of Designation of
    Series A Junior Participating Preferred Stock(4)4
.1

Specimen Common Stock
    Certificate(2)4
.2

Fifth Amended and Restated
    Investors Rights Agreement, dated December 16, 2004, by and
    among the Company and certain stockholders of the Company(3)4
.3

Form of Rights Certificate(5)10
.1*

Form of Indemnification Agreement
    between the Company and its officers and directors(6)10
.2*

Form of Employee Proprietary
    Information Agreement between the Company and its executive
    officers(3)10
.3

Lease Agreement, dated
    September 24, 2001, by and between the Company and Sobrato
    Interests(3)10
.4

Sublease Agreement, dated
    April 30, 2004, by and between the Company and ILYPSA,
    Inc.(3)10
.4.1

Sublease Termination Agreement,
    dated January 22, 2007, by and between the Company and
    ILYPSA, Inc.10
.5*

1999 Stock Plan(3)10
.6*

Form of Stock Option Agreement
    under the 1999 Stock Plan(3)10
.7*

2005 Equity Incentive Plan(6)10
.8*

Form of Option Agreement under the
    2005 Equity Incentive Plan(6)10
.9*

2005 Non-Employee Directors
    Stock Option Plan(2)10
.10*

Form of Stock Option Agreement
    under the 2005 Non-Employee Directors Stock Option Plan(2)10
.11*

2005 Employee Stock Purchase
    Plan(6)10
.12*

Form of 2005 Employee Stock
    Purchase Plan Offering Document(6) 66




---



##### Table of Contents



ExhibitNumber

Description of Document10
.13*

Form of Change of Control
    Agreement between the Company and certain of its executive
    officers, dated April 1, 2002(3)10
.14*

Change of Control Agreement
    between the Company and Ronald W. Barrett, dated April 1,
    2002(3)10
.15*

Change of Control Agreement
    between the Company and William J. Rieflin, dated June 18,
    2004(3)10
.16*

Change of Control Agreement
    between the Company and Pierre V. Trân, dated July 15,
    2004(3)10
.17*

Letter Agreement between the
    Company and William G. Harris, dated May 4, 2001(3)10
.18*

Employment Agreement between the
    Company and William J. Rieflin, dated June 18, 2004(3)10
.19*

Employment Agreement between the
    Company and Pierre V. Trân, dated July 15, 2004(3)10
.20*

Promissory note issued by Kenneth
    C. Cundy to the Company, dated December 20, 2001(3)10
.21*

Promissory note issued by William
    G. Harris to the Company, dated January 11, 2002(3)10
.22*

Promissory note issued by Mark A.
    Gallop to the Company, dated April 12, 2002(3)10
.23*

Promissory note issued by William
    G. Harris to the Company, dated May 17, 2002(3)10
.24*

XenoPort, Inc. Corporate Bonus
    Plan(7)10
.25*

Termsheet for Director Cash
    Compensation(8)10
.26*

Executive Compensation(7)10
.27

Distribution and License
    Agreement, dated as of December 1, 2005, between the
    Company and Astellas Pharma Inc.(9)10
.28

Rights Agreement, dated as of
    December 15, 2005, by and between the Company and Mellon
    Investor Services LLC(10)23
.1

Consent of Independent Registered
    Public Accounting Firm24
.1

Power of Attorney (included in the
    signature page hereto)31
.1

Certification of the Chief
    Executive Officer pursuant to Securities Exchange Act
    Rules 13a-14(a)
    and
    15d-14(a) as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200231
.2

Certification of the Chief
    Financial Officer pursuant to Securities Exchange Act
    Rules 13a-14(a)
    and
    15d-14(a) as
    adopted pursuant to Section 302 of the Sarbanes-Oxley Act
    of 200232
.1

Certification required by
    Rule 13a-14(b)
    or
    Rule 15d-14(b)
    and Section 1350 of Chapter 63 of Title 18 of the
    United States Code (18 U.S.C. §1350) (11)     *
    
    Represents a management contract or compensation plan or
    arrangement.
    
    Confidential treatment has been granted for portions of this
    exhibit. Omitted portions have been filed separately with the
    Securities and Exchange Commission pursuant to
    Rule 24b-2
    of the Securities Exchange Act of 1934, as amended.(1)
    
    Incorporated herein by reference to the same numbered exhibit of
    our quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended June 30, 2005, as filed with the SEC
    on August 11, 2005.(2)
    
    Incorporated herein by reference to the same numbered exhibit of
    our registration statement on
    Form S-1,
    as amended (File
    No. 333-122156),
    as filed with the SEC on April 13, 2005.(3)
    
    Incorporated herein by reference to the same numbered exhibit of
    our registration statement on
    Form S-1
    (File
    No. 333-122156),
    as filed with the SEC on January 19, 2005.(4)
    
    Filed as Exhibit 3.1 to our current report of
    Form 8-K,
    filed with the SEC on December 16, 2005, and incorporated
    herein by reference.(5)
    
    Filed as Exhibit 4.1 to our current report of
    Form 8-K,
    filed with the SEC on December 16, 2005, and incorporated
    herein by reference.(6)
    
    Incorporated herein by reference to the same numbered exhibit of
    our registration statement on
    Form S-1
    (File
    No. 333-122156),
    as filed with the SEC on March 2, 2005. 67




---



##### Table of Contents



(7)
    
    Incorporated herein by reference to the same numbered exhibit to
    our current report of
    Form 8-K,
    filed with the SEC on February 2, 2007.(8)
    
    Incorporated herein by reference to the same numbered exhibit to
    our current report of
    Form 8-K,
    filed with the SEC on August 4, 2006, and incorporated
    herein by reference.(9)
    
    Incorporated herein by reference to the same numbered exhibit to
    our current report of
    Form 8-K,
    filed with the SEC on December 2, 2005.(10)
    
    Filed as Exhibit 4.2 to our current report of
    Form 8-K,
    filed with the SEC on December 16, 2005, and incorporated
    herein by reference.(11)
    
    This certification accompanies the annual report on
    Form 10-K
    to which it relates, is not deemed filed with the Securities and
    Exchange Commission and is not to be incorporated by reference
    into any filing of the Registrant under the Securities Act of
    1933, as amended, or the Securities Exchange Act of 1934, as
    amended (whether made before or after the date of the
    Form 10-K),
    irrespective of any general incorporation language contained in
    such filing. 68




---



##### Table of Contents



SIGNATURES    XenoPort, Inc.
  (Registrant)
  /s/  Ronald
    W. Barrett       
   
 (Principal Financial and Accounting Officer)
    
       POWER OF
    ATTORNEY
  attorneys-in-fact Form 10-K, attorneys-in-fact attorneys-in-fact
    Signature

Title

Date/s/  Ronald
    W. BarrettRonald
    W. Barrett

Chief Executive Officer and
    Director (Principal Executive Officer)

March 7, 2007/s/  William
    G. HarrisWilliam
    G. Harris

Senior Vice President of Finance
    and
    Chief Financial Officer (Principal Financial and Accounting Officer)

March 7, 2007 69




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##### Table of Contents



Signature

Title

Date/s/  Paul
    L. BernsPaul
    L. Berns

Director

March 7, 2007/s/  John
    G. FreundJohn
    G. Freund

Director

March 7, 2007/s/  Jeryl
    L. HillemanJeryl
    L. Hilleman

Director

March 7, 2007/s/  Kenneth
    J. NussbacherKenneth
    J. Nussbacher

Director

March 7, 2007/s/  Bryan
    RobertsBryan
    Roberts

Director

March 7, 2007/s/  Gary
    D. TollefsonGary
    D. Tollefson

Director

March 7, 2007/s/  Wendell
    WierengaWendell
    Wierenga

Director

March 7, 2007  70




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##### Table of Contents



EXHIBIT INDEX  ExhibitNumber

Description of Document3
.1

Amended and Restated Certificate
    of Incorporation(1)3
.2

Amended and Restated Bylaws(1)3
.3

Certificate of Designation of
    Series A Junior Participating Preferred Stock(4)4
.1

Specimen Common Stock
    Certificate(2)4
.2

Fifth Amended and Restated
    Investors Rights Agreement, dated December 16, 2004, by and
    among the Company and certain stockholders of the Company(3)4
.3

Form of Rights Certificate(5)10
.1*

Form of Indemnification Agreement
    between the Company and its officers and directors(6)10
.2*

Form of Employee Proprietary
    Information Agreement between the Company and its executive
    officers(3)10
.3

Lease Agreement, dated September
    24, 2001, by and between the Company and Sobrato Interests(3)10
.4

Sublease Agreement, dated April
    30, 2004, by and between the Company and ILYPSA, Inc.(3)10
.4.1

Sublease Termination Agreement,
    dated January 22, 2007, by and between the Company and ILYPSA,
    Inc.10
.5*

1999 Stock Plan(3)10
.6*

Form of Stock Option Agreement
    under the 1999 Stock Plan(3)10
.7*

2005 Equity Incentive Plan(6)10
.8*

Form of Option Agreement under the
    2005 Equity Incentive Plan(6)10
.9*

2005 Non-Employee Directors
    Stock Option Plan(2)10
.10*

Form of Stock Option Agreement
    under the 2005 Non-Employee Directors Stock Option Plan(2)10
.11*

2005 Employee Stock Purchase
    Plan(6)10
.12*

Form of 2005 Employee Stock
    Purchase Plan Offering Document(6)10
.13*

Form of Change of Control
    Agreement between the Company and certain of its executive
    officers, dated April 1, 2002(3)10
.14*

Change of Control Agreement
    between the Company and Ronald W. Barrett, dated April 1, 2002(3)10
.15*

Change of Control Agreement
    between the Company and William J. Rieflin, dated June 18,
    2004(3)10
.16*

Change of Control Agreement
    between the Company and Pierre V. Trân, dated July 15,
    2004(3)10
.17*

Letter Agreement between the
    Company and William G. Harris, dated May 4, 2001(3)10
.18*

Employment Agreement between the
    Company and William J. Rieflin, dated June 18, 2004(3)10
.19*

Employment Agreement between the
    Company and Pierre V. Trân, dated July 15, 2004(3)10
.20*

Promissory note issued by Kenneth
    C. Cundy to the Company, dated December 20, 2001(3)10
.21*

Promissory note issued by William
    G. Harris to the Company, dated January 11, 2002(3)10
.22*

Promissory note issued by Mark A.
    Gallop to the Company, dated April 12, 2002(3)10
.23*

Promissory note issued by William
    G. Harris to the Company, dated May 17, 2002(3)10
.24*

XenoPort, Inc. Corporate Bonus
    Plan(7)10
.25*

Termsheet for Director Cash
    Compensation(8)10
.26*

Executive Compensation(7)10
.27

Distribution and License
    Agreement, dated as of December 1, 2005, between the Company and
    Astellas Pharma Inc.(9)10
.28

Rights Agreement, dated as of
    December 15, 2005, by and between the Company and Mellon
    Investor Services LLC(10)23
.1

Consent of Independent Registered
    Public Accounting Firm24
.1

Power of Attorney (included in the
    signature page hereto) 71




---



##### Table of Contents



ExhibitNumber

Description of Document31
.1

Certification of the Chief
    Executive Officer pursuant to Securities Exchange Act Rules
    13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 200231
.2

Certification of the Chief
    Financial Officer pursuant to Securities Exchange Act Rules
    13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of
    the Sarbanes-Oxley Act of 200232
.1

Certification required by Rule
    13a-14(b) or Rule 15d-14(b) and Section 1350 of Chapter 63 of
    Title 18 of the United States Code (18 U.S.C. §1350)(12)     *
    
    Represents a management contract or compensation plan or
    arrangement.
    
    Confidential treatment has been granted for portions of this
    exhibit. Omitted portions have been filed separately with the
    Securities and Exchange Commission pursuant to
    Rule 24b-2
    of the Securities Exchange Act of 1934, as amended.(1)
    
    Incorporated herein by reference to the same numbered exhibit of
    our quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended June 30, 2005, as filed with the SEC
    on August 11, 2005.(2)
    
    Incorporated herein by reference to the same numbered exhibit of
    our registration statement on
    Form S-1,
    as amended (File
    No. 333-122156),
    as filed with the SEC on April 13, 2005.(3)
    
    Incorporated herein by reference to the same numbered exhibit of
    our registration statement on
    Form S-1
    (File
    No. 333-122156),
    as filed with the SEC on January 19, 2005.(4)
    
    Filed as Exhibit 3.1 to our current report of
    Form 8-K,
    filed with the SEC on December 16, 2005, and incorporated
    herein by reference.(5)
    
    Filed as Exhibit 4.1 to our current report of
    Form 8-K,
    filed with the SEC on December 16, 2005, and incorporated
    herein by reference.(6)
    
    Incorporated herein by reference to the same numbered exhibit of
    our registration statement on
    Form S-1
    (File
    No. 333-122156),
    as filed with the SEC on March 2, 2005.(7)
    
    Incorporated herein by reference to the same numbered exhibit to
    our current report of
    Form 8-K,
    filed with the SEC on February 2, 2007.(8)
    
    Incorporated herein by reference to the same numbered exhibit to
    our current report of
    Form 8-K,
    filed with the SEC on August 4, 2006, and incorporated
    herein by reference.(9)
    
    Incorporated herein by reference to the same numbered exhibit to
    our current report of
    Form 8-K,
    filed with the SEC on December 2, 2005.(10)
    
    Filed as Exhibit 4.2 to our current report of
    Form 8-K,
    filed with the SEC on December 16, 2005, and incorporated
    herein by reference.(11)
    
    This certification accompanies the annual report on
    Form 10-K
    to which it relates, is not deemed filed with the Securities and
    Exchange Commission and is not to be incorporated by reference
    into any filing of the Registrant under the Securities Act of
    1933, as amended, or the Securities Exchange Act of 1934, as
    amended (whether made before or after the date of the
    Form 10-K),
    irrespective of any general incorporation language contained in
    such filing. 72




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##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM               
    73




---



##### Table of Contents



XENOPORT,
    INC.
  BALANCE
    SHEETS
  December 31,2006


2005(In thousands)Current assets:Cash and cash equivalents

$
14,857


$
22,088Short-term investments


103,997



69,830Accounts receivable


2,796



55Other current assets


1,332



2,461Total current assets


122,982



94,434Property and equipment, net


3,532



3,807Restricted investments


1,699



3,205Employee notes receivable and
    other assets


452



462Total assets

$
128,665


$
101,908Current liabilities:Accounts payable

$
144


$
2,990Accrued compensation


2,928



1,682Accrued preclinical and clinical
    costs


13,430



1,920Other accrued liabilities


1,737



608Deferred revenue


2,424



1,515Current portion of equipment
    financing obligations


500



714Current portion of liability for
    early exercise of employee stock options


292



403Total current liabilities


21,455



9,832Deferred revenue


21,843



23,359Deferred rent and other


1,696



1,807Noncurrent portion of equipment
    financing obligations


181



680Noncurrent portion of liability
    for early exercise of employee stock options


205



588CommitmentsStockholders equity
    (deficit):Common stock, $0.001 par
    value; 60,000 and 60,000 shares authorized; 24,517 and
    19,443 shares issued and outstanding, at December 31,
    2006 and 2005, respectively


24



19Additional paid-in capital


287,513



210,681Notes receivable from stockholders


(33
)


(158
)Deferred stock compensation






(4,821
)Accumulated other comprehensive
    income (loss)


37



(136
)Accumulated deficit


(204,256
)


(139,943
)Total stockholders equity
    (deficit)


83,285



65,642Total liabilities and
    stockholders equity (deficit)

$
128,665


$
101,908    74




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##### Table of Contents



XENOPORT,
    INC.



STATEMENTS
    OF OPERATIONS  Year Ended December 31,2006


2005


2004(In thousands, exceptper share amounts)Revenues:Collaboration revenue

$
10,606


$
4,667


$
8,882Grant revenue






86



1,073Total revenues


10,606



4,753



9,955Operating expenses:Research and development


65,434



38,698



33,384General and administrative


14,834



10,989



8,154Total operating expenses


80,268



49,687



41,538Loss from operations


(69,662
)


(44,934
)


(31,583
)Interest income


5,634



2,258



674Interest and other expense


(285
)


(233
)


(333
)Net loss


(64,313
)


(42,909
)


(31,242
)Convertible preferred stock
    dividends






(969
)


(97
)Loss applicable to common
    stockholders

$
(64,313
)

$
(43,878
)

$
(31,339
)Basic and diluted loss per share
    applicable to common stockholders

$
(2.91
)

$
(3.69
)

$
(25.51
)Shares used to compute basic and
    diluted loss per share applicable to common stockholders


22,101



11,898



1,229    75




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##### Table of Contents



XENOPORT,
    INC.



STATEMENTS
    OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)  AccumulatedNotes





OtherConvertible








Additional


Receivable


Deferred


Comprehensive





TotalPreferred Stock


Common Stock


Paid-In


From


Stock


Income


Accumulated


StockholdersShares


Amount


Shares


Amount


Capital


Stockholders


Compensation


(Loss)


Deficit


Equity (Deficit)(In thousands, except share amounts)Balance at December 31, 2003


7,604,950


$
90,149



1,258,553


$
1


$
1,265


$
(245
)

$



$
11


$
(64,726
)

$
(63,694
)Issuance of Series C
    convertible preferred stock


2,477,760



33,789































Issuance of common stock warrants


















2,806



















2,806Issuance of Series D
    convertible preferred stock


1,666,651



24,866































Issuance of common stock upon
    exercise of warrants










14,788







1



















1Issuance of common stock upon
    exercise of options and vesting of early exercise options










480,132



1



1,119



(315
)














805Repurchase of common stock










(10,919
)






(25
)


















(25
)Compensation expense relating to
    consultant options


















181



















181Reclassification of unvested common
    stock










(317,723
)






(822
)


















(822
)Issuance of warrant to purchase
    convertible preferred stock


















12



















12Issuance of common stock warrants


















28



















28Issuance of common stock to
    employee in connection with employment agreement










149,999







1,449







(1,448
)










1Deferred stock compensation, net of
    terminations


















1,974







(1,974
)










Amortization of deferred stock
    compensation


























528











528Compensation expense relating to
    common stock options granted to employees


















250



















250Convertible preferred stock
    dividends payable


































(97
)


(97
)Comprehensive loss:Change in unrealized gain/loss on
    investments






























(111
)






(111
)Net loss


































(31,242
)


(31,242
)Comprehensive loss






































(31,353
)Balance at December 31, 2004


11,749,361


$
148,804



1,574,830


$
2


$
8,238


$
(560
)

$
(2,894
)

$
(100
)

$
(96,065
)

$
(91,379
)Issuance of common stock upon
    exercise of warrants










693,268







38



















38Issuance of common stock upon
    exercise of options and vesting of early exercised options










451,397







1,516



















1,516Issuance of common stock in
    connection with Employee Stock Purchase Plan










40,811







362



















362Repurchase of common stock










(4,696
)






(11
)


















(11
)Issuance of Series A
    convertible preferred stock upon exercise of warrants


12,249



73











(12
)


















(12
)Conversion of preferred stock to
    common stock upon IPO


(11,761,610
)


(148,877
)


11,761,610



12



148,866



















148,878Convertible preferred stock
    dividends


































(969
)


(969
)   76




---



##### Table of Contents



XENOPORT,
    INC.



STATEMENTS
    OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)  (Continued)  AccumulatedNotes





OtherConvertible








Additional


Receivable


Deferred


Comprehensive





TotalPreferred Stock


Common Stock


Paid-In


From


Stock


Income


Accumulated


StockholdersShares


Amount


Shares


Amount


Capital


Stockholders


Compensation


(Loss)


Deficit


Equity (Deficit)(In thousands, except share amounts)Exercise and conversion of
    convertible preferred stock dividend to common stock upon IPO










71,080







1,066



















1,066Proceeds from common stock issued
    upon IPO, net of issuance costs










5,000,000



5



46,349



















46,354Proceeds from greenshoe, net of
    issuance costs










9,569







63



















63Compensation expense relating to
    consultant options


















369



















369Repayment of promissory notes from
    stockholders






















125















125Reclassification of unvested common
    stock










(3,251
)






(9
)


















(9
)Reversal of deferred stock
    compensation


















(4,821
)






4,821











Compensation expense relating to
    common stock option granted to an employee


















128



















128Comprehensive loss:Change in unrealized gain/loss on
    investments






























(36
)






(36
)Net loss


































(42,909
)


(42,909
)Comprehensive loss






































(42,945
)Balance at December 31, 2005










19,442,616


$
19


$
210,681


$
(158
)

$
(4,821
)

$
(136
)

$
(139,943
)

$
65,642Issuance of common stock upon
    exercise of options and vesting of early exercised options










346,593







1,199



















1,199Issuance of common stock in
    connection with Employee Stock Purchase Plan










93,837







1,110



















1,110Repurchase of common stock










(4,134
)






(13
)


















(13
)Proceeds from common stock issued
    upon FPO, net of issuance costs










4,500,000



5



71,534



















71,539Proceeds from greenshoe, net of
    issuance costs










140,856







2,257



















2,257Compensation expense relating to
    consultant options


















198



















198Repayment of promissory notes from
    stockholders






















125















125Reclassification of unvested common
    stock










(3,251
)






(9
)


















(9
)Reversal of deferred stock
    compensation


















(4,821
)






4,821











Stock-based compensation
    expense  employees


















5,377



















5,377Comprehensive loss:Change in unrealized gain/loss on
    investments






























173







173Net loss


































(64,313
)


(64,313
)Comprehensive loss






































(64,141
)Balance at December 31, 2006










24,516,517


$
24


$
287,513


$
(33
)

$



$
37


$
(204,256
)

$
83,285     77




---



##### Table of Contents



XENOPORT,
    INC.



STATEMENTS
    OF CASH FLOWS  Year Ended December 31,2006


2005


2004(In thousands)Operating activitiesNet loss

$
(64,313
)

$
(42,909
)

$
(31,242
)Adjustments to reconcile net loss
    to net cash used in operating activities:Depreciation


1,630



2,095



2,234Accretion of investment discounts,
    net


(1,463
)


(141
)


476Amortization of deferred
    compensation






2,403



528Stock-based compensation
    expense  employees


5,377



128



250Stock-based compensation
    expense  consultants


198



369



181Change in assets and liabilities:Accounts receivable


(2,741
)


1,299



(615
)Other current assets


1,129



(1,242
)


105Deposits and other assets


10



23



9Notes receivable from employees






191



(191
)Accounts payable


(2,846
)


1,365



519Accrued compensation


1,247



334



896Accrued preclinical and clinical
    costs


11,510



(1,020
)


1,577Other accrued liabilities


1,129



(537
)


338Deferred revenue


(607
)


22,728



(2,750
)Deferred rent and other


(111
)


55



497Net cash used in operating
    activities


(49,851
)


(14,859
)


(27,188
)Investing activitiesPurchases of investments


(172,826
)


(102,023
)


(49,482
)Proceeds from sales and maturities
    of investments


140,295



55,989



42,228Change in restricted investments


1,506



(36
)


(149
)Purchases of property and equipment


(1,355
)


(872
)


(1,483
)Net cash used in investing
    activities


(32,380
)


(46,942
)


(8,886
)Financing activitiesProceeds from issuance of
    convertible preferred stock, net of issuance costs and exercise
    of warrants






61



61,462Proceeds from issuance of common
    stock and exercise of stock options and warrants


75,601



48,284



731Repurchases of common stock


(13
)


(11
)


(25
)Proceeds from repayment of
    promissory notes from a stockholder


125







Proceeds from equipment financing
    obligations






84



1,715Payments on capital leases and
    equipment financing obligations


(713
)


(1,083
)


(2,548
)Net cash provided by financing
    activities


75,000



47,335



61,335Net increase (decrease) in cash and
    cash equivalents


(7,231
)


(14,466
)


25,261Cash and cash equivalents at
    beginning of period


22,088



36,554



11,293Cash and cash equivalents at end of
    period

$
14,857


$
22,088


$
36,554Supplemental schedule of noncash
    investing and financing activitiesWarrants issued in connection with
    a preferred stock financing

$



$



$
2,806Issuance of common stock in
    exchange for notes receivable from stockholders

$



$
402


$
315Conversion of preferred stock to
    common stock upon initial public offering

$



$
149,944


$
Issuance of common stock in a
    cashless exercise of a warrant

$



$
12


$
Reclassification of the unvested
    portion of common stock from early exercises of stock options to
    a liability

$
9


$
621


$
822Vesting of common stock from early
    exercises of stock options

$
504


$
452


$
22Deferred stock compensation, net of
    forfeitures

$



$
4,330


$
3,422Stock dividends payable to
    preferred stockholders

$



$
969


$
97Disposal of property and equipment
    at no gain or loss

$
6,300


$
49


$
Supplemental disclosure of cash
    flow informationInterest paid

$
122


$
187


$
219    78




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS
  1.
    Organization
    and Summary of Significant Accounting Policies  Nature
    of Operations
        Reverse
    Stock Split
  1-for-6
  Use of
    Estimates
    Fair
    Value of Financial Instruments
    Cash
    Equivalents and Short-Term Investments
    available-for-sale. available-for-sale Available-for-sale
   79




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
  other-than-temporary available-for-sale
  Restricted
    Investments
      Concentrations
    of Risk
    available-for-sale available-for-sale
  available-for-sale
    Property
    and Equipment
   80




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Long-Lived
    Assets
  Accounting for the Impairment
    or Disposal of Long-Lived Assets.
  Revenue
    Recognition
  No. 00-21, Revenue Arrangements with Multiple Deliverables Revenue Recognition in Financial Statements
        Research
    and Development
   81




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Clinical
    Trials
    Stock-Based
    Compensation
  Share-Based Payment
    ( Accounting for Stock Issued to Employees Accounting for Stock Compensation
  Prior
    to the Adoption of SFAS 123R
  Accounting for Stock-Based
    Compensation  Transition and Disclosures.
 82




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     Year Ended December 31,2005


2004(In thousands, except per share amounts)Net loss, as reported

$
(42,909
)

$
(31,242
)Add: Stock-based employee
    compensation expense based on intrinsic value method


2,531



778Less: Stock-based employee
    compensation expense determined under the fair value method


(5,245
)


(1,726
)Pro forma net loss


(45,623
)


(32,190
)Convertible preferred stock
    dividends


(969
)


(97
)Pro forma loss applicable to
    common stockholders

$
(46,592
)

$
(32,287
)Loss per share applicable to
    common stockholders:Basic and diluted, as reported

$
(3.69
)

$
(25.51
)Basic and diluted, pro forma

$
(3.92
)

$
(26.28
)   Impact
    of the Adoption of SFAS 123R
    Year EndedDecember 31, 2006(In thousands, except pershare amounts)Stock-based compensation by type
    of award:Employee stock options

$
5,048Purchase Plan


329Non-employee stock options


198Total stock-based compensation

$
5,575Effect on basic and diluted loss
    per share applicable to common stockholders

$
(0.25
)      83




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
     Year Ended December 31,2006


2005


2004(In thousands)Research and development

$
2,782


$
849


$
205General and administrative


2,595



1,554



323$
5,377


$
2,403


$
528   Valuation
    Assumptions
    Year Ended December 31,2006


2005


2004Dividend yield


0
%


0
%


0
%Volatility for options


0.70



0.75



0.80Volatility for ESPP


0.51



0.46



Weighted-average expected life of
    options (years)


4.83



5



5Weighted-average expected life of
    ESPP rights (years)


0.5



0.5



Risk-free interest rate for options


4.35-5.07
%


3.87-4.29
%


2.98-3.72
%Risk-free interest rate for ESPP
    rights


3.69-5.15
%


3.69
%


     Income
    Taxes
  Accounting for Income Taxes.
 84




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   Comprehensive
    Loss
  available-for-sale
  Loss
    Per Share
    Year Ended December 31,2006


2005


2004(In thousands, exceptper share amounts)HistoricalNumerator:Loss applicable to common
    stockholders (in thousands)

$
(64,313
)

$
(43,878
)

$
(31,339
)Denominator:Weighted-average common shares
    outstanding


22,372



12,402



1,480Less: Weighted-average unvested
    common shares subject to repurchase


(271
)


(504
)


(251
)Denominator for basic and diluted
    loss per share applicable to common stockholders


22,101



11,898



1,229Basic and diluted loss per share
    allocable to common stockholders

$
(2.91
)

$
(3.69
)

$
(25.51
)Historical outstanding dilutive
    securities not included in diluted loss per share applicable to
    common stockholders calculationPreferred stock










11,749Options to purchase common stock


2,254



1,624



1,260Warrants outstanding


39



39



7562,293



1,663



13,765   Recent
    Accounting Pronouncements
  Accounting for Uncertainty in Income
    Taxes  an interpretation of FASB Statement
    No. 109
 85




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    2.
    Collaboration
    Revenue        Year Ended December 31,2006


2005


2004ALZA

$



$
1,895


$
5,132Pfizer






2,646



3,750Astellas


10,606



126



$
10,606


$
4,667


$
8,882      86




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   3.
    Cash and
    Cash Equivalents, Short-Term Investments and Restricted
    Investments    GrossUnrealized Gains


EstimatedCost


(Losses)


Fair ValueAs of December 31, 2006:Cash

$
3,048


$



$
3,048Money market funds


11,809







11,809Government debt securities










Corporate debt securities


103,960



37



103,997Certificate of deposit


1,699







1,699$
120,516


$
37


$
120,553Reported as:Cash and cash equivalents









$
14,857Short-term investments










103,997Restricted investments










1,699$
120,553   GrossUnrealized Gains


EstimatedCost


(Losses)


Fair ValueAs of December 31, 2005:Cash

$
513


$



$
513Money market funds


19,576







19,576Government debt securities


28,451



(71
)


28,380Corporate debt securities


43,513



(64
)


43,449Certificate of deposit


3,205







3,205$
95,258


$
(135
)

$
95,123Reported as:Cash and cash equivalents









$
22,088Short-term investments










69,830Restricted investments










3,205$
95,123    87




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
   4.
    Property
    and Equipment    December 31,2006


2005Laboratory equipment

$
5,332


$
8,961Furniture and fixtures


168



281Computer equipment and software


691



2,030Leasehold improvements


2,021



1,9618,212



13,233Less: Accumulated depreciation and
    amortization


(4,680
)


(9,426
)Property and equipment, net

$
3,532


$
3,807     5.
    Employee
    Notes Receivable    6.
    Commitments  Operating
    Leases
      sub-tenant
 88




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Year ending December 31:2007

$
3,8322008


3,9562009


4,0852010


4,2182011


3,981Total minimum lease payments

$
20,072   Capital
    Leases and Equipment Financing Obligations
    48-month
    EquipmentFinancingArrangementsYear ending December 31:2007

$
5002008


1762009


5Total minimum payments required


681Less: Current portion


(500
)Noncurrent portion

$
181  89




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    Guarantees
    and Indemnifications
    Contingencies
    7.
    Stockholders
    Equity  Common
    Stock
    Stockholders
    Rights Plan
    Equity
    Incentive Plans
  1999
    Stock Plan
   90




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
      No. 00-23, Issues Related to Accounting for Stock Compensation under APB
    Opinion No. 25 and FASB Interpretation No. 44
    2005
    Equity Incentive Plan
    2005
    Non-Employee Directors Stock Option Plan
   91




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
        Weighted-Weighted-


AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


Value(In thousands)Outstanding at January 1, 2006


1,623,893


$
7.51Options granted


1,002,450


$
18.68Options canceled


(87,469
)

$
13.32Options exercised


(284,985
)

$
5.48Outstanding at December 31,
    2006


2,253,889


$
12.51



8.34


$
29,251Exercisable at December 31,
    2006


1,255,542


$
6.39



7.68


$
32,343             Weighted-AverageGrant DateShares


Fair ValueUnvested at January 1, 2006


1,286,694


$
6.52Options granted


1,002,450


$
18.68Options cancelled


(89,172
)

$
12.85Options vested


(695,903
)

$
8.22Unvested at December 31, 2006


1,504,069


$
13.46   Employee
    Stock Purchase Plan
   92




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
    8.
    Preferred
    Stock  Preferred
    stock
    Convertible
    preferred stock
    9.
    Income
    Taxes    December 31,2006


2005Net operating loss carryforwards

$
60,636


$
49,916Research credit carryforwards


14,171



6,248Capitalized research and
    development


4,132



1,845Deferred revenue


9,888



Other


2,525



1,682Total deferred tax assets


91,352



59,691Valuation allowance


(91,352
)


(59,691
)Net deferred tax assets

$



$
    93




---



##### Table of Contents



XENOPORT,
    INC.
  NOTES TO
    FINANCIAL STATEMENTS  (Continued)
           10.
    Subsequent
    Events  60-days 120-days
 94