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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, 2007oro

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(Address of principal
    executive offices)

95051(Zip Code)   (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

The NASDAQ Stock Market LLCPreferred share purchase rights   Securities registered pursuant to Section 12(g) of the
    Act:
 None
  þ o
  o þ
  þ o
  Regulation S-K Form 10-K Form 10-K. o
    Large accelerated
    filer þ

Accelerated
    filer o

Non-accelerated
    filer o

Smaller reporting
    company o(Do not check if a smaller reporting company)   Rule 12b-2 o þ
  and/or
    Class

Outstanding at February 1, 2008Common stock, par value $0.001 per share

25,087,907 shares   DOCUMENTS INCORPORATED BY REFERENCE
  Document

Parts Into Which IncorporatedPortions of the Definitive Proxy Statement for the Annual
    Meeting of Stockholders to be held on or about May 8, 2008
    (Proxy Statement) to be filed with the Securities and Exchange
    Commission pursuant to Regulation 14A not later than
    120 days after the end of the fiscal year covered by this
    Form 10-K
    are incorporated by reference

Part III, Items 10-14




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##### 





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

Business

3Overview

3Transported Prodrugs

5Our Product Candidates

6Future Applications for Our Transported
    Prodrugs

20Our Strategic Alliances

21Patents and Proprietary Rights

22Manufacturing

23Research and Development

25Marketing and Sales

25Competition

25Government Regulation

27Pharmaceutical Pricing and Reimbursement

29Facilities

30Employees

30Executive Officers of the Registrant

30About XenoPort

31Available Information

31Item 1A.

Risk Factors

31Item 1B.

Unresolved Staff Comments.

52Item 2.

Properties

52Item 3.

Legal Proceedings

52Item 4.

Submission of Matters to a Vote of Security
    Holders

52PART II.Item 5.

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

52Item 6.

Selected Financial Data

55Item 7.

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

56Item 7A.

Quantitative and Qualitative Disclosures About
    Market Risk

68Item 8.

Financial Statements and Supplementary Data

68Item 9.

Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure

68Item 9A.

Controls and Procedures

68Item 9B.

Other Information

71PART III.Item 10.

Directors, Executive Officers and Corporate
    Governance

71Item 11.

Executive  Compensation

71Item 12.

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

72Item 13.

Certain Relationships and Related Transactions,
    and Director Independence

73Item 14.

Principal Accountant Fees and Services

73PART IV.Item 15.

Exhibits, Financial Statement Schedules

73Signatures

77Index to Exhibits

79EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1   2




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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. All
    statements other than statements of historical facts are
    forward-looking statements for purposes of these
    provisions, including any projections or earnings. 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
   3




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
    XP13512 for RLS.  XP13512 is a Transported
    Prodrug of gabapentin. XP13512 is currently being evaluated for
    the treatment of RLS in a Phase 3 clinical program in the United
    States and in a Phase 2 clinical trial in Japan. RLS is
    characterized by an irresistible urge to move ones legs,
    usually accompanied by unpleasant sensations or pain in the
    legs. We have announced top-line data from two RLS Phase 3
    clinical trials that demonstrated statistically significant
    improvements compared to placebo on the primary endpoints of
    these trials and that XP13512 was generally well tolerated.
    XP13512 for Neuropathic Pain.  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. XP13512 is being studied
    by our partner, Astellas, in a Phase 2 clinical trial in Japan
    for the treatment of PDN, a chronic type of neuropathic pain
    that results from diabetes. Our partner, GSK, has announced that
    it intends to initiate in the first quarter of this year a
    neuropathic pain program that will include two Phase 2 clinical
    trials designed to show the safety and efficacy of XP13512 in
    the management of PHN, as well as a Phase 2 clinical trial
    designed to show the safety and efficacy of XP13512 in the
    treatment of PDN.
    XP13512 for Migraine Prophylaxis.  Migraine is
    a neurological disorder characterized by recurrent headache
    attacks that are usually accompanied by various combinations of
    symptoms, including nausea and vomiting, as well as distorted
    vision and sensitivity to light and sound. Migraine prophylaxis
    is designed to reduce the frequency and severity of migraine
    attacks. GSK has announced plans to initiate in the second half
    of this year parallel, pivotal Phase 3 clinical trials designed
    to show the safety and efficacy of XP13512 in preventing
    migraines in patients, along with a long-term clinical trial
    designed to establish safety in this patient population,
    following agreement with the U.S. Food and Drug
    Administration, or FDA.
    XP19986 for GERD.  XP19986 is a Transported
    Prodrug of R-baclofen that we are developing for the treatment
    of GERD, which is a digestive system disorder caused primarily
    by transient 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. We
    initiated a second Phase 2 clinical trial of XP19986 in patients
    with GERD in the fourth quarter of 2007.
    XP19986 for Spasticity.  XP19986 is also a
    potential treatment for spasticity, a condition in which certain
    muscles are continuously contracted, causing stiffness or
    tightness of muscles that interferes with movement or speech.
    Racemic baclofen, which contains both R-baclofen and S-baclofen,
    is currently approved in the United States for the treatment of
    spasticity resulting from multiple sclerosis, spinal cord injury
    and other spinal cord diseases. We believe that spasticity
    patients may benefit from XP19986 due to less frequent 4




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dosing and a more desirable pharmacokinetic profile than racemic
    baclofen. We initiated a Phase 2 clinical trial of XP19986 in
    spinal cord injury patients with spasticity in the fourth
    quarter of 2007.  
    XP21279 for Parkinsons Disease.  XP21279
    is a Transported Prodrug of levodopa, or L-Dopa, that we are
    developing for the treatment of Parkinsons disease, a
    neurological disorder of the elderly, characterized by tremor,
    rigidity and loss of reflexes. We initiated a Phase 1 clinical
    trial to evaluate the safety and pharmacokinetics of XP21279 in
    the fourth quarter of 2007.
    XP20925 for Migraine.  XP20925 is a Transported
    Prodrug of propofol that is in preclinical development for the
    treatment of migraine. We have commenced preclinical development
    activities to support the filing of an investigational new drug
    application, or IND, for XP20925.
    XP21510 for the Treatment of Women with
    Menorrhagia.  XP21510 is a Transported Prodrug of
    tranexamic acid. Tranexamic acid is a man-made derivative of the
    naturally occurring amino acid lysine and works to inhibit, on a
    molecular basis, the break down of blood clots. It is approved
    in many countries in Europe and Asia for the treatment of women
    with menorrhagia, or heavy menstrual bleeding. In October 2007,
    we announced an exclusive license agreement for the development
    and commercialization of XP21510 by Xanodyne in the United
    States. Transported
    Prodrugs           5




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Our
    Product Candidates    XenoPort ProductCandidate

Commercialization Rights

Target Indications

Development StatusXP13512

XenoPort: U.S. co-promotion option with GSK

   Restless legs syndrome

   Post-herpetic neuralgia

   U.S. Phase 3 clinical program ongoing
   Phase 2a successfully completedPartner Designation:ASP8825

Astellas: six Asian countries

   Restless legs syndrome

   Japan Phase 2 clinical trial ongoing   Painful diabetic neuropathy

   Japan Phase 2 clinical trial ongoingGSK1838262

GSK: worldwide, excluding the Astellas territory

   Restless legs syndrome

   Polysomnography trials planned for the
    second half of 2008   Migraine prophylaxis

   Phase 3 clinical trials planned for the
    second half of 2008, pending FDA agreement   Painful diabetic neuropathy

   Phase 2 clinical trial planned for the
    first quarter of 2008   Post-herpetic neuralgia

   Phase 2 clinical trial planned for the
    first quarter of 2008XP19986

Retained by XenoPort

   Gastroesophageal reflux disease

   Second Phase 2 clinical trial ongoing   Spasticity

   Phase 2 clinical trial ongoingXP21279

Retained by XenoPort

   Parkinsons disease

   Phase 1 clinical trial ongoingXP20925

Retained by XenoPort

   Migraine

   PreclinicalXP21510

XenoPort: worldwide, excluding the U.S.

   Menorrhagia

   PreclinicalXanodyne: U.S.   XP13512 
    A Transported Prodrug of Gabapentin
  composition-of-matter composition-of-matter,
 6




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Parent
    Drug Background
        Our
    Transported Prodrug
      Phase 1
    Clinical Trials
   7




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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 moderate-to-severe
  Neurology
  Phase 2a Clinical Trial Results.
   8




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Phase 2b Clinical Trial Results. 24-hour
  24-hour
    Phase 3 Clinical Program and Planned Regulatory
    Filing.
  moderate-to-severe
 9




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moderate-to-severe
    Clinical Development of XP13512 in Restless Legs
    Syndrome.
        Neuropathic
    Pain
  Background on Neuropathic Pain.
 10




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Potential Market.
    Current Treatments.
  Phase 2a Clinical Trial Results.
   11




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Clinical Development of XP13512 in Neuropathic
    Pain. eight-week,
    Migraine
    Prophylaxis
  Background on Migraine.
  Potential Market.
  Current Treatments.
    Planned Development.
 12




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Development
    and Commercialization Strategy
    60-days 120-days
  XP19986 
    A Transported Prodrug of R-baclofen
  composition-of-matter
  Parent
    Drug Background
   13




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Our
    Transported Prodrug
      and/or
  Phase 1
    Clinical Trials
    
    In a two-stage safety, tolerability and pharmacokinetics trial
    in 60 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 59 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 30 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
    potentially would be suitable for 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 events were mild in nature and have been reported
    previously for racemic baclofen.
    In a safety, tolerability and pharmacokinetics trial of a
    formulation of XP19986 previously identified as a once-daily
    sustained-release tablet formulation, 47 healthy adult
    volunteers in four separate cohorts were administered either
    XP19986 or placebo. Following an up-titration period, the first
    cohort received placebo or 30 mg once daily of XP19986 for
    seven days, followed by 30 mg twice daily for seven days
    and ending with a down-titration period. Subsequent cohorts
    received placebo or 60 mg and 90 mg once daily and
    twice daily following a similar protocol. The final group of
    subjects received placebo or 120 mg only once daily. 14




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Subjects were monitored for adverse events, and blood and urine
    were sampled to determine pharmacokinetic profiles and
    bioavailability. The preliminary results of this trial
    demonstrated that repeated once daily dosing of XP19986 resulted
    in sustained levels of R-baclofen in blood over
    24-hours,
    which reached
    steady-state
    within three days. Repeated twice-daily dosing reduced the
    steady-state
    peak-to-trough
    ratio of
    R-baclofen
    by approximately 50% compared to once-daily dosing. Exposure to
    R-baclofen and XP19986 increased linearly with dose. All
    reported adverse effects were consistent with those previously
    reported for racemic baclofen. In the 120 mg cohort, one
    subject experienced episodes of slurred speech and tremor, which
    are reported effects of baclofen. This subject received medical
    treatment, discontinued dosing and was reported as a serious
    adverse event.  peak-to-trough
  Initial
    Target Indications
  Gastroesophageal
    Reflux Disease
  Background on GERD.
  Potential Market.
  Current Treatments. 2 over-the-counter
      Phase 2a Clinical Trial Results. pH/impedance
 15




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12-hour
  12-hour
  12-hour
  Clinical Development of XP19986 in GERD. and/or
  Spasticity
  Background on Spasticity.
 16




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Potential Market.
  Clinical Development of XP19986 in
    Spasticity. twice-a-day
  Development,
    Commercialization and Partnering Strategy
    XP21279 
    A Transported Prodrug of L-Dopa
    Parent
    Drug Background
      Our
    Transported Prodrug
   17




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Initial
    Target Indication
  Parkinsons
    Disease
  Background on Parkinsons
    Disease.
  Potential Market.
  Current Treatments.
    Development, Commercialization and Partnering Strategy
    XP20925 
    A Transported Prodrug of Propofol
   18




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Parent
    Drug Background
      Our
    Transported Prodrug
    Planned
    Clinical Development
    Initial
    Target Indications
  Migraine.
  XP21510 
    A Transported Prodrug of Tranexamic Acid
    Parent
    Drug Background
   19




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Our
    Transported Prodrug
    Planned
    Clinical Development
  12-month 120-days
  Initial
    Target Indications
  Menorrhagia.
 Future
    Applications for Our Transported Prodrugs    and/or
  Blood
    Brain Barrier
   20




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Third-Party
    Compounds
   Our
    Strategic Alliances  Astellas
    Pharma Inc.
    Glaxo
    Group Limited
    Xanodyne
    Pharmaceuticals, Inc.
  12-month
 21




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120-days
 Patents
    and Proprietary Rights    composition-of-matter composition-of-matter
    composition-of-matter
 22




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Manufacturing       23




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scale-up
    L-Dopa
     24




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Research
    and Development   Marketing
    and Sales       Competition    
    discover and develop products that are superior to other
    products in the market; 25




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
    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
  moderate-to-severe
  XP19986.
 26




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XP21279.
 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.          Phase 1.
  Phase 2.
 27




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Phase 3.
          and/or
 28




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Pharmaceutical
    Pricing and Reimbursement     29




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Facilities   Employees   Executive
    Officers of the Registrant    Name

Age

PositionRonald W. Barrett, Ph.D.


52


Chief Executive Officer and DirectorWilliam J. Rieflin


47


PresidentKenneth C. Cundy, Ph.D.


48


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


45


Senior Vice President of ResearchWilliam G. Harris


49


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


62


Senior Vice President of Development   Ronald W. Barrett
  William J. Rieflin
  Kenneth C. Cundy
 30




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Mark A. Gallop
  William G. Harris
  David R. Savello
 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
 31




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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 cumulative operating losses since inception.
    Although we may achieve quarterly and annual profitability from
    time to time, we expect to continue to incur losses for the
    foreseeable future and we may never sustain
    profitability.
      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.   32




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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.
      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.
   33




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
    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;
    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;
    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 and XP21510, we will have to alter
    our development and commercialization plans.
   34




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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 cost of manufacturing clinical and establishing commercial
    supplies of our product candidates and any products that we may
    develop;
    the timing of any milestone payments under our collaborative
    arrangements;
    the number and characteristics of product candidates that we
    pursue;
    the cost, timing and outcomes of regulatory approvals;
    the cost and timing of establishing sales, marketing and
    distribution capabilities;
    the terms and timing of any collaborative, licensing and other
    arrangements that we may establish;
    the timing, receipt and amount of sales, profit sharing 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.          
    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. 35




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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.    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.   36




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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.
    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.     37




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and/or
  non-U.S. patent
    and/or
 38




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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
  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.
     39




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40




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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, or obtaining a
    qualified commercial supplier of, a new sustained-release tablet
    formulation of XP19986 could delay the clinical development and
    commercialization of this product candidate.
   41




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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.          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.
   42




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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.   43




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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.
    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.
   44




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
    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.
        
    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.   45




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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.
     46




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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.
      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.
   47




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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 or injury or violates laws, we may be
    liable for damages.
   48




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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 or our collaborative
    partners 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 approvability, 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;
    actions taken by regulatory agencies with respect to products or
    drug classes related to our product candidates;
    the commercial success of any of our products approved by the
    FDA or its foreign counterparts; 49




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
    changes in our collaborators business strategies;
    regulatory developments in the United States and foreign
    countries;
    changes in the structure of healthcare payment systems;
    any intellectual property matter involving us, including
    infringement lawsuits;
    announcements of technological innovations or new products by us
    or our competitors;
    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 or our collaborative
    partners 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 approvability, 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; 50




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
    actions taken by regulatory agencies with respect to products or
    drug classes related to our product candidates;
    the commercial success of any of our products approved by the
    FDA or its foreign counterparts;
    changes in our collaborators business strategies;
    regulatory developments in the United States and foreign
    countries;
    changes in the structure of healthcare payment systems;
    any intellectual property matter involving us, including
    infringement lawsuits; and
    announcements of technological innovations or new products by us
    or our competitors.  up-front
  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.     51




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If
    there are large sales of our common stock, the market price of
    our common stock could drop substantially.
    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.   52




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High


Low20074th Quarter

$
58.23


$
48.053rd Quarter


48.85



38.332nd Quarter


46.49



27.851st Quarter


28.48



23.0020064th Quarter

$
27.48


$
20.913rd Quarter


22.00



16.662nd Quarter


24.79



16.521st Quarter


25.77



14.25     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, 2007  October 31, 2007


19,098


$
2.70



N/A



N/ANovember 1, 2007  November 30, 2007





$




N/A



N/ADecember 1, 2007  December 31, 2007





$




N/A



N/ATotal


19,098


$
2.70



N/A



N/A     (1)
    
    The 19,098 shares of our common stock were repurchased by
    us from an employee upon termination of service pursuant to the
    terms and conditions of our 1999 Stock Plan, which permits us to
    elect to purchase such shares at the original issuance price. 53




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Performance
    Measurement Comparison(1)
    Comparison
    of Cumulative Total Return on Investment(line graph)
    (1)
    
    This section is not soliciting material, is not
    deemed filed with the SEC and is not to be
    incorporated by reference into any filing of XenoPort under the
    Securities Act of 1933, as amended, or the Securities Exchange
    Act of 1934, as amended, whether made before or after the date
    hereof and irrespective of any general incorporation language in
    any such filing. 54




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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 31,2007


2006


2005


2004


2003(In thousands, except per share amounts)Statement of Operations Data:Revenues:Collaboration revenue

$
113,822


$
10,606


$
4,667


$
8,882


$
5,157Grant revenue










86



1,073



1,074Total revenues


113,822



10,606



4,753



9,955



6,231Operating expenses:Research and development


74,397



65,434



38,698



33,384



25,718General and administrative


18,652



14,834



10,989



8,154



5,852Total operating expenses


93,049



80,268



49,687



41,538



31,570Income (loss) from operations


20,773



(69,662
)


(44,934
)


(31,583
)


(25,339
)Interest income


8,198



5,634



2,258



674



527Interest and other expense


(156
)


(285
)


(233
)


(333
)


(519
)Income (loss) before income taxes


28,815



(64,313
)


(42,909
)


(31,242
)


(25,331
)Income tax provision


622















Net income (loss)


28,193



(64,313
)


(42,909
)


(31,242
)


(25,331
)Convertible preferred stock dividend










(969
)


(97
)


Income (loss) applicable to common stockholders

$
28,193


$
(64,313
)

$
(43,878
)

$
(31,339
)

$
(25,331
)Basic income (loss) per share applicable to common stockholders

$
1.14


$
(2.91
)

$
(3.69
)

$
(25.51
)

$
(26.79
)Diluted income (loss) per share applicable to common stockholders

$
1.08


$
(2.91
)

$
(3.69
)

$
(25.51
)

$
(26.79
)Shares used to compute basic income (loss) per share applicable
    to stockholders


24,773



22,101



11,898



1,229



946Shares used to compute diluted income (loss) per share
    applicable to stockholders


25,992



22,101



11,898



1,229



946Balance Sheet Data:Cash, cash equivalents and short-term investments

$
160,141


$
118,854


$
91,918


$
60,245


$
28,318Working capital


138,685



101,527



84,602



51,997



21,451Restricted investments


1,771



1,699



3,205



3,169



3,020Total assets


172,877



128,665



101,908



71,693



39,636Current portion of equipment financing obligations


176



500



714



1,068



2,416Noncurrent portion of equipment financing obligations


5



181



680



1,325



668Accumulated deficit


176,063



204,256



139,943



96,065



64,726Total stockholders equity (deficit)


125,537



83,285



65,642



(91,379
)


(63,694
)  55




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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 for
    the treatment of RLS in a Phase 3 clinical program in the United
    States and in a Phase 2 clinical trial in Japan. RLS is
    characterized by an irresistible urge to move ones legs,
    usually accompanied by unpleasant sensations or pain in the
    legs. We have announced top-line data from two RLS Phase 3
    clinical trials that demonstrated statistically significant
    improvements compared to placebo on the primary endpoints of
    these trials and that XP13512 was generally well tolerated.
    XP13512 for Neuropathic Pain.  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. XP13512 is being studied
    by our partner, Astellas, in a Phase 2 clinical trial in Japan
    for the treatment of PDN, a chronic type of neuropathic pain
    that results from diabetes. Our partner, GSK, has announced that
    it intends to initiate in the first quarter of this year a
    neuropathic pain program that will include two Phase 2 clinical
    trials designed to show the safety and efficacy of XP13512 in
    the management of PHN, as well as a Phase 2 clinical trial
    designed to show the safety and efficacy of XP13512 in the
    treatment of PDN.
    XP13512 for Migraine Prophylaxis.  Migraine is
    a neurological disorder characterized by recurrent headache
    attacks that are usually accompanied by various combinations of
    symptoms, including nausea and vomiting, as well as distorted
    vision and sensitivity to light and sound. Migraine prophylaxis
    is designed to reduce the frequency and severity of migraine
    attacks. GSK has announced plans to initiate in the second half
    of this year parallel, pivotal Phase 3 clinical trials designed
    to show the safety and efficacy of XP13512 in preventing
    migraines in patients, along with a long-term clinical trial
    designed to establish safety in this patient population,
    following agreement with the U.S. Food and Drug
    Administration, or FDA.
    XP19986 for GERD.  XP19986 is a Transported
    Prodrug of R-baclofen that we are developing for the treatment
    of GERD, which is a digestive system disorder caused primarily
    by transient 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. We
    initiated a second Phase 2 clinical trial of XP19986 in patients
    with GERD in the fourth quarter of 2007.
    XP19986 for Spasticity.  XP19986 is also a
    potential treatment for spasticity, a condition in which certain
    muscles are continuously contracted, causing stiffness or
    tightness of muscles that interferes with movement or speech.
    Racemic baclofen, which contains both R-baclofen and S-baclofen,
    is currently approved in the United States for the treatment of
    spasticity resulting from multiple sclerosis, spinal cord injury
    and other 56




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spinal cord diseases. We believe that spasticity patients may
    benefit from XP19986 due to less frequent dosing and a more
    desirable pharmacokinetic profile than racemic baclofen. We
    initiated a Phase 2 clinical trial of XP19986 in spinal cord
    injury patients with spasticity in the fourth quarter of 2007.  
    XP21279 for Parkinsons Disease.XP21279
    is a Transported Prodrug of levodopa, or L-Dopa, that we are
    developing for the treatment of Parkinsons disease, a
    neurological disorder of the elderly, characterized by tremor,
    rigidity and loss of reflexes. We initiated a Phase 1 clinical
    trial to evaluate the safety and pharmacokinetics of XP21279 in
    the fourth quarter of 2007.
    XP20925 for Migraine.  XP20925 is a Transported
    Prodrug of propofol that is in preclinical development for the
    treatment of migraine. We have commenced preclinical development
    activities to support the filing of an investigational new drug
    application, or IND, for XP20925.
    XP21510 for the Treatment of Women with
    Menorrhagia.  XP21510 is a Transported Prodrug of
    tranexamic acid. Tranexamic acid is a man-made derivative of the
    naturally occurring amino acid lysine and works to inhibit, on a
    molecular basis, the break down of blood clots. It is approved
    in many countries in Europe and Asia for the treatment of women
    with menorrhagia, or heavy menstrual bleeding. In October 2007,
    we announced an exclusive license agreement for the development
    and commercialization of XP21510 by Xanodyne Pharmaceuticals,
    Inc. in the United States.         57




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12-month
 58




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Critical
    Accounting Policies and Significant Judgments and
    Estimates
    Revenue
    Recognition
  Revenue
    Recognition No. 00-21, Revenue Arrangements with Multiple Deliverables
  
    Up-front, licensing-type fees.  To date, these
    types of fees have been classified within the collaboration
    agreements as license fees, access fees, rights fees and initial
    licensing fees, and each of them was non-refundable and payable
    in connection with the execution of the contract. Up-front,
    licensing-type payments are assessed to determine whether or not
    the licensee is able to obtain any stand-alone value from the
    license. Where this is not the case, we do not consider the
    license deliverable to be a separate unit of accounting, and we
    defer the revenue with revenue recognition for the license fee
    being assessed in conjunction with the other deliverables that
    constitute the combined unit of accounting.
    Milestones.  We assess milestones on an
    individual basis and recognize revenue from these milestones
    when earned, as evidenced by acknowledgment from our
    collaborator, provided that (i) the milestone event is
    substantive and its achievability was not reasonably assured at
    the inception of the agreement, (ii) the milestone
    represents the culmination, or progress towards the culmination,
    of an earnings process and (iii) the milestone payment is
    non-refundable. Where separate milestones do not meet these
    criteria, we typically default to a performance-based model,
    with revenue recognition following delivery of effort as
    compared to an estimate of total expected effort. Milestones
    that are received after all substantive deliverables have
    occurred are considered to be bonus payments and are recognized
    upon receipt of the cash, assuming all of the other revenue
    recognition criteria are met.
    Collaborative research payments.  Generally,
    the payments received are based on a contractual cost per
    full-time equivalent employee working on the project, and we
    recognize revenue related to these payments as the services are
    performed over the related funding periods for each agreement. 59




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
    Grant revenues.  Grant revenues are recognized
    as research is performed. Grant revenues are non-refundable.
    Combined units of accounting.  Where there are
    multiple deliverables combined as a single unit of accounting,
    revenues are deferred and recognized over the period which we
    remain obligated to perform services or deliver product. The
    specific methodology for the recognition of the revenue (e.g.,
    straight-line or according to specific performance criteria) is
    determined on a
    case-by-case
    basis according to the facts and circumstances applicable to a
    given contract.    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.    Stock-Based
    Compensation
  Share-Based Payment Accounting for Stock Issued to
    Employees Accounting for Stock Compensation.
  Accounting for Stock-Based
    Compensation  Transition and Disclosures.
 60




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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
  Income
    Taxes
  Accounting for Uncertainty in Income
    Taxes  an interpretation of FASB Statement
    No. 109, Accounting for Income Taxes
     61




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Research
    and Development Expenses
  project-by-project
    62




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##### Table of Contents



Estimated

Related R&D ExpensesCompletion of

Year Ended December 31,Product Candidate

Description

Phase of Development

Current Phase

2007


2006


2005(In thousands)Clinical developmentXP13512

RLS

Phase 3

2008

$
30,116


$
31,834


$
13,508XP19986

GERD

Phase 2

2008Spasticity

Phase 2

2008


9,718



4,112



3,857XP21279

Parkinsons disease

Phase 1

2008


900







Other(1)








13,752



12,874



6,195Total clinical development








54,486



48,820



23,560Research and preclinical(2)








19,911



16,614



15,138Total research and development







$
74,397


$
65,434


$
38,698     (1)
    
    Other constitutes internal clinical development
    costs for our product candidates that are not directly allocated
    to XP13512, XP19986 or XP21279. For the year ended
    December 31, 2007, other expenses consisted
    primarily of personnel costs of $10.4 million and office
    and facilities overhead costs of $2.7 million.(2)
    
    For the year ended December 31, 2007, research and
    preclinical expenses consisted primarily of personnel
    costs of $12.3 million, office and facilities overhead
    costs of $3.8 million and equipment and services costs of
    $2.4 million.     63




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Results
    of Operations
  Years
    Ended December 31, 2007, 2006 and 2005
  Revenues
  2006 to 2007

2005 to 2006Year Ended December 31,

Change

Change2007

2006

2005

$

%

$

%(In thousands, except percentages)Revenues

$
113,822


$
10,606


$
4,753


$
103,216



973
%

$
5,853



123
%         
    a $10.5 million increase in revenues in 2006 due to the
    recognition of revenues associated with up-front and milestone
    payments from our collaboration with Astellas; partially offset
    by
    a $1.9 million decrease in revenues due to the conclusion
    of the ALZA collaboration in March 2005; and
    a $2.6 million decrease in revenues due to the conclusion
    of the Pfizer collaboration in November 2005.    Research
    and Development Expenses
    2006 to 2007


2005 to 2006Year Ended December 31,


Change


Change2007


2006


2005


$


%


$


%(In thousands, except percentages)Research and preclinical

$
19,911


$
16,614


$
15,138


$
3,297



20
%

$
1,476



10
%Clinical development


54,486



48,820



23,560



5,666



12
%


25,260



107
%Total research and development

$
74,397


$
65,434


$
38,698


$
8,963



14
%

$
26,736



69
%     
    increased net costs for XP19986 of $5.6 million due to
    increased manufacturing, clinical and toxicology costs;
    increased personnel costs of $5.9 million, including
    non-cash stock-based compensation of $2.3 million, and
    facilities costs of $0.4 million, partially offset by;
    decreased net costs for XP13512 of $1.7 million due to
    decreased manufacturing and toxicology costs, offset by
    increased clinical and consulting costs; and
    decreased net costs for XP21279 of $1.3 million due to
    increased clinical costs, offset by decreased toxicology and
    absorption, distribution, metabolism and excretion, or ADME,
    costs. 64




---



##### Table of Contents




    increased net costs for XP13512 of $18.3 million due to
    increased clinical trial, manufacturing and consulting costs,
    offset by decreased toxicology costs;
    increased net costs for XP19986 of $0.3 million due to
    increased clinical trial and manufacturing costs, offset by
    decreased toxicology costs;
    increased net costs for XP21279 of $2.1 million due to
    manufacturing, toxicology and preclinical costs; and
    increased personnel costs of $5.0 million, including
    non-cash stock-based compensation of $1.9 million, service
    and travel costs of $0.6 million and consulting costs of
    $0.4 million.    General
    and Administrative Expenses
  2006 to 2007

2005 to 2006Year Ended December 31,

Change

Change2007

2006

2005

$

%

$

%(In thousands, except percentages)General and administrative

$
18,652


$
14,834


$
10,989


$
3,818



26
%

$
3,845



35
%         Interest
    Income and Interest and Other Expense
  2006 to 2007

2005 to 2006Year Ended December 31,

Change

Change2007

2006

2005

$

%

$

%(In thousands, except percentages)Interest income

$
8,198


$
5,634


$
2,258


$
2,564



46
%

$
3,376



150
%Interest and other expense


156



285



233



(129
)


(45
)%


52



22
%      65




---



##### Table of Contents



Income
    Taxes
    Liquidity
    and Capital Resources
  Year Ended December 31,2007


2006


2005Cash provided by (used in):Operating activities

$
36,374


$
(49,851
)

$
(14,859
)Investing activities


(37,093
)


(32,380
)


(46,942
)Financing activities


3,823



75,000



47,335Capital expenditures (included in investing activities above)


(5,260
)


(1,355
)


(872
)            66




---



##### Table of Contents




    the scope, rate of progress, results and cost of our preclinical
    testing, clinical trials and other research and development
    activities;
    the cost of manufacturing clinical, and establishing commercial,
    supplies of our product candidates and any products that we may
    develop;
    the timing of any milestone payments under our collaborative
    arrangements;
    the number and characteristics of product candidates that we
    pursue;
    the cost, timing and outcomes of regulatory approvals;
    the cost and timing of establishing sales, marketing and
    distribution capabilities;
    the terms and timing of any other collaborative, licensing and
    other arrangements that we may establish;
    the timing, receipt and amount of sales, profit sharing 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

$
188


$
183


$
5


$
Operating lease obligations


16,240



3,956



8,303



3,981Total fixed contractual obligations

$
16,428


$
4,139


$
8,308


$
3,981  67




---



##### Table of Contents



Recent
    Accounting Pronouncements
  No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities EITF 07-03. EITF 07-03 EITF 07-03 EITF 07-03 EITF 07-03
  No. 07-01, Accounting for Collaborative Arrangements Related to the
    Development and Commercialization of Intellectual Property EITF 07-01. EITF 07-01 EITF 07-01 EITF 07-01 EITF 07-01
  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)
 68




---



##### Table of Contents



Managements
    Report on Internal Control over Financial Reporting
  Rules 13a-15(f) 15d-15(f).
  Internal
    Control  Integrated Framework
   69




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  The Board
    of Directors and Shareholders of XenoPort, Inc.
               
    70




---



##### 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.   71




---



##### Table of Contents



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


Weighted-Average


Future Issuance Underto be Issued Upon


Exercise Price of


Equity CompensationExercise of


Outstanding


Plans (ExcludingOutstanding Options,


Options, Warrants


Securities ReflectedWarrants and Rights


and Rights


in ColumnPlan Category

(a)


(b)


(a)Equity compensation plans approved by security holders:1999 Stock Option Plan(1)


698,245


$
3.97



2005 Equity Incentive Plan(2)


1,808,446


$
22.70



1,268,6272005 Non-Employee Directors Stock Option Plan(3)


206,666


$
29.37



63,3342005 Employee Stock Purchase Plan(4)










501,689Equity compensation plans not approved by security
    holders:None










Total


2,713,357


$
18.52



1,833,650     (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, 2007, the annual
    increase to the 2005 Incentive Plan reserve was
    617,663 shares.(3)
    
    In January 2005, we adopted the 2005 Non-Employees
    Directors Stock Option Plan, or the 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, 2007, the
    annual increase to the Directors Plan reserve was
    70,000 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 72




---



##### 



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 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, 2007, the annual increase to
    the ESPP reserve was 247,065 shares.    Item 13.
    Certain
    Relationships and Related Transactions, and Director
    Independence.    Item 14.
    Principal
    Accountant Fees and Services.   PART IV.  Item 15.
    Exhibits,
    Financial Statement Schedules.  Index to Financial Statements
     
 PageNumberReport of Independent Registered Public
    Accounting Firm


82Balance Sheets as of December 31, 2007 and
    2006


83Statements of Operations for each of the three
    years ended December 31, 2007, 2006 and 2005


84Statements of Convertible Preferred Stock and
    Stockholders Equity (Deficit) for each of the three years
    ended December 31, 2007, 2006 and 2005


85Statements of Cash Flows for each of the three
    years ended December 31, 2007, 2006 and 2005


86Notes to Financial Statements


87    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(2)4
.1

Specimen Common Stock Certificate(3) 73




---



##### Table of Contents



ExhibitNumber

Description of Document4
.2

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

Form of Right 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(4)10
.3

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

Sublease Agreement, dated April 30, 2004, by and between
    the Company and ILYPSA, Inc.(4)10
.4.1

Sublease Termination Agreement, dated January 22, 2007, by
    and between the Company and ILYPSA, Inc.(7)10
.5*

1999 Stock Plan(4)10
.6*

Form of Stock Option Agreement under the 1999 Stock Plan(4)10
.7*

2005 Equity Incentive Plan(6)10
.8*

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

Form of Stock Unit Award Agreement under the 2005 Equity
    Incentive Plan(8)10
.10*

2005 Non-Employee Directors Stock Option Plan(3)10
.11*

Form of Stock Option Agreement under the 2005 Non-Employee
    Directors Stock Option Plan(3)10
.12*

2005 Employee Stock Purchase Plan(6)10
.13*

Form of 2005 Employee Stock Purchase Plan Offering Document(6)10
.14*

Form of Change of Control Agreement between the Company and
    certain of its officers, dated November 7, 2007(9)10
.15*

Change of Control Agreement between the Company and Ronald W.
    Barrett, dated November 7, 2007(10)10
.16*

Change of Control Agreement between the Company and William J.
    Rieflin, dated November 7, 2007(11)10
.17*

Change of Control Agreement between the Company and William G.
    Harris, dated November 7, 2007(12)10
.18*

Change of Control Agreement between the Company and Kenneth C.
    Cundy, dated November 7, 2007(13)10
.19*

Change of Control Agreement between the Company and Mark A.
    Gallop, dated November 7, 2007(14)10
.20*

Change of Control Agreement between the Company and David R.
    Savello, dated November 7, 2007(15)10
.21*

Amended and Restated Employment Agreement between the Company
    and William J. Rieflin, dated November 7, 2007(16)10
.22*

Promissory note issued by Kenneth C. Cundy to the Company, dated
    December 20, 2001(4)10
.23*

Promissory note issued by Mark A. Gallop to the Company, dated
    April 12, 2002(4)10
.24*

Promissory note issued by William G. Harris to the Company,
    dated May 17, 2002(4)10
.25*

XenoPort, Inc. Corporate Bonus Plan(17)10
.26*

Termsheet for Director Cash Compensation(18)10
.27*

Executive Compensation(19)10
.28

Distribution and License Agreement, dated as of December 1,
    2005, between the Company and Astellas Pharma Inc.(20)10
.29

Development and Commercialization Agreement, dated
    February 7, 2007, by and between the Company and Glaxo
    Group Limited(21)10
.29.1

First Amendment to Development and Commercialization Agreement,
    dated May 4, 2007, by and between the Company and Glaxo
    Group Limited(21) 74




---



##### Table of Contents



ExhibitNumber

Description of Document10
.30

Licensing Agreement, dated as of October 12, 2007, between
    the Company and Xanodyne Pharmaceuticals, Inc.(22)10
.31

Rights Agreement, dated as of December 15, 2005, by and
    between the Company and Mellon Investor Services LLC(23)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)(24)     *
    
    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.
    
    Confidential treatment has been requested 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 Exhibit 3.1 of our
    current report of
    Form 8-K,
    filed with the SEC on December 16, 2005.(3)
    
    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.(4)
    
    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.(5)
    
    Incorporated herein by reference to Exhibit 4.1 of our
    current report of
    Form 8-K,
    filed with the SEC on December 16, 2005.(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 of
    our annual report on
    Form 10-K
    (File
    No. 000-51329)
    for the period ended December 31, 2007, as filed with the
    SEC on March 7, 2007.(8)
    
    Incorporated herein by reference to Exhibit 10.30 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended June 30, 2007, as filed with the SEC
    on August 9, 2007.(9)
    
    Incorporated herein by reference to Exhibit 10.13 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(10)
    
    Incorporated herein by reference to Exhibit 10.14 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(11)
    
    Incorporated herein by reference to Exhibit 10.15 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(12)
    
    Incorporated herein by reference to Exhibit 10.17 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(13)
    
    Incorporated herein by reference to Exhibit 10.31 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007. 75




---



##### Table of Contents



(14)
    
    Incorporated herein by reference to Exhibit 10.32 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(15)
    
    Incorporated herein by reference to Exhibit 10.33 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(16)
    
    Incorporated herein by reference to Exhibit 10.18 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(17)
    
    Incorporated herein by reference to Exhibit 10.21 of our
    current report of
    Form 8-K,
    filed with the SEC on February 2, 2007.(18)
    
    Incorporated herein by reference to Exhibit 10.25 of our
    current report of
    Form 8-K,
    filed with the SEC on August 4, 2006, and incorporated
    herein by reference.(19)
    
    Incorporated herein by reference to Exhibit 10.28 of our
    current report of
    Form 8-K,
    filed with the SEC on February 1, 2008.(20)
    
    Incorporated herein by reference to Exhibit 10.27 of our
    current report of
    Form 8-K,
    filed with the SEC on December 2, 2005.(21)
    
    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 March 31, 2007, as filed with the SEC
    on May 9, 2007.(22)
    
    Incorporated herein by reference to Exhibit 10.34 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(23)
    
    Incorporated herein by reference to Exhibit 4.2 of our
    current report of
    Form 8-K,
    filed with the SEC on December 16, 2005.(24)
    
    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. 76




---



##### Table of Contents



SIGNATURES    XenoPort, Inc.(Registrant)February 22, 2008

/s/  Ronald
    W. BarrettRonald
    W. Barrett
    Chief Executive Officer and DirectorFebruary 22, 2008

/s/  William
    G. HarrisWilliam
    G. Harris
    Senior Vice President of Finance and
    Chief Financial Officer
    (Principal Financial and Accounting Officer)February 22, 2008

/s/  Martyn
    J. WebsterMartyn
    J. Webster
    Vice President of Finance  77




---



##### Table of Contents



POWER OF
    ATTORNEY
  Form 10-K,
    Signature

Title

Date/s/  Ronald
    W. BarrettRonald
    W. Barrett

Chief Executive Officer and Director (Principal Executive
    Officer)

February 22, 2008/s/  William
    G. HarrisWilliam
    G. Harris

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

February 22, 2008/s/  Paul
    L. BernsPaul
    L. Berns

Director

February 22, 2008/s/  John
    G. FreundJohn
    G. Freund

Director

February 22, 2008/s/  Catherine
    J. FriedmanCatherine
    J. Friedman

Director

February 22, 2008/s/  Jeryl
    L. HillemanJeryl
    L. Hilleman

Director

February 22, 2008/s/  Kenneth
    J. NussbacherKenneth
    J. Nussbacher

Director

February 22, 2008/s/  Gary
    D. TollefsonGary
    D. Tollefson

Director

February 22, 2008/s/  Wendell
    WierengaWendell
    Wierenga

Director

February 22, 2008  78




---



##### 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(2)4
.1

Specimen Common Stock Certificate(3)4
.2

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

Form of Right 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(4)10
.3

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

Sublease Agreement, dated April 30, 2004, by and between
    the Company and ILYPSA, Inc.(4)10
.4.1

Sublease Termination Agreement, dated January 22, 2007, by
    and between the Company and ILYPSA, Inc.(7)10
.5*

1999 Stock Plan(4)10
.6*

Form of Stock Option Agreement under the 1999 Stock Plan(4)10
.7*

2005 Equity Incentive Plan(6)10
.8*

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

Form of Stock Unit Award Agreement under the 2005 Equity
    Incentive Plan(8)10
.10*

2005 Non-Employee Directors Stock Option Plan(3)10
.11*

Form of Stock Option Agreement under the 2005 Non-Employee
    Directors Stock Option Plan(3)10
.12*

2005 Employee Stock Purchase Plan(6)10
.13*

Form of 2005 Employee Stock Purchase Plan Offering Document(6)10
.14*

Form of Change of Control Agreement between the Company and
    certain of its officers, dated November 7, 2007(9)10
.15*

Change of Control Agreement between the Company and Ronald W.
    Barrett, dated November 7, 2007(10)10
.16*

Change of Control Agreement between the Company and William J.
    Rieflin, dated November 7, 2007(11)10
.17*

Change of Control Agreement between the Company and William G.
    Harris, dated November 7, 2007(12)10
.18*

Change of Control Agreement between the Company and Kenneth C.
    Cundy, dated November 7, 2007(13)10
.19*

Change of Control Agreement between the Company and Mark A.
    Gallop, dated November 7, 2007(14)10
.20*

Change of Control Agreement between the Company and David R.
    Savello, dated November 7, 2007(15)10
.21*

Amended and Restated Employment Agreement between the Company
    and William J. Rieflin, dated November 7, 2007(16)10
.22*

Promissory note issued by Kenneth C. Cundy to the Company, dated
    December 20, 2001(4)10
.23*

Promissory note issued by Mark A. Gallop to the Company, dated
    April 12, 2002(4)10
.24*

Promissory note issued by William G. Harris to the Company,
    dated May 17, 2002(4)10
.25*

XenoPort, Inc. Corporate Bonus Plan(17)10
.26*

Termsheet for Director Cash Compensation(18)10
.27*

Executive Compensation(19)10
.28

Distribution and License Agreement, dated as of December 1,
    2005, between the Company and Astellas Pharma Inc.(20) 79




---



##### Table of Contents



ExhibitNumber

Description of Document10
.29

Development and Commercialization Agreement, dated
    February 7, 2007, by and between the Company and Glaxo
    Group Limited(21)10
.29.1

First Amendment to Development and Commercialization Agreement,
    dated May 4, 2007, by and between the Company and Glaxo
    Group Limited(21)10
.30

Licensing Agreement, dated as of October 12, 2007, between
    the Company and Xanodyne Pharmaceuticals, Inc.(22)10
.31

Rights Agreement, dated as of December 15, 2005, by and
    between the Company and Mellon Investor Services LLC(23)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)(24)     *
    
    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.
    
    Confidential treatment has been requested 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 Exhibit 3.1 of our
    current report of
    Form 8-K,
    filed with the SEC on December 16, 2005.(3)
    
    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.(4)
    
    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.(5)
    
    Incorporated herein by reference to Exhibit 4.1 of our
    current report of
    Form 8-K,
    filed with the SEC on December 16, 2005.(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 of
    our annual report on
    Form 10-K
    (File
    No. 000-51329)
    for the period ended December 31, 2007, as filed with the
    SEC on March 7, 2007.(8)
    
    Incorporated herein by reference to Exhibit 10.30 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended June 30, 2007, as filed with the SEC
    on August 9, 2007.(9)
    
    Incorporated herein by reference to Exhibit 10.13 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(10)
    
    Incorporated herein by reference to Exhibit 10.14 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(11)
    
    Incorporated herein by reference to Exhibit 10.15 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007. 80




---



##### Table of Contents



(12)
    
    Incorporated herein by reference to Exhibit 10.17 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(13)
    
    Incorporated herein by reference to Exhibit 10.31 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(14)
    
    Incorporated herein by reference to Exhibit 10.32 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(15)
    
    Incorporated herein by reference to Exhibit 10.33 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(16)
    
    Incorporated herein by reference to Exhibit 10.18 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(17)
    
    Incorporated herein by reference to Exhibit 10.21 of our
    current report of
    Form 8-K,
    filed with the SEC on February 2, 2007.(18)
    
    Incorporated herein by reference to Exhibit 10.25 of our
    current report of
    Form 8-K,
    filed with the SEC on August 4, 2006, and incorporated
    herein by reference.(19)
    
    Incorporated herein by reference to Exhibit 10.28 of our
    current report of
    Form 8-K,
    filed with the SEC on February 1, 2008.(20)
    
    Incorporated herein by reference to Exhibit 10.27 of our
    current report of
    Form 8-K,
    filed with the SEC on December 2, 2005.(21)
    
    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 March 31, 2007, as filed with the SEC
    on May 9, 2007.(22)
    
    Incorporated herein by reference to Exhibit 10.34 of our
    quarterly report on
    Form 10-Q
    (File
    No. 000-51329)
    for the period ended September 30, 2007, as filed with the
    SEC on November 9, 2007.(23)
    
    Incorporated herein by reference to Exhibit 4.2 of our
    current report of
    Form 8-K,
    filed with the SEC on December 16, 2005.(24)
    
    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. 81




---



##### Table of Contents



REPORT OF
    INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM             
    82




---



##### Table of Contents



XENOPORT,
    INC.



BALANCE
    SHEETS  December 31,2007


2006(In thousands)Current assets:Cash and cash equivalents

$
17,961


$
14,857Short-term investments


142,180



103,997Accounts receivable


1,392



2,796Employee note receivable and other current assets


2,682



1,332Total current assets


164,215



122,982Property and equipment, net


6,791



3,532Restricted investments


1,771



1,699Employee notes receivable and other assets


100



452Total assets

$
172,877


$
128,665Current liabilities:Accounts payable

$
1,647


$
144Accrued compensation


3,923



2,928Accrued preclinical and clinical costs


8,726



13,430Other accrued liabilities


2,809



1,737Deferred revenue


8,117



2,424Current portion of equipment financing obligations


176



500Current portion of liability for early exercise of employee
    stock options


132



292Total current liabilities


25,530



21,455Deferred revenue


20,328



21,843Deferred rent and other


1,455



1,696Noncurrent portion of equipment financing obligations


5



181Noncurrent portion of liability for early exercise of employee
    stock options


22



205Commitments and ContingenciesStockholders equity (deficit):Common stock, $0.001 par value; 60,000 shares
    authorized; 24,989 and 24,517 shares issued and
    outstanding, at December 31, 2007 and 2006, respectively


25



24Additional paid-in capital


301,084



287,513Notes receivable from stockholders






(33
)Accumulated other comprehensive income


491



37Accumulated deficit


(176,063
)


(204,256
)Total stockholders equity


125,537



83,285Total liabilities and stockholders equity

$
172,877


$
128,665    83




---



##### Table of Contents



XENOPORT,
    INC.



STATEMENTS
    OF OPERATIONS  Year Ended December 31,2007


2006


2005(In thousands, except per share amounts)Revenues:Collaboration revenue

$
113,822


$
10,606


$
4,667Grant revenue










86Total revenues


113,822



10,606



4,753Operating expenses:Research and development


74,397



65,434



38,698General and administrative


18,652



14,834



10,989Total operating expenses


93,049



80,268



49,687Income (loss) from operations


20,773



(69,662
)


(44,934
)Interest income


8,198



5,634



2,258Interest and other expense


(156
)


(285
)


(233
)Income (loss) before income taxes


28,815



(64,313
)


(42,909
)Income tax provision


622







Net income (loss)


28,193



(64,313
)


(42,909
)Convertible preferred stock dividends










(969
)Income (loss) applicable to common stockholders

$
28,193


$
(64,313
)

$
(43,878
)Basic income (loss) per share applicable to common stockholders

$
1.14


$
(2.91
)

$
(3.69
)Diluted income (loss) per share applicable to common stockholders

$
1.08


$
(2.91
)

$
(3.69
)Shares used to compute basic income (loss) per share applicable
    to common stockholders


24,773



22,101



11,898Shares used to compute diluted income (loss) per share
    applicable to common stockholders


25,992



22,101



11,898    84




---



##### Table of Contents





XENOPORT,
    INC.
 STATEMENTS
    OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS EQUITY
    (DEFICIT)  AccumulatedNotes





Other





TotalConvertible








Additional


Receivable


Deferred


Comprehensive





StockholdersPreferred Stock


Common Stock


Paid-In


from


Stock


Income


Accumulated


EquityShares


Amount


Shares


Amount


Capital


Stockholders


Compensation


(Loss)


Deficit


(Deficit)(In thousands, except share amounts)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
)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






















402















402Reclassification of unvested common stock










(155,253
)






(621
)


















(621
)Deferred stock compensation, net


















4,330







(4,330
)










Amortization of deferred stock compensation


























2,403











2,403Compensation expense relating to common stock option granted to
    an employee


















128



















128Comprehensive income (loss):Change in unrealized gain/loss on investments






























(36
)






(36
)Net loss


































(42,909
)


(42,909
)Comprehensive income (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 income (loss):Change in unrealized gain/loss on investments






























173







173Net loss


































(64,313
)


(64,313
)Comprehensive income (loss):






































(64,140
)Balance at December 31, 2006










24,516,517


$
24


$
287,513


$
(33
)

$



$
37


$
(204,256
)

$
83,285Issuance of common stock upon exercise of warrants










12,346



























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










428,653



1



3,293



















3,294Issuance of common stock in connection with Employee Stock
    Purchase Plan










59,218







1,429



















1,429Repurchase of common stock










(26,676
)






(82
)


















(82
)Compensation expense relating to consultant options


















17



















17Repayment of promissory notes from stockholders






















33















33Reclassification of unvested common stock










(1,375
)






(8
)


















(8
)Stock-based compensation expense  employees


















8,922



















8,922Comprehensive income (loss):Change in unrealized gain/loss on investments






























454







454Net income


































28,193



28,193Comprehensive income (loss):






































28,647Balance at December 31, 2007










24,988,683


$
25


$
301,084


$



$



$
491


$
(176,063
)

$
125,537    85




---



##### Table of Contents





XENOPORT,
    INC.
 STATEMENTS
    OF CASH FLOWS  Year Ended December 31,2007


2006


2005(In thousands)Operating activitiesNet income (loss)

$
28,193


$
(64,313
)

$
(42,909
)Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities:Depreciation and amortization


2,007



1,630



2,095Accretion of investment discounts, net


(5,974
)


(1,463
)


(141
)Amortization of deferred compensation










2,403Stock-based compensation expense  employees


8,922



5,377



128Stock-based compensation expense  consultants


17



198



369Change in assets and liabilities:Accounts receivable


1,404



(2,741
)


1,299Deposit and other current and non-current assets


(1,198
)


1,139



(1,219
)Notes receivable from employees


200







191Accounts payable


1,503



(2,846
)


1,365Accrued compensation


995



1,247



334Accrued preclinical and clinical costs


(4,704
)


11,510



(1,020
)Other accrued liabilities


1,072



1,129



(537
)Deferred revenue


4,178



(607
)


22,728Deferred rent and other


(241
)


(111
)


55Net cash provided by (used in) operating activities


36,374



(49,851
)


(14,859
)Investing activitiesPurchases of investments


(297,389
)


(172,826
)


(102,023
)Proceeds from sales and maturities of investments


265,628



140,295



55,989Change in restricted investments


(72
)


1,506



(36
)Purchases of property and equipment


(5,260
)


(1,355
)


(872
)Net cash used in investing activities


(37,093
)


(32,380
)


(46,942
)Financing activitiesProceeds from issuance of convertible preferred stock, net of
    issuance costs and exercise of warrants










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


4,372



75,601



48,284Repurchases of common stock


(82
)


(13
)


(11
)Proceeds from repayment of promissory notes from a stockholder


33



125



Proceeds from equipment financing obligations










84Payments on capital leases and equipment financing obligations


(500
)


(713
)


(1,083
)Net cash provided by financing activities


3,823



75,000



47,335Net increase (decrease) in cash and cash equivalents


3,104



(7,231
)


(14,466
)Cash and cash equivalents at beginning of period


14,857



22,088



36,554Cash and cash equivalents at end of period

$
17,961


$
14,857


$
22,088Supplemental schedule of noncash investing and financing
    activitiesIssuance of common stock in exchange for notes receivable from
    stockholders

$



$



$
402Conversion of preferred stock to common stock upon initial
    public offering

$



$



$
149,944Issuance of common stock in a cashless exercise of a warrant

$



$



$
12Reclassification of the unvested portion of common stock from
    early exercises of stock options to a liability

$
8


$
9


$
621Vesting of common stock from early exercises of stock options

$
351


$
504


$
452Deferred stock compensation, net of forfeitures

$



$



$
4,330Stock dividends payable to preferred stockholders

$



$



$
969Disposal of property and equipment at no gain or loss

$



$
6,300


$
49Supplemental disclosure of cash flow informationInterest paid

$
48


$
122


$
187Income taxes paid

$
794


$



$
    86




---



##### Table of Contents



XENOPORT,
    INC.
 NOTES TO
    FINANCIAL STATEMENTS  1.
    Organization
    and Summary of Significant Accounting Policies  Nature
    of Operations
    Use of
    Estimates
    Fair
    Value of Financial Instruments
    Cash
    Equivalents and Short-Term Investments
        Restricted
    Investments
     87




---



##### Table of Contents



Concentrations
    of Risk
          Property
    and Equipment
    Long-Lived
    Assets
  Accounting for the
    Impairment or Disposal of Long-Lived Assets.
  Revenue
    Recognition
  Revenue
    Recognition
 88




---



##### Table of Contents



No. 00-21, Revenue Arrangements with Multiple Deliverables
  
    Up-front, licensing-type fees.  Up-front,
    licensing-type payments are assessed to determine whether or not
    the licensee is able to obtain any stand-alone value from the
    license. Where this is not the case, the Company does not
    consider the license deliverable to be a separate unit of
    accounting, and the revenue is deferred with revenue recognition
    for the license fee being assessed in conjunction with the other
    deliverables that constitute the combined unit of accounting.
    Milestones.  Milestones are assessed on an
    individual basis and revenue is recognized from these milestones
    when earned, as evidenced by acknowledgment from collaborators,
    provided that (i) the milestone event is substantive and
    its achievability was not reasonably assured at the inception of
    the agreement, (ii) the milestone represents the
    culmination, or progress towards the culmination, of an earnings
    process and (iii) the milestone payment is non-refundable.
    Where separate milestones do not meet these criteria, the
    Company typically defaults to a performance-based model, with
    revenue recognition following delivery of effort as compared to
    an estimate of total expected effort. Milestones that are
    received after all substantive deliverables have occurred are
    considered to be bonus payments and are recognized upon receipt
    of the cash, assuming all of the other revenue recognition
    criteria are met.
    Collaborative research payments.  Generally,
    the payments received are based on a contractual cost per
    full-time equivalent employee working on the project, and are
    recognized as the services are performed over the related
    funding periods for each agreement.
    Grant revenues.  Grant revenues are recognized
    as research is performed.  case-by-case
      Research
    and Development
    Clinical
    Trials
   89




---



##### Table of Contents



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.
    Year EndedDecember 31, 2005(In thousands, exceptper share amounts)Net loss, as reported

$
(42,909
)Add: Stock-based employee compensation expense based on
    intrinsic value method


2,531Less: Stock-based employee compensation expense determined under
    the fair value method


(5,245
)Pro forma net loss


(45,623
)Convertible preferred stock dividends


(969
)Pro forma net loss

$
(46,592
)Loss per share:Basic and diluted, as reported

$
(3.69
)Basic and diluted, pro forma

$
(3.92
)   Impact
    of the Adoption of SFAS 123R
   90




---



##### Table of Contents



Year Ended December 31,2007


2006(In thousands, except pershare amounts)Stock-based compensation by type of award:Employee stock options

$
8,470


$
5,048ESPP


452



329Non-employee stock options


17



198Total stock-based compensation

$
8,939


$
5,575Effect on basic income (loss) per share

$
0.36


$
(0.25
)Effect on diluted income (loss) per share

$
0.34


$
(0.25
)Tax effect on basic income (loss) per share

$
0.01


$
Tax effect on diluted income (loss) per share

$
0.01


$
         Year Ended December 31,2007


2006


2005(In thousands)Research and development

$
5,044


$
2,782


$
849General and administrative


3,878



2,595



1,554$
8,922


$
5,377


$
2,403   Valuation
    Assumptions
   91




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##### Table of Contents



weighted-average
  Year Ended December 31,2007


2006


2005Dividend yield


0
%


0
%


0
%Volatility for options


0.63



0.70



0.75Volatility for ESPP


0.55



0.51



0.46Weighted-average expected life of options (years)


4.69



4.83



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


0.5



0.5



0.5Risk-free interest rate for options


3.49-5.03
%


4.35-5.07
%


3.87-4.29
%Risk-free interest rate for ESPP rights


4.55-5.15
%


3.69-5.15
%


3.69
%     Income
    Taxes
  Accounting of Income Taxes
  Accounting for Uncertainty in
    Income Taxes  an interpretation of FASB Statement
    No. 109,
      Comprehensive
    Income (Loss)
  available-for-sale
 92




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##### Table of Contents



Income
    (loss) Per Share Applicable to Common Stockholders
    Year Ended December 31,2007


2006


2005(In thousands, exceptper share amounts)Numerator:Income (loss) applicable to common stockholders

$
28,193


$
(64,313
)

$
(43,878
)Denominator:Weighted-average common shares outstanding


24,893



22,372



12,402Less: Weighted-average unvested common shares subject to
    repurchase


(120
)


(271
)


(504
)Denominator for basic income (loss) per share applicable to
    common stockholders


24,773



22,101



11,898Dilutive effect of:Restricted stock units and options to purchase common stock


1,202







Warrants outstanding


17







Denominator for diluted income (loss) per share applicable to
    common stockholders


25,992



22,101



11,898Basic income (loss) per share applicable to common stockholders

$
1.14


$
(2.91
)

$
(3.69
)Diluted income (loss) per share applicable to common stockholders

$
1.08


$
(2.91
)

$
(3.69
)Outstanding dilutive securities not included in the
    computation of diluted income (loss) per share applicable to
    common stockholders as they had an antidilutive effect:Restricted stock units and options to purchase common stock


447



2,254



1,624Warrants outstanding






39



39447



2,293



1,663   Recent
    Accounting Pronouncements
  No. 07-03, Accounting for Nonrefundable Advance Payments for Goods or
    Services to Be Used in Future Research and Development
    Activities EITF 07-03. EITF 07-03 EITF 07-03 EITF 07-03 EITF 07-03
 93




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##### Table of Contents



No. 07-01, Accounting for Collaborative Arrangements Related to the
    Development and Commercialization of Intellectual Property EITF 07-01. EITF 07-01 EITF 07-01 EITF 07-01 EITF 07-01
  2.
    Collaboration
    Agreements       94




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##### Table of Contents



12-month
    Year Ended December 31,2007


2006


2005ALZA

$



$



$
1,895Pfizer










2,646Astellas


7,424



10,606



126GSK


104,898







Xanodyne


1,500







$
113,822


$
10,606


$
4,667    95




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##### Table of Contents



3.
    Cash and
    Cash Equivalents, Short-Term Investments and Restricted
    Investments    GrossUnrealized Gains


EstimatedCost


(Losses)


Fair ValueAs of December 31, 2007:Cash

$
1,770


$



$
1,770Money market funds


10,104







10,104Corporate debt securities


147,776



491



148,267Certificate of deposit


1,771







1,771$
161,421


$
491


$
161,912Reported as:Cash and cash equivalents









$
17,961Short-term investments










142,180Restricted investments










1,771$
161,912   GrossUnrealized Gains


EstimatedCost


(Losses)


Fair ValueAs of December 31, 2006:Cash

$
3,048


$



$
3,048Money market funds


11,809







11,809Corporate 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    96




---



##### Table of Contents



4.
    Property
    and Equipment    December 31,2007


2006Laboratory equipment

$
8,021


$
5,332Furniture and fixtures


935



168Computer equipment and software


1,961



691Leasehold improvements


2,238



2,021Construction in-progress


307



13,462



8,212Less: Accumulated depreciation and amortization


(6,671
)


(4,680
)Property and equipment, net

$
6,791


$
3,532   5.
    Employee
    Notes Receivable    6.
    Commitments
    and Contingencies  Operating
    Leases
      sub-tenant
   97




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##### Table of Contents



Year ending December 31:2008

$
3,9562009


4,0852010


4,2182011


3,981Total minimum lease payments

$
16,240   Equipment
    Financing Obligations
  48-month
    EquipmentFinancingArrangementsYear ending December 31:2008

$
1762009


5Total minimum payments required


181Less: Current portion


(176
)Noncurrent portion

$
5     Guarantees
    and Indemnifications
    Contingencies
   98




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##### Table of Contents



7.
    Stockholders
    Equity  Common
    Stock
    Stockholders
    Rights Plan
    Equity
    Incentive Plans
  1999
    Stock Plan
      No. 00-23, Issues Related to Accounting for Stock Compensation under APB
    Opinion No. 25 and FASB Interpretation No. 44
    2005
    Equity Incentive Plan
   99




---



##### Table of Contents



2005
    Non-Employee Directors Stock Option Plan
   100




---



##### Table of Contents



Weighted-Weighted-


AverageAverage


Remaining


AggregateExercise


Contractual


IntrinsicShares


Price


Term


Value(In thousands)Outstanding at January 1, 2007


2,253,889


$
12.51Options and awards granted


1,093,865


$
26.96Options and awards canceled


(228,414
)

$
20.85Options and awards exercised


(405,983
)

$
6.56Outstanding at December 31, 2007


2,713,357


$
18.52



8.04


$
104,338Exercisable at December 31, 2007


1,315,001


$
11.35



7.39


$
58,556             Weighted-AverageGrant DateShares


Fair ValueUnvested at January 1, 2007


1,504,069


$
13.46Options granted


1,093,865


$
26.96Options cancelled


(255,090
)

$
18.99Options vested


(1,029,439
)

$
12.03Unvested at December 31, 2007


1,313,405


$
24.75   Employee
    Stock Purchase Plan
   101




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##### Table of Contents



8.
    Preferred
    Stock  Preferred
    stock
    Convertible
    preferred stock
    9.
    Income
    Taxes      December 31,2007


2006Net operating loss carryforwards

$
29,871


$
60,636Research credit carryforwards


16,903



14,171Capitalized research and development


22,227



4,132Deferred revenue


8,900



9,888Other


5,001



2,525Total deferred tax assets


82,902



91,352Valuation allowance


(82,902
)


(91,352
)Net deferred tax assets

$



$
      102




---



##### Table of Contents



10.
    Quarterly
    Financial Data (Unaudited)    Dec. 31,


Sept. 30,


June 30,


March 31,


Dec. 31,


Sept. 30,


June 30,


March 31,2007


2007


2007


2007


2006


2006


2006


2006Selected Quarterly Data:Total revenues

$
25,761


$
35,425


$
36,097


$
16,539


$
3,106


$
3,106


$
3,106


$
1,288Net income (loss)


2,451



15,594



13,497



(3,349
)


(18,617
)


(16,337
)


(14,381
)


(14,978
)Basic net income (loss) per share

$
0.10


$
0.63


$
0.55


$
(0.14
)

$
(0.76
)

$
(0.67
)

$
(0.72
)

$
(0.77
)Diluted net income (loss) per share

$
0.09


$
0.60


$
0.52


$
(0.14
)

$
(0.76
)

$
(0.67
)

$
(0.72
)

$
(0.77
)  103