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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549





FORM 10-Q





(Mark One)



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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008



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

FOR THE TRANSITION PERIOD FROM             TO

Commission file number: 001-33415





OREXIGEN THERAPEUTICS, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 65-1178822                          
|(State or Other Jurisdiction of Incorporation or Organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|3344 North Torrey Pines Court, Suite 200, La Jolla, CA         |  | 92037                               
|(Address of Principal Executive Offices)                       |  | (Zip Code)                          

(858) 875-8600

(Registrants Telephone Number, Including Area Code)





Indicate by check mark whether the registrant:
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.    Yes  x    No    ̈

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act.)

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

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 ̈  Yes    x  No

As of May 6,
2008, the registrant had 34,309,036 shares of Common Stock ($0.001 par value) outstanding.









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##### Table of Contents

OREXIGEN THERAPEUTICS, INC.

TABLE OF CONTENTS



|                              |  |                                                                                                                                                            |  |   
|----------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  | 3                                                                                                                                                         
|                              |  |                                                                                                                                                           
|                              |  | Item 1.
Financial Statements                                                                                                                               |  | 3 
|                              |  | Balance Sheets as of March 31, 2008 (Unaudited) and December 31, 2007                                                                                      |  | 3 
|                              |  | Unaudited Statements of Operations for the three months ended March 31, 2008 and 2007 and the period from September 12, 2002 (Inception) to March 31, 2008 |  | 4 
|                              |  | Unaudited Statements of Cash Flows for the three months ended March 31, 2008 and 2007 and the period from September 12, 2002 (Inception) to March 31, 2008 |  | 5 
|                              |  | Notes to Unaudited Financial Statements                                                                                                                    |  | 6 
|                              |  | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations                                                              |  | 13
|                              |  | Item 3.
Quantitative and Qualitative Disclosures about Market Risk                                                                                         |  | 18
|                              |  | Item 4.
Controls and Procedures                                                                                                                            |  | 18
|                              | 
|PART II. OTHER INFORMATION    |  | 19                                                                                                                                                        
|                              |  |                                                                                                                                                           
|                              |  | Item 1.
Legal Proceedings                                                                                                                                  |  | 19
|                              |  | Item 1A.
Risk Factors                                                                                                                                      |  | 19
|                              |  | Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                        |  | 45
|                              |  | Item 3.
Defaults Upon Senior Securities                                                                                                                    |  | 45
|                              |  | Item 4.
Submission of Matters to a Vote of Security Holders                                                                                                |  | 45
|                              |  | Item 5.
Other Information                                                                                                                                  |  | 45
|                              |  | Item 6.
Exhibits                                                                                                                                           |  | 45
|                              | 
|SIGNATURES                    |  | 47                                                                                                                                                        
|                              |  |                                                                                                                                                           
|                              |  | EXHIBIT 31.1                                                                                                                                               |  |   
|                              |  | EXHIBIT 31.2                                                                                                                                               |  |   
|                              |  | EXHIBIT 32.1                                                                                                                                               |  |   
|                              |  | EXHIBIT 32.2                                                                                                                                               |  |   



2



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##### Table of Contents

PART I.
FINANCIAL INFORMATION



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

Orexigen Therapeutics, Inc.

(a development stage company)

Balance Sheets

(In thousands, except share and par value amounts)



|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                    |  | March 31,2008 |          |   | December 31,2007 |  
|                                                                                                                                                                                                                    |  | (Unaudited)   |          |   |                  |  
|Assets                                                                                                                                                                                                              |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                           |  | $             | 33,410   |   |                  | $ | 28,967   |  
|Investment securities, available-for-sale                                                                                                                                                                           |  |               | 107,632  |   |                  |   | 56,487   |  
|Prepaid expenses and other current assets                                                                                                                                                                           |  |               | 624      |   |                  |   | 2,471    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                                |  |               | 141,666  |   |                  |   | 87,925   |  
|Property and equipment, net                                                                                                                                                                                         |  |               | 867      |   |                  |   | 924      |  
|Restricted cash                                                                                                                                                                                                     |  |               | 1,125    |   |                  |   | 1,125    |  
|Other assets                                                                                                                                                                                                        |  |               | 2,199    |   |                  |   | 1,346    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                        |  | $             | 145,857  |   |                  | $ | 91,320   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                                |  |               |          |   |                  |   |          |  
|Accounts payable and accrued expenses                                                                                                                                                                               |  | $             | 10,563   |   |                  | $ | 8,454    |  
|Deferred revenue, current portion                                                                                                                                                                                   |  |               | 88       |   |                  |   | 88       |  
|Long-term debt, current portion                                                                                                                                                                                     |  |               | 5,175    |   |                  |   | 4,735    |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                           |  |               | 15,826   |   |                  |   | 13,277   |  
|Deferred revenue, less current portion                                                                                                                                                                              |  |               | 1,125    |   |                  |   | 1,147    |  
|Long-term debt, less current portion                                                                                                                                                                                |  |               | 9,617    |   |                  |   | 11,072   |  
|Other long-term liabilities                                                                                                                                                                                         |  |               | 941      |   |                  |   | 941      |  
|Commitments and contingencies                                                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                               |  |               |          |   |                  |   |          |  
|Preferred stock, $.001 par value, 10,000,000 shares authorized at March 31, 2008 and December 31, 2007; no shares issued and
outstanding at March 31, 2008 and December 31, 2007                                    |  |               |         |   |                  |   |         |  
|Common stock, $.001 par value, 100,000,000 shares authorized at March 31, 2008 and December 31, 2007; 34,309,036 and 26,982,601
shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively |  |               | 34       |   |                  |   | 27       |  
|Additional paid-in capital                                                                                                                                                                                          |  |               | 247,920  |   |                  |   | 171,571  |  
|Accumulated other comprehensive income                                                                                                                                                                              |  |               | 543      |   |                  |   | 220      |  
|Deficit accumulated during the development stage                                                                                                                                                                    |  |               | (130,149 | ) |                  |   | (106,935 | )
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                          |  |               | 118,348  |   |                  |   | 64,883   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                          |  | $             | 145,857  |   |                  | $ | 91,320   |  
|                                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  

See accompanying notes.



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Orexigen Therapeutics, Inc.

(a development stage company)

Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                                        |  | Three Months EndedMarch 31, |         |   | Period FromSeptember 12, 2002(Inception) toMarch 31, 2008 |  
|                                                                                                        |  | 2008                        |         |   | 2007                                                      |   |        
|Revenues:                                                                                               |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Collaborative agreement                                                                                 |  | $                           |        |   |                                                           | $ |        |   |  | $ | 174      |  
|License revenue                                                                                         |  |                             | 22      |   |                                                           |   | 22      |   |  |   | 287      |  
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Total revenues                                                                                          |  |                             | 22      |   |                                                           |   | 22      |   |  |   | 461      |  
|Operating expenses:                                                                                     |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Research and development                                                                                |  |                             | 20,687  |   |                                                           |   | 10,128  |   |  |   | 110,544  |  
|General and administrative                                                                              |  |                             | 3,319   |   |                                                           |   | 2,361   |   |  |   | 25,490   |  
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Total operating expenses                                                                                |  |                             | 24,006  |   |                                                           |   | 12,489  |   |  |   | 136,034  |  
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Loss from operations                                                                                    |  |                             | (23,984 | ) |                                                           |   | (12,467 | ) |  |   | (135,573 | )
|Other income (expense):                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Interest income                                                                                         |  |                             | 1,199   |   |                                                           |   | 357     |   |  |   | 6,763    |  
|Interest expense                                                                                        |  |                             | (429    | ) |                                                           |   | (59     | ) |  |   | (1,339   | )
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Total other income (expense)                                                                            |  |                             | 770     |   |                                                           |   | 298     |   |  |   | 5,424    |  
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss                                                                                                |  |                             | (23,214 | ) |                                                           |   | (12,169 | ) |  |   | (130,149 | )
|Accretion to redemption value of redeemable convertible preferred stock                                 |  |                             |        |   |                                                           |   | (8      | ) |  |   | (78      | )
|Deemed dividend of beneficial conversion for Series C preferred stock                                   |  |                             |        |   |                                                           |   |        |   |  |   | (13,860  | )
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss attributable to common stockholders                                                            |  | $                           | (23,214 | ) |                                                           | $ | (12,177 | ) |  | $ | (144,087 | )
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss per share attributable to common stockholders - basic and diluted (1)                          |  | $                           | (0.73   | ) |                                                           | $ | (5.26   | ) |  |   |          |  
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Shares used in computing net loss per share attributable to common stockholders  basic and diluted (1) |  |                             | 31,942  |   |                                                           |   | 2,315   |   |  |   |          |  
|                                                                                                        |  |                             |         |   |                                                           |   |         |   |  |   |          |  



|(1) | As a result of the issuance of 8,050,000 shares of common stock in the Companys initial public offering in May 2007 and the conversion of the Companys preferred
stock into 16,462,231 shares of common stock upon completion of the Companys initial public offering, there is a lack of comparability in the basic and diluted net loss per share amounts for the periods presented. See Note 3 for
further discussion.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

See accompanying notes.



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Orexigen Therapeutics, Inc.

(a development stage company)

Statements of Cash Flows

(In thousands)

(Unaudited)



|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------------ |  | --------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                                 |  | Three Months EndedMarch 31, |         |   | Period FromSeptember 12, 2002(Inception) toMarch 31, 2008 |  
|                                                                                                 |  | 2008                        |         |   | 2007                                                      |   |        
|Operating activities                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net loss                                                                                         |  | $                           | (23,214 | ) |                                                           | $ | (12,169 | ) |  | $ | (130,149 | )
|Adjustments to reconcile net loss to net cash used by operating activities:                      |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Depreciation                                                                                     |  |                             | 57      |   |                                                           |   | 30      |   |  |   | 252      |  
|Loss on disposal of assets                                                                       |  |                             |        |   |                                                           |   |        |   |  |   | 4        |  
|Amortization of premium on securities available-for-sale                                         |  |                             | (725    | ) |                                                           |   | (194    | ) |  |   | (3,093   | )
|Amortization of debt issuance costs                                                              |  |                             | 66      |   |                                                           |   | 48      |   |  |   | 277      |  
|Stock-based compensation                                                                         |  |                             | 1,444   |   |                                                           |   | 930     |   |  |   | 9,243    |  
|Issuance of common stock in exchange for technology and services                                 |  |                             |        |   |                                                           |   |        |   |  |   | 47       |  
|Changes in operating assets and liabilities:                                                     |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Prepaid expenses and other current assets                                                        |  |                             | 1,847   |   |                                                           |   | (521    | ) |  |   | (624     | )
|Accounts payable and accrued expenses                                                            |  |                             | 2,109   |   |                                                           |   | (134    | ) |  |   | 10,619   |  
|Other assets                                                                                     |  |                             | (1,026  | ) |                                                           |   | 62      |   |  |   | (1,351   | )
|Deferred rent                                                                                    |  |                             |        |   |                                                           |   | 3       |   |  |   | 41       |  
|Deferred revenue                                                                                 |  |                             | (22     | ) |                                                           |   | (22     | ) |  |   | 1,213    |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net cash used by operating activities                                                            |  |                             | (19,464 | ) |                                                           |   | (11,967 | ) |  |   | (113,521 | )
|Investing activities                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Purchases of securities available-for-sale                                                       |  |                             | (70,758 | ) |                                                           |   | (3,656  | ) |  |   | (261,707 | )
|Maturities of securities available-for-sale                                                      |  |                             | 20,661  |   |                                                           |   | 1,250   |   |  |   | 157,712  |  
|Purchases of property and equipment                                                              |  |                             |        |   |                                                           |   |        |   |  |   | (1,123   | )
|Restricted cash                                                                                  |  |                             |        |   |                                                           |   |        |   |  |   | (1,125   | )
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net cash used by investing activities                                                            |  |                             | (50,097 | ) |                                                           |   | (2,406  | ) |  |   | (106,243 | )
|Financing activities                                                                             |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Proceeds from issuance of common stock, net of repurchases                                       |  |                             | 74,912  |   |                                                           |   |        |   |  |   | 162,894  |  
|Proceeds from borrowings on long-term debt                                                       |  |                             |        |   |                                                           |   | 10,000  |   |  |   | 18,000   |  
|Payments on borrowings on long-term debt                                                         |  |                             | (1,015  | ) |                                                           |   |        |   |  |   | (3,208   | )
|Proceeds from issuance of redeemable convertible preferred stock for cash, net of issuance costs |  |                             |        |   |                                                           |   |        |   |  |   | 44,109   |  
|Proceeds from issuance of convertible preferred stock for cash, net of issuance costs            |  |                             |        |   |                                                           |   |        |   |  |   | 29,940   |  
|Proceeds from promissory notes                                                                   |  |                             |        |   |                                                           |   |        |   |  |   | 1,665    |  
|Costs paid in connection with loan agreement                                                     |  |                             |        |   |                                                           |   |        |   |  |   | (226     | )
|Costs paid in connection with public offering                                                    |  |                             | 107     |   |                                                           |   | (306    | ) |  |   |         |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net cash provided by financing activities                                                        |  |                             | 74,004  |   |                                                           |   | 9,694   |   |  |   | 253,174  |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Net increase (decrease) in cash and cash equivalents                                             |  |                             | 4,443   |   |                                                           |   | (4,679  | ) |  |   | 33,410   |  
|Cash and cash equivalents at beginning of period                                                 |  |                             | 28,967  |   |                                                           |   | 19,425  |   |  |   |         |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Cash and cash equivalents at end of period                                                       |  | $                           | 33,410  |   |                                                           | $ | 14,746  |   |  | $ | 33,410   |  
|                                                                                                 |  |                             |         |   |                                                           |   |         |   |  |   |          |  

See accompanying notes.



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OREXIGEN THERAPEUTICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

Organization

Orexigen Therapeutics, Inc. (the
Company), a Delaware corporation, is a biopharmaceutical company focused on the development and commercialization of pharmaceutical products for the treatment of central nervous system disorders, including obesity. The Company was
incorporated in September 2002 and commenced operations in 2003.

The Companys primary activities since incorporation have been
organizational activities, including recruiting personnel, conducting research and development, including clinical trials, and raising capital. Since the Company has not yet begun principal operations of commercializing a product candidate, the
Company is considered to be in the development stage. In addition, the Company has experienced losses since its inception, and as of March 31, 2008, had an accumulated deficit of $130.1 million. The Company expects to continue to incur losses
for at least the next several years. Successful transition to attaining profitable operations is dependent upon achieving a level of revenues adequate to support the Companys cost structure, and until that time, the Company will continue to
raise additional equity or debt financing. Management believes that it has sufficient capital to fund operations through at least the next 12 months.

Basis of Presentation

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

The accompanying unaudited financial statements
and notes thereto should be read in conjunction with the audited financial statements for the year ended December 31, 2007 included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.

2. Summary of Significant Accounting Policies

Research and
Development Costs

All research and development costs are charged to expense as incurred and consist principally of costs related to
clinical trials managed by the Companys contract research organizations, license fees and salaries and related benefits. Clinical trial costs are a significant component of research and development expenses. These costs are accrued based on
estimates of work performed, and requires estimates of total costs incurred based on patients enrolled, progress of patient studies and other events. Clinical trial costs are subject to revision as the trials progress and revisions are charged to
expense in the period in which they become known.

Revenue Recognition

The Company has entered into an agreement with Cypress Bioscience, Inc. (Cypress) which contains multiple elements, including non-refundable
upfront fees, payments for reimbursement of research costs, payments associated with achieving specific development milestones and royalties based on specified percentages of net product sales, if any. The Company applies the revenue recognition
criteria outlined in Staff Accounting Bulletin (SAB) No. 104, Revenue Recognitionand Emerging Issues Task Force (EITF) Issue 00-21, Revenue Arrangements with Multiple Deliverables. In applying these
revenue recognition criteria, the Company considers a variety of factors in determining the appropriate method of revenue recognition under these arrangements, such as whether the elements are separable, whether there are determinable fair values
and whether there is a unique earnings process associated with each element of a contract. If the required ongoing obligations involve minimal or no cost effort, nonrefundable up front fees would be recognized upon receipt. Otherwise, non-refundable
upfront fees are recognized over the period the related services are provided or over the period the Company has significant involvement. Revenue from milestones is recognized as agreed upon scientific events are achieved, as long as the event is
substantial and was not readily assured at the beginning of the collaboration.

Advance payments received in excess of amounts earned are
classified as deferred revenue until earned.



6



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New Accounting Standards

On January 1, 2008, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 157, Fair Value Measurement, related to its financial assets. The
Company measures certain assets at fair value as disclosed in the footnotes to its quarterly and annual financial statements. The adoption of SFAS No. 157 did not have an impact on the Companys financial statements.

On January 1, 2008, the Company adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities. SFAS No. 159 allows certain financial assets and liabilities to be recognized, at the Companys election, at fair market value, with any gains or losses for the period recorded in the statement of
operations. SFAS No. 159 includes investment securities, available-for-sale in the assets eligible for this treatment. The Company has not elected to account for any investment securities, available-for-sale using the provisions of
SFAS No. 159. Currently, the Company records any unrealized gains or losses for investment securities, available-for-sale for the period in comprehensive income and in the equity section of the balance sheet.

On January 1, 2008, the Company adopted the provisions of EITF Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods and
Services to Be Used in Future Research and Development Activities. The consensus requires companies to defer and capitalize prepaid, nonrefundable research and development payments to third parties over the period that the research and
development activities are performed or the services are provided, subject to an assessment of recoverability. The adoption of EITF Issue No. 07-3 did not have an impact on the Companys financial statements.

On January 1, 2008, the Company adopted EITF Issue No. 07-1, Accounting for Collaborative Arrangements Related to the Development and
Commercialization of Intellectual Property.Companies may enter into arrangements with other companies to jointly develop, manufacture, distribute, and market a product. Often the activities associated with these arrangements are conducted
by the collaborators without the creation of a separate legal entity (that is, the arrangement is operated as a virtual joint venture). The arrangements generally provide that the collaborators will share, based on contractually defined
calculations, the profits or losses from the associated activities. Periodically, the collaborators share financial information related to product revenues generated (if any) and costs incurred that may trigger a sharing payment for the combined
profits or losses. The consensus requires collaborators in such an arrangement to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) other collaborators based on
other applicable GAAP or, in the absence of other applicable GAAP, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. As the Companys current
collaborative agreement does not incorporate such a revenue- and cost-sharing arrangement, the adoption of EITF Issue No. 07-1 did not have an impact on the Companys financial statements.

3. Net Loss per Share

We calculate net loss per
share in accordance with SFAS No. 128, Earnings Per Share. Basic earnings per share (EPS) is calculated by dividing the net income or loss available to common stockholders by the weighted average number of common shares
outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period and the
weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method.



7



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For purposes of this calculation, options are considered to be common stock equivalents and are only
included in the calculation of diluted earnings per share when their effect is dilutive.

(In thousands, except per share amounts)



|                                                                                                                              |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                              |  | Three Months EndedMarch 31, |        
|                                                                                                                              |  | 2008                        |         |   | 2007 |  
|Numerator:                                                                                                                    |  |                             |         |   |      |   |         |  
|Net loss attributable to common stockholders                                                                                  |  | $                           | (23,214 | ) |      | $ | (12,177 | )
|                                                                                                                              |  |                             |         |   |      |   |         |  
|Denominator:                                                                                                                  |  |                             |         |   |      |   |         |  
|Weighted average shares of common stock outstanding                                                                           |  |                             | 31,942  |   |      |   | 2,398   |  
|Weighted average unvested shares of common stock subject to repurchase                                                        |  |                             |        |   |      |   | (83     | )
|                                                                                                                              |  |                             |         |   |      |   |         |  
|Denominator for basic and diluted net loss per share attributable to common stockholders                                      |  |                             | 31,942  |   |      |   | 2,315   |  
|                                                                                                                              |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share attributable to common stockholders                                                      |  | $                           | (0.73   | ) |      | $ | (5.26   | )
|                                                                                                                              |  |                             |         |   |      |   |         |  
|Historical outstanding anti-dilutive securities not included in diluted net loss per share calculation include the following: |  |                             |         |   |      |   |         |  
|Convertible preferred stock, as converted                                                                                     |  |                             |        |   |      |   | 16,462  |  
|Common stock options                                                                                                          |  |                             | 3,010   |   |      |   | 2,352   |  
|Common shares subject to repurchase                                                                                           |  |                             |        |   |      |   | 69      |  
|                                                                                                                              |  |                             |         |   |      |   |         |  
|                                                                                                                              |  |                             | 3,010   |   |      |   | 18,883  |  
|                                                                                                                              |  |                             |         |   |      |   |         |  

Upon closing of the initial public offering of 7,000,000 shares of the Companys common stock
in May 2007, all shares of the Companys outstanding preferred stock were converted into an aggregate of 16,462,231 shares of common stock.

Pro Forma Net Loss per Share

The pro forma disclosure below shows what net loss per share
would have been if the conversion of our shares of redeemable convertible preferred stock had occurred at the beginning of the respective period being reported using the as-if-converted method. All shares of convertible preferred stock were
automatically converted to 16,462,231 shares of common stock upon the completion of our initial public offering in May 2007. This pro forma information provides supplemental information that helps investors compare the results of the prior
period after giving effect to the change in capitalization resulting from the conversion of preferred stock. The pro forma basic net loss per share is computed as follows (in thousands, except per share amounts):



|                                                                                                |  |                    |         |  
|----------------------------------------------------------------------------------------------- |  | ------------------ | ------- | -
|                                                                                                |  | Three Months Ended |        
|                                                                                                |  | March 31, 2007     |        
|Numerator:                                                                                      |  |                    |         |  
|Net loss attributable to common stockholders                                                    |  | $                  | (12,177 | )
|Adjustment to eliminate accretion to redemption value of redeemable convertible preferred stock |  |                    | 8       |  
|                                                                                                |  |                    |         |  
|Pro forma net loss                                                                              |  | $                  | (12,169 | )
|                                                                                                |  |                    |         |  
|Denominator:                                                                                    |  |                    |         |  
|Weighted average shares of common stock outstanding                                             |  |                    | 2,315   |  
|Pro forma adjustment to reflect assumed conversion of preferred stock, as-if-converted          |  |                    | 16,462  |  
|                                                                                                |  |                    |         |  
|Denominator for pro forma basic and diluted net loss per share                                  |  |                    | 18,777  |  
|                                                                                                |  |                    |         |  
|Pro forma basic and diluted net loss per share                                                  |  | $                  | (0.65   | )
|                                                                                                |  |                    |         |  



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##### Table of Contents

4. Investment Securities, Available-for-Sale

The Company invests its excess cash in investment securities, principally debt instruments of financial institutions and corporations with strong credit
ratings. A summary of the estimated fair value of investment securities, available-for-sale, is as follows at March 31, 2008 and December 31, 2007 (in thousands):



|                                  |  |                  |  |               |         |   |            |   |        |  |   |            |   |  |   |         |  
|--------------------------------- |  | ---------------- |  | ------------- | ------- | - | ---------- | - | ------ |  | - | ---------- | - |  | - | ------- | -
|March 31, 2008                    |  |                  |  |               |         |   | Unrealized |   |        |  |  
|                                  |  | Maturity inYears |  | AmortizedCost |         |   | Gains      |   | Losses |  |   | Fair Value |  
|Corporate debt obligations        |  | Less than 1      |  | $             | 97,215  |   |            | $ | 503    |  | $ |           |   |  | $ | 97,718  |  
|U.S. government agency securities |  | Less than 1      |  |               | 14,524  |   |            |   | 12     |  |   | (2         | ) |  |   | 14,534  |  
|Asset-backed securities           |  | 2-3              |  |               | 5,340   |   |            |   | 30     |  |   |           |   |  |   | 5,370   |  
|                                  |  |                  |  |               |         |   |            |   |        |  |   |            |   |  |   |         |  
|                                  |  |                  |  |               | 117,079 |   |            |   | 545    |  |   | (2         | ) |  |   | 117,622 |  
|Less cash equivalents             |  |                  |  |               | (9,990  | ) |            |   |       |  |   |           |   |  |   | (9,990  | )
|                                  |  |                  |  |               |         |   |            |   |        |  |   |            |   |  |   |         |  
|Amounts classified as investments |  |                  |  | $             | 107,089 |   |            | $ | 545    |  | $ | (2         | ) |  | $ | 107,632 |  
|                                  |  |                  |  |               |         |   |            |   |        |  |   |            |   |  |   |         |  
|                                  |  |                  |  |              
|December 31, 2007                 |  |                  |  |               |         |   | Unrealized |   |        |  |  
|                                  |  | Maturity inYears |  | AmortizedCost |         |   | Gains      |   | Losses |  |   | Fair Value |  
|Corporate debt obligations        |  | Less than 1      |  | $             | 49,194  |   |            | $ | 218    |  | $ | (2         | ) |  | $ | 49,410  |  
|Asset-backed securities           |  | 2-3              |  |               | 7,073   |   |            |   | 4      |  |   |           |   |  |   | 7,077   |  
|                                  |  |                  |  |               |         |   |            |   |        |  |   |            |   |  |   |         |  
|Total investment securities       |  |                  |  | $             | 56,267  |   |            | $ | 222    |  | $ | (2         | ) |  | $ | 56,487  |  
|                                  |  |                  |  |               |         |   |            |   |        |  |   |            |   |  |   |         |  

5. Fair Value Measurements

In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, Fair Value Measurement, which defines fair value, establishes a framework for measuring fair value and
expands disclosures about fair value measurements. SFAS No. 157 also requires the Company to consider its own credit spreads when measuring the fair value of liabilities, including derivatives. Effective January 1, 2008, the
Company adopted the provisions of SFAS No. 157. The Company did not record a cumulative adjustment as a result of adopting SFAS No. 157.

The following table presents information about the Companys financial assets measured at fair value on a recurring basis as of March 31, 2008, and indicates the fair value hierarchy of the valuation techniques utilized by the
Company to determine such fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. The Company
classifies money market funds as Level 1 assets. Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs
include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
The Company classifies commercial paper holdings, U. S. government agency securities and asset-backed security holdings as Level 2 assets. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is
little, if any, market activity for the asset or liability. The Company does not hold any Level 3 assets. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In
such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The
Companys assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.



9



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##### Table of Contents

Assets that have recurring measurements are shown below:



|                                                       |  |                             |         |                                                            |   |                                             |  |                                         |         |  |   |  
|------------------------------------------------------ |  | --------------------------- | ------- | ---------------------------------------------------------- | - | ------------------------------------------- |  | --------------------------------------- | ------- |  | - | -
|                                                       |  |                             |         | Fair Value Measurement at Reporting Date Using            
|Description                                            |  | Balance as ofMarch 31, 2008 |         | Quoted Prices inActive Marketsfor IdenticalAssets (Level1) |   | Significant OtherObservableInputs (Level 2) |  | SignificantUnobservableInputs (Level 3)
|Financial instruments owned:                           |  |                             |         |                                                            |   |                                             |  |                                         |         |  |   |  
|Money market funds                                     |  | $                           | 20,277  |                                                            | $ | 20,277                                      |  | $                                       |        |  | $ | 
|Commercial paper                                       |  |                             | 97,718  |                                                            |   |                                            |  |                                         | 97,718  |  |   | 
|U.S. government agency securities                      |  |                             | 14,534  |                                                            |   |                                            |  |                                         | 14,534  |  |   | 
|Asset-backed securities, collateralized by credit card |  |                             | 5,370   |                                                            |   |                                            |  |                                         | 5,370   |  |   | 
|                                                       |  |                             |         |                                                            |   |                                             |  |                                         |         |  |   |  
|Total financial instruments owned                      |  | $                           | 137,899 |                                                            | $ | 20,277                                      |  | $                                       | 117,622 |  | $ | 
|                                                       |  |                             |         |                                                            |   |                                             |  |                                         |         |  |   |  

6. Property and Equipment

Property and equipment consist of the following (in thousands):



|                                               |  |                     |  |               |       |   |                  |   |       |  
|---------------------------------------------- |  | ------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|                                               |  | Useful LifeIn Years |  | March 31,2008 |       |   | December 31,2007 |  
|Furniture and fixtures                         |  | 5                   |  | $             | 311   |   |                  | $ | 311   |  
|Computers and equipment                        |  | 3 to 5              |  |               | 111   |   |                  |   | 111   |  
|Leasehold improvements                         |  | 5                   |  |               | 42    |   |                  |   | 42    |  
|Laboratory equipment                           |  | 5                   |  |               | 648   |   |                  |   | 648   |  
|                                               |  |                     |  |               |       |   |                  |   |       |  
|                                               |  |                     |  |               | 1,112 |   |                  |   | 1,112 |  
|Less accumulated depreciation and amortization |  |                     |  |               | (245  | ) |                  |   | (188  | )
|                                               |  |                     |  |               |       |   |                  |   |       |  
|                                               |  |                     |  | $             | 867   |   |                  | $ | 924   |  
|                                               |  |                     |  |               |       |   |                  |   |       |  

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):



|                                                |  |               |        |                  |   |      
|----------------------------------------------- |  | ------------- | ------ | ---------------- | - | -----
|                                                |  | March 31,2008 |        | December 31,2007
|Accounts payable                                |  | $             | 3,723  |                  | $ | 4,114
|Accrued preclinical and clinical trial expenses |  |               | 5,532  |                  |   | 2,079
|Accrued compensation related expenses           |  |               | 803    |                  |   | 1,760
|Accrued legal and professional expenses         |  |               | 257    |                  |   | 87   
|Other accrued liabilities                       |  |               | 248    |                  |   | 414  
|                                                |  |               |        |                  |   |      
|                                                |  | $             | 10,563 |                  | $ | 8,454
|                                                |  |               |        |                  |   |      

8. Comprehensive Income

Comprehensive income consists of the following components (in thousands):



|                                                   |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|-------------------------------------------------- |  | --------------------------- | ------- | - | --------------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                   |  | Three Months EndedMarch 31, |         |   | Period FromSeptember 12, 2002(Inception) toMarch 31, 2008 |  
|                                                   |  | 2008                        |         |   | 2007                                                      |   |        
|Net loss, as reported                              |  | $                           | (23,214 | ) |                                                           | $ | (12,169 | ) |  | $ | (130,149 | )
|Unrealized gains (losses) on marketable securities |  |                             | 323     |   |                                                           |   | (5      | ) |  |   | 543      |  
|                                                   |  |                             |         |   |                                                           |   |         |   |  |   |          |  
|Comprehensive loss                                 |  | $                           | (22,891 | ) |                                                           | $ | (12,174 | ) |  | $ | (129,606 | )
|                                                   |  |                             |         |   |                                                           |   |         |   |  |   |          |  



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##### Table of Contents

9. Stock-Based Compensation

Total stock-based compensation expense recognized during the three months ended March 31, 2008 and 2007 was comprised of the following (in thousands):



|                           |  |                             |       |                                                           |   |     |  |   |      
|-------------------------- |  | --------------------------- | ----- | --------------------------------------------------------- | - | --- |  | - | -----
|                           |  | Three Months EndedMarch 31, |       | Period FromSeptember 12, 2002(Inception)
toMarch 31, 2008
|                           |  | 2008                        |       | 2007                                                      |  
|General and administrative |  | $                           | 879   |                                                           | $ | 587 |  | $ | 6,142
|Research and development   |  |                             | 565   |                                                           |   | 343 |  |   | 3,101
|                           |  |                             |       |                                                           |   |     |  |   |      
|                           |  | $                           | 1,444 |                                                           | $ | 930 |  | $ | 9,243
|                           |  |                             |       |                                                           |   |     |  |   |      

The fair value of each option award is estimated on the date of grant using the Black-Scholes
option valuation model. The following weighted-average assumptions were utilized for the calculations during each period:



|                         |  |                             |   |  |      |  
|------------------------ |  | --------------------------- | - |  | ---- | -
|                         |  | Three months endedMarch 31, |  
|                         |  | 2008                        |   |  | 2007 |  
|Expected life (in years) |  | 6.2                         |   |  | 6.2  |  
|Expected volatility      |  | 55.0                        | % |  | 70.0 | %
|Risk-free interest rate  |  | 2.8                         | % |  | 4.7  | %
|Expected dividend yield  |  |                            |   |  |     |  

10. Common Stock

In January 2008, the Company completed a public offering of 7,000,000 shares of its common stock at a public offering price of $11.00 per share. Net cash proceeds from the public offering are estimated to be
approximately $71.5 million, after deducting underwriting discounts, commissions and estimated offering expenses payable by the Company. In February 2008, the underwriters exercised a portion of their overallotment option and purchased an
additional 326,435 shares of the Companys common stock, from which the Company received cash proceeds, net of underwriting discounts, of approximately $3.4 million.

11. Commitments and Contingencies

Credit and Security Agreement

In December 2006, the Company entered into a credit and security agreement with Merrill Lynch Capital, which as amended, provides for potential borrowing
until December 31, 2008 of up to $25.0 million. The Company is required to make monthly payments of principal and interest and all amounts outstanding under the credit and security agreement will become due and payable on the earlier of
July 1, 2011 or three years after the funding of any amounts under the agreement. Interest accrues on amounts outstanding at a base rate set forth in the agreement plus an applicable margin, which ranges from 3.75% to 4.25% based on the date of
borrowing (average of 9.2% on amounts outstanding at March 31, 2008). The loan is collateralized by substantially all of the Companys assets other than, subject to certain limited exceptions, intellectual property. Subject to certain
limited exceptions, amounts prepaid under the credit and security agreement are subject to a prepayment fee equal to 3% of the amount prepaid. In addition, upon repayment of the total amounts borrowed for any reason, the Company will be required to
pay an exit fee equal to the greater of $900,000 or 5% of the total amounts borrowed under the credit facility. Under the terms of the agreement, the Company is subject to operational covenants, including limitations on the Companys ability to
incur liens or additional debt, pay dividends, redeem stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions. As of March 31, 2008, $18.0 million has been drawn under this
agreement, of which $14.8 million is outstanding.



11



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##### Table of Contents

At March 31, 2008, future minimum principal payments under the credit and security agreement are as
follows:



|                      |  |   |        |  
|--------------------- |  | - | ------ | -
|Due in:               |  |   |        |  
|2008                  |  | $ | 3,720  |  
|2009                  |  |   | 6,026  |  
|2010                  |  |   | 4,046  |  
|2011                  |  |   | 1,000  |  
|                      |  |   |        |  
|                      |  |   | 14,792 |  
|Less: current portion |  |   | (5,175 | )
|                      |  |   |        |  
|                      |  | $ | 9,617  |  
|                      |  |   |        |  

Technology and License Agreement

Cypress Bioscience, Inc.

In
January 2005, the Company entered into a license agreement with Cypress whereby the Company sublicensed certain of its rights under a patent license agreement with Duke University (Duke) to Cypress for specified uses. As consideration
for this license, Cypress paid the Company non-refundable upfront fees of $1,500,000. The term of the license agreement generally extends until the licensed patent expires, which is expected to occur in 2023. Cypress can require the Company to
provide clinical support for any of the specified uses over the term of the agreement. Accordingly, this $1,500,000 is being recognized over 17 years, the estimated term of the agreement. In addition, Cypress is obligated to pay the Company a
royalty on net sales of any products covered by the sublicensed technology. Cypress may also be required to make future milestone payments to the Company of up to $57,000,000 upon its achievement of various regulatory milestones. In June 2006,
Cypress announced that the results of a completed Phase IIa trial did not support continuing its development program for obstructive sleep apnea, one of the specified uses under the agreement. Therefore, the Companys receipt of
$20,000,000 of milestone payments related to sleep apnea is unlikely at this time.

For the three months ended March 31, 2008 and 2007
and for the period September 12, 2002 (inception) to March 31, 2008, the Company recognized revenues under this agreement of $22,000, $22,000, and $287,000, respectively. At March 31, 2008 and December 31, 2007, deferred revenue
under this agreement totaled $1,213,000 and $1,235,000, respectively.

As a result of the Companys sublicensing of the Duke
technology to Cypress for specified uses, the Company may be required to make future payments to Duke of up to $5.7 million ($3.7 million excluding milestone payments related to sleep apnea) upon Cypresss achievement of various
regulatory milestones. The term of the Cypress agreement generally extends until the last licensed patent right expires, which is expected to occur in 2023. Either party may terminate the agreement upon delivery of written notice if the other party
commits fraud, willful misconduct, or illegal conduct of the other party with respect to the subject matter of the agreement. In addition, either party may terminate the agreement upon delivery of written notice if the other party commits a material
breach of its obligations and fails to remedy the breach within a specified period. Cypress may terminate the agreement for any reason upon delivery of written notice within the specified period. Cypress may also terminate with no notice if an
unfavorable judgment is entered against the Company or any other party relating to the patents we have sublicensed to Cypress. In addition, Cypress may terminate the agreement upon specified bankruptcy, liquidation or receivership proceedings.

12. Related Party Transactions

In
August 2006, the Company entered into a sponsored research agreement with Oregon Health & Science University (OHSU), one of the Companys stockholders, for work conducted by the laboratory of Dr. Michael Cowley, an
officer and employee of the Company. The agreement, which was terminated in February 2008, provided for payment by the Company to OHSU of up to approximately $847,500 over the 30 month term of the agreement and was primarily for the
continuation of research underlying the license agreement entered into between the Company and OHSU in June 2003. During the three months ended March 31, 2007, the Company paid $273,000 to OHSU in accordance with the terms of the agreement. At
March 31, 2008, the Company had recorded a receivable of approximately $100,000 for amounts paid to OHSU in excess of monies spent by OHSU on the Companys research.



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##### Table of Contents

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

The
following discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those
set forth below under Part II, Item 1A, Risk Factors. The interim financial statements and this Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the
financial statements and notes thereto for the year ended December 31, 2007 and the related Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form
10-K for the year ended December 31, 2007. Except as required by law, we assume no obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Background

We are a biopharmaceutical company focused on the development of pharmaceutical product candidates
for the treatment of central nervous system, or CNS, disorders, including obesity. Our lead product candidates targeted for obesity are Contrave®, which is in Phase III clinical
trials, and EmpaticTM, which is in the later stages of Phase II clinical development. Each of these product candidates is a combination of
generic drugs, which we have systematically screened for synergistic CNS activity. We seek to combine chemical entities that, individually, have already received regulatory approval and have been commercialized previously, into new product
candidates that we believe address unmet medical needs and are patentable. We are testing these combinations in an effort to demonstrate adequate efficacy and safety for potential regulatory approval. We have not yet received regulatory approval for
any product candidate. In addition, we plan to continue to screen drugs for synergistic CNS activity and, based on the results, we may advance other potential combination product candidates into clinical trials.

In addition, we have begun developing two additional product candidates: OREX-003 for the mitigation of weight gain associated with antipsychotic therapy
and OREX-004 for the treatment of obsessive-compulsive disorder.

We are a development stage company. We have incurred significant net
losses since our inception. As of March 31, 2008, we had an accumulated deficit of $130.1 million. These losses have resulted principally from costs incurred in connection with research and development activities, primarily costs of clinical
trial activities associated with our current product candidates, and general and administrative expenses. We expect to continue to incur operating losses for the next several years as we pursue the clinical development and market launch of our
product candidates and acquire or in-license additional products and technologies, and add the necessary infrastructure to support our growth.

In January 2008, we completed a public offering of 7,000,000 shares of common stock at a public offering price of $11.00 per share. Net cash proceeds from the public offering are estimated to be approximately $71.5 million, after
deducting underwriting discounts, commissions and estimated offering expenses payable by us. In February 2008, the underwriters exercised a portion of their overallotment option and purchased an additional 326,435 shares of our common stock,
from which we received cash proceeds, net of underwriting discounts, of approximately $3.4 million.

Revenues

We have generated approximately $461,000 in revenue from inception through March 31, 2008, resulting from the sublicensing of technology and amounts
earned under a collaborative agreement. During 2005, we sublicensed technology to Cypress Bioscience, Inc., or Cypress, for an upfront payment of $1.5 million, and this amount is being recognized ratably over the estimated life of the sublicensed
patent. In addition, we recognized revenue of approximately $174,000 during the year ended December 31, 2005 related to a collaborative agreement with Eli Lilly and Company, or Eli Lilly, the term of which has since expired. We do not expect to
generate any significant revenues from licensing, achievement of milestones or product sales unless and until we are able to obtain regulatory approval of, and commercialize, our product candidates either ourselves or with a collaborator. However,
we may never generate revenues from our product candidates as we may never succeed in obtaining regulatory approval or commercializing products.



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##### Table of Contents

Research and Development Expenses

The majority of our operating expenses to date have been incurred in research and development activities. Our research and development expenses consist
primarily of costs associated with clinical trials managed by our contract research organizations, or CROs, product development efforts and manufacturing costs. License fees, salaries and related employee benefits for certain personnel, and costs
associated with certain non-clinical activities such as regulatory expenses, are also included in this amount. Our most significant costs to date are expenses incurred in connection with the clinical trials for Contrave and Empatic. The clinical
trial expenses include payments to vendors such as CROs, investigators, suppliers of clinical drug materials and related consultants. We charge all research and development expenses to operations as incurred because the underlying technology
associated with these expenditures relates to our research and development efforts and has no alternative future uses.

At any time, we
have several ongoing research projects. Our internal research and development resources are not directly tied to any individual research project and are primarily deployed across our Contrave and Empatic programs, both of which target the obesity
market. We are developing our two obesity product candidates in parallel and, due to the fact that we use shared resources across projects, we do not maintain information regarding our internal costs incurred for our research and development
programs on a program-specific basis. We use external service providers to manage our clinical trials, to manufacture the product supplies used in these trials and for formulations development, consulting and other activities. Prior to 2007, our
external service providers did not generally bill us on a program-specific basis.

The following table summarizes our research and
development expenses for the three months ended March 31, 2008 and 2007. Costs that are not attributable to a specific research program are included in the Other category (in thousands):



|                                        |  |                             |        |      |   |       
|--------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                        |  | Three Months EndedMarch 31,
|                                        |  | 2008                        |        | 2007
|Costs of external service providers:    |  |                             |        |      |   |       
|Obesity                                 |  | $                           | 18,680 |      | $ | 9,039 
|Non-Obesity                             |  |                             | 286    |      |   | 11    
|Other                                   |  |                             | 88     |      |   | 298   
|                                        |  |                             |        |      |   |       
|Subtotal                                |  |                             | 19,054 |      |   | 9,348 
|Internal costs                          |  |                             | 1,068  |      |   | 437   
|Stock-based compensation                |  |                             | 565    |      |   | 343   
|                                        |  |                             |        |      |   |       
|Total research and development expenses |  | $                           | 20,687 |      | $ | 10,128
|                                        |  |                             |        |      |   |       

At this time, due to the risks inherent in the clinical trial process and given the early stage of
our product development programs, we are unable to estimate with any certainty the costs we will incur in the continued development of our product candidates for potential commercialization. Clinical development timelines, the probability of success
and development costs can differ materially from expectations. While we are currently focused on advancing each of our product development programs, our future research and development expenses will depend on the clinical success of each product
candidate, as well as ongoing assessments as to each product candidates commercial potential. In addition, we cannot forecast with any degree of certainty which product candidates will be subject to future collaborations, when such
arrangements will be secured, if at all, and to what degree such arrangements would affect our development plans and capital requirements.

We expect our development expenses to grow over the next few years as we continue the advancement of our product development programs. We initiated our Phase IIb clinical trial for Contrave in July 2005 and our Phase IIb clinical trial for
Empatic in July 2006. In the second quarter of 2007, we initiated our first two Phase III clinical trials for Contrave and in the fourth quarter of 2007, we initiated our last two Phase III clinical trials for Contrave. The lengthy process
of completing our clinical trials and seeking regulatory approval for our product candidates requires the expenditure of substantial resources. Any failure by us or delay in completing our clinical trials, or in obtaining regulatory approvals, could
cause a delay in the commencement of product revenues and cause our research and development expenses to increase and, in turn, have a material adverse effect on our results of operations. We do not expect any of our current product candidates to be
commercially available in major markets before 2010, if at all.

General and Administrative

Our general and administrative expenses consist primarily of salaries and related costs for personnel in executive, finance, accounting and internal
support functions. In addition, general and administrative expenses include professional fees for legal, consulting and accounting services. We anticipate increases in general and administrative expenses as we add personnel, comply with the
reporting obligations applicable to publicly-held companies, and continue to build our corporate infrastructure in support of our continued development and preparation for the potential commercialization of our product candidates.



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Other Income (Expense)

Other income consists of interest earned on our cash, cash equivalents and investment securities. Interest expense consists of interest incurred in
connection with the $25.0 million credit and security agreement, as amended, with Merrill Lynch Capital.

Income Taxes

As of December 31, 2007, we had federal and state net operating loss carryforwards of approximately $91.0 million and
$92.4 million, respectively. If not utilized, the net operating loss carryforwards will begin expiring in 2022 for federal purposes and 2012 for state purposes. As of December 31, 2007, we had federal and state research and development tax
credit carryforwards of approximately $5.3 million and $4.1million, respectively. The federal tax credits will begin expiring in 2023 unless previously utilized and the state tax credits carry forward indefinitely. Under Section 382 of the
Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, substantial changes in our ownership may limit the amount of net operating loss carryforwards that could be utilized annually in the future to offset taxable income. An
analysis was performed which indicated that multiple ownership changes have occurred in previous years which created annual limitations on our ability to utilize its net operating loss and tax credit carryovers. Such limitations will result in
approximately $900,000 of tax benefits related to net operating loss and tax credit carryforwards that will expire unused. Accordingly, the related net operating loss and research and development tax credit carryforwards have been removed from
deferred tax assets accompanied by a corresponding reduction of the valuation allowance. Due to the existence of the valuation allowance, limitations created by future ownership changes, if any, will not impact our effective tax rate.

Critical Accounting Policies and Estimates

Managements discussion and analysis of our financial condition and results of operations are based upon our financial statements which are prepared in accordance with accounting principles that are generally accepted in the United
States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, related disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. We continually evaluate our estimates and judgments, the most critical of which are those related to accounting for research and development expenses and
stock-based compensation costs. We base our estimates and judgments on historical experience and other factors that we believe to be reasonable under the circumstances. Materially different results can occur as circumstances change and additional
information becomes known.

There were no significant changes during the quarter ended March 31, 2008 to the items that we disclosed
as our critical accounting policies and estimates in Note 2 to our audited financial statements for the year ended December 31, 2007 in our Annual Report on Form 10-K for the year ended December 31, 2007, other than as follows:

Fair Value of Financial Assets and Liabilities

In September 2006, the Financial Accounting Standards Board issued Statement of Financial Standards (SFAS) No. 157, Fair Value Measurement, which defines fair value, establishes a framework for
measuring fair value and expands disclosures about fair value measurements. Effective January 1, 2008, we adopted the provisions of SFAS No. 157. We did not record a cumulative adjustment as a result of adopting SFAS No. 157.

In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or
liabilities that we have the ability to access. We classify money market funds as Level 1 assets. At March 31, 2008, our Level 1-classified investments totaled $20.3 million. Fair values determined by Level 2 inputs utilize
inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than
quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. We classify our holdings in commercial paper, U. S. government agency securities and asset-backed
securities as Level 2 assets. At March 31, 2008, our Level 2-classified investments totaled $117.6 million. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any,
market activity for the asset or liability. At March 31, 2008, we did not hold any Level 3-classified investments. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value
hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.



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Results of Operations

Comparison of three months ended March 31, 2008 to three months ended March 31, 2007

Revenues.Revenues for each of the three months ended March 31, 2008 and March 31, 2007 were $22,000, and were related to our sublicensed technology to Cypress.

Research and Development Expenses.Research and development expenses increased to $20.7 million for the three months ended
March 31, 2008 from $10.1 million for the comparable period during 2007. This increase of $10.6 million was due primarily to increased expenses in connection with clinical trials and consulting expenses totaling approximately $9.8
million. The remaining increase is primarily the result of increases in salaries and personnel related costs and stock-based compensation costs totaling approximately $750,000.

General and Administrative Expenses.General and administrative expenses increased to $3.3 million for the three months ended
March 31, 2008 from $2.4 million for the comparable period during 2007. This increase of $900,000 was principally due to an increase in stock-based compensation costs of approximately $290,000, an increase in salaries and personnel related
costs of approximately $280,000 and an increase in costs related to being a public company totaling approximately $250,000.

Interest
and Other Income.Interest income increased to $1.2 million for the three months ended March 31, 2008 from $357,000 for the comparable period during 2007. This increase of $843,000 was due to the increase in average cash and investment
balances as a result of our IPO in May 2007 and the public offering completed in January 2008.

Interest Expense.Interest
expense increased to $429,000 for the three months ended March 31, 2008 from $59,000 for the comparable period during 2007 due to interest expense incurred on the $18.0 million borrowed under the credit and security agreement as of
March 31, 2008.

Liquidity and Capital Resources

Since inception, our operations have been financed primarily through the sale of equity securities. Through March 31, 2008, we received net proceeds of approximately $238.6 million from the sale of shares of
our preferred and common stock as follows:



| |  |  | from September 12, 2002 to December 31, 2006, we issued and sold a total of 1,053,572 shares of common stock for aggregate net proceeds of $14,801;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in March 2004, we issued and sold a total of 9,322,035 shares of Series A redeemable convertible preferred stock for aggregate net proceeds of
$9.2 million and the conversion of promissory notes and interest thereon totaling $1.7 million;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | from April 2005 to May 2005, we issued and sold 14,830,509 shares of Series B redeemable convertible preferred stock for aggregate net proceeds of
$34.9 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in November 2006, we issued and sold a total of 8,771,930 shares of Series C convertible preferred stock for aggregate net proceeds of $29.9 million;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | in May 2007, we issued and sold a total of 8,050,000 shares of common stock for aggregate net proceeds of $87.9 million; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | in January and February 2008, we issued and sold a total of 7,326,435 shares of common stock for estimated aggregate net proceeds of $74.9 million.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

As of March 31, 2008, we had $33.4 million in cash and cash equivalents and an additional $107.6 million
in investment securities, available-for-sale. We have invested a substantial portion of our available cash in money market funds placed with reputable financial institutions for which credit loss is not anticipated and in corporate debt obligations.
In addition, we have established guidelines relating to diversification and maturities of our investments to preserve principal and maintain liquidity.



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Net cash used in operating activities was $19.5 million and $12.0 million for the three months
ended March 31, 2008 and 2007, respectively. Net cash used in each of these periods was primarily a result of external research and development expenses, clinical trial costs, personnel-related costs, third-party supplier expenses and
professional fees.

Net cash used by investing activities was $50.1 million and $2.4 million for the three months ended March 31,
2008 and 2007, respectively. These amounts are the result of the net purchases and maturities of investment securities.

Net cash provided
by financing activities was $74.0 million and $9.7 million for the three months ended March 31, 2008 and 2007, respectively. The net cash provided for the three months ended March 31, 2008 is primarily as a result of the public
sale of common stock in January and February 2008 for estimated aggregate net proceeds of $74.9 million and the net cash provided for the three months ended March 31, 2007 is primarily the result of the $10.0 million draw against the
credit and security agreement, as amended, with Merrill Lynch Capital in March 2007.

We cannot be certain if, when or to what extent we
will receive cash inflows from the commercialization of our product candidates. We expect our development expenses to be substantial and to increase over the next few years as we continue the advancement of our product development programs.

As a biopharmaceutical company focused on in-licensing and developing proprietary pharmaceutical product candidates, we have entered into
license agreements to acquire the rights to develop and commercialize our Contrave and Empatic product candidates. Pursuant to these agreements, we obtained exclusive licenses to the patent rights and know-how for selected indications and
territories. Under our license agreement with Duke University, we issued 442,624 shares of our common stock in March 2004 and may be required to make future milestone payments totaling up to $1.7 million upon the achievement of various
milestones related to regulatory or commercial events. Under our license agreement with Lee Dante, M.D., we issued an option to purchase 73,448 shares of our common stock in April 2004 at an exercise price of $0.10 per share, which expires
in April 2014. In April 2006, Dr. Dante exercised options with respect to 35,000 of these shares. We also paid Dr. Dante an upfront fee of $100,000 and may be required to make future milestone payments totaling up to $1.0 million upon
the achievement of a milestone related to a regulatory event. Under our license agreement with Oregon Health & Science University, we issued 76,315 shares of our common stock in December 2003 and paid an upfront fee of $65,000. Under
these three agreements, we are also obligated to pay royalties on any net sales of the licensed products.

Our future capital uses and
requirements depend on numerous factors. These factors include but are not limited to the following:



| |  |  | the progress of our clinical trials, including expenses to support the trials and milestone payments that may become payable;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to establish and maintain strategic collaborations, including licensing and other arrangements;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | the costs involved in enforcing or defending patent claims or other intellectual property rights;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of regulatory approvals;
| | - |  | ---------------------------------------------



| |  |  | the costs of establishing sales or distribution capabilities;
| | - |  | -------------------------------------------------------------



| |  |  | the successful commercialization of our products; and
| | - |  | -----------------------------------------------------



| |  |  | the extent to which we in-license, acquire or invest in other indications, products, technologies and businesses.
| | - |  | -----------------------------------------------------------------------------------------------------------------

In December 2006, we entered into a credit and security agreement with Merrill Lynch Capital providing for potential borrowing until June 30, 2007
of up to $17.0 million. In July 2007, we entered into a first amendment to the credit and security agreement with Merrill Lynch Capital. The first amendment provided for, among other things, the extension of the period during which Merrill
Lynch Capital was obligated to make advances under the credit and security agreement to us from June 30, 2007 to December 31, 2007. In November 2007, we entered into a second amendment to the credit and security agreement with Merrill
Lynch Capital. The second amendment provided for, among other things, the increase of the total amount available for advances under the credit and security agreement from $17.0 million to $25.0 million, our obligation to request an advance
of $8.0 million on or before December 31, 2007, and the extension of the period during which Merrill Lynch Capital is obligated to make advances to us under the credit and security agreement from December 31, 2007 to December 31,
2008.



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In March 2007, we drew down $10.0 million under the credit and security agreement, and in December
2007, we drew down $8.0 million. Under the credit and security agreement, we are required to make monthly payments of principal and interest and all amounts then outstanding will become due and payable upon the earlier to occur of July 1,
2011 or three years from the funding of any amounts under the agreement. Interest accrues on amounts outstanding under the agreement at a base rate set forth in the agreement plus an applicable margin, which ranges from 3.75% to 4.25% based on the
date of borrowing. Amounts outstanding under the credit and security agreement at March 31, 2008 bear interest at an average rate of 9.2%. The loan is collateralized by substantially all of our assets other than, subject to certain limited
exceptions, intellectual property. Subject to certain limited exceptions, amounts prepaid under the credit and security agreement are subject to a prepayment fee equal to 3% of the amount prepaid. In addition, upon repayment of the amounts borrowed
for any reason, we will be required to pay an exit fee equal to the greater of $900,000 or 5% of the total amounts borrowed under the credit facility. Under the terms of the agreement, we are subject to operational covenants, including limitations
on our ability to incur liens or additional debt, pay dividends, redeem our stock, make specified investments and engage in merger, consolidation or asset sale transactions, among other restrictions.

We believe that our existing cash and cash equivalents, along with the borrowing capacity under our credit and security agreement, as amended, with
Merrill Lynch Capital, will be sufficient to meet our projected operating requirements through at least the next 12 months.

Until we
can generate significant cash from our operations, we expect to continue to fund our operations with existing cash resources, proceeds of potential offerings of our equity securities, potential borrowings and potential corporate collaborations. In
addition, we may finance future cash needs through the sale of additional equity securities, strategic collaboration agreements and other debt financing. In addition, we cannot be sure that our existing cash and investment resources will be
adequate, that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to us or our stockholders. Having insufficient funds may require us to delay, scale back or eliminate some or all
of our development programs, relinquish some or even all rights to product candidates or renegotiate less favorable terms than we would otherwise choose. Failure to obtain adequate financing also may adversely affect our ability to operate as a
going concern. If we raise additional funds by issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring debt financing, the terms of the debt may involve significant cash
payment obligations as well as covenants and specific financial requirements that may restrict our ability to operate our business.

Off-Balance Sheet
Arrangements

We have not engaged in any off-balance sheet activities.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Our cash and cash equivalents as of
March 31, 2008 consisted primarily of money market funds, corporate debt obligations and U.S. government agency securities. We do not have any auction rate securities on our balance sheet, as they are not permitted by our investment policy. Our
primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because the majority of our investments are in short-term marketable debt securities. The
primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may be subject to
market risk. This means that a change in prevailing interest rates may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises,
the value of our investment will probably decline. To minimize this risk, we intend to continue to maintain our portfolio of cash equivalents and short-term investments in a variety of securities including commercial paper, money market funds and
government and non-government debt securities, all with various maturities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.



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

Disclosure Controls and Procedures

We maintain disclosure controls and procedures and internal controls that are designed to provide reasonable assurance that information required to be
disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures and internal controls,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable,



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and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to
apply its judgment in evaluating the cost benefit relationship of possible controls and procedures and internal controls.

As required by
the Securities and Exchange Commission Rule 13a-15(b), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective at the reasonable assurance level.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION



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

We are not currently a party to any material legal proceedings.



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

You should carefully consider the following risk factors, as well as the other
information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or
cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the factors described when evaluating our business.

We have marked with an asterisk (*) those risk factors that reflect substantive changes from the risk factors included in our
previously filed Annual Report on Form 10-K for the year ended December 31, 2007.

Risks Related to Our Business and Industry

We are largely dependent on the success of our two obesity product candidates in clinical
development: Contrave® (naltrexone/bupropion, each in a sustained release, or SR, formulation) and EmpaticTM(zonisamide SR/bupropion SR). We cannot be certain that either product candidate will receive regulatory approval or be successfully commercialized.

We currently have only a limited number of product candidates in clinical development, and our business currently depends entirely on their successful
development and commercialization. We currently have no drug products for sale and we may never be able to develop marketable drug products. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of drug products
are subject to extensive regulation by the U.S. Food and Drug Administration, or FDA, and other regulatory authorities in the United States and other countries, which regulations differ from country to country. We are not permitted to market
our product candidates in the United States until we receive approval of a new drug application, or NDA, from the FDA, or in any foreign countries until we receive the requisite approval from the regulatory authorities of such countries. We have not
submitted an NDA or received marketing approval for any of our product candidates. Obtaining approval of an NDA is a lengthy, expensive and uncertain process. The FDA also has substantial discretion in the drug approval process, including the
ability to delay, limit or deny approval of a product candidate for many reasons. For example:



| |  |  | the FDA may not deem a product candidate safe and effective;
| | - |  | ------------------------------------------------------------



| |  |  | the FDA may not find the data from preclinical studies and clinical trials sufficient to support approval;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | the FDA may require additional preclinical or clinical studies;
| | - |  | ---------------------------------------------------------------



| |  |  | the FDA may not approve of our third-party manufacturers processes and facilities; or
| | - |  | --------------------------------------------------------------------------------------



| |  |  | the FDA may change its approval policies or adopt new regulations.
| | - |  | ------------------------------------------------------------------

Contrave is currently being evaluated in Phase III clinical trials for the treatment of obesity and will require the successful completion of at least two pivotal clinical trials before we are able to submit an
NDA with respect to Contrave to the FDA for potential approval. Empatic is in the later stages of Phase II development and, following its Phase II clinical trials, also will



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need to successfully complete two or more pivotal trials prior to our submission of an NDA to the FDA for potential approval. Our product candidates may not
be approved even if they achieve their specified endpoints in these and future clinical trials. The FDA may disagree with our trial design and our interpretation of data from clinical trials, or may change the requirements for approval even after it
has reviewed and commented on the design for our clinical trials. The FDA may also approve a product candidate for fewer or more limited indications than we request, or may grant approval contingent on the performance of costly post-approval
clinical trials. In addition, the FDA may not approve the labeling claims that we believe are necessary or desirable for the successful commercialization of our product candidates. Any failure to obtain regulatory approval of Contrave or Empatic
would limit our ability to ever generate revenues (and any failure to obtain such approval for all of the indications and labeling claims we deem desirable could reduce our potential revenue) and would have a material and adverse impact on our
business.

Our clinical trials may fail to demonstrate acceptable levels of safety or efficacy of our product candidates, which could prevent or
significantly delay their regulatory approval.

Our product candidates are prone to the risks of failure inherent in drug
development. Before obtaining regulatory approvals for the commercial sale of Contrave, Empatic or any other product candidate for a target indication, we must demonstrate with substantial evidence gathered in well-controlled clinical trials, and,
with respect to approval in the United States, to the satisfaction of the FDA and, with respect to approval in other countries, similar regulatory authorities in those countries, that the product candidate is safe and effective for use for that
target indication.

With respect to Contrave, we submitted to the FDA in October 2006 the 24 week results of our Phase II
clinical trial, which we characterize as a Phase IIb trial because we believe the results from this clinical trial provide sufficient evidence of the superiority of the combination drug therapy to the individual monotherapies in the treatment of
obesity. We received correspondence from the FDA in December 2006 in which the FDA agreed that our future pivotal studies for Contrave could be performed against placebo only. This understanding was confirmed in our end-of-Phase-II meeting with the
FDA in October 2007. While the FDA has provided us with guidance on the general efficacy benchmarks required in pivotal trials for comparison against placebo, we may not be able to achieve these requirements or replicate the results observed in our
earlier Phase II and IIb clinical trials. Furthermore, the FDAs guidelines were set forth in correspondence and not in the form of a special protocol assessment and, therefore, may change in the future. However, the FDA issued draft
guidance on developing products for weight management in February 2007. The draft guidance provides recommendations on the design of studies evaluating the efficacy and safety of products intended to treat obesity. We believe the design of our
ongoing and planned pivotal clinical trials for Contrave is consistent with the recommendations made by the FDA in the draft guidance, and we therefore have not revised, and do not intend to revise, the design of our trials in response to the
guidance.

With respect to Empatic, we intend to conduct an additional Phase II clinical trial to establish that the combination is
more effective than the individual components. It is not clear what magnitude of superiority the FDA will require Empatic to demonstrate versus the most active individual component in order to agree that Phase III clinical trials may be
conducted against placebo only. We have not yet commenced any Phase III clinical trials for this product candidate.

In addition,
before we can submit an NDA to the FDA for potential regulatory approval, we may need to complete additional preclinical testing of our product candidates to evaluate safety and toxicity. The results from the preclinical and clinical trials that we
have completed for Contrave and Empatic may not be replicated in future trials, or we may be unable to demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for either product candidate. A number of companies in the
biotechnology and pharmaceutical industries have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. If our drug candidates are not shown to be safe and effective in clinical trials, our
clinical development programs could be delayed or terminated. Any delays could also result in the need for additional financing, and our failure to adequately demonstrate the efficacy and safety of Contrave, Empatic or any other product candidates
that we may develop, in-license or acquire would prevent receipt of regulatory approval and, ultimately, the commercialization of that product candidate.

Our bioequivalence studies may fail to demonstrate acceptable comparability between different formulations of Contrave used in our Phase III clinical trials and between formulations of Contrave used in our Phase III clinical
trials and the formulation of Contrave we intend to launch commercially.

Because different manufacturers and manufacturing methods
have been used during the Contrave development program, we will likely need to demonstrate comparable bioavailability and bioequivalence between the differing formulations of Contrave used in our Phase III clinical trials and between the
Phase III and commercial formulations of Contrave. If we are unable to demonstrate that the different Contrave formulations used in our Phase III clinical trials are bioequivalent to one another, or if we are unable to demonstrate that the
Contrave formulations used in our Phase III clinical trials are bioequivalent to the formulation we intend to launch commercially, then we may be required to repeat some or all of our Phase III clinical trials, or we may need to develop an
alternative commercial formulation that is bioequivalent. As a result, our ability to obtain approval of Contrave, if any, may be delayed.



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Our product candidates may cause undesirable side effects or have other properties that could delay or prevent
their regulatory approval or limit the commercial profile of any approved label.*

Undesirable side effects caused by our product
candidates could cause us or regulatory authorities to interrupt, delay or halt clinical trials and could result in a more restricted label or the delay or denial of regulatory approval by the FDA or other regulatory authorities. For example, in
each trial evaluating Contrave, some patients experienced nausea. We have developed new formulations and techniques in an effort to reduce the frequency and magnitude of this side effect; however, we are only in the early stages of blinded testing
of these methods in four current Phase III clinical trials. Other less common side effects reported in our Contrave trials were dizziness, insomnia and headaches. The most common side effects reported in our Phase IIb trial of Empatic have been
headache, nausea, insomnia, anxiety and dry mouth. In addition, the constituent drugs of each of our product candidates each has its own side effect profile that is included in its current product label. If our product candidates are approved by the
FDA we would anticipate that their labels would include the side effect profiles of each of the constituent drugs. Moreover, patients in our clinical trials may experience side effects that are indicated in the constituent drugs labels. In
addition, while the constituent drugs that make up Contrave and Empatic have post-marketing safety records and while we have tested these constituent drugs in combination in our clinical trials of Contrave and Empatic to date, the combination of
these constituent drugs is still being tested and has not received regulatory approval. Accordingly, the safety of their combined use is not yet fully known. The approvability and eventual labeling of Contrave and Empatic will be determined by the
safety experience with the drugs in the context of their relative merits (efficacy) in an obese population. For example, the Endocrinologic and Metabolic Drugs Advisory Committee convened by the FDA recently reviewed another companys obesity
product candidate, rimonabant, and determined not to recommend approval of the product candidate to the FDA, based on concerns regarding the safety profile of the product candidate (in particular, depression, suicidality and seizures) and the
potential for long-term use of the product by patients.

A key constituent of Contrave and Empatic is bupropion, which has been approved by
the FDA for the treatment of depression and to assist smoking cessation. The FDA has directed manufacturers of all antidepressant drugs to include in their product labels a black box warning and expanded warning statements regarding an
increased risk of suicidal thinking and behavior in children and adolescents being treated with these drugs. The package insert for bupropion includes such a black box warning statement. Although neither Contrave nor Empatic is intended
to be promoted for or used in the treatment of primary depression, many obese patients may experience depression and it is likely that there will be depressed obese patients who use these product candidates, if approved. We expect that a similar
warning statement will be required on labeling for both Contrave and Empatic. In December 2006, the FDA held an advisory committee meeting regarding suicidal thinking and behavior in adults being treated with antidepressant drugs. The advisory
committee recommended that the black box warning be extended to cover adults up to their mid-20s. We expect that any additional warnings or other labeling changes related to suicidal thinking and behavior in adults will be required
on labeling for both Contrave and Empatic. The FDA has also directed manufacturers of antidepressant drugs to create Medication Guides to be distributed to patients regarding the risk of suicidal thinking and behavior in children and adolescents.
Although we have not designed either the Contrave or Empatic programs for the treatment of children or adolescents, it is possible that the FDA will require a Medication Guide for both Contrave and Empatic. These warnings and other requirements may
have the effect of limiting the market acceptance by our targeted physicians and patients of Contrave and Empatic, if these product candidates are approved.

In addition, each of the constituent drugs included in the Contrave and Empatic combinations has in its package insert a Category C pregnancy precaution. This means that animal studies have shown that each
of these constituent drugs has the potential to cause birth defects and that there have been no adequate and well-controlled studies of the constituent drugs in pregnant women, but that the FDA has determined that the benefits from the use of such
drugs in pregnant women may be acceptable despite the potential risks.

Zonisamide, a constituent drug of Empatic, also has a warning that
women of childbearing age should be advised to use contraception due to the teratogenicity seen in animal studies. In addition, because of published concerns in academic journals regarding the possible developmental effects of zonisamide in animals
as well as reports from Japan in which women receiving zonisamide combined with other anticonvulsants had children with birth defects, it is likely that Empatic, if approved, will receive a Category X pregnancy precaution and thus, would
be contraindicated for use by pregnant or nursing women with warnings about use of Empatic in women of childbearing age. This means that there could be a limitation on the use of Empatic without adequate contraception or perhaps a prohibition on the
use of Empatic by all women of childbearing age. Although we have designed our clinical trials to educate women about the necessity of using adequate contraception while taking, and for a period of time after taking, our product candidates, women
may not take the necessary precautions to prevent pregnancy and as a result, women taking our product candidates may risk bearing children with birth defects. For example, during the ZB-201 trial, four women on Empatic



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became pregnant and carried the pregnancies to term. Three of the pregnancies resulted in normal infants at birth. In the fourth case, we understand that an
unspecified heart-related birth abnormality was corrected surgically. The fourth case has been reported by the investigator as a serious adverse event and possibly related to Empatic. This case is a complicated one with a number of plausible,
alternative etiologies.

Recently the FDA analyzed reports of suicidal behavior or ideation from placebo-controlled clinical studies of
eleven anticonvulsants (including zonisamide). In the FDAs analysis, patients receiving anticonvulsants had approximately twice the risk of suicidal behavior or ideation compared to patients receiving placebo. The relative risk for suicidal
behavior or ideation was higher in the patients with epilepsy compared to patients who were given one of the anticonvulsants for conditions other than epilepsy. The FDA has indicated that it will be working with manufacturers of marketed
anticonvulsants to include this new information in the labeling of these products. It is possible that any changes related to suicidal behavior or ideation that occur to the labels of these anticonvulsants will be required on the labeling for
Empatic.

If any of our product candidates receives marketing approval and we or others identify undesirable side effects caused by the
product, a number of potentially significant negative consequences could result, including:



| |  |  | regulatory authorities may withdraw their approval of the product;
| | - |  | ------------------------------------------------------------------



| |  |  | regulatory authorities may require the addition of labeling statements, such as a black box warning with Contrave or Empatic or a contraindication;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to create a Medication Guide outlining the risks of such side effects for distribution to patients;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | we may be required to change the way the product is administered, conduct additional clinical trials or change the labeling of the product;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we could be asked to formulate a risk evaluation mitigation strategy that could include a program of post-marketing surveillance or restricted distribution for
patients receiving our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we could be sued and held liable for injury caused to individuals exposed to or taking our product candidates; and
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | our reputation may suffer.
| | - |  | --------------------------

Any of
these events could prevent us from achieving or maintaining market acceptance of the affected product candidate and could substantially increase the costs of commercializing our product candidates.

Delays in the commencement or completion of clinical testing could result in increased costs to us and delay or limit our ability to generate revenues.

Delays in the commencement or completion of clinical testing could significantly affect our product development costs. We do not know
whether planned clinical trials will begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:



| |  |  | obtaining regulatory approval to commence a clinical trial;
| | - |  | -----------------------------------------------------------



| |  |  | reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive
negotiation and may vary significantly among different CROs and trial sites;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | manufacturing sufficient quantities of a product candidate for use in clinical trials;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | obtaining institutional review board, or IRB, approval to conduct a clinical trial at a prospective site;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | recruiting and enrolling patients to participate in clinical trials for a variety of reasons, including competition from other clinical trial programs for the
treatment of obesity or similar indications; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | retaining patients who have initiated a clinical trial but may be prone to withdraw due to side effects from the therapy, lack of efficacy or personal issues, or
who are lost to further follow-up.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Clinical trials may also be delayed as a result of ambiguous or negative interim results. In addition, a
clinical trial may be suspended or terminated by us, the FDA, the IRB overseeing the clinical trial at issue, any of our clinical trial sites with respect to that site, or other regulatory authorities due to a number of factors, including:



| |  |  | failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | inspection of the clinical trial operations or trial sites by the FDA or other regulatory authorities resulting in the imposition of a clinical hold;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen safety issues; and
| | - |  | -----------------------------



| |  |  | lack of adequate funding to continue the clinical trial.
| | - |  | --------------------------------------------------------

Additionally, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes. For instance, the FDA issued draft guidance on developing products
for weight management in February 2007, after we had established the design of our first Phase III clinical trial for Contrave. In addition, the Endocrinologic and Metabolic Drugs Advisory Committee convened by the FDA recently reviewed another
companys obesity product candidate, known as rimonabant, and determined not to recommend its approval to the FDA. In connection with its review of rimonabant, the committee discussed various aspects of the rimonabant development program, and
these discussions provided further insight on the FDAs view of what is and is not acceptable in connection with a clinical trial protocol for obesity product candidates. While we believe the designs of our ongoing and planned pivotal clinical
trials for Contrave are consistent with the current recommendations made by the FDA in the draft guidance and the advisory committees recent discussions, we cannot guarantee that the FDA will ultimately deem the design or execution of one or
more of our clinical trials to be sufficient to support regulatory approval, and that we will not be required to modify our ongoing clinical trials or to conduct additional clinical trials in order to obtain approval. Amendments in response to
changes in regulatory requirements or guidance may require us to resubmit our clinical trial protocols to IRBs for reexamination, which may impact the costs, timing or successful completion of a clinical trial. If we experience delays in completion
of, or if we terminate, any of our clinical trials, the commercial prospects for our product candidates may be harmed and our ability to generate product revenues will be delayed. In addition, many of the factors that cause, or lead to, a delay in
the commencement or completion of clinical trials may also ultimately lead to the denial of regulatory approval of a product candidate.

Our product
candidates are combinations of generically-available pharmaceutical products, and our success is dependent on our ability to compete against off-label generic substitutes and demonstrate the advantages of our proprietary combination products.

The patents we have in-licensed and our pending patent applications do not prevent physicians from prescribing the generic
constituents of our product candidates. We believe that a practitioner seeking safe and effective therapy is not likely to prescribe such off-label generics in place of Contrave or Empatic because the dosage strengths, pharmacokinetic profiles and
titration regimens recommended for our Contrave and Empatic product candidates are not available using existing generic preparations of immediate release, or IR, naltrexone, zonisamide IR and bupropion SR, and there are no oral generic SR
formulations of naltrexone or zonisamide. However, a physician could seek to prescribe off-label generics in place of Contrave or Empatic. Off-label use occurs when physicians prescribe a drug that is approved by the FDA for one indication for a
different, unapproved indication.

With regard to off-label substitution at the pharmacy level, we expect to rely on the novel dose ratios
and novel pharmacokinetic properties of our product candidates, as well as the differences in their approved indications, to provide sufficient distinction such that generic preparations are not considered therapeutic equivalents by the FDA. State
pharmacy laws in many instances only permit pharmacists to substitute generic products for branded products if the products are therapeutic equivalents. Therefore, the lack of therapeutic equivalency limits generic substitution by pharmacies and/or
pharmacy benefit managers. However, we cannot be certain that pharmacists and/or pharmacy benefit managers will not seek prescriber authorization to substitute generics in place of Contrave and Empatic, which could significantly diminish their
market potential.

In addition, although we believe the current market prices for the generic forms of naltrexone and zonisamide make
generic substitution by physicians, pharmacists or pharmacy benefit managers unlikely, should the prices of the generic forms decline, the motivation for generic substitution may become stronger. Wide scale generic substitution by physicians and at
the pharmacy level could have substantial negative consequences to our business.



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We rely primarily on third parties to conduct our clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize our product candidates within our expected timeframes or at all.

We currently rely primarily on Metropolitan Research Associates, or MRA, a CRO, to conduct our clinical trials for Contrave and Empatic, and we may
depend on other CROs and independent clinical investigators to conduct our clinical trials in the future. We utilize the services of HHI Clinical & Statistical Services to conduct our data management. The third parties with which we
contract for execution of our clinical trials play a significant role in the conduct of these trials and the subsequent collection and analysis of data. CROs and investigators are not our employees, and we have limited ability to control the amount
or timing of resources that they devote to our programs. If MRA, other CROs, consultants or independent investigators fail to devote sufficient time and resources to our drug development programs, or if their performance is substandard, it will
delay the potential approval of our regulatory applications and the commercialization of our product candidates. In addition, the execution of clinical trials, and the subsequent compilation and analysis of the data produced, requires coordination
among various parties. In order for these functions to be carried out effectively and efficiently, it is imperative that these parties communicate and coordinate with one another. If these third parties are unable to coordinate and communicate with
one another, our clinical trials may be delayed or the completion and analysis of the data may be delayed or compromised. Moreover, these independent investigators and CROs may also have relationships with other commercial entities, some of which
may compete with us. If independent investigators and CROs also contract to provide services for our competitors, it could adversely affect our business.

We expect intense competition in the obesity marketplace for Contrave and Empatic, and new products may emerge that provide different or better therapeutic alternatives for obesity and weight loss.*

If approved and commercialized, both Contrave and Empatic will compete with well established prescription drugs for the treatment of obesity, including
Xenical (orlistat), marketed by Roche Laboratories Inc., and Meridia (sibutramine), marketed by Abbott Laboratories. Orlistat has also been launched by GlaxoSmithKline in over-the-counter form under the brand name alli, which represents additional
competition and potential negative pricing pressure. Both orlistat and sibutramine are marketed by pharmaceutical companies with substantially greater resources than we have. In addition, a number of generic pharmaceutical products are prescribed
for obesity, including phentermine, phendimetrazine, benzphetamine and diethylpropion. Some of these generic drugs, and others, are prescribed in combinations that have shown anecdotal evidence of efficacy. These products are sold at much lower
prices than we intend to charge for our product candidates, if approved. The availability of a large number of branded prescription products, generic products and over-the-counter products could limit the demand for, and the price we are able to
charge for, our product candidates.

Currently there are a number of products in development for obesity which could become competitors
against our product candidates. These include products being developed by Arena Pharmaceuticals, Inc., Amylin Pharmaceuticals, Inc., Alizyme plc, Athersys, Inc., Genaera Corporation, Merck & Co., Inc., Nastech Pharmaceutical Co., Inc.,
Neurosearch A/S, Sanofi-Aventis, and Vivus, Inc., among others. Based on reports from these companies, it appears that some of these product candidates are entering into later stage clinical trials.

Rimonabant, the Sanofi-Aventis compound, has been approved in certain countries outside of the United States. On June 13, 2007, the Endocrinologic
and Metabolic Drugs Advisory Committee convened by the FDA recommended unanimously against approval of rimonabant for use in obese patients. Although such recommendations are not binding on the FDA, on June 29, 2007, Sanofi-Aventis announced
its decision to withdraw the rimonabant NDA in the United States. Sanofi-Aventis could, however, resubmit an amended NDA at some point in the future.

New developments, including the development of other drug technologies and methods of preventing the incidence of disease, occur in the pharmaceutical and medical technology industries at a rapid pace. These
developments may render our product candidates less competitive. Some of our potential competitors are large pharmaceutical or device firms and have substantially greater resources than we have. These resources could be directed toward the obesity
market and include:



| |  |  | research and development resources, including personnel and technology;
| | - |  | -----------------------------------------------------------------------



| |  |  | regulatory experience;
| | - |  | ----------------------



| |  |  | drug development and clinical trial experience;
| | - |  | -----------------------------------------------



| |  |  | experience and expertise in exploitation of intellectual property rights; and
| | - |  | -----------------------------------------------------------------------------



| |  |  | capital resources.
| | - |  | ------------------



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As a result of these factors, our competitors may obtain regulatory approval of their products more
rapidly than we do or may obtain patent protection or other intellectual property rights that limit our ability to develop or commercialize our product candidates. Our competitors may also develop drugs that are more effective, more useful and less
costly than ours and may also be more successful in manufacturing and marketing their products. We currently outsource our manufacturing and therefore rely on third parties for that competitive expertise. There can be no assurance that we will be
able to develop or contract for these capabilities on acceptable economic terms, or at all. In addition, should both Contrave and Empatic be approved to treat obesity, these product candidates may compete with one another. We are developing Contrave
to treat mild to moderate obesity, especially in women with food craving. We are developing Empatic to treat more severe obesity, especially in men and in women beyond the childbearing years. While we intend to direct each product candidate to
specific segments of the obesity marketplace, the FDA does not distinguish between these types of obesity and, if approved, any potential label for Contrave and Empatic would be expected to refer to obesity generally. There is no guarantee that we
will be successful in marketing Contrave and Empatic to their respective target markets or minimizing competition between them.

We have limited
sales and marketing experience or resources, and we may not be able to effectively market and sell our products.

We are developing
our obesity product candidates for large markets traditionally served by general and family practitioners and internists. Generalist physicians number in the several hundred thousand in the United States. Traditional pharmaceutical companies employ
groups of sales representatives numbering in the thousands to call on this large generalist physician population. In order to adequately address these physician groups, we must either establish sales and marketing collaborations or co-promotion
arrangements or expend significant resources to develop our own sales and marketing presence. We currently possess limited resources and may not be successful in establishing collaborations or co-promotion arrangements on acceptable terms, if at
all. We also face competition in our search for collaborators, co-promoters and sales force personnel. By entering into strategic collaborations or similar arrangements, we may rely on third parties for financial resources and for development,
commercialization, sales and marketing and regulatory expertise. Our collaborators may fail to develop or effectively commercialize our product candidates because they cannot obtain the necessary regulatory approvals or decide to pursue a
competitive potential product that may be developed outside of the collaboration. Even if we are able to identify suitable collaborators to assist in the commercialization of our product candidates, they may fail to devote the resources necessary to
realize the full commercial potential of our product candidates.

Our development and commercialization strategy depends upon access to findings of
safety and effectiveness based on data not developed by us but which the FDA may reference in reviewing our U.S. marketing applications. In territories outside the United States, we must either negotiate access to these safety and effectiveness
findings or develop them ourselves.

The Drug Price Competition and Patent Term Restoration Act of 1984, also known as the
Hatch-Waxman Act, added Section 505(b)(2) to the Federal Food, Drug, and Cosmetic Act. Section 505(b)(2) permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for
the applicant and for which the applicant has not obtained a right of reference. This statutory provision expressly allows the FDA to rely, for purposes of approving an NDA, on findings of safety and effectiveness based on data not developed by the
filer of the NDA. Under these guidelines, we were able to move directly into Phase II clinical trials for each of our drug combinations, because our planned NDAs will rely, in part, upon the FDAs findings of safety and effectiveness for
the previously-approved products that are incorporated into Contrave and Empatic. Analogous legislation does not exist in other countries. In territories where data are not freely available, we may not have the ability to commercialize our products
without negotiating rights from third parties to refer to their clinical data in our regulatory applications, which could require the expenditure of significant additional funds to generate our own data. We may be unable to obtain rights to the
necessary clinical data and may be required to develop our own proprietary safety and manufacturing dossiers. In addition, even though we can take advantage of Section 505(b)(2) to support potential U.S. approval for our Contrave and
Empatic product candidates, the FDA may also require us to perform additional studies or measurements to support changes from the previously-approved products incorporated into our product candidates.

To the extent that a Section 505(b)(2) application relies on the FDAs finding of safety and effectiveness of a previously-approved drug, the applicant is
required to certify to the FDA concerning any patents listed for the approved product in the FDAs publication called Approved Drug Products with Therapeutic Equivalence Evaluations, otherwise known as the Orange Book.
Specifically, the applicant must certify when the application is submitted that: (1) there is no patent information listed; (2) the listed patent has expired; (3) the listed patent has not expired, but will expire on a particular date
and approval is sought after patent expiration; or (4) the listed patent is invalid or will not be infringed by the manufacture, use, or sale of the new product. A certification that the new product will not infringe the already approved
products Orange Book listed patents or that such patents are invalid is called a



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paragraph IV certification. If the applicant has provided a paragraph IV certification to the FDA, the applicant must also send notice of the
paragraph IV certification to the NDA holder and patent owner. When we file our NDAs for Contrave and Empatic, we intend to make paragraph IV certifications that our products do not infringe the bupropion SR formulation patents listed in
the Orange Book, and send the appropriate notice to the patent holder and NDA holder. In the event that the patent holder or NDA holder files a patent infringement lawsuit against us within 45 days of its receipt of our paragraph IV
certification, such lawsuit would automatically prevent the FDA from approving our Section 505(b)(2) NDA until the earliest of 30 months, expiration of the patent (2013), settlement of the lawsuit or a decision in the infringement case
that is favorable to us. Any such patent infringement lawsuit could be costly, take a substantial amount of time to resolve and divert management resources. If we obtain FDA approval for either Contrave or Empatic, we could obtain three years of
Hatch-Waxman marketing exclusivity for such product, assuming we obtain the first approval for either product candidate for the indication supported by the clinical studies we conducted. Under this form of exclusivity, the FDA would be precluded
from approving a marketing application for a duplicate drug product (for example, a product that incorporates the change or innovation represented by our product) for a period of three years, although the FDA may accept and commence review of such
applications. However, this form of exclusivity might not prevent the FDA from approving an NDA that relies on its own clinical data to support the change or innovation. Further, if another company obtains approval for either product candidate for
the same indication we are studying before we do, our approval could be blocked until the other companys Hatch-Waxman marketing exclusivity expires.

Even if our product candidates receive regulatory approval, they may still face future development and regulatory difficulties.

Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a products indicated uses or marketing or impose ongoing requirements for potentially costly post-approval
studies. For example, the label ultimately approved for Contrave or Empatic, if any, may include restrictions on use, including restrictions based on pregnancy status, level of obesity and duration of treatment or a black box warning
related to general concerns regarding antidepressants or otherwise. The FDA may also require the distribution of a Medication Guide to patients outlining the increased risk of suicidal thinking or behavior in children and adolescents or other
populations. The FDA could also require a registry to track the patients utilizing the product. Our product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, advertising, promotion, recordkeeping
and submission of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with
current good manufacturing practices, or cGMP, regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the
product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturer or us, including requiring withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the
manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:



| |  |  | issue warning letters or untitled letters;
| | - |  | ------------------------------------------



| |  |  | impose civil or criminal penalties;
| | - |  | -----------------------------------



| |  |  | suspend regulatory approval;
| | - |  | ----------------------------



| |  |  | suspend any ongoing clinical trials;
| | - |  | ------------------------------------



| |  |  | refuse to approve pending applications or supplements to applications filed by us;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | impose restrictions on operations, including costly new manufacturing requirements; or
| | - |  | --------------------------------------------------------------------------------------



| |  |  | seize or detain products or require us to initiate a product recall.
| | - |  | --------------------------------------------------------------------

Even if our product candidates receive regulatory approval in the United States, we may never receive approval or commercialize our products outside of the United States.

In order to market any products outside of the United States, we must establish and comply with numerous and varying regulatory requirements of other
countries regarding safety and efficacy. Approval procedures vary among countries and can involve additional product testing and additional administrative review periods. The time required to obtain approval in other countries might differ from that
required to obtain FDA approval. The regulatory approval process in other countries may include all of the risks detailed above regarding FDA approval in the United States as well as other risks. Regulatory approval in one country does not ensure
regulatory approval in another, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in others. Failure to obtain regulatory approval in other countries or any delay or setback
in obtaining such



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approval could have the same adverse effects detailed above regarding FDA approval in the United States. As described above, such effects include the risks
that our product candidates may not be approved for all indications requested, which could limit the uses of our product candidates and have an adverse effect on their commercial potential or require costly, post-marketing follow-up studies.

If the suppliers upon whom we rely for active pharmaceutical ingredients, or API, fail to produce such ingredients in the volumes that we require on
a timely basis, or to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the conduct of our clinical trials.

We do not manufacture any of our API nor do we plan to develop any capacity to do so. Instead, we rely on suppliers of API to provide component materials to our other contract manufacturers, who produce finished
pharmaceutical products incorporating the API for use in our clinical trials. Currently, we have only one supplier for zonisamide API, a component in our Empatic product candidate, one supplier of naltrexone API, a component in our Contrave product
candidate, and one supplier of bupropion API, a component in each of our Empatic and Contrave product candidates.

While a number of
manufacturers are FDA-qualified to produce zonisamide and bupropion, and we have already entered into negotiations with other suppliers to act as secondary or supplemental suppliers of these ingredients, we may not be successful in securing these
additional supply arrangements on a timely or commercially reasonable basis or at all. The failure or inability of our API suppliers to satisfy our API requirements on a timely basis could cause a disruption of our trials and delay our development
program.

Although naltrexone itself is not addictive, synthesis of naltrexone is a multi-step process with a natural opiate starting
material that has the potential for abuse and is therefore regulated as a controlled substance under the Federal Controlled Substance Act. As such, manufacturers of naltrexone API must be registered by the Drug Enforcement Administration, or DEA.
Manufacturers making naltrexone also must obtain annual quotas from the DEA for the opiate starting material. Because of the DEA-related requirements and modest current demand for naltrexone API, there exist few current manufacturers of this API.
Therefore, API costs for naltrexone are greater than for the other constituents of our product candidates. Demand for Contrave may require amounts of naltrexone greater than the currently available worldwide supply. Any lack of sufficient quantities
of naltrexone would limit our ability to complete our planned clinical trials and commercially launch Contrave. Although we are evaluating additional possible manufacturers to supplement our current naltrexone manufacturing capacity, including those
in the United States, Europe and Asia, we may not be successful in accessing additional manufacturing supply of naltrexone API or other necessary components of our product candidates at the appropriate quantities, quality or price.

To date, all of our purchases of API have been completed by purchase orders. We have no long-term commitments or supply agreements with any of our API
suppliers. Although we may seek to establish long-term supply commitments in the future, we may be required to agree to minimum volume requirements, exclusivity arrangements or other restrictions. We may not be able to enter into long-term
agreements on commercially reasonable terms, or at all. Consequently, even if and when our product candidates are approved, we may not be able to successfully commercialize these product candidates if we are unable to secure long-term supply
commitments for their API components.

If the contract manufacturers upon whom we rely fail to produce our product candidates in the volumes that we
require on a timely basis, or fail to comply with stringent regulations applicable to pharmaceutical drug manufacturers, we may face delays in the development and commercialization of our product candidates.

We do not currently possess nor do we plan to implement manufacturing processes internally. We currently utilize the services of contract manufacturers
to manufacture our clinical supplies. These clinical supplies include the formulations of our product candidates components using the API from our API suppliers, the tablets combining those components and the Contrave Titration Packs, Empatic
Titration Packs and bottles used to package these tablets for use in clinical trials. To date, all of these contract manufacturers have performed services under short-term purchase orders or similar arrangements. We have no long-term commitments or
supply agreements with these contract manufacturers. For example, Patheon currently manufactures bupropion SR as well as finished Contrave tablets for our Contrave Phase III clinical trials on a proposal by proposal basis under a master
agreement for pharmaceutical development services that we entered into in February 2007. Either party may terminate the agreement upon notice if the other party commits a material breach of its obligations and fails to remedy the breach within
30 days. In addition, we may terminate the agreement immediately for any business reason.

With respect to the manufacturing for our
commercial scale product, we intend to eventually pursue long-term agreements with our current manufacturers or transfer the manufacturing to other larger manufacturers. There can be no assurance we will be able to transfer any manufacturing
processes to other larger manufacturers. Furthermore, we may be required to agree to minimum volume



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requirements, exclusivity arrangements or other restrictions. We may not be able to enter into long-term agreements on commercially reasonable terms, or at
all. If we change to other manufacturers, the FDA and comparable foreign regulators must approve these manufacturers facilities and processes prior to use, which would require new testing and compliance inspections, and the new manufacturers
would have to be educated in or independently develop the processes necessary for the production of our product candidates.

The
manufacture of pharmaceutical products requires significant expertise and capital investment, including the development of advanced manufacturing techniques and process controls. Manufacturers of pharmaceutical products often encounter difficulties
in production, particularly in scaling up initial production. These problems include difficulties with production costs and yields, quality control, including stability of the product candidate and quality assurance testing, shortages of qualified
personnel, as well as compliance with strictly enforced federal, state and foreign regulations. If our manufacturers were to encounter any of these difficulties or otherwise fail to comply with their obligations to us, our ability to provide product
candidates to patients in our clinical trials would be jeopardized. Any delay or interruption in the supply of clinical trial supplies could delay the completion of our clinical trials, increase the costs associated with maintaining our clinical
trial program and, depending upon the period of delay, require us to commence new trials at significant additional expense or terminate the trials completely.

In addition, all manufacturers of our products must comply with cGMP requirements enforced by the FDA through its facilities inspection program. These requirements include, among other things, quality control, quality
assurance and the generation and maintenance of records and documentation. Manufacturers of our products may be unable to comply with these cGMP requirements and with other FDA, state and foreign regulatory requirements. We have little control over
our manufacturers compliance with these regulations and standards. A failure to comply with these requirements may result in fines and civil penalties, suspension of production, suspension or delay in product approval, product seizure or
recall, or withdrawal of product approval. If the safety of any product supplied is compromised due to our manufacturers failure to adhere to applicable laws or for other reasons, we may not be able to obtain regulatory approval for or
successfully commercialize our products, and we may be held liable for any injuries sustained as a result. Any of these factors could cause a delay of clinical trials, regulatory submissions, approvals or commercialization of our product candidates,
entail higher costs or result in our being unable to effectively commercialize our products. Furthermore, if our manufacturers fail to deliver the required commercial quantities on a timely basis, pursuant to provided specifications and at
commercially reasonable prices, we may be unable to meet demand for our products and would lose potential revenues.

Bupropion, which is an API in
both Contrave and Empatic, is known to have issues with stability.

Bupropion, which is an API in both Contrave and Empatic, is
known to have issues with stability that require manufacturing processes that minimize exposure to moisture and limit oxidation. We are performing stability testing to ensure that our combination tablet of Contrave has sufficient stability to
provide the customary two-year stability characteristics and shelf life expected of a conventional pharmaceutical product. Although we are currently conducting stability studies, we cannot be sure that either Contrave or Empatic will be stable, and
we may not be able to demonstrate sufficient long-term stability to provide at least two years of shelf life for these product candidates, which could jeopardize our ability to bring such product candidates to market.

We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability.

The use of our product candidates in clinical trials and the sale of any products for which we obtain marketing approval expose us to the risk of product
liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend ourselves
against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in:



| |  |  | decreased demand for our product candidates;
| | - |  | --------------------------------------------



| |  |  | impairment of our business reputation;
| | - |  | --------------------------------------



| |  |  | withdrawal of clinical trial participants;
| | - |  | ------------------------------------------



| |  |  | costs of related litigation;
| | - |  | ----------------------------



| |  |  | distraction of managements attention from our primary business;
| | - |  | ----------------------------------------------------------------



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| |  |  | substantial monetary awards to patients or other claimants;
| | - |  | -----------------------------------------------------------



| |  |  | loss of revenues; and
| | - |  | ---------------------



| |  |  | the inability to commercialize our product candidates.
| | - |  | ------------------------------------------------------

We have obtained product liability insurance coverage for our clinical trials with a $10.0 million annual aggregate coverage limit. Our insurance coverage may not be sufficient to reimburse us for any expenses or
losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability.
If and when we obtain marketing approval for any of our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially
reasonable terms. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. A successful product liability claim or series of claims brought against us could cause our stock price to
decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business.

If any of our product candidates
for which we receive regulatory approval does not achieve broad market acceptance, the revenues that we generate from their sales will be limited.

The commercial success of our product candidates for which we obtain marketing approval from the FDA or other regulatory authorities will depend upon the acceptance of these products by both the medical community and
patient population. Coverage and reimbursement of our product candidates by third-party payors, including government payors, generally is also necessary for optimal commercial success. The degree of market acceptance of any of our approved products
will depend on a number of factors, including:



| |  |  | our ability to provide acceptable evidence of safety and efficacy;
| | - |  | ------------------------------------------------------------------



| |  |  | the relative convenience and ease of administration;
| | - |  | ----------------------------------------------------



| |  |  | the prevalence and severity of any adverse side effects;
| | - |  | --------------------------------------------------------



| |  |  | limitations or warnings contained in a products FDA-approved labeling, including, for example, potential black box warnings or pregnancy
precautions associated with the APIs in Contrave and/or Empatic;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | availability of alternative treatments, including, in the case of Contrave and/or Empatic, a number of competitive products already approved for the treatment of
weight loss or expected to be commercially launched in the near future;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | pricing and cost effectiveness;
| | - |  | -------------------------------



| |  |  | the effectiveness of our or any future collaborators sales and marketing strategies;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our ability to obtain sufficient third-party coverage or reimbursement; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the willingness of patients to pay out of pocket in the absence of third-party coverage.
| | - |  | ----------------------------------------------------------------------------------------

If our product candidates are approved but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not
generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources
and may never be successful.

We are subject to uncertainty relating to reimbursement policies which, if not favorable to our product candidates,
could hinder or prevent our product candidates commercial success.

Our ability to commercialize our product candidates
successfully will depend in part on the extent to which governmental authorities, private health insurers and other third-party payors establish appropriate coverage and reimbursement levels for our product candidates and related treatments. As a
threshold for coverage and reimbursement, third-party payors generally require that drug products have been approved for marketing by the FDA. Third-party payors also are increasingly challenging the effectiveness of and prices charged for medical
products and services. We cannot provide any assurances that we will be able to obtain third-party coverage or reimbursement for our product candidates in whole or in part.



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The obesity market, in particular, continues to be marked by limited coverage and reimbursement from
health insurers and other payors, who have historically viewed obesity as a lifestyle issue. For example, state Medicaid programs, administered by individual states for qualifying low income individuals, are permitted to exclude coverage for weight
loss drugs. In addition, weight loss drugs are excluded from coverage under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 designed for eligible seniors and disabled individuals and which went into effect on
January 1, 2006.

Currently, our competitors drug products have limited third-party payor coverage. This means that individuals
prescribed such drug products often either have significant out-of-pocket costs or pay for the products entirely by themselves. If our product candidates do not receive adequate coverage or reimbursement, the market acceptance and commercial success
of our products may be limited.

Recently, the Medicare program, a federal governmental third-party payor whose policies often are emulated
or adopted by other payors, has removed longstanding policy language that obesity itself cannot be considered an illness. This deletion did not alter the statutory prohibition on drug reimbursement by Medicare or result in a change to coverage for
particular obesity-related procedures, and treatment for obesity alone remains uncovered. However, the Medicare program has since issued a national policy recognizing coverage for bariatric surgery for co-morbid conditions associated with obesity.
Although third-party payor attitudes regarding obesity-related products and services appear to be changing, as exemplified by Medicare changes, we may continue to face a poor coverage and reimbursement environment.

Our failure to successfully acquire, develop and market additional product candidates or approved products would impair our ability to grow.

As part of our growth strategy, we intend to acquire, in-license, develop and/or market additional products and product candidates. Because our internal
research capabilities are limited, we may be dependent upon pharmaceutical and biotechnology companies, academic scientists and other researchers to sell or license products or technology to us. The success of this strategy depends partly upon our
ability to identify, select and acquire promising pharmaceutical product candidates and products.

The process of proposing, negotiating
and implementing a license or acquisition of a product candidate or approved product is lengthy and complex. Other companies, including some with substantially greater financial, marketing and sales resources, may compete with us for the license or
acquisition of product candidates and approved products. We have limited resources to identify and execute the acquisition or in-licensing of third-party products, businesses and technologies and integrate them into our current infrastructure.
Moreover, we may devote resources to potential acquisitions or in-licensing opportunities that are never completed, or we may fail to realize the anticipated benefits of such efforts. We may not be able to acquire the rights to additional product
candidates on terms that we find acceptable, or at all.

In addition, future acquisitions may entail numerous operational and financial
risks, including:



| |  |  | exposure to unknown liabilities;
| | - |  | --------------------------------



| |  |  | disruption of our business and diversion of our managements time and attention to develop acquired products or technologies;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | incurrence of substantial debt or dilutive issuances of securities to pay for acquisitions;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | higher than expected acquisition and integration costs;
| | - |  | -------------------------------------------------------



| |  |  | increased amortization expenses;
| | - |  | --------------------------------



| |  |  | difficulty and cost in combining the operations and personnel of any acquired businesses with our operations and personnel;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | impairment of relationships with key suppliers or customers of any acquired businesses due to changes in management and ownership; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to retain key employees of any acquired businesses.
| | - |  | -------------------------------------------------------------



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Further, any product candidate that we acquire may require additional development efforts prior to
commercial sale, including extensive clinical testing and approval by the FDA and applicable foreign regulatory authorities. All product candidates are prone to risks of failure typical of pharmaceutical product development, including the
possibility that a product candidate will not be shown to be sufficiently safe and effective for approval by regulatory authorities. In addition, we cannot provide assurance that any products that we develop or approved products that we may acquire
will be commercialized profitably or achieve market acceptance.

Healthcare reform measures could hinder or prevent our product candidates
commercial success.

Among policy makers and payors in the United States and elsewhere, there is significant interest in promoting
changes in health care systems to contain health care costs and improve quality. While reform proposals often involve expanding coverage to more individuals, health care reform may also involve increased government price controls, additional
regulatory mandates and other measures designed to lower medical and pharmaceutical costs. Within the United States, the pharmaceutical industry has been a particular focus of both the U.S. Congress, as well as state governments. Proposed
reforms include, but are not limited to, increasing regulation of pharmaceutical representatives, restricting direct to consumer advertising and off-label uses, limiting manufacturers access to marketing data, requiring greater reliance on
comparative effectiveness reviews of competing drugs, increasing use of electronic prescribing and authorizing the re-importation of drugs from Canada and other foreign countries to lower pharmaceutical costs to U.S. consumers.

We cannot predict the initiatives that may be adopted in the future. The continuing efforts of the government, insurance companies, managed care
organizations and other payors of health care services to contain or reduce costs of health care may adversely affect:



| |  |  | our ability to set a price we believe is fair for our products;
| | - |  | ---------------------------------------------------------------



| |  |  | our ability to generate revenues and achieve or maintain profitability; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | the availability of capital.
| | - |  | ----------------------------

We will need to
increase the size of our organization, and we may experience difficulties in managing growth.*

As of May 1, 2008, we had
32 full-time employees and two part-time employees. We will need to continue to expand our managerial, operational, financial and other resources in order to manage our operations and clinical trials, continue our development activities and
commercialize our current and any of our future product candidates. Our management and personnel and systems currently in place may not be adequate to support this future growth. Our need to effectively execute our growth strategy requires that we:



| |  |  | manage our clinical trials effectively, including our ongoing Phase III clinical trials for Contrave which are being conducted at numerous clinical trial sites
and our upcoming Phase II clinical trial for Empatic;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | manage the manufacturing and development of Contrave and Empatic;
| | - |  | -----------------------------------------------------------------



| |  |  | manage our internal development efforts effectively while carrying out our contractual obligations to licensors, contractors, collaborators and other third parties;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continue to improve our operational, financial and management controls, reporting systems and procedures; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | attract and retain the breadth and depth of sufficient numbers of talented employees.
| | - |  | -------------------------------------------------------------------------------------

We have traditionally utilized the services of outside vendors to perform tasks including clinical trial management, statistics, regulatory affairs,
formulation development, pharmacokinetics and other drug development functions. Our growth strategy may also entail expanding our group of contractors to implement these tasks going forward. Because we rely on a substantial number of consultants,
effectively outsourcing many key functions of our business, we will need to be able to effectively manage these consultants to ensure that they successfully carry out their contractual obligations and meet expected deadlines. However, if we are
unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by consultants is compromised for any reason, our clinical trials or other development activities may be extended, delayed or terminated,
and we may not be able to obtain regulatory approval for our product candidates or otherwise advance our business. There can be no assurance that we will be able to manage our existing consultants or find other competent outside contractors and
consultants on economically reasonable terms, or at all.



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We may not be able to manage our business effectively if we are unable to attract and retain key personnel.

We may not be able to attract or retain qualified management and scientific and clinical personnel in the future due to the
intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses, particularly in the San Diego, California area. Our industry has experienced a high rate of turnover of management personnel in recent years.
If we are not able to attract, retain and motivate necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional
capital and our ability to implement our business strategy.

We are highly dependent on the development, regulatory, commercial and
financial expertise of our senior management, particularly Gary D. Tollefson, M.D., Ph.D., our President and Chief Executive Officer. If we lose any members of our senior management team, we may not be able to find suitable replacements,
and our business may be harmed as a result. However, we are not aware of any key personnel who have plans to retire or leave our company in the near future. In addition to the competition for personnel, the San Diego area in particular is
characterized by a high cost of living. As such, we could have difficulty attracting experienced personnel to our company and may be required to expend significant financial resources in our employee recruitment and retention efforts.

Although we have employment agreements with each of our executive officers, these agreements are terminable at will at any time with or without notice
and, therefore, we may not be able to retain their services as expected. In addition, certain of our executive officers are only required to devote a portion of their full business time to our business, and therefore may not contribute as much to
our growth and development as a full-time member of management could.

In addition, we have scientific and clinical advisors who assist us
in formulating our product development and clinical strategies. These advisors are not our employees and may have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to us, or may have
arrangements with other companies to assist in the development of products that may compete with ours.

We will need to obtain FDA approval of our
proposed product names, Contrave and Empatic, and any failure or delay associated with such approval may adversely impact our business.

Any name we intend to use for our product candidates will require approval from the FDA regardless of whether we have secured a formal trademark registration from the U.S. Patent and Trademark Office, or PTO. The FDA typically conducts
a rigorous review of proposed product names, including an evaluation of potential for confusion with other product names. The FDA may also object to a product name if it believes the name inappropriately implies medical claims. If the FDA objects to
the product names Contrave or Empatic, we may be required to adopt an alternative name for our initial product candidates. If we adopt an alternative name, we would lose the benefit of our existing trademark applications for Contrave and/or Empatic
and may be required to expend significant additional resources in an effort to identify a suitable product name that would qualify under applicable trademark laws, not infringe the existing rights of third parties and be acceptable to the FDA. We
may be unable to build a successful brand identity for a new trademark in a timely manner or at all, which would limit our ability to commercialize our product candidates.

If we fail to comply with healthcare regulations, we could face substantial penalties and our business, operations and financial condition could be adversely affected.

As a manufacturer of pharmaceuticals, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid
or other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients rights are and will be applicable to our business. We could be subject to healthcare fraud and abuse and patient
privacy regulation by both the federal government and the states in which we conduct our business, without limitation. The regulations that may affect our ability to operate include:



| |  |  | the federal healthcare program Anti-Kickback Law, which prohibits, among other things, persons from soliciting, receiving or providing remuneration, directly or
indirectly, to induce either the referral of an individual, for an item or service or the purchasing or ordering of a good or service, for which payment may be made under federal healthcare programs such as the Medicare and Medicaid programs;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | federal false claims laws which prohibit, among other things, individuals or entities from knowingly presenting, or causing to be presented, claims for payment from
Medicare, Medicaid, or other third-party payors that are false or fraudulent, and which may apply to entities like us which provide coding and billing advice to customers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which prohibits executing a scheme to defraud any healthcare benefit program or
making false statements relating to healthcare matters and which also imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Federal Food, Drug, and Cosmetic Act, which among other things, strictly regulates drug product marketing, prohibits manufacturers from marketing drug products
for off-label use and regulates the distribution of drug samples; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | state law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply to items or services reimbursed by any
third-party payor, including commercial insurers, and state laws governing the privacy and security of health information in certain circumstances, many of which differ from each other in significant ways and often are not preempted by HIPAA, thus
complicating compliance efforts.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

If our operations are found to be in violation of any of the laws described above or
any other governmental regulations that apply to us, we may be subject to penalties, including civil and criminal penalties, damages, fines and the curtailment or restructuring of our operations. Any penalties, damages, fines, curtailment or
restructuring of our operations could adversely affect our ability to operate our business and our financial results. Although compliance programs can mitigate the risk of investigation and prosecution for violations of these laws, the risks cannot
be entirely eliminated. Any action against us for violation of these laws, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our managements attention from the operation of our business.
Moreover, achieving and sustaining compliance with applicable federal and state privacy, security and fraud laws may prove costly.

Our business
involves the use of hazardous materials and we and our third-party manufacturers must comply with environmental laws and regulations, which can be expensive and restrict how we do business.

Our third-party manufacturers activities involve the controlled storage, use and disposal of hazardous materials owned by us, including the
components of our product candidates and other hazardous compounds. We and our manufacturers are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of these hazardous materials.
Although we believe that the safety procedures utilized by our third-party manufacturers for handling and disposing of these materials comply with the standards prescribed by these laws and regulations, we cannot eliminate the risk of accidental
contamination or injury from these materials. In the event of an accident, state or federal authorities may curtail the use of these materials and interrupt our business operations. We do not currently maintain hazardous materials insurance
coverage. If we are subject to any liability as a result of our third-party manufacturers activities involving hazardous materials, our business and financial condition may be adversely affected. In the future we may seek to establish longer
term third-party manufacturing arrangements, pursuant to which we would seek to obtain contractual indemnification protection from such third-party manufacturers potentially limiting this liability exposure.

Our business and operations would suffer in the event of system failures.

Despite the implementation of security measures, our internal computer systems and those of our CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural
disasters, terrorism, war and telecommunication and electrical failures. While we have not experienced any such system failure, accident or security breach to date, if such an event were to occur and cause interruptions in our operations, it could
result in a material disruption of our drug development programs. For example, the loss of clinical trial data from completed or ongoing clinical trials for Contrave or Empatic could result in delays in our regulatory approval efforts and
significantly increase our costs to recover or reproduce the data. To the extent that any disruption or security breach were to result in a loss of or damage to our data or applications, or inappropriate disclosure of confidential or proprietary
information, we could incur liability and the further development of our product candidates could be delayed.



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Risks Related to Intellectual Property

The issued patent rights that we have in-licensed covering Contrave and Empatic are limited to the United States and although we have international patent
applications pending, our market opportunity for Contrave and Empatic may be limited by the lack of patent protection in other territories. In addition, although we have additional U.S. and international patent applications pending which seek
further protection of all of our product candidates, these applications may not issue on a timely basis or at all.*

Contrave is
currently protected by U.S. patent number 5,512,593 issued in April 1996 and U.S. patent number 5,817,665 issued in October 1998, which we have licensed on an exclusive basis from Dr. Lee Dante and which we collectively refer to as
the Dante patents. Provided maintenance fees are paid, U.S. patent number 5,512,593 is expected to expire in April 2013 and U.S. patent number 5,817,665 is expected to expire in March 2013. The Dante patents do not protect our Contrave
product candidate outside of the United States. The Dante patents cover compositions of certain specified opioid antagonists (including naltrexone) combined with certain specified antidepressants (including bupropion and fluoxetine), and thus
provide coverage for both our Contrave and OREX-004 (naltrexone SR/fluoxetine) product candidates.

In addition to the Dante patents, we
own a U.S. patent application and related continuation patent applications, which we refer to as the Weber/Cowley patent applications and which are the subject of an agreement with Oregon Health & Science University, or OHSU. The
claims currently pending in the Weber/Cowley patent applications are directed to the current composition of our Contrave product candidate and methods for using that composition to effect weight loss. The Weber/Cowley patent applications have not
yet issued and we cannot provide assurance that they will issue on a timely basis or at all. We have filed a number of international counterparts to the Weber/Cowley patent applications in foreign countries and also cannot provide assurance that
they will issue on a timely basis or at all.

One of the pending Weber/Cowley patent applications, with claims directed to the current
composition of our Contrave product candidate, has been allowed by the PTO and we have paid the issue fee for it. If the application is not withdrawn from issue by us or by the PTO, we would expect a U.S. patent to issue on this application in
due course. If and when a U.S. patent issues as we anticipate based on the Issue Notification posted on the PTO website, we expect to have protection for Contrave extended from 2013 to 2025. Although withdrawal from issue is not common, no
assurance can be given that this patent application will not be withdrawn from issue, nor can there be any assurance that any patent claims issuing from this application will be sufficiently broad to protect Contrave in the United States. Further,
even if this patent ultimately issues, there is no assurance that it will not be successfully opposed or otherwise challenged by third parties. Another of the pending Weber/Cowley patent applications, with claims directed to methods of treatment for
weight loss, has received an interim rejection from the PTO on the basis that the claimed methods were disclosed in the prior art. Although we believe that we have sufficient arguments, and are working with the PTO to amend the application in such a
way as to overcome these interim rejections of claims, there can be no assurance that these rejections and any future rejections will ultimately be overcome or that any claims that may issue will be sufficiently broad to protect our Contrave product
candidate in the United States. In addition, we cannot be certain that the scope of any issued U.S. or foreign patent will be consistent with the currently pending claims, as there is a significant likelihood that the scope of the currently
pending claims will be modified. A European counterpart application to the Weber/Cowley patent applications covering compositions and uses of bupropion and naltrexone for affecting weight loss has now issued in the European Patent Office, or EPO.
However, there is no assurance that the claims in this patent will be sufficiently broad to protect Contrave in the EPO countries, it will not be successfully opposed or otherwise challenged by a third party.

We have filed patent applications in the United States and certain foreign countries and under the Patent Cooperation Treaty, or PCT, which is an
international treaty providing a unified procedure under which the initial filing of a single patent application can provide an effective filing date in each participating country in which appropriate steps are subsequently taken. These filings seek
to protect the formulations and use of SR oral naltrexone, an ingredient in our Contrave and OREX-004 product candidates, but we cannot provide assurance that the claims in these patent applications will issue in their current form or at all.
Accordingly, unless the Weber/Cowley patent applications or our other pending patent applications ultimately issue with a scope of protection that protects our Contrave product candidate, a competitor could file an NDA for the development of
naltrexone in combination with bupropion, seeking approval as early as 2013, when the Dante patents expire. Alternatively, if a competitor is willing to challenge the scope or validity of the Dante patents, the competitor could file an NDA seeking
approval any time before we obtain approval from the FDA of an NDA for Contrave and three years after we obtain such approval. If issued, the Weber/Cowley patent applications and other patent filings have the potential to protect Contrave for an
additional 11 years following the expiration of the Dante patents.

Our intellectual property protection for Empatic derives from
U.S. patent number 7,109,198, which was issued in September 2006 and which we refer to as the Gadde patent. We in-license this patent on an exclusive basis from Duke University, or Duke, together with several related patent applications. This
patent provides composition coverage for the Empatic zonisamide/bupropion



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combination and also covers methods for using Empatic to treat obesity and to reduce the risk of hypertension, diabetes or dyslipidemia. Provided maintenance
fees are paid, this U.S. patent is expected to expire in May 2023. Duke has received a Notice of Allowance from the PTO and has paid the issue fee for a continuation patent application, which is related to the Gadde patent and also exclusively
licensed to us, that covers methods of using zonisamide (including combinations with bupropion) to cause weight loss. If a patent ultimately issues from this allowed continuation application, it will provide additional coverage for methods of using
Empatic to treat obesity, until the expected patent expiration in 2023. In addition, Duke has filed international counterparts to the Gadde patent that are currently pending; however, there is no assurance that the claims in these applications will
issue in their currently pending form or at all. We have also filed patent applications in the United States, under the PCT and in certain foreign countries with the goal of protecting the formulations and use of zonisamide SR, an ingredient in our
Empatic and OREX-003 product candidates, but we cannot provide assurance that the claims in these patent applications will issue in their currently pending form or at all.

We and Duke have filed patent applications in the United States and certain foreign countries with claims directed to compositions and methods for the
prevention of drug associated weight gain, with the goal of protecting our Empatic and OREX-003 product candidates and methods of using them. In the United States, this application has received interim rejections from the PTO on the basis that the
composition claims were obvious. Although we believe that we have sufficient arguments to, and have amended our application in such a way as to, overcome these interim rejections of claims, there can be no assurance that these rejections and any
future rejections will ultimately be overcome or that any claims that may issue will be sufficiently broad to protect the use of our Empatic or OREX-003 product candidates. Likewise, we cannot provide assurance that the claims in the corresponding
foreign patent application will issue in their currently pending form or at all.

In addition to the Dante patents and the naltrexone SR
patent application mentioned above, we have also filed patent applications in the United States, under the PCT and in certain foreign countries with the goal of protecting the use of our OREX-004 product candidate to treat obsessive-compulsive
disorder. Although we have received a favorable preliminary indication of patentability in our PCT application with respect to this indication, we cannot provide assurance that the claims in these patent applications will issue in their currently
pending form or at all.

We may face additional competition outside of the United States as a result of a lack of patent enforcement in foreign
countries and off-label use of other dosage forms of the generic components in our product candidates.*

While we have filed patent
applications in many countries outside the United States, and have one issued patent in the EPO relating to our Contrave product candidate, we do not currently have any other patent protection for our Contrave, Empatic, OREX-003 or OREX-004 product
candidates in any of these foreign jurisdictions. Even if international patent applications ultimately issue or receive approval, it is likely that the scope of protection provided by such patents will be different from, and possibly less than, the
scope provided by our corresponding U.S. patents. The success of our international market opportunity is dependent upon the enforcement of patent rights in various other countries. A number of countries in which we have filed or intend to file
patent applications have a history of weak enforcement of intellectual property rights. Even if we have patents issued in these jurisdictions, there can be no assurance that our patent rights will be sufficient to prevent generic competition or
unauthorized use.

We may face competition from the off-label use of other dosage forms of the generic components in our product
candidates. In addition, others may attempt to commercialize our product candidate combinations in the countries of the European Union, Canada, Mexico, Japan or other markets where we do not have patent protection for our product candidates. Due to
the lack of patent protection for these combinations in territories outside the United States and the potential for correspondingly lower prices for the drugs in those markets, it is possible that patients will seek to acquire the generic IR
components of our product candidates (naltrexone IR and zonisamide IR), in those other territories. The off-label use of the generic IR components in the United States or the importation of the generic IR components from foreign markets could
adversely affect the commercial potential for our product candidates and adversely affect our overall business and financial results.

We have
in-licensed all or a portion of the rights to our product candidates from third parties. If we default on any of our material obligations under those licenses, we could lose rights to our product candidates.

We have in-licensed and otherwise contracted for rights to our product candidates, and we expect to enter into similar licenses in the future to
supplement our product candidate pipeline. Under the relevant agreements, we are subject to commercialization, development, sublicensing, royalty, insurance and other obligations. If we fail to comply with any of these requirements, or otherwise
breach these license agreements, the licensor may have the right to terminate the license in whole or to terminate the exclusive nature of the license. Loss of any of these licenses or the exclusive rights provided therein could harm our financial
condition and operating results. For example, our license agreement with Dr. Dante requires us to use commercially reasonable efforts to develop, obtain regulatory approval of and commercialize our Contrave product candidate. To the extent we
are unable to comply with these obligations, the license may be terminated.



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Restrictions on our patent rights relating to our product candidates may limit our ability to prevent third parties
from competing against us.

Our success will depend on our ability to obtain and maintain patent protection for our product
candidates, preserve our trade secrets, prevent third parties from infringing upon our proprietary rights and operate without infringing upon the proprietary rights of others. Composition of matter patents on APIs are generally considered to be the
strongest form of intellectual property protection for pharmaceutical products as they apply without regard to any method of use. Entirely new individual chemical compounds, often referred to as new chemical entities, are typically entitled to
composition of matter coverage. Current law also allows novel and unobvious combinations of old compounds to receive composition of matter coverage for the combination. However, we cannot be certain that the current law will remain the same, or that
our product candidates will be considered novel and unobvious by the PTO and courts.

In addition to composition of matter patents and
patent applications, we also have filed method of use patent applications. This type of patent protects the use of the product only for the specified method. However, this type of patent does not prevent a competitor from making and marketing a
product that is identical to our product for an indication that is outside the scope of the patented method. Moreover, even if these competitors do not actively promote their product for our targeted indication, physicians may prescribe these
products off-label. Although off-label prescriptions may infringe or contribute to the infringement of method of use patents, the practice is common and such infringement is difficult to prevent or prosecute.

Although we believe we and our licensors have conducted appropriate prior art searches relating to our key patents and patent applications, there is no
assurance that all of the potentially relevant prior art has been found. Moreover, because the constituents of our combination product candidates have been on the market as separate monotherapeutic products for many years, it is possible that these
monotherapies have previously been used off-label in such a manner that such prior usage would affect the validity of our method of use patents.

Patent applications in the United States and most other countries are confidential for a period of time until they are published, and publication of discoveries in scientific or patent literature typically lags actual discoveries by several
months or more. As a result, we cannot be certain that we and the inventors of the issued patents and applications that we in-licensed were the first to conceive inventions covered by the patents and pending patent applications or that we and those
inventors were the first to file patent applications for such inventions.

We also rely upon unpatented trade secrets, unpatented know-how
and continuing technological innovation to develop and maintain our competitive position, which we seek to protect, in part, by confidentiality agreements with our employees and our collaborators and consultants, some of whom assist with the
development of other obesity drugs. We also have agreements with our employees and selected consultants that obligate them to assign their inventions to us. It is possible that technology relevant to our business will be independently developed by a
person that is not a party to such an agreement. Furthermore, if the employees and consultants that are parties to these agreements breach or violate the terms of these agreements, we may not have adequate remedies for any such breach or violation,
and we could lose our trade secrets through such breaches or violations. Further, our trade secrets could otherwise become known or be independently discovered by our competitors.

If we are sued for infringing intellectual property rights of third parties, it will be costly and time consuming, and an unfavorable outcome in that litigation would have a material adverse effect on our
business.*

Our commercial success depends upon our ability and the ability of our collaborators to develop, manufacture, market
and sell our product candidates and use our proprietary technologies without infringing the proprietary rights of third parties. Numerous U.S. and foreign issued patents and pending patent applications, which are owned by third parties, exist
in the fields in which we and our collaborators are developing products. As the biotechnology and pharmaceutical industries expand and more patents are issued, the risk increases that our product candidates and/or proprietary technologies may give
rise to claims of infringement of the patent rights of others. There may be issued patents of third parties of which we are currently unaware that may be infringed by our product candidates or proprietary technologies. Because patent applications
can take many years to issue, there may be currently pending applications, unknown to us, which may later result in issued patents that our product candidates or proprietary technologies may infringe.



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We may be exposed to, or threatened with, future litigation by third parties having patent or other
intellectual property rights alleging that our product candidates and/or proprietary technologies infringe their intellectual property rights. If one of these patents is found to cover our product candidates, proprietary technologies or their uses,
we or our collaborators could be enjoined by a court and required to pay damages and could be unable to commercialize our product candidates or use our proprietary technologies unless we or they obtained a license to the patent. A license may not be
available to us or our collaborators on acceptable terms, if at all. In addition, during litigation, the patent holder could obtain a preliminary injunction or other equitable relief which could prohibit us from making, using or selling our
products, technologies or methods pending a trial on the merits, which could be years away.

There is a substantial amount of litigation
involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally. If a third party claims that we or our collaborators infringe its intellectual property rights, we may face a number of issues,
including, but not limited to:



| |  |  | infringement and other intellectual property claims which, regardless of merit, may be expensive and time-consuming to litigate and may divert our managements
attention from our core business;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | substantial damages for infringement, which we may have to pay if a court decides that the product at issue infringes on or violates the third partys rights,
and if the court finds that the infringement was willful, we could be ordered to pay treble damages and the patent owners attorneys fees;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a court prohibiting us from selling or licensing the product unless the third party licenses its product rights to us, which it is not required to do;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if a license is available from a third party, we may have to pay substantial royalties and fees and/or grant cross-licenses to intellectual property rights for our
products; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesigning our products or processes so they do not infringe, which may not be possible or may require substantial monetary expenditures and time.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

We will be obtaining our bupropion SR, zonisamide SR, naltrexone SR, our finished Contrave and Empatic tablets combining
these components, and our Contrave Titration Packs, Empatic Titration Packs and bottles used to package these tablets from third-party manufacturers. Similarly, it is likely that we will be obtaining the components of our OREX-003 and OREX-004
product candidates from third parties as well. Each aspect of product design, formulation, manufacturing, packaging, and use has the potential to implicate third-party patent rights. For example, we are developing our own formulation of bupropion SR
that we believe will not infringe third-party patent rights. However, if we do not successfully complete the development of our own formulation, we could be exposed to potential patent infringement liability from third parties who hold patents on
various formulations of bupropion. In addition, even if we successfully complete the development of our own formulation, we could still be exposed to potential patent infringement liability from third parties who hold patents on various formulations
of bupropion.

No assurance can be given that patents do not exist, have not been filed, or could not be filed or issued, which contain
claims covering these or other aspects of our products, technology or methods, as implemented by us or by third-party manufacturers with whom we contract. Because of the large number of patents issued and patent applications filed in our field, we
believe there is a risk that third parties may allege they have patent rights encompassing our products, technology or methods. Such third-party patent rights, if relevant, could prevent us from adopting or marketing a particular formulation or
product, or could expose us to patent infringement liability.

Although we have entered into a settlement agreement designed to prevent the parties
to the agreement from asserting infringement and other specified claims against our Empatic product candidate in the United States, and abroad, disputes with third parties relating to our Empatic product could nevertheless affect our intellectual
property rights.

In June 2004, we jointly filed a lawsuit with Duke, against Elan Corporation, plc, Elan Pharma International Ltd.
and Elan Pharmaceuticals, Inc., which we refer to collectively as Elan, Eisai, Inc. and Eisai Co., Ltd., which we refer to together as Eisai, and Julianne E. Jennings, a former employee of Elan, in the U.S. District Court for the Middle
District of North Carolina, Durham Division, to resolve a dispute over rights in an invention relating to the use of zonisamide to treat obesity. We alleged in this lawsuit that scientists at Duke made the invention, and that Elan improperly used
information supplied by the Duke scientists to file a U.S. patent application on the invention, in which Ms. Jennings (then an Elan product manager) is named as the sole inventor. This patent application was later assigned by Elan to
Eisai. Duke also filed a U.S. patent application on the invention at issue, which patent application is exclusively licensed to us. This is the Gadde continuation patent application discussed above for which Duke received a Notice of Allowance
from the PTO. In December 2006, we, Elan, Eisai, Duke and Ms. Jennings entered into a settlement agreement to settle the lawsuit. Upon execution of the settlement agreement, the lawsuit was dismissed with prejudice.



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Under the terms of the settlement agreement, the parties have, subject to limitations set forth in the
agreement, released each other from all claims and demands arising under the laws of the United States or any state within the United States existing as of the date of the settlement agreement that arise out of or relate to the lawsuit or the
specified Duke and Eisai patents that may issue from certain patent applications claiming the use of zonisamide as the sole active ingredient to treat obesity or other weight-related disorders or conditions. In addition, if Elan, Eisai or
Ms. Jennings obtains a U.S. patent containing a claim that encompasses the use of zonisamide as the sole active ingredient to treat obesity or other weight-related disorders or conditions that issues from or is based upon the Eisai patent
application, Elan, Eisai and Ms. Jennings have each agreed that they will not assert such patent against any of our products containing zonisamide in combination with any other active pharmaceutical agent, including bupropion. Likewise, if Duke
obtains a U.S. patent containing a claim that encompasses the use of zonisamide as the sole active ingredient to treat obesity or other weight-related disorders or conditions that issues from or is based upon the Duke patent application, we and
Duke have agreed that we will not assert any such patent against Elan, Eisai or Ms. Jennings for any conduct relating to Zonegran, which is a zonisamide product currently marketed by Eisai. As discussed above, Duke has received a Notice of
Allowance from the PTO for a patent application having such claims.

In September 2007, we and Duke entered into a settlement agreement
with Eisai which resolves the foreign aspects of the dispute referenced in the paragraph above. Under the terms of the settlement agreement, the parties have, subject to limitations set forth in the agreement, released each other from all claims and
demands arising under the laws of any country outside of the United States existing as of the date of the agreement that arise out of or relate to the lawsuit or certain specified Duke and Eisai foreign patents that may issue from certain patent
applications claiming the use of zonisamide as the sole active ingredient to treat obesity or other weight-related disorders or conditions. In addition, if Eisai obtains a foreign patent containing a claim that encompasses the use of zonisamide as
the sole active ingredient to treat obesity or other weight-related disorders or conditions that issues from or is based upon the specified Eisai foreign patent applications, Eisai has agreed that it will not assert any such patent against any
product of ours containing zonisamide in combination with any other active pharmaceutical agent, including bupropion. Likewise, if Duke obtains a foreign patent containing a claim that encompasses the use of zonisamide as the sole active ingredient
to treat obesity or other weight-related disorders or conditions that issues from or is based upon the specified Duke foreign patent applications, we and Duke have agreed that we will not assert any such patent against Eisai for any conduct relating
to Zonegran, which is a zonisamide product currently marketed by Eisai.

Although we have resolved the U.S. lawsuit and entered into a
settlement agreement containing terms that would prevent Eisai, Elan and Ms. Jennings from asserting specified U.S. patents against our Empatic product and have entered into a settlement agreement containing terms that would prevent Eisai
from asserting specified foreign patents against our Empatic product, there is no assurance that the parties will abide by these settlement agreements. There also is no assurance that Eisai, Elan and/or Ms. Jennings do not have, or will not in
the future obtain, other patent rights not covered by the settlement agreements that could be asserted against our Empatic product candidate or our other product candidates. Furthermore, Elan and Ms. Jennings are not parties to the settlement
agreement which resolves the foreign aspects of the dispute. Although PTO records indicate that Eisai has abandoned its pending patent application, it may take steps to revive the application. In the event that Eisai revives its application and both
Duke and Eisai maintain their pending U.S. patent applications for use of zonisamide to treat obesity or other weight-related disorders, such actions may lead to initiation of a patent interference to determine which party invented first. We
are not relying on any patent Duke may obtain directed to zonisamide as the sole active ingredient to treat obesity or other weight disorder to protect our Empatic product candidate. The U.S. settlement agreement also contains terms that would
not allow Eisai, Elan or Ms. Jennings to use any patent they may obtain by winning an interference to prevent the sale of our Empatic product, if approved. However, if Duke loses the interference or abandons its patent application covering the
use of zonisamide as the sole active ingredient to treat obesity or other weight disorder, then the potential additional protection for our Empatic product candidate that could result from such a patent will not be available to us.

Obtaining and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other requirements imposed by
governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance with these requirements.

Periodic maintenance fees on the Gadde patent covering Empatic are due to be paid to the PTO in several stages over the lifetime of the patent. Future maintenance fees will also need to be paid on the Dante patents. We have systems in place
to remind us to pay these fees, and we employ an outside firm, Computer Patent Annuities, to pay annuity fees due to foreign patent agencies on our pending foreign patent applications. The PTO and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. We employ reputable law firms and other professionals to help us comply, and in many cases, an inadvertent lapse can
be cured by payment of a late fee or by



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other means in accordance with the applicable rules. However, there are situations in which noncompliance can result in abandonment or lapse of the patent or
patent application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. In such an event, our competitors might be able to enter the market and this circumstance would have a material adverse effect on our business.

We have not yet registered our trademarks in all of our potential markets, and failure to secure those registrations could adversely affect our
business.*

We have received federal trademark registration no. 3396021 for our corporate logo for use in connection with
pharmaceutical preparations and substances for the treatment of obesity, inducement of weight loss and prevention of weight gain. We have a foreign trademark application pending in Canada for the same mark and have obtained trademark registrations
in Europe and Japan for the same mark. In addition, we have received federal trademark registration no. 3396807 for our corporate name OREXIGEN for use in connection with pharmaceutical preparations for the treatment of disorders of the central
nervous system, printed instructional, educational and teaching materials in the field of treatment and management of disorders of the central nervous system, and providing medical information in the field of disorders of the central nervous system.
We have a foreign trademark application pending in Canada for the same mark and have obtained trademark registrations in Europe and Japan for the same mark. We have obtained foreign trademark registrations for the corporate name Orexigen
Therapeutics, Inc. in Europe and Japan and have a pending trademark application for the same mark in Canada. We have received federal trademark registration no. 3393576 for the mark CONTRAVE for use in connection with pharmaceutical preparations for
use in the treatment of obesity and inducing weight loss. An application for the CONTRAVE mark remains pending in the United States in connection with certain printed materials and medical information services. We have also obtained foreign
trademark registrations for the mark CONTRAVE in Europe and Japan and an application for this mark is pending in Canada. We have received a Notice of Allowance from the PTO for the intent-to-use trademark application for the mark EMPATIC for use in
connection with pharmaceutical preparations for the treatment of obesity and inducing weight loss, various printed materials, and medical information services. Foreign trademark registrations have issued in Europe and Japan for the mark EMPATIC, and
an application remains pending in Canada. However, no assurance can be given that our allowed trademark applications will actually become registered, or that our registered trademarks can be maintained or enforced. During trademark registration
proceedings in the various countries, we have received and expect to receive rejections. Although we are given an opportunity to respond to those rejections, there can be no assurance that the rejections can be successfully overcome. In addition, in
the PTO and in many foreign jurisdictions, third parties are given an opportunity to oppose pending trademark applications and to cancel registered trademarks. For example, another pharmaceutical company opposed the registration of EXCALIA, the
prior mark for the product candidate that we now call EMPATIC. No assurance can be given that opposition or cancellation proceedings will not be filed against our trademarks, nor can there be any assurance that our trademarks would survive such
proceedings.

We may be subject to claims that our employees have wrongfully used or disclosed alleged trade secrets of their former employers.

As is common in the biotechnology and pharmaceutical industries, we employ individuals who were previously employed at other biotechnology or
pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject to claims that these employees or we have inadvertently or otherwise used or disclosed trade secrets
or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to
management.

Risks Related to Our Finances and Capital Requirements

We have incurred significant operating losses since our inception and anticipate that we will incur continued losses for the foreseeable future.*

We are a development stage company with a limited operating history. We have focused primarily on developing our first two product candidates, Contrave
and Empatic, with the goal of supporting regulatory approval for these product candidates. We have financed our operations almost exclusively through the sale of our preferred and common stock and debt and have incurred losses in each year since our
inception in September 2002. As of March 31, 2008, we had an accumulated deficit of $130.1 million. These losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders equity
and working capital. We expect our development expenses, as well as clinical product manufacturing expenses, to increase in connection with our ongoing and planned clinical trials for our product candidates. In addition, if we obtain regulatory
approval for any of our product candidates, we may incur significant sales, marketing and outsourced manufacturing expenses as well as continued development expenses. As a result, we expect to continue to incur significant and increasing operating
losses for the foreseeable future. Because of the numerous risks and uncertainties associated with developing pharmaceutical products, we are unable to predict the extent of any future losses or when we will become profitable, if at all.



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We have not generated any revenue from our product candidates and may never be profitable.

Our ability to become profitable depends upon our ability to generate revenue. To date, we have not generated any revenue from our development-stage
product candidates, and we do not know when, or if, we will generate any revenue. Our ability to generate revenue depends on a number of factors, including, but not limited to, our ability to:



| |  |  | successfully complete our ongoing and planned clinical trials for Contrave and Empatic;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | obtain regulatory approval for Contrave and Empatic;
| | - |  | ----------------------------------------------------



| |  |  | manufacture commercial quantities of our product candidates at acceptable cost levels if regulatory approvals are received; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | identify and enter into one or more strategic collaborations to effectively market and sell our product candidates.
| | - |  | -------------------------------------------------------------------------------------------------------------------

Even if one or more of our product candidates is approved for commercial sale, which we do not expect to occur for several years (we do not expect to
file our first NDA until late 2009 at the earliest), we anticipate incurring significant costs associated with commercializing any approved product. We may not achieve profitability soon after generating product sales, if ever. If we are unable to
generate product revenues, we will not become profitable and may be unable to continue operations without continued funding.

Our short operating
history makes it difficult to evaluate our business and prospects.

We were incorporated in September 2002. Our operations to date
have been limited to organizing and staffing our company and conducting product development activities primarily for our first two product candidates, Contrave and Empatic. We have not yet demonstrated an ability to obtain regulatory approval for or
commercialize a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had a history of successfully developing and commercializing pharmaceutical products.

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.

Developing products for the obesity market, conducting clinical trials, establishing outsourced
manufacturing relationships and successfully manufacturing and marketing drugs that we may develop is expensive. We believe that our existing cash and cash equivalents, which includes the net proceeds from our public offering completed in January
2008, will be sufficient to fund the completion of our Phase III clinical trials for Contrave, the initiation and completion of our second Phase IIb clinical trial for Empatic and the initiation of our Phase II proof-of-concept clinical
trials for OREX-003 and OREX-004. However, we have based these estimates on assumptions that may prove to be wrong, and we could spend our available financial resources much faster than we currently expect. Further, we will need to raise additional
capital to:



| |  |  | fund our operations and continue to conduct clinical trials to support potential regulatory approval of marketing applications;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



| |  |  | qualify and outsource the commercial-scale manufacturing of our products under cGMPs; and
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | commercialize Contrave, Empatic or any other product candidates that we may develop, in-license or acquire, if any of these product candidates receive regulatory
approval.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The amount and timing of our future funding requirements will depend on many factors, including, but not
limited to:



| |  |  | the rate of progress and cost of our clinical trials and other product development programs for Contrave, Empatic and any other product candidates that we may
develop, in-license or acquire;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights associated with our product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the costs and timing of completion of outsourced commercial manufacturing supply arrangements for each product candidate;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of regulatory approval of our product candidates, if at all;
| | - |  | -----------------------------------------------------------------------



| |  |  | the costs of establishing sales, marketing and distribution capabilities, should we elect to do so;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the effect of competing technological and market developments; and
| | - |  | ------------------------------------------------------------------



| |  |  | the terms and timing of any collaborative, licensing, co-promotion or other arrangements that we may establish.
| | - |  | ---------------------------------------------------------------------------------------------------------------

Future capital requirements will also depend on the extent to which we acquire or invest in additional complementary businesses, products and
technologies. We currently have no commitments or agreements relating to any of these types of transactions.

Until we can generate a
sufficient amount of product revenue and achieve profitability, we expect to finance future cash needs through public or private equity offerings, debt financings or corporate collaboration and licensing arrangements, as well as through interest
income earned on cash and investment balances. We cannot be certain that additional funding will be available on acceptable terms, or at all. If adequate funds are not available, we may be required to delay, reduce the scope of or eliminate one or
more of our development programs or our commercialization efforts.

Our quarterly operating results may fluctuate significantly.

We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous
factors, including:



| |  |  | variations in the level of expenses related to our two existing product candidates or future development programs;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | addition or termination of clinical trials or funding support;
| | - |  | --------------------------------------------------------------



| |  |  | any intellectual property infringement lawsuit in which we may become involved;
| | - |  | -------------------------------------------------------------------------------



| |  |  | regulatory developments affecting our product candidates or those of our competitors;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | if any of our product candidates receives regulatory approval, the level of underlying demand for our product candidates and wholesalers buying patterns.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our
common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially. We believe that quarterly comparisons of our financial results are not
necessarily meaningful and should not be relied upon as an indication of our future performance.

Raising additional funds by issuing securities may
cause dilution to existing stockholders and raising funds through lending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.

To the extent that we raise additional capital by issuing equity securities, our existing stockholders ownership will be diluted. Debt financing
typically contains covenants that restrict operating activities. Our credit and security agreement, as amended, with Merrill Lynch Capital is secured by a pledge of all of our assets other than, subject to certain limited exceptions, intellectual
property, and contains a variety of operational covenants, including limitations on our ability to incur liens or additional debt, pay dividends, redeem our stock, make certain investments and engage in certain merger, consolidation or asset sale
transactions, among other restrictions. Any future debt financing we enter into may involve similar or more onerous covenants that restrict our operations. Any borrowings under the credit and security agreement, as amended, with Merrill Lynch
Capital or any future debt financing will need to be repaid, which creates additional financial risk for our company, particularly if our business or prevailing financial market conditions are not conducive to paying off or refinancing our
outstanding debt obligations.



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If we raise additional funds through collaboration, licensing or other similar arrangements, it may be
necessary to relinquish potentially valuable rights to our current product candidates, potential products or proprietary technologies, or grant licenses on terms that are not favorable to us. If adequate funds are not available, our ability to
achieve profitability or to respond to competitive pressures would be significantly limited and we may be required to delay, significantly curtail or eliminate the development of one or more of our product candidates.

We incur significant costs as a result of operating as a public company, and our management is required to devote substantial time to public company compliance
initiatives.

As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private
company. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or the SEC, and the Nasdaq Stock Market, Inc., have imposed various new
requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of
time to these new compliance initiatives. Moreover, these rules and regulations will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and
regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar
coverage. As a result, it may be more difficult for us to attract and retain qualified people to serve on our board of directors, our board committees or as executive officers.

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal controls for financial reporting and disclosure. In particular,
commencing in this fiscal year 2008, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness
of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses. We expect to incur significant expense and devote substantial management effort toward ensuring compliance with Section 404. We currently do not have an internal audit
function, and we will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely
manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal controls that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or
investigations by Nasdaq, the SEC or other regulatory authorities, which would entail expenditure of additional financial and management resources.

Risks Relating to Securities Markets and Investment in Our Stock

The market price of our common stock has fluctuated and is likely
to continue to fluctuate, which could reduce the market price of our common stock.

The market prices for securities of
biotechnology and pharmaceutical companies have historically been highly volatile, and the market has from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies.
Since the commencement of trading in connection with our initial public offering, or IPO, through May 1, 2008, the publicly traded shares of our common stock have themselves experienced significant price and volume fluctuations. During this
approximately one-year period, the price per share for our common stock on the Nasdaq Global Market has ranged from a low sale price of $9.64 to a high sale price of $19.15. This market volatility is likely to continue and could reduce the market
price of our common stock, regardless of our operating performance. In addition, the trading price of our common stock could change significantly over short periods of time in response to many factors, including:



| |  |  | the results from our clinical trials, including our current Phase III clinical trials for Contrave and our upcoming Phase II clinical trial for Empatic;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | FDA or international regulatory actions, including failure to receive regulatory approval for any of our product candidates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | announcements regarding manufacturing or supply developments for Contrave or Empatic;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | failure of any of our product candidates, if approved, to achieve commercial success;
| | - |  | -------------------------------------------------------------------------------------



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| |  |  | announcements of the introduction of new products by us or our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | market conditions in the pharmaceutical and biotechnology sectors;
| | - |  | ------------------------------------------------------------------



| |  |  | announcements concerning product development results or intellectual property rights of others;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | litigation or public concern about the safety of our potential products;
| | - |  | ------------------------------------------------------------------------



| |  |  | actual and anticipated fluctuations in our quarterly operating results;
| | - |  | -----------------------------------------------------------------------



| |  |  | deviations in our operating results from the estimates of securities analysts or other analyst comments;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | additions or departures of key personnel;
| | - |  | -----------------------------------------



| |  |  | third-party coverage and reimbursement policies;
| | - |  | ------------------------------------------------



| |  |  | developments concerning current or future strategic collaborations; and
| | - |  | -----------------------------------------------------------------------



| |  |  | discussion of us or our stock price by the financial and scientific press and in online investor communities.
| | - |  | -------------------------------------------------------------------------------------------------------------

The realization of any of the risks described in these Risk Factors could also have a dramatic and material adverse impact on the market
price of our common stock.

Future sales of our common stock may depress our stock price.

Persons who were our stockholders prior to the sale of shares in our IPO continue to hold a substantial number of shares of our common stock that they
will be able to sell in the public market in the near future. Significant portions of these shares are held by a small number of stockholders. Sales by our current stockholders of a substantial number of shares, or the expectation that such sales
may occur, could significantly reduce the market price of our common stock. For example, certain of our executive officers have established selling plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, or the Exchange Act,
for the purpose of effecting specified sales of our common stock over a specified period of time. Moreover, the holders of a substantial number of shares of common stock may have rights, subject to certain conditions, to require us to file
registration statements to permit the resale of their shares in the public market or to include their shares in registration statements that we may file for ourselves or other stockholders.

We have also registered all common stock that we may issue under our employee benefits plans. As a result, these shares can be freely sold in the public
market upon issuance, subject to restrictions under the securities laws. In addition, our directors and executive officers may in the future establish programmed selling plans under Rule 10b5-1 of the Exchange Act for the purpose of effecting
sales of our common stock, in addition to the already established plans. If any of these events cause a large number of our shares to be sold in the public market, the sales could reduce the trading price of our common stock and impede our ability
to raise future capital.

Our executive officers and directors and their affiliates will exercise significant influence over stockholder voting
matters in a manner that may not be in the best interests of all of our stockholders.

As of April 30, 2008, our executive
officers and directors and their affiliates will together control approximately 44.3% of our outstanding common stock. As a result, these stockholders will collectively be able to significantly influence all matters requiring approval of our
stockholders, including the election of directors and approval of significant corporate transactions. The concentration of ownership may delay, prevent or deter a change in control of our company even when such a change may be in the best interests
of some stockholders, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company or our assets and might affect the prevailing market price of our common stock.

Anti-takeover provisions under our charter documents and Delaware law could delay or prevent a change of control which could limit the market price of our common
stock and may prevent or frustrate attempts by our stockholders to replace or remove our current management.

Our amended and
restated certificate of incorporation and amended and restated bylaws contain provisions that could delay or prevent a change of control of our company or changes in our board of directors that our stockholders might consider favorable. Some of
these provisions include:



| |  |  | a board of directors divided into three classes serving staggered three-year terms, such that not all members of the board will be elected at one time;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | a prohibition on stockholder action through written consent;
| | - |  | ------------------------------------------------------------



| |  |  | a requirement that special meetings of stockholders be called only by the chairman of the board of directors, the chief executive officer, the president or by a
majority of the total number of authorized directors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | advance notice requirements for stockholder proposals and nominations;
| | - |  | ----------------------------------------------------------------------



| |  |  | a requirement of approval of not less than 662/3% of all outstanding shares of our capital stock entitled to vote to amend any bylaws by stockholder action, or to
amend specific provisions of our certificate of incorporation; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the authority of the board of directors to issue preferred stock on terms determined by the board of directors without stockholder approval.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------

In addition, we are governed by the provisions of Section 203 of the Delaware General Corporate Law, which may
prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our amended and restated certificate of incorporation, amended and restated bylaws and Delaware law could make
it more difficult for stockholders or potential acquirers to obtain control of our board of directors or initiate actions that are opposed by the then-current board of directors, including to delay or impede a merger, tender offer or proxy contest
involving our company. Any delay or prevention of a change of control transaction or changes in our board of directors could cause the market price of our common stock to decline.

We have never paid dividends on our capital stock, and because we do not anticipate paying any cash dividends in the foreseeable future, capital appreciation, if any, of our common stock will be your sole source
of gain on an investment in our stock.

We have paid no cash dividends on any of our classes of capital stock to date and we
currently intend to retain our future earnings, if any, to fund the development and growth of our business. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. Furthermore, our credit and security agreement,
as amended, with Merrill Lynch Capital restricts our ability to pay dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable future.

We may become involved in securities class action litigation that could divert managements attention and harm our business.

The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock
of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In the past, securities class action litigation has often been brought against a company following a decline in the market price
of its securities. This risk is especially relevant for us because biotechnology and biopharmaceutical companies have experienced significant stock price volatility in recent years. We may become involved in this type of litigation in the future.
Litigation often is expensive and diverts managements attention and resources, which could adversely affect our business.



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##### Table of Contents

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

Recent Sales of Unregistered Securities

None.

Use of Proceeds

Our initial public offering of common stock was effected through a Registration Statement on Form S-1 (File No. 333-139496) which was declared
effective by the Securities and Exchange Commission on April 25, 2007. On April 26, 2007, additional shares of our common stock were registered through a Registration Statement filed pursuant to Rule 462(b) (File No. 333-142375). On
May 1, 2007, a total of 7,000,000 shares of common stock were sold on our behalf at an initial public offering price of $12.00 per share, for aggregate gross offering proceeds of $84.0 million, managed by Merrill Lynch & Co., JMP
Securities, JPMorgan and Leerink Swann & Company. In addition, on May 1, 2007, in connection with the exercise of the underwriters over-allotment option, 1,050,000 additional shares of common stock were sold on our behalf at the
initial public offering price of $12.00 per share, for aggregate gross offering proceeds of $12.6 million.

We paid to the
underwriters underwriting discounts totaling approximately $6.8 million in connection with the offering. In addition, we incurred additional costs of approximately $2.0 million in connection with the offering, which when added to the
underwriting discounts paid by us, amounts to total costs of approximately $8.8 million. Thus, the net offering proceeds to us, after deducting underwriting discounts and offering expenses, were approximately $87.9 million. No offering expenses
were paid directly or indirectly to any of our directors or officers (or their associates) or persons owning ten percent or more of any class of our equity securities or to any other affiliates.

As of March 31, 2008, we had used approximately $21.8 million of the net proceeds from the
offering, of which approximately $20.7 million was used to fund clinical trials for our two product candidates, Contrave ® and Empatic, and other operating activities, and
approximately $1.0 million was used to repay our long-term debt. We have invested the remainder of the proceeds in investment-grade, interest bearing instruments, pending their use to fund ongoing research and development activities. The amount and
timing of our expenditures will depend on several factors, including the progress of our clinical trials and commercialization efforts as well as the amount of cash used in our operations.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES
|------- | -------------------------------

None.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

None.



|ITEM 5. | OTHER INFORMATION
|------- | -----------------

None.



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



|              |  |                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                         
|              | 
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                                 
|              | 
|3.2(1)        |  | Amended and Restated Bylaws of the Registrant                                                                                                       
|              | 
|4.1(1)        |  | Form of the Registrants Common Stock Certificate                                                                                                   
|              | 
|4.2(1)        |  | Second Amended and Restated Investors Rights Agreement dated November 20, 2006                                                                     
|              | 
|4.3(2)        |  | Registration Rights Waiver and Amendment dated January 6, 2008                                                                                      
|              | 
|31.1*         |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|              | 
|31.2*         |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|              | 
|32.1*         |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  
|              | 
|32.2*         |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  



45



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##### Table of Contents

|(1) | Filed with the Registrants Registration Statement on Form S-1 on December 19, 2006, as amended (File No. 333-139496).
|--- | ----------------------------------------------------------------------------------------------------------------------



|(2) | Filed with the Registrants Current Report on Form 8-K on January 7, 2008.
|--- | --------------------------------------------------------------------------



|* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18
of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Orexigen Therapeutics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                  |  |  |  |                             |  |                       |  |                                             
|----------------- |  |  |  | --------------------------- |  | --------------------- |  | --------------------------------------------
|                  |  |  |  | OREXIGEN THERAPEUTICS, INC.
|                  |  |  | 
|Date: May 9, 2008 |  |  |  | By:                         |  | /s/ GARY D. TOLLEFSON
|                  |  |  |  |                             |  |                       |  | Gary D. Tollefson, M.D., Ph.D.              
|                  |  |  |  |                             |  |                       |  | President and Chief Executive Officer       
|                  |  |  |  |                             |  |                       |  | (Principal Executive Officer)               
|                  |  |  | 
|Date: May 9, 2008 |  |  |  | By:                         |  | /s/ Graham K. Cooper 
|                  |  |  |  |                             |  |                       |  | Graham K. Cooper                            
|                  |  |  |  |                             |  |                       |  | Chief Financial Officer and Treasurer       
|                  |  |  |  |                             |  |                       |  | (Principal Financial and Accounting Officer)



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##### Table of Contents

INDEX TO EXHIBITS



|              |  |                                                                                                                                                     
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                         
|              | 
|3.1(1)        |  | Amended and Restated Certificate of Incorporation of the Registrant                                                                                 
|              | 
|3.2(1)        |  | Amended and Restated Bylaws of the Registrant                                                                                                       
|              | 
|4.1(1)        |  | Form of the Registrants Common Stock Certificate                                                                                                   
|              | 
|4.2(1)        |  | Second Amended and Restated Investors Rights Agreement dated November 20, 2006                                                                     
|              | 
|4.3(2)        |  | Registration Rights Waiver and Amendment dated January 6, 2008                                                                                      
|              | 
|31.1*         |  | Certification of Chief Executive Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|              | 
|31.2*         |  | Certification of Chief Financial Officer pursuant to Rules 13a-14 and 15d-14 promulgated pursuant to the Securities Exchange Act of 1934, as amended
|              | 
|32.1*         |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  
|              | 
|32.2*         |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                  



|(1) | Filed with the Registrants Registration Statement on Form S-1 on December 19, 2006, as amended (File No. 333-139496).
|--- | ----------------------------------------------------------------------------------------------------------------------



|(2) | Filed with the Registrants Current Report on Form 8-K on January 7, 2008.
|--- | --------------------------------------------------------------------------



|* | These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18
of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of Orexigen Therapeutics, Inc., whether made before or after the date hereof, regardless of any general incorporation language in such filing.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48