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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 30, 2008

or



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

Commission file number: 001-33438

NEUROGESX, INC.

(Exact name of registrant as specified in its charter)



|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3307935                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                                           |  |           
|---------------------------------------------------------- |  | ----------
|2215 Bridgepointe Parkway, Suite 200 San Mateo, California |  | 94404     
|(Address of principal executive offices)                   |  | (Zip Code)

Registrants telephone number, including area code: (650) 358-3300

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 the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                           |  |                       |  |                                               |  |                             
|-------------------------- |  | --------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer    ̈ |  | Non-accelerated filer  x                      |  | Smaller reporting company   ̈
|                           |  |                       |  | (Do not check if a smaller reporting company) |  |                             

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

Yes   ̈    No  x

Number of shares of common stock, $0.001 par value, outstanding as of October 31, 2008: 17,540,209









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NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2008



|                              |  |                                                                                                                                                                                              |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                                                                                                              |  | Page
|PART I. FINANCIAL INFORMATION |  | 1                                                                                                                                                                                           
|Item 1.                       |  | Financial Statements (unaudited)                                                                                                                                                             |  | 1   
|                              |  | Condensed Consolidated Balance Sheets as of September 30, 2008 and December 31, 2007                                                                                                         |  | 1   
|                              |  | Condensed Consolidated Statements of Operations for the three and nine months ended September 
30, 2008 and 2007, and the period from May 28, 1998 (date of inception) to September 30, 2008 |  | 2   
|                              |  | Condensed Consolidated Statements of Cash Flows for the nine months ended September 
30, 2008 and 2007, and the period from May 28, 1998 (date of inception) to September 30, 2008           |  | 3   
|                              |  | Notes to Condensed Consolidated Financial Statements                                                                                                                                         |  | 4   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                                                        |  | 13  
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                   |  | 23  
|Item 4T.                      |  | Controls and Procedures                                                                                                                                                                      |  | 23  
|                              | 
|PART II. OTHER INFORMATION    |  | 25                                                                                                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                                                                                                            |  | 25  
|Item 1A.                      |  | Risk Factors                                                                                                                                                                                 |  | 25  
|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                                                                                                                                                                                     |  | 46  
|                              | 
|SIGNATURES                    |  | 47                                                                                                                                                                                          
|                              | 
|EXHIBIT INDEX                 |  | 48                                                                                                                                                                                          



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##### Table of Contents

PART I. FINANCIAL INFORMATION



|ITEM 1. | FINANCIAL STATEMENTS (Unaudited)
|------- | --------------------------------

NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands)



|                                                 |  |                   |          |   |                  |   |          |  
|------------------------------------------------ |  | ----------------- | -------- | - | ---------------- | - | -------- | -
|                                                 |  | September 30,2008 |          |   | December 31,2007 |  
|                                                 |  | (unaudited)       |          |   | (Note 1)         |  
|Assets                                           |  |                   |          |   |                  |   |          |  
|Current assets:                                  |  |                   |          |   |                  |   |          |  
|Cash and cash equivalents                        |  | $                 | 17,800   |   |                  | $ | 31,478   |  
|Short-term investments                           |  |                   | 13,048   |   |                  |   | 21,373   |  
|Prepaid expenses and other current assets        |  |                   | 624      |   |                  |   | 585      |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total current assets                             |  |                   | 31,472   |   |                  |   | 53,436   |  
|Property and equipment, net                      |  |                   | 518      |   |                  |   | 453      |  
|Restricted cash                                  |  |                   | 240      |   |                  |   | 240      |  
|Other assets                                     |  |                   | 24       |   |                  |   | 56       |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total assets                                     |  | $                 | 32,254   |   |                  | $ | 54,185   |  
|                                                 |  |                   |          |   |                  |   |          |  
|Liabilities and Stockholders Equity             |  |                   |          |   |                  |   |          |  
|Current liabilities:                             |  |                   |          |   |                  |   |          |  
|Accounts payable                                 |  | $                 | 863      |   |                  | $ | 1,712    |  
|Accrued compensation                             |  |                   | 1,009    |   |                  |   | 680      |  
|Accrued research and development                 |  |                   | 1,427    |   |                  |   | 1,198    |  
|Other accrued expenses                           |  |                   | 971      |   |                  |   | 1,848    |  
|Notes payable - current portion                  |  |                   | 3,294    |   |                  |   | 3,859    |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total current liabilities                        |  |                   | 7,564    |   |                  |   | 9,297    |  
|Non-current liabilities:                         |  |                   |          |   |                  |   |          |  
|Notes payable  non-current portion              |  |                   | 740      |   |                  |   | 3,024    |  
|Deferred rent                                    |  |                   | 273      |   |                  |   | 156      |  
|Accrued research and development  non-current   |  |                   |         |   |                  |   | 347      |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total non-current liabilities                    |  |                   | 1,013    |   |                  |   | 3,527    |  
|Commitments and contingencies                    |  |                   |          |   |                  |   |          |  
|Stockholders equity:                            |  |                   |          |   |                  |   |          |  
|Common stock                                     |  |                   | 18       |   |                  |   | 17       |  
|Additional paid-in capital                       |  |                   | 208,964  |   |                  |   | 205,417  |  
|Deferred stock-based compensation                |  |                   | (4       | ) |                  |   | (15      | )
|Accumulated other comprehensive income           |  |                   | 55       |   |                  |   | 51       |  
|Deficit accumulated during the development stage |  |                   | (185,356 | ) |                  |   | (164,109 | )
|                                                 |  |                   |          |   |                  |   |          |  
|Total stockholders equity                       |  |                   | 23,677   |   |                  |   | 41,361   |  
|                                                 |  |                   |          |   |                  |   |          |  
|Total liabilities and stockholders equity       |  | $                 | 32,254   |   |                  | $ | 54,185   |  
|                                                 |  |                   |          |   |                  |   |          |  

See accompanying notes.



1



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NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

(unaudited)



|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | -------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ------------------------------------------------------ |  | - | ---------- | - |  | - | --------- | - |  | - | -------- | -
|                                                                                            |  | Three Months Ended September 30, |            |   | Nine Months Ended September 30, |   |            | Period fromMay 28, 1998(inception) toSeptember 30,2008 | 
|                                                                                            |  | 2008                             |            |   | 2007                            |   |            | 2008                                                   |  |   | 2007       |   | 
|Operating expenses:                                                                         |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Research and development(1)                                                                 |  | $                                | 3,653      |   |                                 | $ | 7,481      |                                                        |  | $ | 13,607     |   |  | $ | 19,667    |   |  | $ | 108,995  |  
|General and administrative(2)                                                               |  |                                  | 2,677      |   |                                 |   | 1,973      |                                                        |  |   | 8,027      |   |  |   | 5,042     |   |  |   | 36,900   |  
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Total operating expenses                                                                    |  |                                  | 6,330      |   |                                 |   | 9,454      |                                                        |  |   | 21,634     |   |  |   | 24,709    |   |  |   | 145,895  |  
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Loss from operations                                                                        |  |                                  | (6,330     | ) |                                 |   | (9,454     | )                                                      |  |   | (21,634    | ) |  |   | (24,709   | ) |  |   | (145,895 | )
|Interest income                                                                             |  |                                  | 212        |   |                                 |   | 562        |                                                        |  |   | 1,001      |   |  |   | 1,229     |   |  |   | 4,916    |  
|Interest expense                                                                            |  |                                  | (183       | ) |                                 |   | (299       | )                                                      |  |   | (640       | ) |  |   | (948      | ) |  |   | (2,566   | )
|Other income (expense), net                                                                 |  |                                  | (12        | ) |                                 |   |           |                                                        |  |   | 26         |   |  |   | 360       |   |  |   | (2,907   | )
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Net loss before cumulative effect of change in accounting principle                         |  |                                  | (6,313     | ) |                                 |   | (9,191     | )                                                      |  |   | (21,247    | ) |  |   | (24,068   | ) |  |   | (146,452 | )
|Cumulative effect of change in accounting principle                                         |  |                                  |           |   |                                 |   |           |                                                        |  |   |           |   |  |   |          |   |  |   | (32      | )
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Net loss                                                                                    |  |                                  | (6,313     | ) |                                 |   | (9,191     | )                                                      |  |   | (21,247    | ) |  |   | (24,068   | ) |  |   | (146,484 | )
|Accretion of redeemable convertible preferred stock                                         |  |                                  |           |   |                                 |   |           |                                                        |  |   |           |   |  |   | (4,626    | ) |  |   | (38,872  | )
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Loss attributable to common stockholders                                                    |  | $                                | (6,313     | ) |                                 | $ | (9,191     | )                                                      |  | $ | (21,247    | ) |  | $ | (28,694   | ) |  | $ | (185,356 | )
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Net loss per common share  basic and diluted:                                              |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Loss per share attributable to common stockholders                                          |  | $                                | (0.36      | ) |                                 | $ | (0.68      | )                                                      |  | $ | (1.21      | ) |  | $ | (3.86     | ) |  |   |          |  
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|Shares used to compute basic and diluted loss per share attributable to common stockholders |  |                                  | 17,538,886 |   |                                 |   | 13,429,471 |                                                        |  |   | 17,508,094 |   |  |   | 7,434,588 |   |  |   |          |  
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|                                                                                           
|Non-cash stock-based compensation expense included in operating expenses:                   | 
|                                                                                            |  |                                  |            |   |                                
|(1)    Research and development                                                             |  | $                                | 183        |   |                                 | $ | 210        |                                                        |  | $ | 597        |   |  | $ | 735       |   |  |   |          |  
|(2)    General and administrative                                                           |  |                                  | 190        |   |                                 |   | 179        |                                                        |  |   | 570        |   |  |   | 685       |   |  |   |          |  
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  
|                                                                                            |  | $                                | 373        |   |                                 | $ | 389        |                                                        |  | $ | 1,167      |   |  | $ | 1,420     |   |  |   |          |  
|                                                                                            |  |                                  |            |   |                                 |   |            |                                                        |  |   |            |   |  |   |           |   |  |   |          |  

See accompanying notes.



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NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | ------------------------------ | ------- | - | ------------------------------------------------------ | - | ------- | - |  | - | -------- | -
|                                                                                        |  | Nine Months EndedSeptember 30, |         |   | Period fromMay 28, 1998(inception) toSeptember 30,2008 |  
|                                                                                        |  | 2008                           |         |   | 2007                                                   |   |        
|Operating activities                                                                    |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Net loss                                                                                |  | $                              | (21,247 | ) |                                                        | $ | (24,068 | ) |  | $ | (146,484 | )
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Depreciation and amortization                                                           |  |                                | 131     |   |                                                        |   | 67      |   |  |   | 1,496    |  
|Amortization of debt issuance costs                                                     |  |                                | 149     |   |                                                        |   | 149     |   |  |   | 443      |  
|Amortization of investment premiums                                                     |  |                                | (679    | ) |                                                        |   | (571    | ) |  |   | (1,115   | )
|Stock-based compensation                                                                |  |                                | 1,167   |   |                                                        |   | 1,420   |   |  |   | 8,122    |  
|Gain on sales of short-term investments                                                 |  |                                | (31     | ) |                                                        |   |        |   |  |   | (31      | )
|Loss on disposal of fixed assets                                                        |  |                                | 5       |   |                                                        |   |        |   |  |   | 87       |  
|Revaluation of preferred stock warrant liability                                        |  |                                |        |   |                                                        |   | (360    | ) |  |   | 2,888    |  
|Changes in operating assets and liabilities:                                            |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Prepaid expenses and other current assets                                               |  |                                | (39     | ) |                                                        |   | (74     | ) |  |   | (624     | )
|Other assets                                                                            |  |                                |        |   |                                                        |   |        |   |  |   | (116     | )
|Accounts payable                                                                        |  |                                | (849    | ) |                                                        |   | 459     |   |  |   | 863      |  
|Accrued compensation                                                                    |  |                                | 329     |   |                                                        |   | 131     |   |  |   | 1,009    |  
|Accrued research and development                                                        |  |                                | (118    | ) |                                                        |   | 1,370   |   |  |   | 1,427    |  
|Deferred rent                                                                           |  |                                | 123     |   |                                                        |   | 39      |   |  |   | 279      |  
|Other accrued expenses                                                                  |  |                                | (879    | ) |                                                        |   | (442    | ) |  |   | 974      |  
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Net cash used in operating activities                                                   |  |                                | (21,938 | ) |                                                        |   | (21,880 | ) |  |   | (130,782 | )
|Investing activities                                                                    |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Purchases of short-term investments                                                     |  |                                | (50,288 | ) |                                                        |   | (43,948 | ) |  |   | (173,168 | )
|Proceeds from maturities of short-term investments                                      |  |                                | 37,360  |   |                                                        |   | 17,250  |   |  |   | 139,354  |  
|Proceeds from sales of short-term investments                                           |  |                                | 21,967  |   |                                                        |   |        |   |  |   | 21,967   |  
|Change in restricted cash                                                               |  |                                |        |   |                                                        |   | (240    | ) |  |   | (240     | )
|Proceeds from disposal of property and equipment                                        |  |                                | 2       |   |                                                        |   |        |   |  |   | 8        |  
|Purchases of property and equipment                                                     |  |                                | (203    | ) |                                                        |   | (71     | ) |  |   | (2,109   | )
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Net cash provided by/(used in) investing activities                                     |  |                                | 8,838   |   |                                                        |   | (27,009 | ) |  |   | (14,188  | )
|Financing activities                                                                    |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Proceeds from notes payable                                                             |  |                                |        |   |                                                        |   |        |   |  |   | 11,092   |  
|Repayment of notes payable                                                              |  |                                | (2,966  | ) |                                                        |   | (1,515  | ) |  |   | (6,939   | )
|Proceeds from issuance of redeemable convertible preferred stock, net of issuance costs |  |                                |        |   |                                                        |   | 10,083  |   |  |   | 96,187   |  
|Proceeds from issuance of warrants                                                      |  |                                | 14      |   |                                                        |   |        |   |  |   | 150      |  
|Proceeds from issuance of common stock                                                  |  |                                | 2,374   |   |                                                        |   | 38,434  |   |  |   | 62,280   |  
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Net cash provided by/(used in) financing activities                                     |  |                                | (578    | ) |                                                        |   | 47,002  |   |  |   | 162,770  |  
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Net increase/(decrease) in cash and cash equivalents                                    |  |                                | (13,678 | ) |                                                        |   | (1,887  | ) |  |   | 17,800   |  
|Cash and cash equivalents, beginning of period                                          |  |                                | 31,478  |   |                                                        |   | 11,908  |   |  |   |         |  
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Cash and cash equivalents, end of period                                                |  | $                              | 17,800  |   |                                                        | $ | 10,021  |   |  | $ | 17,800   |  
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Supplemental cash flow information                                                      |  |                                |         |   |                                                        |   |         |   |  |   |          |  
|Cash paid for interest                                                                  |  | $                              | 521     |   |                                                        | $ | 719     |   |  | $ | 2,044    |  
|                                                                                        |  |                                |         |   |                                                        |   |         |   |  |   |          |  

See accompanying notes.



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NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (UNAUDITED)

Note 1. The Company

Nature of Operations

NeurogesX, Inc. (the Company) is a biopharmaceutical company focused on developing
and commercializing novel pain management therapies. The Companys initial focus is on chronic peripheral neuropathic pain. The Companys lead product candidate, NGX-4010, a synthetic capsaicin-based dermal patch designed to manage pain
associated with peripheral neuropathic pain conditions, is the subject of a New Drug Application (NDA) which was submitted to the U.S. Food and Drug Administration (FDA) in October 2008 and is subject to acceptance by the
FDA. The NDA seeks marketing approval for the use of NGX-4010 for the management of pain associated with postherpetic neuralgia (PHN). The Company submitted a marketing authorization application (MAA) to the European
Medicines Agency (EMEA), which was accepted for review in September 2007 and seeks approval for the use of NGX-4010 for the management of peripheral neuropathic pain. NGX-4010 has completed three pivotal Phase 3 clinical trials that have
met their primary endpoints, two in PHN and one in HIV-distal sensory polyneuropathy (HIV-DSP). The Company has also completed two Phase 3 trials for NGX-4010 that have not met their primary endpoints, one each in PHN and HIV-DSP.

The Company was incorporated in California as Advanced Analgesics, Inc. on May 28, 1998 and changed its name to NeurogesX, Inc. in
September 2000. In February 2007, the Company reincorporated into Delaware. The Company is located in San Mateo, California. Since its inception, the Company has devoted substantially all of its efforts to the development of NGX-4010 and other
potential products, establishing its offices, recruiting personnel, performing business and financial planning, and raising capital. Accordingly, the Company is considered to be in the development stage.

Principles of Consolidation

The accompanying
unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, NeurogesX UK Limited, which was incorporated as of June 1, 2004. NeurogesX UK Limited was established for the purposes of
conducting clinical trials in the UK and marketing approval submission.

Basis of Presentation

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial information on the same basis as the annual consolidated financial statements and in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited condensed consolidated interim financial statements include all adjustments (consisting
only of normal recurring adjustments) that management believes are necessary for the fair statement of the balances and results for the periods presented. These unaudited condensed consolidated interim financial statement results are not necessarily
indicative of results to be expected for the full fiscal year or any future interim period.



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The balance sheet at December 31, 2007 has been derived from the audited consolidated financial
statements at that date. The unaudited condensed consolidated interim financial statements and related disclosures have been prepared with the presumption that users of such information have read or have access to the audited consolidated financial
statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007 contained in the
Companys 2007 Form 10-K.

Initial Public Offering

The Company completed its initial public offering (IPO) and sold 4,000,000 shares of common stock at $11.00 per share on May 7, 2007. Gross proceeds from the offering totaled $44,000,000. The net
offering proceeds to the Company, after deducting expenses of approximately $5,914,000, totaled $38,086,000. Upon the closing of the IPO, all of the outstanding shares of the Companys redeemable convertible preferred stock converted to
8,722,013 shares of the Companys common stock.

Private Placement

On December 28, 2007, the Company completed the first closing of a private placement in which the Company sold 3,638,741 shares of common stock at
$6.18 per share and warrants at $0.125 per share to purchase 1,091,622 shares of its common stock. The stock and warrants were offered solely to accredited investors. On January 3, 2008, the Company completed the second closing of the private
placement in which the Company issued 382,170 shares of common stock at $6.18 per share and warrants at $0.125 per share to purchase 114,651 shares of its common stock. The warrants from both closings have a term of five years, contain a
net-exercise provision, and have an exercise price of $8.034 per share. The fair value of the warrants issued in the first closing was approximately $3,411,000 and the fair value of the warrants issued in the second closing was approximately
$420,000. The fair value of the warrants issued in both closings was allocated from the net proceeds of the financing and was recorded in additional paid-in capital. The net proceeds to the Company from both closings, after deducting expenses of
approximately $1,235,000, totaled $23,765,000.

Reverse Stock Split

On April 13, 2007, the Company effected a 1-for-15 reverse split of its common stock. All common stock and per share amounts have been retroactively
restated to reflect the reverse stock split in the accompanying condensed consolidated financial statements and notes for all periods presented.

Use
of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2. Summary of Significant Accounting Policies

Stock-Based Compensation

Effective January 1, 2006 the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 123R,
Share-Based Payment(SFAS No. 123R), using the prospective transition method. Under the prospective transition method, beginning January 1, 2006, compensation cost recognized includes: (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of



5



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December 31, 2005, based on the intrinsic value as measured on the date of grant in accordance with the provisions of Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123R. All awards granted, modified, or settled after the date of adoption are accounted for using the measurement, recognition, and attribution provisions of SFAS No. 123R.

The components of stock-based compensation expense are as follows (in thousands):



|                                                                                                    |  |                                  |     |                                 |   |      |  |      |       |  |   |       |  
|--------------------------------------------------------------------------------------------------- |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | ----- |  | - | ----- | -
|                                                                                                    |  | Three Months Ended September 30, |     | Nine Months Ended September 30, |  
|                                                                                                    |  | 2008                             |     | 2007                            |   | 2008 |  | 2007 |      
|Share based payments granted subsequent to December 31, 2005 under SFAS No. 123R                    |  | $                                | 370 |                                 | $ | 384  |  | $    | 1,158 |  | $ | 1,123 |  
|Compensation expense related to non-employee options and variable accounting for stock-based awards |  |                                  | 1   |                                 |   | 3    |  |      | 2     |  |   | (89   | )
|Compensation expense related to forgiveness of non-recourse promissory notes                        |  |                                  |    |                                 |   |     |  |      |      |  |   | 379   |  
|Amortization of deferred stock-based compensation                                                   |  |                                  | 2   |                                 |   | 2    |  |      | 7     |  |   | 7     |  
|                                                                                                    |  |                                  |     |                                 |   |      |  |      |       |  |   |       |  
|Total stock-based compensation expense                                                              |  | $                                | 373 |                                 | $ | 389  |  | $    | 1,167 |  | $ | 1,420 |  
|                                                                                                    |  |                                  |     |                                 |   |      |  |      |       |  |   |       |  

Certain of the Companys stock options are granted to officers and employees with vesting
acceleration features based upon the achievement of certain performance milestones. The timing of the attainment of these milestones may affect the timing of expense recognition under SFAS No. 123R.

The following table shows the assumptions used to compute stock-based compensation expense for stock options granted to employees and directors for three
and nine months ended September 30, 2007 and for the nine months ended September 30, 2008 using the Black-Scholes valuation model. The Company did not grant any stock options during the three months ended September 30, 2008; therefore
no assumptions related to the Black-Scholes valuation model were made for this period. The table below also shows the assumptions used to compute stock-based compensation expense for the Companys Employee Stock Purchase Plan (ESPP)
during the three and nine-month periods ended September 30, 2008 and 2007 using the Black-Scholes valuation model:



|                         |  |                                  |  |                                 |  |            |  |           
|------------------------ |  | -------------------------------- |  | ------------------------------- |  | ---------- |  | ----------
|                         |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|                         |  | 2008                             |  | 2007                            |  | 2008       |  | 2007      
|Stock Options            |  |                                  |  |                                 |  |            |  |           
|Expected dividend yield  |  |                                 |  | 0%                              |  | 0%         |  | 0%        
|Expected volatility      |  |                                 |  | 71%                             |  | 70%        |  | 71  77%  
|Expected life (in years) |  |                                 |  | 6.0                             |  | 6.0        |  | 6.0       
|Risk-free interest rate  |  |                                 |  | 4.5%                            |  | 3.1  3.4% |  | 4.5  4.8%
|                         |  |                                  |  |                                
|ESPP                     |  |                                  |  |                                 |  |            |  |           
|Expected dividend yield  |  | 0%                               |  | 0%                              |  | 0%         |  | 0%        
|Expected volatility      |  | 56  68%                         |  | 44  61%                        |  | 44  68%   |  | 44  61%  
|Expected life (in years) |  | 0.5  1.0                        |  | 0.5  1.0                       |  | 0.5  1.0  |  | 0.5  1.0 
|Risk-free interest rate  |  | 1.9  3.6%                       |  | 4.9  5.0%                      |  | 1.9  5.0% |  | 4.9  5.0%



6



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All stock option awards to non-employees are accounted for at the fair value of the consideration
received or the fair value of the equity instrument issued, as calculated using the Black-Scholes model, in accordance with SFAS No. 123R and Emerging Issues Task Force (EITF) Consensus No. 96-18, Accounting for Equity
Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. The option arrangements are subject to periodic remeasurement over their vesting terms.

The following table shows the assumptions used to compute stock-based compensation expense during the three and nine-month periods ended
September 30, 2008 and 2007 using the Black-Scholes valuation model for stock options granted to non-employees:



|                         |  |                                  |  |                                 |  |            |  |           
|------------------------ |  | -------------------------------- |  | ------------------------------- |  | ---------- |  | ----------
|                         |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|                         |  | 2008                             |  | 2007                            |  | 2008       |  | 2007      
|Expected dividend yield  |  | 0%                               |  | 0%                              |  | 0%         |  | 0%        
|Expected volatility      |  | 68%                              |  | 71%                             |  | 68  70%   |  | 71  77%  
|Expected life (in years) |  | 7.3                              |  | 8.3  8.8                       |  | 7.3  7.8  |  | 6.8  9.3 
|Risk-free interest rate  |  | 3.9%                             |  | 4.6%                            |  | 3.5  4.0% |  | 4.5  5.1%

Fair Value of Warrants Issued

In connection with the private placement of common stock in December 2007 and January 2008, the Company issued the investors warrants to purchase
1,206,273 shares of common stock with an exercise price of $8.034 per share. The warrants became exercisable immediately upon issuance and expire five years from issuance. The fair value of the warrants to purchase 1,091,622 shares of common stock
issued in conjunction with the first closing of the private placement in December 2007 was approximately $3,411,000 and was determined using the Black-Scholes method with the following assumptions: expected volatility of 67%, a dividend yield of 0%,
a risk-free interest rate of 3.52%, and an expected life of five years. The fair value of the warrants to purchase 114,651 shares of common stock issued in conjunction with the second closing of the private placement in January 2008 was
approximately $420,000 and was determined using the Black-Scholes method with the following assumptions: expected volatility of 67%, a dividend yield of 0%, a risk-free interest rate of 3.26%, and an expected life of five years. The fair value of
the warrants issued was allocated from the proceeds of the financing and was recorded in additional paid-in capital.

Comprehensive Loss

The Company reports comprehensive loss and its components as part of total stockholders equity. Comprehensive loss is comprised of
net loss and unrealized gains (losses) on available-for-sale investments. For the three and nine months ended September 30, 2008 and 2007, comprehensive loss was as follows:



|                                     |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                     |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                     |  | 2008                             |        |   | 2007                            |   |        | 2008 |  |   | 2007    |  
|Net loss                             |  | $                                | (6,313 | ) |                                 | $ | (9,191 | )    |  | $ | (21,247 | ) |  | $ | (24,068 | )
|Changes in unrealized gains (losses) |  |                                  | 2      |   |                                 |   | 24     |      |  |   | 4       |   |  |   | 58      |  
|                                     |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  
|Total comprehensive loss             |  | $                                | (6,311 | ) |                                 | $ | (9,167 | )    |  | $ | (21,243 | ) |  | $ | (24,010 | )
|                                     |  |                                  |        |   |                                 |   |        |      |  |   |         |   |  |   |         |  



7



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The fluctuation in accumulated other comprehensive income represents the net change in fair value for
invested assets as a result of changes in interest rates and other factors affecting fair value and as a result of sales of investments prior to their maturities. The cumulative effect of these periodic fluctuations is reflected as other
comprehensive income on the Companys balance sheet.

Net Loss Per Share

Basic loss per share is calculated by dividing the loss attributable to common stockholders by the weighted-average number of common shares outstanding
during the period less the weighted average unvested common shares subject to repurchase and without consideration of common stock equivalents. Diluted loss per share is computed by dividing the loss attributable to common stockholders by the
weighted-average number of common share and share equivalents outstanding for the period less the weighted average unvested common shares subject to repurchase. For purposes of this calculation, warrants and options to purchase common stock are
considered to be common stock equivalents but have been excluded from the calculation of diluted net loss per share as their effect is anti-dilutive.



|                                                                                     |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|------------------------------------------------------------------------------------ |  | ---------------------------------------------- | ---------- | - | ------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | --------- | -
|                                                                                     |  | Three Months Ended September 30,               |            |   | Nine Months Ended September 30, |  
|                                                                                     |  | 2008                                           |            |   | 2007                            |   |            | 2008 |  |   | 2007       |  
|                                                                                     |  | (in thousands except share and per share data) |           
|Numerator:                                                                           |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|Net loss                                                                             |  | $                                              | (6,313     | ) |                                 | $ | (9,191     | )    |  | $ | (21,247    | ) |  | $ | (24,068   | )
|Accretion of redeemable convertible preferred stock                                  |  |                                                |           |   |                                 |   |           |      |  |   |           |   |  |   | (4,626    | )
|                                                                                     |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|Loss attributable to common stockholders                                             |  | $                                              | (6,313     | ) |                                 | $ | (9,191     | )    |  | $ | (21,247    | ) |  | $ | (28,694   | )
|                                                                                     |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|Denominator:                                                                         |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|Weighted-average common shares outstanding                                           |  |                                                | 17,540,078 |   |                                 |   | 13,432,698 |      |  |   | 17,509,600 |   |  |   | 7,437,852 |  
|Less: Weighted-average unvested common shares subject to repurchase                  |  |                                                | (1,192     | ) |                                 |   | (3,227     | )    |  |   | (1,506     | ) |  |   | (3,264    | )
|                                                                                     |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|Denominator for basic and diluted loss per share attributable to common stockholders |  |                                                | 17,538,886 |   |                                 |   | 13,429,471 |      |  |   | 17,508,094 |   |  |   | 7,434,588 |  
|                                                                                     |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  
|Basic and diluted loss per share attributable to common stockholders                 |  | $                                              | (0.36      | ) |                                 | $ | (0.68      | )    |  | $ | (1.21      | ) |  | $ | (3.86     | )
|                                                                                     |  |                                                |            |   |                                 |   |            |      |  |   |            |   |  |   |           |  



|                                                                                                                         |  |               |  |        
|------------------------------------------------------------------------------------------------------------------------ |  | ------------- |  | -------
|                                                                                                                         |  | September 30,
|                                                                                                                         |  | 2008          |  | 2007   
|Historical outstanding securities not included in diluted loss per share attributable to common stockholder calculation: |  |               |  |        
|Options to purchase common stock                                                                                         |  | 1,420,550     |  | 813,960
|Warrants outstanding                                                                                                     |  | 1,265,846     |  | 59,573 
|Common stock subject to repurchase                                                                                       |  | 1,087         |  | 2,914  
|                                                                                                                         |  |               |  |        
|                                                                                                                         |  | 2,687,483     |  | 876,447
|                                                                                                                         |  |               |  |        

Recently Issued Accounting Standards

Not Yet Adopted

In December
2007, the EITF issued EITF Issue 07-1, Accounting for Collaborative Arrangements(EITF 07-1), which applies to collaborative arrangements where no separate legal entity exists and in which the parties are active participants and
are exposed to significant risks and rewards that depend on the success of the activity. This issue, among other things, requires certain income statement presentation of transactions with third parties and of payments between parties to the
collaborative arrangement, along with disclosure



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##### Table of Contents

about the nature and purpose of the arrangement. The provisions of EITF 07-1 are effective for fiscal years beginning on or after December 15, 2008. The
Company is currently evaluating the impact of the adoption of EITF 07-1 on its consolidated financial statements.

Adopted in 2008

In June 2007, the EITF issued Issue No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services To Be
Used in Future Research and Development Activities(EITF 07-3), which concluded that nonrefundable advance payments for goods or services to be received in the future for use in research and development activities should be deferred
and capitalized. The capitalized amounts should be expensed as the related goods are delivered or services are performed. Such capitalized amounts should be charged to expense if expectations change such that the goods or services will not be
delivered. The provisions of EITF 07-3 are effective for new contracts entered into during fiscal years beginning after December 15, 2007. The consensus may not be applied to earlier periods and early adoption is not permitted. The Company
adopted EITF 07-3 on January 1, 2008. The adoption of EITF 07-3 did not have a material impact on the Companys financial position and results of operations.

The Company adopted the provisions of the Financial Accounting Standards Board (FASB), Statement No. 157, Fair Value Measurements(SFAS No. 157), effective January 1,
2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the
exchange price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement
date. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Companys consolidated results of operations and financial
condition.

Effective January 1, 2008, the Company adopted SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities(SFAS No. 159). SFAS No. 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and financial liabilities. The Company
did not elect the fair value option under this Statement.

Note 3. Preferred Stock Warrants

In January and February 2007, the Company issued a total of 13,444,450 shares of Series C2 preferred stock at $0.75 per share upon exercise of warrants
resulting in aggregate net cash proceeds of approximately $10,083,000.



9



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In May 2007, the Company completed its IPO as a result of which all of the existing shares of the
Companys preferred stock were converted to common stock. At the time of the completion of the IPO, the Company had outstanding warrants to purchase 33,600 shares of its Series A preferred stock, 20,000 shares of its Series B preferred stock,
and 840,000 shares of its Series C2 preferred stock. Upon the closing of the Companys IPO, warrants to purchase 893,600 shares of the Companys preferred stock were converted into warrants to purchase 59,573 shares of the Companys
common stock, of which, at September 30, 2008, warrants to purchase 56,000 shares of the Companys common stock automatically exercise in the event of an acquisition of the Company.

For the three and nine months ended September 30, 2007, the Company recorded approximately $0 and $360,000, respectively, included in other income
for the decrease in the estimated fair value of all preferred stock warrants. Warrants to purchase the Companys preferred stock were converted to warrants to purchase its common stock as a result of the Companys IPO and not subject to
fair value remeasurement after the completion of the Companys IPO on May 7, 2007.

The Company values its warrants using the
Black-Scholes valuation method. The assumptions used in valuing these warrants are presented in the table below. There were no warrants that were subject to fair value remeasurement after all of the warrants to purchase preferred stock converted to
warrants to purchase common stock as a result of the Companys IPO, therefore assumptions used in valuing these warrants are presented only for the periods in which there were periodic remeasurements:



|                        |  |                                         
|----------------------- |  | ----------------------------------------
|                        |  | Period fromJanuary 1, 2007to May 7, 2007
|Expected dividend yield |  | 0%                                      
|Expected volatility     |  | 59  74%                                
|Expected life           |  | 1.6  6.8                               
|Risk-free interest rate |  | 4.6  4.9%                              



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Note 4. Cash and Cash Equivalents and Short-Term Investments

The following are summaries of cash, cash equivalents and short-term investments (in thousands):



|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|--------------------------- |  | ---- | ------ | -------------------- | - | --------------------- |  | - | ------------------- | - |  | - | ------
|                            |  | Cost |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Estimated FairValue
|As of September 30, 2008:   |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|Cash and money market funds |  | $    | 17,800 |                      | $ |                      |  | $ |                    |   |  | $ | 17,800
|Corporate notes             |  |      | 1,004  |                      |   |                      |  |   | (2                  | ) |  |   | 1,002 
|Commercial paper            |  |      | 11,989 |                      |   | 57                    |  |   |                    |   |  |   | 12,046
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|                            |  | $    | 30,793 |                      | $ | 57                    |  | $ | (2                  | ) |  | $ | 30,848
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|Reported as:                |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|Cash and cash equivalents   |  |      |        |                      |   |                       |  |   |                     |   |  | $ | 17,800
|Short-term investments      |  |      |        |                      |   |                       |  |   |                     |   |  |   | 13,048
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|                            |  |      |        |                      |   |                       |  |   |                     |   |  | $ | 30,848
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|As of December 31, 2007:    |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|Cash and money market funds |  | $    | 31,478 |                      | $ |                      |  | $ |                    |   |  | $ | 31,478
|Commercial paper            |  |      | 10,839 |                      |   | 47                    |  |   |                    |   |  |   | 10,886
|Corporate debt securities   |  |      | 5,751  |                      |   | 1                     |  |   | (1                  | ) |  |   | 5,751 
|Asset-backed securities     |  |      | 4,732  |                      |   | 4                     |  |   |                    |   |  |   | 4,736 
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|                            |  | $    | 52,800 |                      | $ | 52                    |  | $ | (1                  | ) |  | $ | 52,851
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|Reported as:                |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|Cash and cash equivalents   |  |      |        |                      |   |                       |  |   |                     |   |  | $ | 31,478
|Short-term investments      |  |      |        |                      |   |                       |  |   |                     |   |  |   | 21,373
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       
|                            |  |      |        |                      |   |                       |  |   |                     |   |  | $ | 52,851
|                            |  |      |        |                      |   |                       |  |   |                     |   |  |   |       

At September 30, 2008 and December 31, 2007, the contractual maturities of investments
held were less than one year. During the three and nine months ended September 30, 2008, the Company received approximately $8,218,000 and $21,967,000, respectively, in gross proceeds from the sales of certain short-term investments in
commercial paper, corporate debt and asset-backed securities. As a result of these sales, during the three months ended September 30, 2008, the Company recognized a loss of approximately $7,000 and during the nine months ended
September 30, 2008, the Company recognized a net gain of approximately $31,000, both of which were recorded as other income. The Company did not sell any of its investments prior to maturity during the three and nine months ended
September 30, 2007.



11



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Note 5. Fair Value Measurements

In accordance with SFAS No. 157, the following table represents the Companys financial assets (cash equivalents and short-term investments) measured at fair value on a recurring basis and their level within
the fair value hierarchy as of September 30, 2008 (in thousands):



|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|--------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ------ | ----------------------------------------- | - | -------------------------------------- |  | ----- | - |  | - | ------
|                                                                                  |  | Fair Value Measurements at September 30, 2008 Using        |        |                                          
|                                                                                  |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |        | SignificantOtherObservableInputs(Level
2) |   | SignificantUnobservableInputs(Level 3) |  | Total
|Components of cash equivalents and short-term investments measured at fair value: |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Money market funds                                                                |  | $                                                          | 17,573 |                                           | $ |                                       |  | $     |  |  | $ | 17,573
|Commercial paper                                                                  |  |                                                            |       |                                           |   | 12,046                                 |  |       |  |  |   | 12,046
|Corporate notes                                                                   |  |                                                            |       |                                           |   | 1,002                                  |  |       |  |  |   | 1,002 
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 17,573 |                                           | $ | 13,048                                 |  | $     |  |  |   | 30,621
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Operating cash                                                                    |  |                                                            |        |                                           |   | 227                                   
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       
|Total cash and cash equivalents and short-term investments                        |  |                                                            |        |                                           |   |                                        |  |       |   |  | $ | 30,848
|                                                                                  |  |                                                            |        |                                           |   |                                        |  |       |   |  |   |       

Note 6. Stockholders Equity

Notes Receivable from Stockholders

In January 2007, the Companys board of directors
forgave all outstanding non-recourse promissory notes from certain current and former officers of the Company in the amount of $379,000, including accrued interest, which was recorded as part of stock-based compensation. These non-recourse
promissory notes were issued in exchange for the exercise of stock options to purchase an aggregate 128,886 shares of common stock and in exchange for 140,000 shares of the Companys common stock issued under restricted stock purchase
agreements.

2000 Stock Incentive Plan and 2007 Stock Plan

During the three months ended September 30, 2008, the Company did not grant any stock options. During the three months ended September 30, 2007, the Company granted options to purchase a total of 17,333
shares of the Companys common stock to employees and a member of the board of directors with a fair value of approximately $97,000 that is expected to be amortized through 2011, as of September 30, 2008.

During the nine months ended September 30, 2008 the Company granted options to purchase a total of 420,750 shares of the Companys common stock
to employees and members of the board of directors with a fair value of approximately $1,319,000 that is expected to be amortized through 2012. During the nine months ended September 30, 2007, the Company granted options to purchase a total of
192,407 shares of the Companys common stock to employees and members of the board of directors with a fair value of approximately $1,825,000 that is expected to be amortized through 2011, as of September 30, 2008.

During the nine months ended September 30, 2008, 36,706 shares of the Companys common stock were issued as a result of stock option exercises.



12



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##### Table of Contents

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

This discussion and analysis should be read in conjunction with our financial statements and accompanying notes included elsewhere in this report.
Operating results are not necessarily indicative of results that may occur in future periods.

This report contains forward-looking
statements that are based upon current expectations within the meaning of the Private Securities Reform Act of 1995. We intend that such statements be protected by the safe harbor created thereby. Forward-looking statements involve risks and
uncertainties and our actual results and the timing of events may differ significantly from the results discussed in the forward-looking statements. We undertake no obligation to (and expressly disclaim any such obligation to) revise or update the
forward-looking statements made herein or the risk factors whether as a result of new information, future events or otherwise. Examples of such forward-looking statements include, but are not limited to, statements about or relating to:



| |  |  | potential regulatory approval of the new drug application, or NDA, for NGX-4010 that was recently submitted to the U.S. Food and Drug Administration, or FDA, and
the timing of FDA review of such NDA;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of potential approval by the European Medicines Agency, or EMEA, of the marketing authorization application, or MAA, submitted for NGX-4010, the
potential effect, if any, on the review process that may result from our filing additional information in response to EMEA questions and the potential narrowing of the scope of indications for which we potentially obtain approval under such MAA;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential partners for commercialization of NGX-4010 or other product candidates;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | the sufficiency of existing resources to fund our operations for at least the next twelve months;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | plans to extend possible product labeling of NGX-4010 in the United States beyond PHN to potentially include PDN and HIV-DSP;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | potential development plans with respect to NGX-1998 and other potential product candidates;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | losses, costs and expenses and cash flows;
| | - |  | ------------------------------------------



| |  |  | potential competitors and competitive products;
| | - |  | -----------------------------------------------



| |  |  | our plans for sales, marketing and manufacturing activities;
| | - |  | ------------------------------------------------------------



| |  |  | capital requirements and our needs for additional financing;
| | - |  | ------------------------------------------------------------



| |  |  | patents and our and others intellectual property; and
| | - |  | ------------------------------------------------------



| |  |  | expected future sources of revenue and capital.
| | - |  | -----------------------------------------------



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Such forward-looking statements involve risks and uncertainties, as further described in the section of
this quarterly report entitled Risk Factors, including, but not limited to, those risks and uncertainties relating to:



| |  |  | difficulties or delays in development, testing, obtaining regulatory approval for, and undertaking production and marketing of our drug candidates;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | results in clinical trials may not be sufficient to obtain FDA or European regulatory approval;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | unexpected adverse side effects or inadequate therapeutic efficacy of our drug candidates that could slow or prevent product approval for particular indications
(including the risk that current and past results of clinical trials or preclinical studies are not indicative of future results of clinical trials, and the difficulties associated with clinical trials for pain indications);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain additional financing;
| | - |  | -------------------------------------------



| |  |  | potential for delays in or the inability to complete commercial partnership relationships;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | physician or patient reluctance to use NGX-4010, if approved, or lack of payer coverage for NGX-4010 and for the procedure to administer it, which may impact
physician utilization of NGX-4010;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changing standards of care and the introduction of products by competitors or alternative therapies for the treatment of indications we target;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the uncertainty of protection for our intellectual property, through patents, trade secrets or otherwise; and
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | potential infringement of the intellectual property rights or trade secrets of third parties.
| | - |  | ---------------------------------------------------------------------------------------------

The following discussion should be read in conjunction with the section of this quarterly report entitled Risk Factors.

Overview

We are a biopharmaceutical company focused
on developing and commercializing novel pain management therapies. We are assembling a portfolio of pain management product candidates and are developing innovative new therapies based on known chemical entities. Our initial focus is on chronic
peripheral neuropathic pain, including postherpetic neuralgia, or PHN, painful HIV-distal sensory polyneuropathy, or HIV-DSP, and painful diabetic neuropathy, or PDN. Our most advanced product candidate, NGX-4010, a synthetic capsaicin-based dermal
patch designed to manage pain associated with peripheral neuropathic pain conditions, is the subject of an NDA, which was submitted to the FDA in October 2008 and is subject to acceptance by the FDA. Our NDA seeks marketing approval of NGX-4010 for
the management of pain associated with PHN. In addition, an MAA is currently under review by the EMEA. Our MAA, which was accepted under the centralized procedure in September 2007, seeks approval for use of NGX-4010 for the management of peripheral
neuropathic pain, which, if granted, would allow the marketing of NGX-4010 for peripheral neuropathic conditions including PHN, HIV-DSP and PDN, among others. Our NDA is supported by two Phase 3 studies in PHN and our MAA is supported by one Phase 3
study in HIV-DSP and one Phase 3 study in PHN, all of which met their primary endpoints as well as a number of other studies which we believe support the efficacy and safety of NGX-4010. The results of our successful Phase 3 studies suggest that a
single 30- or 60-minute application of NGX-4010, depending on the indication, may provide at least 12 weeks of clinically-meaningful pain relief. We have also completed two Phase 3 trials for NGX-4010 that have not met their primary endpoints, one
in PHN and one in HIV-DSP.



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In September 2008, we submitted responses to the scheduled Day 120 questions from the EMEA regarding our
MAA. Our response to the scheduled Day 120 questions included clinical data that became available after our initial filing, including our two most recent Phase 3 studies, one in PHN that met its primary endpoint and one in HIV-DSP that did not.
Although we anticipate a decision on our MAA in the first half of 2009, the incorporation of significant additional clinical data to our MAA could delay the EMEAs decision or, depending on the EMEAs evaluation of such data, could result
in our deciding to withdraw and resubmit our MAA. Although our MAA seeks an approval for peripheral neuropathic pain, a marketing authorization, if granted, may be limited to specific neuropathic pain indications, such as PHN.

We are currently focusing our resources on seeking marketing approval of NGX-4010 in both the United States and Europe and preparing for potential
commercialization if NGX-4010 is approved. We are currently evaluating our future clinical development program in NGX-4010 with respect to PDN and HIV-DSP. We are also developing a non-patch liquid formulation of synthetic capsaicin, NGX-1998, for
which we filed an investigational new drug application, or IND, in the second quarter of 2008 and for which we commenced a Phase 1 study in that quarter. This Phase 1 study has since completed enrollment. We are currently evaluating the overall
scope and timing of a development program for NGX-1998. Our evaluation of potential future development activities with regard to both NGX-4010 and NGX-1998 will be determined by a number of factors, including availability of resources, potential
regulatory considerations and strategies related to label expansion opportunities. In addition, we are developing an opioid prodrug program for use in managing pain associated with other chronic pain conditions as well as an analgesic prodrug
program for use in managing pain associated with both chronic and acute pain conditions. We have conducted preliminary non-clinical evaluations in our opioid and analgesic prodrug programs and intend to seek a potential partner for the continued
development of potential product candidates under these programs. We hold all worldwide commercial rights to our product candidates and are actively engaged in discussions with potential commercial partners for both our NGX-4010 and NGX-1998 product
candidates, with a primary focus on European commercialization. We are currently expanding our focus to include the United States market.

We were incorporated in 1998 as Advanced Analgesics, Inc., and commenced operations in 2000 as NeurogesX, Inc. From inception through 2001 our primary activities were related to formulation development and preclinical studies of our lead
product candidate NGX-4010. Since 2002, our focus has expanded to include clinical development of our lead product candidate, NGX-4010, establishing sources of supply and manufacturing processes for NGX-4010 and, more recently, regulatory activities
including the submission of our MAA in September 2007 and our NDA in October 2008. Our focus has also recently expanded to include preparation for potential commercialization of NGX-4010 should marketing approval be attained, seeking commercial
partners for NGX-4010 and the initiation of clinical and preclinical evaluation of additional product candidates, such as NGX-1998 and our opioid prodrug program and analgesic prodrug candidates.

We are a development stage company. To date, we have not generated any revenues and have funded our operations primarily by selling equity securities and
establishing debt facilities. We have incurred significant losses since our inception. As of September 30, 2008, we had a deficit accumulated during the development stage of approximately $185.4 million, of which approximately $38.9 million
represents non-cash charges for the accretion of redeemable convertible preferred stock. We expect to continue to incur annual operating losses over the next several years and those losses may increase as we continue our efforts to gain marketing
approval for NGX-4010 in the United States and the European Union, prepare for potential commercialization if NGX-4010 is approved for marketing, and continue development of our product candidates.



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##### Table of Contents

Critical Accounting Policies and Significant Judgments and Estimates

As of the date of the filing of this quarterly report, we believe that there have been no material changes to our critical accounting policies during the
nine months ended September 30, 2008 compared to those discussed in our 2007 Form 10-K, filed on March 26, 2008. Certain of our accounting policies require the use of management judgment and estimates, of which we present the material
updates below, and actual results may differ from those estimates.

Stock-Based Compensation

The following table shows the assumptions used to compute stock-based compensation expense for stock options granted to: employees and directors;
non-employees; and for our Employee Stock Purchase Plan, or ESPP, during the three and nine-month periods ended September 30, 2008 and 2007 using the Black-Scholes valuation model:



|                         |  |                                  |  |                                 |  |            |  |           
|------------------------ |  | -------------------------------- |  | ------------------------------- |  | ---------- |  | ----------
|Employees:               |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|                         |  | 2008                             |  | 2007                            |  | 2008       |  | 2007      
|Stock Options            |  |                                  |  |                                 |  |            |  |           
|Expected dividend yield  |  |                                 |  | 0%                              |  | 0%         |  | 0%        
|Expected volatility      |  |                                 |  | 71%                             |  | 70%        |  | 71-77%    
|Expected life (in years) |  |                                 |  | 6.0                             |  | 6.0        |  | 6.0       
|Risk-free interest rate  |  |                                 |  | 4.5%                            |  | 3.1  3.4% |  | 4.5  4.8%
|                         |  |                                  |  |                                
|ESPP                     |  |                                  |  |                                 |  |            |  |           
|Expected dividend yield  |  | 0%                               |  | 0%                              |  | 0%         |  | 0%        
|Expected volatility      |  | 56  68%                         |  | 44  61%                        |  | 44  68%   |  | 44  61%  
|Expected life (in years) |  | 0.5  1.0                        |  | 0.5  1.0                       |  | 0.5  1.0  |  | 0.5  1.0 
|Risk-free interest rate  |  | 1.9  3.6%                       |  | 4.9  5.0%                      |  | 1.9  5.0% |  | 4.9  5.0%
|                         |  |                                 
|Non-employees:           |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
|                         |  | 2008                             |  | 2007                            |  | 2008       |  | 2007      
|Expected dividend yield  |  | 0%                               |  | 0%                              |  | 0%         |  | 0%        
|Expected volatility      |  | 68%                              |  | 71%                             |  | 68  70%   |  | 71  77%  
|Expected life (in years) |  | 7.3                              |  | 8.3  8.8                       |  | 7.3  7.8  |  | 6.8  9.3 
|Risk-free interest rate  |  | 3.9%                             |  | 4.6%                            |  | 3.5  4.0% |  | 4.5  5.1%

Certain of our stock options are granted to officers and employees with vesting acceleration
features based upon the achievement of certain performance milestones. The timing of the attainment of these milestones may affect the timing of the expense recognition under Statement of Financial Accounting Standards No. 123R, Share-Based
Payment, or SFAS No. 123R.



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We recognized stock-based compensation expense, which includes the fair value of options granted since
January 1, 2006 under SFAS No. 123R, amortization of deferred stock-based compensation, the costs of awards to consultants, expenses related to awards to employees subject to variable accounting and forgiven notes receivable and related
interest, as follows (in thousands):



|                               |  |                                  |     |                                 |   |      |  |      |       |  |   |      
|------------------------------ |  | -------------------------------- | --- | ------------------------------- | - | ---- |  | ---- | ----- |  | - | -----
|                               |  | Three Months Ended September 30, |     | Nine Months Ended September 30,
|                               |  | 2008                             |     | 2007                            |   | 2008 |  | 2007
|Research and development       |  | $                                | 183 |                                 | $ | 210  |  | $    | 597   |  | $ | 735  
|General and administrative     |  |                                  | 190 |                                 |   | 179  |  |      | 570   |  |   | 685  
|                               |  |                                  |     |                                 |   |      |  |      |       |  |   |      
|Total stock-based compensation |  | $                                | 373 |                                 | $ | 389  |  | $    | 1,167 |  | $ | 1,420
|                               |  |                                  |     |                                 |   |      |  |      |       |  |   |      

Estimation of Fair Value of Warrants to Purchase Redeemable Convertible Preferred Stock

We accounted for warrants to purchase redeemable convertible preferred stock pursuant to the Financial Accounting Standards Board
Staff Position No. 150-5, Issuers Accounting under Statement No. 150 for Freestanding Warrants and Other similar Instruments on Shares that are Redeemable, or FSP No. 150-5, which required us to classify these warrants as current
liabilities and to adjust the value of these warrants to their fair value at the end of each reporting period. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option valuation model, based
on the estimated market value of the underlying redeemable convertible preferred stock at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of
the price of the underlying redeemable convertible preferred stock. These estimates, especially the market value of the underlying redeemable convertible preferred stock and the expected volatility, are highly judgmental.

Upon the closing of our initial public offering, or IPO, on May 7, 2007, all outstanding warrants to purchase shares of preferred stock were
converted to warrants to purchase shares of our common stock and, as a result, are no longer subject to FSP No. 150-5. The then-current aggregate fair value of these warrants of approximately $426,000 was reclassified from liabilities to
additional paid-in capital, a component of stockholders equity, in the second quarter of 2007 and we have ceased to record any further periodic fair value adjustments.

Adoption of New Accounting Standard

We adopted the provisions of Financial Accounting Standards
Board Statement No. 157, Fair Value Measurements, or SFAS No. 157, effective January 1, 2008. SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles
and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market to transfer the asset or liability in an orderly transaction between market participants on the measurement date. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable
and the last unobservable, that may be used to measure fair value, which are the following:

Level 1 - Quoted prices in active markets for
identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value
of the assets or liabilities.



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The adoption of this statement did not have a material impact on our consolidated results of operations
and financial condition.

A discussion of other recently issued accounting standards can be found in Note 2 of the unaudited condensed
consolidated financial statements.

Results of Operations

Our research and development expenses consist of internal and external costs. Our internal costs are primarily employee salaries and benefits, contract employee expense, non-cash stock compensation expense, allocated
facility and other overhead costs. Our external costs are primarily expenses related to the development of product candidates including formulation development, manufacturing process development, non-clinical studies, clinical trial costs, such as
the cost of clinical research organizations and clinical investigators, and costs associated with the preparation and filing of regulatory submissions.

For the period from inception through September 30, 2008, NGX-4010 has accounted for in excess of 90% of our external research and development expenses. Specifically, in the three and nine-month periods ended
September 30, 2008, our external research and development expenses totaled approximately $1.3 million and $6.4 million, respectively, and of these amounts 64% and 85%, respectively, were incurred in programs related to NGX-4010. In the three
and nine-month periods ended September 30, 2007, our external research and development expenses totaled approximately $5.3 million and $13.3 million, respectively, and of these amounts 91% and 93%, respectively, were incurred in programs
related to NGX-4010. We commence tracking the separate, external costs of a project when we determine that a project has a reasonable chance of entering clinical development. We use our internal research and development resources across several
projects and many resources are not attributable to specific projects. Accordingly, we do not account for our internal research and development costs on a project basis. However, over time, we believe that our internal costs are expended on each
development project generally in proportion to our external development costs for such project relative to total external development costs.

The process of conducting preclinical testing and clinical trials necessary to obtain FDA and other regulatory approvals is costly and time consuming. The probability of success for each product candidate may be affected by a variety of
factors, including, among others, results of non-clinical studies, the development of manufacturing capabilities, successful clinical results, determination of regulatory authorities of the safety and efficacy of our product candidates, our funding,
and competitive and commercial viability. As a result of these and other factors, we are unable to determine the duration and completion costs of current or future product candidate development or when or to what extent we will generate revenues
from commercialization and sale of any of our product candidates. Currently we are primarily focused on attaining market approval for NGX-4010 in the United States for PHN and in the European Union for peripheral neuropathic pain and preparing for a
product launch of NGX-4010 if marketing approval is attained. Our MAA was accepted by the EMEA in September 2007, and we submitted an NDA in the United States in October 2008. Over the next few quarters, we anticipate that our research and
development expenses will be focused primarily on activities supporting our NDA and MAA. We do not currently anticipate any significant non-clinical or clinical trial activity over the next few quarters as we continue to evaluate the scope and
timing of our clinical development efforts with respect to possible label extension beyond PHN for NGX-4010 and further development of our NGX-1998 or other development programs. Therefore, we expect that our quarterly research and development
expenses may be similar to or even lower than our third quarter 2008 research and development expenses.

Our general and administrative
expenses consist primarily of salaries and benefits for our administrative and marketing personnel, non-cash stock compensation expense, professional fees related to our administrative, finance, human resource, legal and information technology
functions, marketing expenses,



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including expenses associated with pre-commercialization activities, costs associated with our status as a public company and patent costs. In addition,
general and administrative expenses include allocated facility, basic operational and support costs and insurance costs. Given the current economic environment and its impact on access to capital in general, we expect that our G&A spending over
the next few quarters may be flat or lower than recent quarters. However, as economic events change or access to capital improves, we anticipate that our spending will increase in anticipation of potential commercialization of NGX-4010. Those
increases are likely to be attributable to marketing activities in anticipation of and upon receipt of, required regulatory approvals and potentially the costs of hiring and deploying a sales force in the United States to support a commercial launch
of NGX-4010 should we achieve FDA approval. Additional increases are likely to be attributable to investments in general and administrative infrastructure to support potential commercial activities.

Comparison of Three Months Ended September 30, 2008 and 2007



|                                    |  |                                    |        |   |                    |   |        |                     |  |   |        |   |  |     |   
|----------------------------------- |  | ---------------------------------- | ------ | - | ------------------ | - | ------ | ------------------- |  | - | ------ | - |  | --- | --
|                                    |  | Three Months Ended September 30,   |        |   | Increase(Decrease) |   |        | %Increase(Decrease) | 
|                                    |  | 2008                               |        |   | 2007               |   |        |                    
|                                    |  | (in thousands, except percentages) |       
|Research and development expenses   |  | $                                  | (3,653 | ) |                    | $ | (7,481 | )                   |  | $ | (3,828 | ) |  | (51 | %)
|General and administrative expenses |  |                                    | (2,677 | ) |                    |   | (1,973 | )                   |  |   | 704    |   |  | 36  | % 
|Interest income                     |  |                                    | 212    |   |                    |   | 562    |                     |  |   | (350   | ) |  | (62 | %)
|Interest expense                    |  |                                    | (183   | ) |                    |   | (299   | )                   |  |   | (116   | ) |  | (39 | %)
|Other income (expense), net         |  |                                    | (12    | ) |                    |   |       |                     |  |   | 12     |   |  |    |   

Research and Development Expenses.Research and development expenses decreased
approximately $3.8 million, or 51%, to $3.7 million for the three months ended September 30, 2008 from $7.5 million for the same period in 2007. Research and development expenses decreased primarily as a result of a $3.5 million decrease in
clinical study related costs associated with NGX-4010. During the third quarter of 2007, we were conducting two Phase 3 clinical trials, whereas in the third quarter of 2008, there were no major clinical trials ongoing. Also contributing to the
decrease was a $0.3 million decrease in regulatory expenses resulting from the recognition of our MAA filing fees in the third quarter of 2007 partially offset by an increase in employee related expenses in the 2008 period. These decreases were
partially offset by a $0.1 million increase in costs related to our manufacturing support infrastructure to support our regulatory submissions and prepare for potential commercial launch of our lead product candidate if marketing approval is
attained.

General and Administrative Expenses. General and administrative expenses increased approximately $0.7 million, or 36%, to
$2.7 million for the three months ended September 30, 2008 from $2.0 million for the same period in 2007. General and administrative expenses increased primarily as a result of a $0.4 million increase in general and administrative
employee-related expenses due to an increase in staffing in support of being a public company and pre-commercialization activities. Also contributing to the increase was a $0.2 million increase in spending for pre-commercialization activities such
as medical education and marketing materials development. In addition, there was a $0.2 million increase in professional fees.

Interest
income. Interest income decreased approximately $0.4 million, or 62%, to $0.2 million for the three months ended September 30, 2008 from $0.6 million for the same period in 2007. The decrease was primarily attributable to a decrease in the
rate of return on our invested assets as rates declined in the market in general, and as we moved our invested assets to investments of lower relative risk in light of events in the credit markets. The decrease was also attributable to a lower
average invested asset balance during the three months ended September 30, 2008. We have continued efforts to reduce the relative risk of our investment portfolio and subsequent to September 30, 2008, we sold all of our remaining
investments in commercial paper and are currently invested in U.S. Treasury securities. As a result, our interest income over the coming quarters is expected to be lower relative to past quarters.



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Interest expense. Interest expense decreased approximately $0.1 million, or 39%, to $0.2 million
for the three months ended September 30, 2008 from $0.3 million for the same period in 2007. This decrease was related to the reduction in the outstanding principal balance of notes payable as a result of the scheduled repayment of principal on
those notes payable.

Comparison of Nine Months Ended September 30, 2008 and 2007



|                                    |  |                                    |         |   |                    |   |         |                      |  |   |        |   |  |     |   
|----------------------------------- |  | ---------------------------------- | ------- | - | ------------------ | - | ------- | -------------------- |  | - | ------ | - |  | --- | --
|                                    |  | Nine Months Ended September 30,    |         |   | Increase(Decrease) |   |         | % Increase(Decrease) | 
|                                    |  | 2008                               |         |   | 2007               |   |         |                     
|                                    |  | (in thousands, except percentages) |        
|Research and development expenses   |  | $                                  | (13,607 | ) |                    | $ | (19,667 | )                    |  | $ | (6,060 | ) |  | (31 | %)
|General and administrative expenses |  |                                    | (8,027  | ) |                    |   | (5,042  | )                    |  |   | 2,985  |   |  | 59  | % 
|Interest income                     |  |                                    | 1,001   |   |                    |   | 1,229   |                      |  |   | (228   | ) |  | (19 | %)
|Interest expense                    |  |                                    | (640    | ) |                    |   | (948    | )                    |  |   | (308   | ) |  | (32 | %)
|Other income (expense), net         |  |                                    | 26      |   |                    |   | 360     |                      |  |   | (334   | ) |  | (93 | %)

Research and Development Expenses. Research and development expenses decreased
approximately $6.1 million, or 31%, to $13.6 million for the nine months ended September 30, 2008 from $19.7 million for the same period in 2007. Research and development expenses decreased primarily as a result of a $6.1 million decrease in
clinical study related costs associated with NGX-4010. During the nine months ended September 30, 2007, we were conducting two Phase 3 clinical trials, whereas we completed our latest Phase 3 clinical trial in the first half of 2008. Also
contributing to the decrease was a $0.3 million decrease in external regulatory expenses resulting from the recognition of our MAA filing fees in the third quarter of 2007 and a $0.2 million decrease in quality assurance costs as a result of a lower
level of clinical trial activity in the 2008 period. Additional decreases included a $0.1 million decrease in non-cash stock based compensation expense and a $0.1 million decrease in spending related to NGX-1998. These decreases were partially
offset by a $0.4 million increase in spending related to our manufacturing support infrastructure to support our regulatory submissions and prepare for potential commercial launch of our lead product candidate if marketing approval is attained.
Additional increases related to a $0.3 million increase in internal regulatory and quality assurance expenses associated with an increase in staffing in support of our MAA and NDA filings and a $0.1 million increase in research in support of our new
product initiatives.

General and Administrative Expenses. General and administrative expenses increased approximately $3.0 million,
or 59%, to $8.0 million for the nine months ended September 30, 2008 from $5.0 million for the same period in 2007. General and administrative expenses increased primarily as a result of a $1.2 million increase in spending for
pre-commercialization activities such as marketing materials development, medical education and work in support of our pricing and reimbursement strategies. Other increases were due to costs of being a public company including a $0.8 million
increase in professional fees, directors and officers insurance expense and other public company costs. Additional increases included a $0.8 million increase in general and administrative employee-related expenses as a result of an increase in
staffing in support of being a public company and in support of pre-commercialization activities, and a $0.4 million increase in costs associated with our new facility lease, which commenced upon the move to our new corporate headquarters in San
Mateo, California in October 2007. These increases were partially offset by a $0.1 million decrease in non-cash stock-based compensation expense.

Interest income. Interest income decreased approximately $0.2 million, or 19%, to $1.0 million for the nine months ended September 30, 2008 from $1.2 million for the same period in 2007. This decrease was



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primarily attributable to a decrease in the rate of return on our invested assets as rates declined in the market, in general, and as we moved our invested
assets to investments of lower relative risk in light of events in the credit markets, partially offset by a higher average invested asset balance during the 2008 period. The average invested balance was impacted by the timing of the closings of
both our IPO in May 2007 and our private placement transactions in December 2007 and January 2008.

Interest expense. Interest
expense decreased approximately $0.3 million, or 32%, to $0.6 million for the nine months ended September 30, 2008 from $0.9 million for the same period in 2007. This decrease was related to the reduction in the outstanding principal balance of
notes payable as a result of the scheduled repayment of principal on those notes payable.

Other income (expense), net. Other income
(expense), net, decreased approximately $0.3 million, or 93%, to less than $0.1 million for the nine months ended September 30, 2008 from $0.4 million for the same period in 2007. The other income amount of $0.4 million in the 2007 period was
attributable to a decline in the fair value of our preferred stock warrant liability. Due to the conversion of all outstanding shares of preferred stock into common stock in connection with our IPO in the second quarter of 2007, these warrants
became exercisable for common stock and are no longer required to be recorded at fair value at each quarter-end. We performed a final remeasurement in the period ended June 30, 2007 and have ceased to record any further periodic fair value
adjustments.

Liquidity and Capital Resources

Since our inception through September 30, 2008, we have financed our operations primarily through private placements and a public offering of our equity securities and, to a lesser extent, through debt facilities. Through
September 30, 2008, we have received approximately $158.6 million from the sale of our equity securities, net of issuance costs. On May 7, 2007, we completed an IPO of our common stock which resulted in net cash proceeds, after deducting
total expenses including underwriting discounts and commissions and other offering-related expenses, of approximately $38.1 million. On December 28, 2007, we completed the first closing of a private placement of our common stock and warrants
resulting in net cash proceeds of $21.5 million and on January 3, 2008, we completed the second closing of this private placement of our common stock and warrants resulting in net cash proceeds of $2.3 million.

As of September 30, 2008, we had approximately $30.8 million in cash, cash equivalents and short-term investments. Our cash and investment
balances are typically held in a variety of interest bearing instruments including corporate bonds, commercial paper and money market funds. Cash in excess of immediate operational requirements is invested in accordance with our investment policy
primarily with a view to liquidity and capital preservation. Further, to reduce portfolio risk through diversification, our investment policy specifies a concentration limit of 10% in any one issuer or group of issuers of corporate bonds or
commercial paper at the time of purchase. Recent events in the credit markets have caused a liquidity crisis in most credit facilities including mortgage-backed securities and auction-rate securities. In response to these events we have undertaken a
continual evaluation of our investment portfolio to protect the principal balances and maintain liquidity of our investments. This evaluation has resulted in our converting, over time, all of our investment holdings into U.S. Treasury securities as
of October 31, 2008. Our sales of investments in other than U.S. Treasury securities were generally conducted at or near cost, however certain individual investments were sold at either a gain or loss, that were not material individually or in
the aggregate.

Net cash used in operating activities was approximately $21.9 million during the nine months ended September 30, 2008
and 2007. Net cash used in each of these periods was primarily a result of external research and development expenses, internal personnel costs associated with our research and development



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programs and infrastructure costs supporting our research and development activities. Included in net cash used in operating activities are net changes in
assets and liabilities affecting cash, including significant reductions in accounts payable and other accrued expenses during the nine months ended September 30, 2008 due to the timing of research and development activities as well as the
timing of our payments to our suppliers, vendors and employees.

Net cash provided by investing activities was approximately $8.8 million
during the nine months ended September 30, 2008 and net cash used in investing activities was approximately $27.0 million during the nine months ended September 30, 2007. Investing activities consist primarily of the purchase, sale and
maturity of marketable securities and, to a lesser extent, the purchase of capital equipment. The net cash provided by investing activities during the nine months ended September 30, 2008 reflected maturities and sales of marketable securities
in excess of the amount purchased during this period as we continued our efforts to reduce the relative risk of our investment portfolio. Net cash used in investing activities during the nine months ended September 30, 2007 reflected the
investment of a majority of the net proceeds generated from our IPO, completed on May 7, 2007, in short-term investments in the 2007 period. Purchases of property and equipment were not significant during these periods. However, we expect that
property and equipment expenditures may increase in the future in conjunction with the potential commercial launch of NGX-4010.

Net cash
used in financing activities was approximately $0.6 million during the nine months ended September 30, 2008 and net cash provided by financing activities was approximately $47.0 million during the nine months ended September 30, 2007.
Financing activities consisted primarily of net proceeds from the sale of our common stock and warrants and the exercise of options in the nine months ended September 30, 2008, offset by principal repayments on our venture loan financing
arrangements. And in the same period in 2007, financing activities consisted primarily of net proceeds from our IPO and the exercise of warrants underlying our preferred stock, partially offset by principal repayments on our venture loan financing
arrangements.

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



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



| |  |  | the conduct of manufacturing activities including process development and manufacture of clinical product supply and potentially commercial product supply;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the scope and cost of pre-commercial activities;
| | - |  | ------------------------------------------------



| |  |  | our ability to establish and maintain strategic collaborations, including licensing and other arrangements that we have or may establish;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the costs of establishing sales and marketing infrastructure, distribution capabilities and potentially a sales force;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | the costs and timing of any post-approval regulatory commitments;
| | - |  | -----------------------------------------------------------------



| |  |  | the progress of our development programs including the number, size and scope of clinical trials and non-clinical development;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | the success of the commercialization of our products;
| | - |  | -----------------------------------------------------



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



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

At September 30, 2008, we had approximately $30.8 million in cash, cash equivalents and short-term investments and the balance of our notes
payable equaled approximately $4.2 million. During the three months ended September 30, 2008, we used a total of approximately $6.2 million in operating activities, which was lower than our cash used in operating activities of approximately
$7.5 million and $7.9 million in the second quarter of 2008 and third quarter of 2007, respectively. At least for the next few quarters, we anticipate that our available cash resources will be devoted to supporting our regulatory processes in the
European Union and United States as well as certain pre-commercialization activities related primarily to our reimbursement strategies. As a result, we anticipate that our existing cash and investments will be sufficient to meet our projected
operating requirements for at least the next twelve months.

To date, we have incurred recurring net losses and negative cash flows from
operations. Until we can generate significant cash from our operations, if ever, we expect to continue to fund our operations with existing cash resources generated from the proceeds of offerings of our equity securities as well as potentially
through strategic collaboration agreements, debt financing or the sale of other equity securities. However, we may not be successful in obtaining collaboration agreements, or in receiving milestone or royalty payments under those agreements. In
addition, we cannot be sure that our existing cash and investment resources will be adequate or 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 at an earlier stage of development or negotiate less favorable terms than we
would otherwise choose. Failure to obtain adequate financing also may adversely affect the launch of our product candidates, if approved for marketing, or our ability to continue in business. 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 ratios that may restrict our ability to operate our business. If we raise additional funds by issuing equity securities, substantial
dilution to existing stockholders would likely result.

Off-Balance Sheet Arrangements

Since inception, we have not engaged in any off-balance sheet arrangements, including the use of structured finance, special purpose entities or variable
interest entities.

Contractual Obligations

There have been no material changes to our disclosures regarding contractual obligations set forth in our 2007 Form 10-K, filed on March 26, 2008.



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

We believe there has been no material change in our exposure to market risk from that discussed in our Form 10-K filed for the year ended December 31, 2007.



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

(a) Evaluation of
disclosure controls and procedures

Our management evaluated, with the participation and under the supervision of our Chief Executive
Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Chief



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Executive Officer and our Chief Financial Officer have concluded, subject to the limitations described below, that our disclosure controls and procedures are
effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange
Commission, or SEC, rules and forms, and that such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosures.

(b) Changes in internal control over financial reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.

(c) Limitations on the Effectiveness of Controls

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls are
met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected. Accordingly, our disclosure controls and procedures are
designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met.



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PART II. OTHER INFORMATION



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

None.



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

You should consider carefully the
risk factors described below, and all other information contained in or incorporated by reference in this Quarterly Report on Form 10-Q before making an investment decision. If any of the following risks actually occur, they may materially harm our
business, financial condition, operating results or cash flows. As a result, the market price of our common stock could decline, and you could lose all or part of your investment. Additional risks and uncertainties that are not yet identified or
that we think are immaterial may also materially harm our business, operating results or financial condition and could result in a complete loss of your investment.

Risks Related to our Business

Our success depends on our ability to obtain U.S. regulatory
approval for our lead product candidate, NGX-4010.

Our success depends substantially on obtaining regulatory approval for our most
advanced product candidate, NGX-4010, a dermal patch containing a high concentration of synthetic capsaicin. Regulatory approval in the United States, requires the completion of extensive non-clinical and clinical evaluation of a product candidate
to demonstrate substantial evidence of safety and efficacy of the product candidate, as well as development of manufacturing processes which demonstrate the ability to reliably and consistently produce the product candidate under current Good
Manufacturing Practice regulations. Each of these elements include certain judgments of applicable regulatory requirements of what will ultimately be deemed acceptable to the regulatory authority. There can be no assurance that any or all
aspects of our development program or our manufacturing processes will satisfy the regulatory requirements for approval, the failure of which to do so would significantly delay or even prevent approval of our product candidate and seriously harm our
ability to generate revenue. NGX-4010 has been evaluated in three completed Phase 3 clinical trials for the management of pain associated with PHN, one of which did not meet its primary endpoint, and two completed Phase 3 clinical trials for the
management of pain associated with HIV-DSP, one of which did not meet its primary endpoint. The FDA generally requires successful completion of at least two adequate and well-controlled Phase 3 clinical trials for each indication for which we seek
marketing approval before submission of an NDA. Although our analyses of two Phase 3 studies in PHN indicated that their primary endpoints were met, the FDA may not agree with our analyses and may require that we complete additional studies or
perform other activities to support an approval of the PHN indication. We may not have adequate financial or other resources to pursue this product candidate through regulatory approval or through commercialization. If we do not receive marketing
approval from the FDA we will not be able to commercialize NGX-4010 in the United States. Further, if the FDA delays approval as a result of requirements to conduct additional clinical studies, commercialization of NGX-4010 could be significantly
delayed. Significant delay or the inability to commercialize NGX-4010 in the United States would significantly harm our business and as a result we may be unable to become profitable or continue our operations, or, even if we are able to
commercialize in the United States, there can be no assurance that we can become profitable. As a consequence of any of these factors, our stock price would be adversely affected. We intend to seek FDA approval for NGX-4010 for PHN. We are
continuing to evaluate whether to seek



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approval for NGX-4010 in HIV-DSP and whether additional studies would be necessary to achieve such an approval. If we decide to seek approval in HIV-DSP, we
would do so no sooner than after the FDA has completed its review of the PHN NDA submission, which we anticipate may take approximately 12 months from the date of our submission of an NDA to the FDA in October 2008, but could be significantly
longer. Further, we may decide not to conduct further studies in HIV-DSP and ultimately may not seek approval of the HIV-DSP indication, in which case our potential revenues could be negatively impacted.

We may not be successful in obtaining European regulatory approval for NGX-4010.

Our MAA for NGX-4010 was accepted by the EMEA in September 2007. Our filing relied on published scientific literature for certain basic research data and
there can be no assurance that the European authorities will accept that these literature references satisfy the MAA requirements for such data. We are requesting marketing authorization for a broad indication of peripheral neuropathic pain for
NGX-4010 based on the results of our first two completed Phase 3 clinical trials that met their primary endpoints, one for the treatment of PHN and the other for the treatment of HIV-DSP which were initially submitted as part of our filing. We have
received the EMEAs initial questions regarding our application and submitted responses to those questions in September 2008. As part of our response, we submitted additional data including data from our most recently completed Phase 3 study in
PHN, the results of a recently completed long term safety study as well as the available results of our most recently completed Phase 3 study in HIV-DSP, where the primary endpoint was not met. Due to the significant amount of additional data we
submitted with our responses to the MAA scheduled Day 120 questions, the EMEAs decision regarding our MAA could be delayed. After evaluating the EMEAs response to our most recent submission, we could decide to continue, or withdraw and
potentially resubmit, our MAA. In the event of withdrawal and resubmission, the timing to potential approval of our product in Europe would be significantly delayed. Further, our failure to adequately address the EMEAs questions or to do so in
a timely manner may result in our not achieving approval for NGX-4010 in Europe. Further, if we do obtain marketing authorization, the authorization may not be as broad as we would like. For example, the EMEA may only approve NGX-4010 for particular
neuropathic pain indications for which we submit sufficient data, rather than accepting such data as supportive of a broad marketing authorization for peripheral neuropathic pain in general. The EMEA may determine that the data we submit are not
sufficient for a favorable opinion and may halt or delay the approval process. If NGX-4010 does not receive European marketing authorization, we will not be able to commercialize the product in Europe. Consequently, our ability to generate revenue
will be significantly harmed, we may be unable to become profitable or continue our operations and our stock price will be adversely affected.

We will require substantial additional funding and may be unable to raise capital when needed.

We had cash, cash
equivalents and short-term investments totaling $30.8 million at September 30, 2008 and during the nine months ended September 30, 2008, we used cash of $21.9 million in operating activities. We expect our negative cash flows from
operations to continue beyond potential regulatory approval and product launch and there can be no assurance that we will ever achieve positive cash flows from operations. Although we believe, based on our current operating plan that our cash, cash
equivalents and short-term investments will be sufficient to fund our operations for at least the next twelve months, the pursuit of regulatory approval of NGX-4010, the development of our sales and marketing capabilities, the continued development
of NGX-4010, NGX-1998 and other product candidates, as well as the potential acquisition and development of additional products or product candidates by us, will require substantial additional funding. There can be no assurance that additional
funding will be available on terms that are acceptable, or at all.



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We cannot predict whether regulatory agencies will determine that the data from our NGX-4010
clinical and non-clinical development program support marketing approval.

The FDAs and EMEAs decisions to approve
NGX-4010 will depend on our ability to demonstrate with substantial evidence, through a thorough non-clinical evaluation as well as sufficient well-controlled clinical trials, that NGX-4010 is safe and effective. With regard to our non-clinical
evaluations, safety is evaluated through a series of laboratory and animal studies to assess the overall safety and toxicity profile of the product candidate. The FDA may consider our product candidate a new chemical entity which could have an
effect on the scope of non-clinical studies required for marketing approval. While we have developed our non-clinical program anticipating the requirements for new chemical entity approval, there can be no assurance that the extent of our testing or
the results of our studies will be viewed by the FDA as sufficient to support approval of our product candidate. With regard to well-controlled clinical trials, efficacy is measured statistically by comparing the overall improvement in pain in
actively-treated patients against improvement in pain in the control group. However, there is a possibility that our data may be statistically significant, but that the actual clinical benefit of the NGX-4010 treatment may not be considered to be
significant. Consequently, we believe that the FDA will consider additional data, such as a responder analysis and other secondary endpoints when evaluating whether our product can be approved. We believe that the FDA views
responders as patients who experience at least a 30% reduction in overall pain. The EMEA standard for reduction in overall pain is between 30% to 50%. We cannot predict whether the regulatory agencies will find that our trial results
provide compelling responder or other secondary endpoint data. Even if we believe that the data from our non-clinical studies and clinical trials will support marketing approval in the United States or in Europe, we cannot predict
whether regulatory agencies will agree with our analysis and approve our applications.

We have no manufacturing capabilities and
depend on other parties for our manufacturing operations. If these manufacturers fail to meet our requirements and strict regulatory requirements, our product development efforts may be negatively affected, we may not be able to obtain regulatory
approval for our product candidates and our commercialization efforts may be materially harmed.

We currently depend on three
contract manufacturers as single source suppliers for the components of our NGX-4010 product candidate: synthetic capsaicin, the dermal patch and the associated cleansing gel. We have entered into long term commercial supply agreements for these
components. In addition we anticipate entering into long-term agreements for the assembly of the NGX-4010 treatment kits in the United States and the European Union. If our relationship with any of these manufacturers is terminated, or if any
manufacturer is unable to produce required quantities on a timely basis or at all, our operations would be delayed and our business harmed.

Our reliance on contract manufacturers exposes us to additional risks, including:



| |  |  | failure of our current and future manufacturers to comply with strictly-enforced regulatory requirements;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | failure of our current and future manufacturers to complete the development and scale-up of the manufacturing process including adequately analyzing and documenting
the source and chemical make-up of ingredients that make up our product candidate and the ability to reliably and consistently produce the product candidate under current Good Manufacturing Practice regulations;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | failure to manufacture to our specifications, or to deliver sufficient quantities in a timely manner;
| | - |  | -----------------------------------------------------------------------------------------------------



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| |  |  | the possibility that we may terminate a contract manufacturer and need to engage a replacement;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the possibility that our current and future manufacturers may not be able to manufacture our product candidates and products without infringing the intellectual
property rights of others;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the possibility that our current and future manufacturers may not have adequate intellectual property rights to provide for exclusivity and prevent competition; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | insufficiency of intellectual property rights to any improvements in the manufacturing processes or new manufacturing processes for our products.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Any of these factors could result in significant delay or suspension of our clinical trials, regulatory submissions,
receipt of required approvals or commercialization of our products and harm our business.

In addition, because our third party
manufacturers operate outside of the United States, and many of the raw materials and the labor that are used to manufacture our product candidates are based in foreign countries, we may experience currency exchange rate risks, even though, in some
instances our contracts are denominated in U.S. dollars. We do not currently engage in forward contracts to hedge this currency risk and as a result, may suffer adverse financial consequences as a result of this currency risk.

Further, our third party manufacturers operate outside of the United States and the materials used to manufacture our product candidates originate
outside the United States, including certain materials which may be sourced from China and India. The FDA has increased its diligence with regard to foreign sourced materials and manufacturing processes which may result in increased costs of
maintaining foreign manufacturing and could lengthen or delay the regulatory review process required to gain approval for our product candidates and could potentially prevent approval of our product candidates.

Our product candidates may never achieve market acceptance even if we obtain regulatory approvals.

Even if we receive regulatory approvals for the commercial sale of our product candidates, the commercial success of these product candidates will depend
on, among other things, acceptance by physicians and patients. Market acceptance of, and demand for, any product that we develop and commercialize will depend on many factors, including:



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



| |  |  | our ability to obtain adequate pricing and sufficient insurance coverage and reimbursement;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | availability, relative cost and relative efficacy and safety of alternative and competing treatments;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | the effectiveness of our or our collaborators sales, marketing and distribution strategy;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | publicity concerning our products or competing products and treatments; and
| | - |  | ---------------------------------------------------------------------------



| |  |  | our ability to produce product in commercial quantities sufficient to meet demand.
| | - |  | ----------------------------------------------------------------------------------

If our product candidates fail to gain market acceptance, we may be unable to earn sufficient revenue to continue our business.



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If physicians are not adequately reimbursed for their time and services in administering NGX-4010,
it is likely that they will not prescribe NGX-4010.

Because many persons suffering from PHN are elderly, in order for NGX-4010 to
be economically viable for this indication in the United States, we will need Medicare coverage for NGX-4010, if NGX-4010 is approved by the FDA for marketing. Medicare policymakers or local contractors that process claims for Medicare may determine
that NGX-4010 is not reasonable and necessary for Medicare beneficiaries or is reasonable and necessary only under limited circumstances. If Medicare policymakers or a significant portion of contractors determine that NGX-4010 is not
reasonable and necessary for and deny or significantly limit reimbursement for NGX-4010, our business would be harmed, not only because Medicare beneficiaries represent a substantial portion of our target market, but also because Medicares
coverage decisions would likely affect the determination of many state Medicaid programs and private payors.

Even if NGX-4010 is covered
by Medicare, we cannot determine whether that coverage will be primarily under Medicare Part B or Medicare Part D. Although products administered by a physician, as we expect NGX-4010 will be, are ordinarily covered by Medicare
Part B, which also reimburses the physician for services in administering the product, Medicare Part B does not currently provide reimbursement for the use of topical patches in the treatment of peripheral neuropathic pain. Obtaining
coverage for NGX-4010 and its related administration under Part B is important to our future success, and there is a possibility that our efforts to achieve such a change in a policy will not be successful or if successful, will likely take one
or more years to achieve. Any delay in achieving reimbursement under Part B will have a negative impact on our ability to generate revenues.

Part D may provide reimbursement for NGX-4010, but we do not view Part D coverage as being as favorable as Part B coverage, because each Part D plan establishes its own formulary and may or may not decide to include
NGX-4010, or if it does, may seek to negotiate significantly lower prices in order to include the product in their formularies. Additionally, Part D does not include reimbursement for the physicians administration of the product. Patient
preparation and NGX-4010 application time is significant and may take two hours or longer, which significantly impacts a physicians ability to see other patients and, consequently, the physicians revenue. If physicians are not adequately
reimbursed for their time and services in administering NGX-4010, it is likely that they will not prescribe NGX-4010, which would significantly impair our ability to obtain revenues.

We also will need to obtain favorable coverage and reimbursement decisions for NGX-4010 from private insurers, including managed care organizations. We
expect that private insurers will consider the efficacy, cost-effectiveness and safety of NGX-4010 in determining whether to provide reimbursement for NGX-4010 and at what level. Obtaining these coverage and reimbursement decisions will be a time
consuming process requiring substantial resources and we may not receive adequate reimbursement of NGX-4010 from private insurers.

We
expect to experience pricing pressures in connection with the sale of NGX-4010, if approved, and our potential future products, due to the trend toward programs and legislation aimed at reducing healthcare costs, as well as the increasing influence
of managed care organizations. In many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to direct governmental control and is influenced by drug reimbursement programs that employ a
variety of price control mechanisms. In these countries, pricing negotiations with governmental authorities or reimbursement programs can take 6 to 12 months or longer after the receipt of regulatory marketing approval for a product. To obtain
reimbursement or pricing approval in some countries, we may be required to conduct additional studies, such as a study to evaluate the cost-effectiveness of NGX-4010 compared to other currently available therapies. If reimbursement for NGX-4010 is
unavailable, delayed or limited in scope or amount or if pricing is set at unsatisfactory levels, our business would be materially harmed.



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We must enter into an agreement with, and depend upon, one or more partners to assist us in
commercializing our lead product candidate, NGX-4010, in Europe.

Because of our limited financial and other resources, we must
actively seek and enter into a collaboration with one or more European partners to assist us in our planned European NGX-4010 launch, if marketing approval is granted. Any collaboration agreement we enter into may contain unfavorable terms, for
example, with respect to product candidates covered, control over decisions and responsibilities, termination rights, payment, and other significant terms. Our ability to receive any significant revenue from our product candidates covered by the
collaboration agreement will be dependent on the efforts of our collaboration partner and may result in lower levels of income to us than if we marketed our product candidates entirely on our own. The collaboration partner may not fulfill its
obligations or commercialize our product candidates as quickly as we would like. We could also become involved in disputes with our partner, which could lead to delays in or termination of our commercialization programs and time-consuming and
expensive litigation or arbitration. If a collaboration partner terminates or breaches its agreement with us, or otherwise fails to complete its obligations in a timely manner, the chances of successfully developing or commercializing our product
candidates would be materially and adversely affected.

Additionally, depending upon the collaboration partner that we choose, other
companies that might otherwise be interested in developing products with us could be less inclined to do so because of our relationship with the collaboration partner. If our ability to work with present or future strategic partners or collaborators
is adversely affected as a result of our collaboration agreement, our business prospects may be limited and our financial condition may be adversely affected. There can be no assurance that we will be able to enter into a collaboration for
commercialization in Europe, or that if we do, it is on a time frame and on economic terms that are favorable to us. Our ongoing interactions with the EMEA regarding our MAA, including questions raised or determinations made by the EMEA, that may
delay or prevent approval for a broad label or otherwise, may prevent or delay the entry into or completion of a collaboration or adversely impact the terms of such collaboration.

If we are unable to establish a sales, marketing and distribution infrastructure or enter into collaborations with partners to perform these
functions, we will not be successful in commercializing our product candidates.

In order to commercialize any of our product
candidates successfully, we must either acquire or internally develop a capable sales, marketing and distribution infrastructure or enter into collaborations with partners to perform these services for us. The acquisition or development of a capable
sales, marketing and distribution infrastructure will require substantial resources, which may divert the attention of our management and key personnel and negatively impact our product development efforts. We intend to enter into partnering or
other distribution arrangements for commercialization outside the United States. While we currently intend to develop a direct sales and marketing organization in the United States for NGX-4010, because we believe that we can best serve our target
customers with a focused, specialty sales force, we are currently evaluating the potential for commercializing NGX-4010 in the United States with a collaboration partner. If we enter into an agreement with a collaboration partner in the United
States, such a collaboration may negatively impact our ability to seek additional strategic relationships and/or may negatively impact the value of your investment in us. Factors that may inhibit our efforts to develop an internal sales, marketing
and distribution infrastructure include:



| |  |  | lack of available financial resources;
| | - |  | --------------------------------------



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| |  |  | our inability to recruit and retain adequate numbers of effective sales and marketing personnel;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | the inability of sales personnel to obtain access to or convince adequate numbers of physicians to prescribe our products;
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | the lack of complementary products to be offered by sales personnel, which may put us at a competitive disadvantage relative to companies with more extensive
product lines; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unforeseen costs and expenses associated with creating a sales and marketing organization.
| | - |  | ------------------------------------------------------------------------------------------

We also may not be able to enter into collaborations on acceptable terms, if at all, and we may face competition in our search for partners with whom we
may collaborate. If we are not able to build a sales, marketing and distribution infrastructure or collaborate with a partner to perform these functions, we may be unable to commercialize our product candidates successfully, which would adversely
affect our business and financial condition.

Even if our product candidates receive regulatory approval, they will be subject to
ongoing regulatory requirements and may face regulatory or enforcement action.

Any product candidate for which we receive
regulatory approval, together with our third-party manufacturing facilities and processes, post-approval clinical data, and advertising and promotional activities for the product, will be subject to significant review and ongoing and changing
regulation by the FDA, the EMEA and other regulatory agencies. Failure to comply with regulatory requirements may subject us to administrative and judicially-imposed sanctions. These may include warning letters, adverse publicity, civil and criminal
penalties, injunctions, product seizures or detention, product recalls, total or partial suspension of production, and refusal to approve pending product marketing applications.

Even if we receive regulatory approval to market a particular product candidate, the approval could be conditioned on us conducting additional costly
post-approval studies or could limit the indicated uses included in our labeling. Moreover, the product may later be found to cause adverse effects that limit or prevent its widespread use, force us to withdraw it from the market or impede or delay
our ability to obtain regulatory approvals in additional countries.

We face potential product liability exposure, and if successful
claims are brought against us, we may incur substantial liability for a product candidate and may have to limit its commercialization.

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 our products. If we cannot successfully defend ourselves against these claims, we will incur substantial liabilities. Regardless of merit or eventual outcome, 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;
| | - |  | ----------------------------



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



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



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

Although we currently have product liability insurance coverage for our clinical trials with limits that we believe are customary and adequate to provide us with coverage for foreseeable risks associated with our
product candidate development efforts, our insurance coverage may not reimburse us or may be insufficient to reimburse us for the actual 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. We intend to expand our insurance coverage to include the sale of commercial products if we obtain
marketing approval for our product candidates in development, but we may be unable to obtain commercially reasonable product liability insurance for any products approved for marketing.

We face substantial competition which may result in others discovering, developing or commercializing products before or more successfully than us.

If NGX-4010 receives marketing approval, it will compete against more established products marketed by large pharmaceutical
companies with far greater name recognition and resources than we have. NGX-4010 will also compete with medications that are potentially prescribed for off-label use. The most directly-competitive currently-marketed products in the United States are
Lidoderm, an FDA-approved 5% lidocaine topical patch for the treatment of PHN marketed by Endo Pharmaceuticals, and Lyrica, an oral anti-convulsant, marketed by Pfizer for use in the treatment of PHN. In addition to these branded drugs, the FDA has
approved gabapentin (Neurontin) for use in the treatment of PHN. Gabapentin is marketed by Pfizer and multiple generic manufacturers, and is the most widely-prescribed drug in the United States for treatment of neuropathic pain. Pfizer has also
received FDA approval of Lyrica for the treatment of PDN, fibromyalgia, epilepsy and general anxiety disorder. The FDA has approved Cymbalta from Eli Lilly for use in the treatment of PDN, general anxiety disorder, depression and fibromyalgia.

Prior to any market launch, competition may become stronger and more direct and products in development, including products that we are
unaware of, may compete with NGX-4010. There are many other companies working to develop new drugs and other therapies to treat pain in general and neuropathic pain in particular, including GlaxoSmithKline, Newron Pharmaceuticals S.p.A, Depomed
Inc., Novartis AG, UCB S.A, Pfizer and Eli Lilly. Many of the compounds in development by such companies are already marketed for other indications, such as anti-depressants or anti-seizure drugs. We are also aware of a small, privately-held
specialty pharmaceutical company that may have begun early development of a high concentration capsaicin patch for the treatment of PHN, for which the FDA has granted orphan drug designation, as well as early development of a local anesthetic patch
for the treatment of PHN, HIV-DSP and PDN. If this company successfully completes its development efforts without violation of our intellectual property rights, it would compete against us. If it were granted orphan exclusivity and was approved by
the FDA in an indication that we are attempting to gain approval for before our product candidate is approved, it would significantly harm our ability to commercialize NGX-4010. In addition, physicians employ other interventional procedures, such as
nerve stimulation or nerve blocks, to treat patients with difficult to treat neuropathic pain conditions. Furthermore, new developments, including the development of other drug technologies and methods of preventing the incidence of disease, such as
vaccines, occur in the biopharmaceutical industry at a rapid pace. Any of these developments may render our product candidates obsolete or noncompetitive.



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Many of our potential competitors, either alone or together with their partners, have substantially
greater financial resources, research and development programs, clinical trial and regulatory experience, expertise in prosecution of intellectual property rights, and manufacturing, distribution and sales and marketing capabilities than we do. As a
result of these factors, our competitors may:



| |  |  | develop product candidates and market products that are less expensive, safer, more effective or involve more convenient treatment procedures than our future
products;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | commercialize competing products before we can launch any of our product candidates;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | initiate or withstand substantial price competition more successfully than we can;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | have greater success in recruiting skilled scientific workers from the limited pool of available talent;
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| |  |  | more effectively negotiate third-party licenses and strategic alliances; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | take advantage of acquisition or other opportunities more readily than we can.
| | - |  | ------------------------------------------------------------------------------

The life sciences industry is characterized by rapid technological change. If we fail to stay at the forefront of technological change we may be unable
to compete effectively.

We may not be able to obtain Hatch-Waxman Act data exclusivity or equivalent regulatory data exclusivity
protection in other jurisdictions for NGX-4010.

We intend to rely, in part, on Hatch-Waxman exclusivity for the commercialization
of NGX-4010 in the United States. The Hatch-Waxman Act provides three-year data exclusivity if clinical data are required to obtain FDA approval of the NDA. This period of data exclusivity may be expanded to a total of five years to the first
applicant to gain approval of an NDA under section 505(b) of the Food, Drug, and Cosmetic Act (Act) for a product using an active ingredient that the FDA has not previously approved, generally referred to as a new chemical entity under
section 505(b) of the Act. While we believe that the FDA has not approved another product containing the active ingredient of NGX-4010, a highly pure synthetic capsaicin, there can be no assurance that a competing product containing a synthetic
capsaicin will not achieve approval before NGX-4010 or that NGX-4010 will be able to qualify for the five-year Hatch-Waxman exclusivity. Additionally, Hatch-Waxman data exclusivity will not prevent the FDA from approving a competitors NDA for
a synthetic capsaicin product if the competitors NDA is based on studies it has performed and not on our studies.

We are aware of a
company that may file an NDA for a product that contains a low concentration of a closely related compound to capsaicin. While we believe that this product, should it be approved by the FDA, may not preclude the granting of data exclusivity under
Hatch-Waxman to NGX-4010, we can make no assurance to such belief. If we are unable to achieve data exclusivity, our revenues could be significantly harmed.

There can be no assurance that European authorities will grant data exclusivity to NGX-4010. Even if European data exclusivity is granted for NGX-4010, that may not protect us from direct competition. Given the
well-established use of capsaicin as a pain reliever, a competitor with a generic version of NGX-4010 may be able to obtain approval of their product during NGX-4010s period of data exclusivity, by submitting an MAA with a less than full
package of preclinical and clinical data.



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Our fast track designation for development of NGX-4010 for treatment of painful
HIV-associated neuropathy may not actually lead to a faster development or regulatory review or approval process.

A product
intended for the treatment of a serious or life-threatening condition that demonstrates the potential to address unmet medical needs for such a condition may be submitted to the FDA for fast track designation. Although we received fast
track designation from the FDA for NGX-4010 for the treatment of HIV-DSP, there is no assurance that, if we decide to file an NDA for NGX-4010 in HIV-DSP, that we will experience a faster development process, review or approval, compared to
conventional FDA standards, or that the product will be approved at all. Further, we anticipate the FDA will, as is the case with other indications, require two successful Phase 3 studies in HIV-DSP to support an approval for that indication, and
therefore, we may never seek approval for HIV-DSP or we will likely need to conduct one or more additional Phase 3 studies prior to submission of an NDA for HIV-DSP. The FDA may also withdraw our fast track designation if it believes that the
designation is no longer supported by data from our clinical development program.

We may not be able to obtain or maintain orphan
drug exclusivity for NGX-4010.

The FDA granted us orphan drug status with regard to NGX-4010 for the treatment of HIV-DSP. In
addition we may obtain orphan drug status for other indications, including PHN. If a product that has orphan drug designation subsequently receives FDA approval for the indication for which it has such designation, the product is entitled to orphan
exclusivitythat is, for seven years, the FDA may not approve any other applications to market the same drug for the same indication, except in very limited circumstances. We may be unable to obtain orphan drug designations for any additional
product candidates or exclusivity for any of our product candidates, or our potential competitors may obtain orphan drug exclusivity for capsaicin-based products competitive with our product candidates before we do, in which case we may be excluded
from that market for the exclusivity period. In addition, orphan drug designation previously granted may be withdrawn under certain circumstances. Even if we obtain orphan drug exclusivity for any of our product candidates, we may not be able to
maintain it if a competitive product based on the same active compound is shown to be clinically superior to our product. Although obtaining FDA approval to market a product with orphan exclusivity can be advantageous, there can be no assurance that
it would provide us with a significant commercial advantage.

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

We do not know whether future clinical trials will
begin on time or be completed on schedule, if at all. The commencement and completion of clinical trials can be disrupted for a variety of reasons, including difficulties in:



| |  |  | availability of financial resources;
| | - |  | ------------------------------------



| |  |  | addressing issues raised by the FDA or European health authorities regarding safety, design, scope and objectives of future clinical studies;
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| |  |  | recruiting and enrolling patients to participate in a clinical trial;
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| |  |  | obtaining regulatory approval to commence a clinical trial;
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| |  |  | reaching agreement on acceptable terms with prospective clinical research organizations and trial sites;
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| |  |  | manufacturing sufficient quantities of a product candidate; and
| | - |  | ---------------------------------------------------------------



| |  |  | obtaining institutional review board approval to conduct a clinical trial at a prospective site.
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A clinical trial may also be suspended or terminated by us, the FDA or other regulatory authorities due to a number of factors, including:



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



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



| |  |  | unforeseen safety issues; or
| | - |  | ----------------------------



| |  |  | inadequate patient enrollment or lack of adequate funding to continue the clinical trial.
| | - |  | -----------------------------------------------------------------------------------------

In addition, changes in regulatory requirements and guidance may occur and we may need to amend clinical trial protocols to reflect these changes, which
could impact the cost, timing or successful completion of a clinical trial. If we experience delays in the commencement or completion of our clinical trials, the commercial prospects for our product candidates and our ability to generate product
revenues will be harmed. Many of the factors that cause, or lead to, a delay in the commencement or completion of clinical trials may also lead to the denial of regulatory approval of a product candidate.

Our clinical trials may fail to demonstrate adequately the safety and efficacy of our product candidates, which could prevent or delay regulatory
approval and commercialization.

Before obtaining regulatory approvals for the commercial sale of NGX-4010 or any other product
candidates, we must demonstrate through lengthy, complex and expensive preclinical testing and clinical trials that the product is both safe and effective for use in each target indication. Clinical trial results from the study of neuropathic pain
are inherently difficult to predict. The primary measure of pain is subjective patient feedback, which can be influenced by factors outside of our control, and can vary widely from day to day for a particular patient, and from patient to patient and
site to site within a clinical study. The results we have obtained in completed clinical trials may not be predictive of results from our ongoing or future trials. Additionally, we may suffer significant setbacks in advanced clinical trials, even
after promising results in earlier studies.

Some of our trial results have been negatively affected by factors that had not been fully
anticipated prior to our examination of the trial results. For example, as is the case in our most recent Phase 3 study in HIV-DSP, we have from time to time observed a significant placebo effect within our control groupsa
phenomenon in which a sham treatment or, in the case of our studies, a low-dose capsaicin treatment that we believed would not be effective, results in a beneficial effect Although we design our clinical study protocols to address known factors that
may negatively affect our study results, there can be no assurance that our protocol designs will be adequate or that factors that we may or may not be aware of or anticipate, will not have a negative effect on the results of our clinical trials,
which could significantly disrupt our efforts to obtain regulatory approvals and commercialize our product candidates. Furthermore, once a study has commenced, we may voluntarily suspend or terminate our clinical trials if at any time we believe
that they present an unacceptable safety risk to patients. In our completed Phase 3 trials there have been three serious adverse events (totaling less than 1%) related to NGX-4010, two related to pain and one case of hypertension. In our PHN studies
C108 and C110, more cardiac adverse events occurred in subjects treated with NGX-4010



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than subjects receiving the control patch. Evaluation of these adverse events did not indicate that they were treatment related. In our most recent PHN
studies, C116 and C117, a similar number of subjects in the NGX-4010 and control groups had cardiac events. However, future late stage clinical trials in other indications or in a larger patient population could reveal more frequent, more severe or
additional side effects that were not seen or deemed unrelated in earlier studies, any of which could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA or other regulatory authorities stopping further
development of or denying approval of our product candidates. Based on results at any stage of clinical trials, we may decide to repeat or redesign a trial, modify our regulatory strategy or even discontinue development of one or more of our product
candidates.

A number of companies in the biotechnology and pharmaceutical industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. If our product candidates are not shown to be both safe and effective in clinical trials, the resulting delays in developing other compounds and conducting associated
preclinical testing and clinical trials, as well as the potential need for additional financing, would have a material adverse effect on our business, financial condition and results of operations.

We rely on third parties to conduct our non-clinical and clinical trials. If these third parties do not perform as contractually required or
otherwise expected, we may not be able to obtain regulatory approval for our product candidates.

We do not currently conduct
non-clinical and clinical trials on our own, and instead rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories, to assist us with our non-clinical and clinical trials.
We are also required to comply with regulations and standards, commonly referred to as good clinical practices, for conducting, recording and reporting the results of clinical trials to assure that data and reported results are credible and accurate
and that the trial participants are adequately protected. If these third parties do not successfully carry out their duties to us or regulatory obligations or meet expected deadlines, if the third parties need to be replaced, or if the quality or
accuracy of the data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other reasons, our non-clinical development activities or clinical trials may be extended, delayed, suspended or
terminated, and we may not be able to obtain regulatory approval for our product candidates.

Even though certain of our clinical
trials for NGX-4010 in treatment of PHN and HIV-DSP have met their primary endpoints, certain other studies in these indications have not met their primary endpoints and, our clinical trials for other indications, if we decide to conduct them, may
not succeed, which would adversely impact our long term success.

We have not prepared for or conducted any NGX-4010 clinical trials
for indications other than PHN, HIV-DSP and PDN. We have conducted one Phase 2 clinical trial for the use of NGX-4010 for the management of PDN. PDN represents a much larger market opportunity than either PHN or HIV-DSP, and unless we successfully
complete required clinical trials and obtain regulatory approvals for the use of NGX-4010 for PDN patients, we will be unable to market NGX-4010 for this indication in the United States and possibly in other countries including those in the European
Union. If this occurs, our long term ability to succeed will be significantly and negatively impacted. We believe that to market NGX-4010 in the United States for future indications, including PDN, we will have to conduct two successful Phase 3
trials for those indications, and that for PDN in particular, we may be required to perform additional safety studies. We are evaluating our development programs related to PDN in NGX-4010 and may decide not to conduct Phase 3 studies in PDN. If we
decide not to conduct Phase 3 studies in PDN, we will not gain approval for NGX-4010 in this indication, which will significantly harm our ability to potentially generate revenue.



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Results of clinical trials of NGX-4010 for patients with PHN or HIV-DSP do not necessarily predict the
results of clinical trials involving other indications. If we decide to conduct additional clinical studies with NGX-4010 in PDN or other indications, those studies may fail to show desired safety and efficacy for management of pain associated with
PDN and other indications, despite results from earlier clinical trials involving PDN, PHN and/or HIV-DSP. Any failure or significant delay in completing clinical trials for NGX-4010 with PDN and other indications, or in receiving regulatory
approval involving such indications, may significantly harm our business.

We have limited experience in regulatory affairs.

We have limited experience in preparing, submitting and prosecuting regulatory filings including NDAs, MAAs and other applications
necessary to gain regulatory approvals. Moreover, some of our product candidates are based on novel applications of therapies that have not been extensively tested in humans, and the regulatory requirements governing these types of products may be
less well defined or more rigorous than for conventional products. As a result of these factors, in comparison to our competitors, we may require more time and incur greater costs to obtain regulatory approvals of products that we develop, license
or acquire.

We depend on our key personnel. If we are not able to retain them, our business will suffer.

We are highly dependent on the principal members of our management and scientific staff. The competition for skilled personnel among biopharmaceutical
companies in the San Francisco Bay Area is intense and the employment services of our scientific, management and other executive officers are terminable at-will. If we lose one or more of these key employees, our ability to implement and execute our
business strategy successfully could be seriously harmed. Replacing key employees may be difficult and may take an extended period of time because of the limited number of individuals in our industry with the breadth of skills and experience
required to develop, gain regulatory approval of and commercialize products successfully. We do not carry key man life insurance on any of our key personnel.

Our management and auditors identified material weaknesses in our internal controls as part of the audit of the consolidated financial statements for the year ended December 31, 2006.

The existence of material weaknesses is an indication that there is a reasonable possibility that a material misstatement of our financial statements will
not be prevented or detected in a future period, and the process of designing and implementing effective internal controls and procedures is a continuous effort that requires us to expend significant resources to maintain a system of internal
controls that is adequate to satisfy our reporting obligations as a public company. For example, in connection with our fiscal 2006 financial statement audit, our independent accounting firm informed us that they had identified material weaknesses
in our internal controls relating to having insufficient personnel resources with sufficient technical accounting expertise within our accounting function. During 2007, we took steps to remediate these weaknesses and in connection with our fiscal
2007 financial statement audit, no material weaknesses were identified.

We cannot assure you that the material weaknesses identified in
connection with our fiscal 2006 financial statement audit will not reoccur or that other material weaknesses or significant deficiencies in our internal controls will not be discovered in the future. If we fail to maintain effective controls and
procedures, we may be unable to provide the required financial information in a timely and reliable manner or otherwise comply with the standards applicable to us as a public company and we may not be able to provide any required report on the
effectiveness of our internal controls. Any failure by us to timely provide the required financial information or provide any required report on the effectiveness of our internal controls could materially and adversely impact our financial condition
and the market value of our securities.



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Risks Related to Our Finances and Capital Requirements

We have incurred operating losses in each year since inception and expect to continue to incur substantial and increasing losses for the foreseeable
future.

We have not generated any revenue to date and we have incurred operating and net losses each year since our inception in
1998. Our net loss for the nine months ended September 30, 2008 was approximately $21.2 million. As of September 30, 2008 we had an accumulated deficit of approximately $185.4 million. We expect to continue to incur losses for several
years, as we seek regulatory approvals for and commercialize NGX-4010, and continue other research and development activities. If NGX-4010 does not gain regulatory approval or does not achieve market acceptance, we will not generate any revenue. We
cannot assure you that we will be profitable even if we commercialize NGX-4010. If we fail to achieve and maintain profitability, or if we are unable to fund our continuing losses, you could lose all or part of your investment.

If we do not raise additional capital, we may be forced to delay; reduce or eliminate our development programs or commercialization efforts.

Our future capital requirements will depend on, and could increase significantly as a result of, many factors, including:



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



| |  |  | the costs of establishing or contracting for sales and marketing capabilities;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the need to conduct additional clinical trials;
| | - |  | -----------------------------------------------



| |  |  | the rate of progress and cost of our clinical trials and other development activities;
| | - |  | --------------------------------------------------------------------------------------



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



| |  |  | the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | the extent to which we acquire or in-license new products, technologies or businesses;
| | - |  | --------------------------------------------------------------------------------------

We intend to seek additional funding through strategic alliances, debt facilities or other financing vehicles which may include the public or private
sales of our equity securities. There can be no assurance, however, that additional funding will be available on reasonable terms, if 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 then existing or planned development, commercialization or expansion activities.

Raising additional funds by issuing
securities or through licensing arrangements may cause dilution to existing stockholders, 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. Any debt financing we enter into may involve covenants that restrict our
operations. These restrictive covenants may include limitations on additional borrowing and specific restrictions on the use of our assets, as well as prohibitions on our ability to create liens, pay dividends, redeem our stock or make investments.
In addition, if we raise additional funds through licensing arrangements, it may be necessary to relinquish potentially valuable rights to our potential products or proprietary technologies, or grant licenses on terms that are not favorable to us.



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Risks Related to our Intellectual Property

The commercial success, if any, of NGX-4010 depends, in part, on the rights we have under certain patents.

The commercial success, if any, of NGX-4010 depends, in part, on a device patent granted in the United States and a device patent granted in Hong Kong and
certain countries of Europe concerning the use of a dermal patch for high concentration capsaicin delivery for the treatment of neuropathic pain. We exclusively license these patents, as well as a related pending patent application in Canada, from
the University of California. We do not currently own, and do not have rights under this license to any issued patents that cover NGX-4010 outside Europe, Hong Kong or the United States. One or more of the inventors named in the method patent
described below may assert a claim of inventorship rights to such patent, which may result in our loss of exclusive use of this patent. Although we do not believe these individuals are co-inventors, there can be no assurance that we would prevail if
such a claim were asserted. The absence of exclusive rights to utilize such patent exposes us to a greater risk of direct competition and could materially harm our business.

In addition to other patents and patent applications which have been licensed under our agreements with third party manufacturers, including the issued
patents and pending applications licensed under our commercial supply agreement for NGX-4010, we also license a method patent granted in the United States from the University of California concerning the delivery of high concentration capsaicin for
the treatment of neuropathic pain. Two of the three inventors named in the method patent did not assign their patent rights to the University of California. As a result, our rights under this patent are non-exclusive. Anesiva, a company focused on
the development and commercialization of treatments for pain, including injection or infiltration of capsaicin for post-surgical pain, osteoarthritis or interdigital neuroma, has licensed from one of the non-assigning inventors the right to use the
technology under the method patent. There can be no assurances that other entities will not similarly obtain rights to use the technology under the method patent. If other entities license the right to use this patent, we may face more products
competitive with NGX-4010 and our business will suffer.

If we are unable to maintain and enforce our proprietary rights, we may not
be able to compete effectively or operate profitably.

Our commercial success will depend, in part, on obtaining and maintaining
patent protection, trade secret protection and regulatory protection (such as Hatch-Waxman protection or orphan drug designation) of our proprietary technology and information as well as successfully defending against third-party challenges to our
proprietary technology and information. We will be able to protect our proprietary technology and information from use by third parties only to the extent that valid and enforceable patents, trade secrets or regulatory protection cover them and we
have exclusive rights to utilize them.

Our commercial success will continue to depend in part on the patent rights we own, the patent
rights we have licensed, the patent rights of our collaborators and suppliers and the patent rights we plan to obtain related to future products we may market. Our success also depends on our and our licensors, collaborators and
suppliers ability to maintain these patent rights against third-party challenges to their validity, scope or enforceability. Further, we do not fully control the patent prosecution of our licensed patent applications. There is a risk that our
licensors will not devote the same resources or attention to the prosecution of the licensed patent applications as we would if we controlled the prosecution of the patent applications, and the resulting patent protection, if any, may not be as
strong or comprehensive as if we had prosecuted the applications ourselves.



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The patent positions of biopharmaceutical companies can be highly uncertain and involve complex legal and
factual questions for which important legal principles remain unresolved. No consistent policy regarding the breadth of claims allowed in such companies patents has emerged to date in the United States. The patent situation outside the United
States is even more uncertain. Changes in either the patent laws or in interpretations of patent laws in the United States or other countries may diminish the value of our intellectual property. Accordingly, we cannot predict the breadth of claims
that may be allowed or enforced in our patents or in third-party patents. For example:



| |  |  | we or our licensors might not have been the first to make the inventions covered by each of our pending patent applications and issued patents;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we or our licensors might not have been the first to file patent applications for these inventions;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | others may independently develop similar or alternative technologies or duplicate any of our technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | it is possible that none of our pending patent applications or the pending patent applications of our licensors will result in issued patents;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our issued patents and the issued patents of our licensors may not provide a basis for commercially viable products, or may not provide us with any competitive
advantages, or may be challenged and invalidated by third parties;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | we may not develop additional proprietary technologies or product candidates that are patentable; or
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | the patents of others may have an adverse effect on our business.
| | - |  | -----------------------------------------------------------------

We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. While we seek to protect
confidential information, in part, by confidentiality agreements with our employees, consultants, contractors, or scientific and other advisors, they may unintentionally or willfully disclose our information to competitors. If we were to enforce a
claim that a third party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable. In addition, courts outside the United States are sometimes less willing to protect
trade secrets.

If we are not able to defend the patent or trade secret protection position of our technologies and product candidates,
then we will not be able to exclude competitors from developing or marketing competing products, and we may not generate enough revenue from product sales to justify the cost of development of our product candidates and to achieve or maintain
profitability.

If we are sued for infringing intellectual property rights of other parties, such litigation will be costly and time
consuming, and an unfavorable outcome would have a significant adverse effect on our business.

Although we believe that we would
have valid defenses to allegations that our current product candidates, production methods and other activities infringe the valid and enforceable intellectual property rights of any third parties of which we are aware, we cannot be certain that a
third party will not challenge our



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position in the future. Other parties may own patent rights that might be infringed by our products or other activities. For example, in June 2005,
Winston Laboratories sent us a letter informing us of their U.S. patent related to cis-capsaicin, and suggested that our synthetic capsaicin formulation could infringe this patent. We responded in August 2005 by denying any infringement.
In 2007, Winston reiterated its claim and offered to discuss a license to its patent. We responded by denying infringement. We believe that our products, if commercialized, will not infringe the Winston patent, which is due to expire in 2009, but
may be extended under certain circumstances. There has been, and we believe that there will continue to be, significant litigation and demands for licenses in our industry regarding patent and other intellectual property rights. Our competitors or
other patent holders may assert that our products and the methods we employ are covered by their patents. These parties could bring claims against us that would cause us to incur substantial expenses and, if successful against us, could cause us to
pay substantial damages or possibly prevent us from commercializing our product candidates. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay research, development, manufacturing or sales of the
product or product candidate that is the subject of the suit.

As a result of patent infringement claims, or in order to avoid potential
claims, we may choose to seek, or be required to seek, a license from the third party and would most likely be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were
able to obtain a license, the rights may be non-exclusive, which would give our competitors access to the same intellectual property. Ultimately, we could be prevented from commercializing a product, or be forced to cease some aspect of our business
operations if, as a result of actual or threatened patent infringement claims, we or our collaborators are unable to enter into licenses on acceptable terms. This could harm our business significantly.

We may incur substantial costs as a result of litigation or other proceedings relating to patent and other intellectual property rights.

The cost to us of any litigation or other proceedings relating to intellectual property rights, even if resolved in our favor, could be
substantial. Some of our potential competitors may be better able to sustain the costs of complex patent litigation because they have substantially greater resources. Uncertainties resulting from the initiation and continuation of any litigation
could have a material adverse effect on our ability to continue our operations. Should third parties file patent applications, or be issued patents claiming technology also claimed by us in pending applications, we may be required to participate in
interference proceedings in the U.S. Patent and Trademark Office to determine priority of invention which could result in substantial costs to us or an adverse decision as to the priority of our inventions. An unfavorable outcome in an interference
proceeding could require us to cease using the technology or to license rights from prevailing third parties. There is no guarantee that any prevailing party would offer us a license or that we could acquire any license made available to us on
commercially acceptable terms.

If we fail to comply with our obligations in the agreements under which we license development or
commercialization rights to products or technology from third parties, we could lose license rights that are important to our business.

We are a party to a number of technology licenses that are important to our business and expect to enter into additional licenses in the future. For example, we hold licenses from The University of California and LTS Lohmann
Therapie-Systeme AG under patents and patent applications relating to NGX-4010, our lead product candidate. These licenses impose various commercialization, milestone payment, royalty, insurance and other obligations on us. If we fail to comply with
these obligations, the licensor may have the right to terminate the license, in which event we would not be able to market products covered by the license, including NGX-4010.



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

Many of our employees were previously employed at universities or 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. If we fail in defending such claims, in addition to paying monetary damages, we may lose valuable
intellectual property rights or personnel. A loss of key research personnel or their work product could hamper or prevent our ability to commercialize certain potential products, which could severely harm our business. 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 an Investment in our
Common Stock

We expect that our stock price will fluctuate significantly, and you may not be able to resell your shares at or
above your investment price.

The stock market has experienced significant volatility, particularly with respect to pharmaceutical,
biotechnology and other life sciences company stocks. The volatility of pharmaceutical, biotechnology and other life sciences company stocks often does not relate to the operating performance of the companies represented by the stock. Factors that
could cause volatility in the market price of our common stock include, but are not limited to:



| |  |  | delays in the process of seeking or our ability to obtain regulatory approvals;
| | - |  | -------------------------------------------------------------------------------



| |  |  | delay in entering, or termination of, strategic partnership relationships;
| | - |  | --------------------------------------------------------------------------



| |  |  | general economic conditions and slow or negative growth of our expected markets.
| | - |  | --------------------------------------------------------------------------------



| |  |  | third-party healthcare reimbursement policies or determinations;
| | - |  | ----------------------------------------------------------------



| |  |  | failure or delays in entering additional product candidates into clinical trials or in commencing additional clinical trials for current product candidates;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | results from and any delays related to the clinical trials for our product candidates;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | our ability to develop and market new and enhanced product candidates on a timely basis;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | announcements by us or our collaborators or competitors of new commercial products, clinical progress or the lack thereof, significant contracts, commercial
relationships or capital commitments;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | issuance of new or changed securities analysts reports or recommendations for our stock or the discontinuation of one or more securities analysts
research coverage for our stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | actual or anticipated quarterly variations in our results of operations or those of our collaborators or competitors;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | developments or disputes concerning our intellectual property or other proprietary rights;
| | - |  | ------------------------------------------------------------------------------------------



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##### Table of Contents

| |  |  | commencement of, or our involvement in, litigation;
| | - |  | ---------------------------------------------------



| |  |  | changes in governmental regulations or in the status of our regulatory approvals;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | market conditions in the life sciences sector;
| | - |  | ----------------------------------------------



| |  |  | any major change in our board or management; and
| | - |  | ------------------------------------------------

If we fail to meet the requirements for continued listing on the NASDAQ Global Market and do not meet initial listing requirements to transfer to the NASDAQ Capital Market, our common stock could be delisted
from trading, which would adversely affect the liquidity of our common stock and our ability to raise additional capital.

Our
common stock is currently listed on the NASDAQ Global Market and to maintain our listing, we must meet certain financial requirements in accordance with the rules of the NASDAQ Stock Market LLC, or Nasdaq, including, but not limited to, the
requirement to maintain a minimum closing bid price of at least $1.00 per share for our common stock and certain other quantitative standards. Although we have maintained our listing status on the NASDAQ Global Market since our initial listing on
May 2, 2007, and despite Nasdaq suspending minimum bid price and certain other requirements until January 19, 2009, there can be no assurance that we will maintain our listing on this market in the future if our bid price deteriorates or
if we fail to meet other requirements. If we are delisted from the NASDAQ Global Market, we can apply to be listed on the NASDAQ Capital Market or other exchanges, which generally have lower standards for listing. Any potential delisting of our
common stock would adversely affect the liquidity of our common stock and our ability to raise additional capital.

We will continue
to incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could affect our operating results.

As a public company, we will continue to incur significant legal, accounting and other expenses that we did not incur as a private company, including
costs associated with public company reporting requirements. We also have incurred and will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as new rules implemented by the
Securities and Exchange Commission and the NASDAQ Stock Market LLC. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly.

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other stockholders from influencing significant
corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

Our executive officers,
directors and their affiliates and significant stockholders beneficially own or control approximately 63% of the outstanding shares of our common stock as of September 30, 2008 (after giving effect to the exercise of all of their outstanding
vested options and warrants exercisable within 60 days of such date). Accordingly, these executive officers, directors and their affiliates and significant stockholders acting as a group, will have substantial influence over the outcome of corporate
actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may also delay or prevent a
change of control of us, even if such a change of control would benefit our other stockholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors perception that
conflicts of interest may exist or arise.



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##### Table of Contents

Future sales of shares by existing stockholders could cause our stock price to decline.

The market price of our common stock could decline as a result of sales by our existing stockholders, including sales by our executive
officers, of shares of common stock in the market, or the perception that these sales could occur. These sales might also make it more difficult for us to sell equity securities at a time and price that we deem appropriate.

Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our
stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.

Provisions
in our certificate of incorporation and bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include a classified board of directors, a prohibition on actions by written consent of our stockholders and the
ability of our board of directors to issue preferred stock without stockholder approval. In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which
prohibits stockholders owning in excess of 15% of our outstanding voting stock from merging or combining with us. Although we believe these provisions collectively provide for an opportunity to receive higher bids by requiring potential acquirors to
negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current
management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

Recent events in the credit markets have, and will continue to, impact our investment returns.

Recent events in the credit markets have caused a liquidity crisis in most credit facilities including mortgage-backed securities and auction-rate securities. In response to these events we have undertaken a continual evaluation of our
investment portfolio to protect principal balances and maintain liquidity of our investments. This evaluation has resulted in our converting, over time, all of our investment holdings into U.S. Treasury securities as of October 31, 2008. Our
sales of investments in other than U.S. Treasury securities were generally conducted at or near cost, however certain individual investments were sold at either a gain or loss, that were not material individually or in the aggregate. As a result of
the credit crisis and our shift in investments to U.S. Treasury securities, we anticipate that our investment returns will be below historical levels. These lower returns will likely continue for some time and we cannot predict when market
conditions will improve and when higher yielding investment options may be available to us.

We have never paid dividends on our
capital stock, and we do not anticipate paying any cash dividends in the foreseeable future.

We have paid no cash dividends on any
of our classes of capital stock to date, have contractual restrictions against paying cash dividends and currently intend to retain our future earnings to fund the development and growth of our business. As a result, capital appreciation, if any, of
our common stock will be an investors sole source of gain for the foreseeable future.



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

Initial Public Offering and Use of Proceeds

We registered our common stock, par value $0.001 per share, on a Registration
Statement on Form S-1 (Registration No. 333-140501), for an IPO that was declared effective on May 1, 2007. On May 7, 2007 we completed the IPO by selling 4.0 million shares at $11.00 per share. Gross proceeds from the offering
were $44.0 million. Total expenses for this offering were approximately $5.9 million, which included underwriting discounts and commissions of approximately $3.1 million and $2.8 million in other offering-related expenses. The net offering proceeds
to us, after deducting total expenses were approximately $38.1 million. The underwriters of the IPO were Morgan Stanley & Co. Incorporated, Pacific Growth Equities, LLC, Lazard Capital Markets LLC and Susquehanna Financial Group, LLLP.

As of September 30, 2008, approximately $22.2 million of the proceeds of the offering had been used to fund the continued development
of our lead product candidate NGX-4010 and initial planning of clinical development of NGX-4010 in PDN, $2.5 million in the development of our new product initiatives, NGX-1998 and our opioid prodrug program, and $13.4 million for general corporate
purposes including the repayment of notes payable, in accordance with their scheduled amortization. We used all of the net proceeds generated from the IPO by the end of the second quarter of 2008.

The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. No such payments were made to our directors or
officers or their associates, holders of 10% or more of any class of our equity securities or to our affiliates other than payments to officers for salaries and other compensation and payments to non-employee directors as compensation for board or
board committee service in the ordinary course of business.



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

None.



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

None.



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

None.



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##### Table of Contents

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



|              |  |                                                                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                      
|              | 
|3.1 (1)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                       
|              | 
|3.2 (1)       |  | Amended and Restated Bylaws.                                                                                                                                             
|              | 
|4.1 (1)       |  | Specimen Common Stock Certificate.                                                                                                                                       
|              | 
|4.2 (1)       |  | Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of November 14, 2005.                           
|              | 
|4.3 (2)       |  | Amendment No. 1 to the Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of December 28, 2007.    
|              | 
|4.4 (1)       |  | Warrant to Purchase Series A Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of December 14, 2000.                                      
|              | 
|4.5 (1)       |  | Warrant to Purchase Series B Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of May 1, 2002.                                            
|              | 
|4.6 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company II LLC, dated as of July 7, 2006.          
|              | 
|4.7 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company III LLC, dated as of July 7, 2006.         
|              | 
|4.8 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Oxford Finance Corporation, dated as of July 7, 2006.                         
|              | 
|4.9 (1)       |  | Form of First Warrant to Purchase Series C2 Preferred Stock.                                                                                                             
|              | 
|4.10 (1)      |  | Form of Second Warrant to Purchase Series C2 Preferred Stock.                                                                                                            
|              | 
|4.11 (2)      |  | Registration Rights Agreement by and between NeurogesX, Inc. and certain investors, dated as of December 23, 2007.                                                       
|              | 
|4.12 (2)      |  | Form of Warrant to Purchase Common Stock.                                                                                                                                
|              | 
|10.1 (3)     |  | Manufacturing and Supply Agreement with Formosa Laboratories, effective as of August 19, 2008.                                                                           
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|              | 
|32.1          |  | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).



|(1) | Incorporated by reference from our registration statement on Form S-1, registration number 333-140501, declared effective by the Securities and Exchange Commission on May 1,
2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 28, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



| | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this filing and have been filed separately with the Securities and
Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

SIGNATURES

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



|                        |  |                                             
|----------------------- |  | --------------------------------------------
|Dated: November 7, 2008 |  | NEUROGESX, INC.                             
|                        |  | (Registrant)                                
|                        | 
|                        |  | /s/ Anthony A. DiTonno                      
|                        |  | Anthony A. DiTonno                          
|                        |  | President and Chief Executive Officer       
|                        |  | (Principal Executive Officer)               
|                        | 
|                        |  | /s/ Stephen F. Ghiglieri                    
|                        |  | Stephen F. Ghiglieri                        
|                        |  | Chief Financial Officer                     
|                        |  | (Principal Financial and Accounting Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                      
|              | 
|3.1 (1)       |  | Amended and Restated Certificate of Incorporation.                                                                                                                       
|              | 
|3.2 (1)       |  | Amended and Restated Bylaws.                                                                                                                                             
|              | 
|4.1 (1)       |  | Specimen Common Stock Certificate.                                                                                                                                       
|              | 
|4.2 (1)       |  | Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of November 14, 2005.                           
|              | 
|4.3 (2)       |  | Amendment No. 1 to the Third Amended and Restated Investors Rights Agreement by and between NeurogesX, Inc. and certain stockholders, dated as of December 28, 2007.    
|              | 
|4.4 (1)       |  | Warrant to Purchase Series A Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of December 14, 2000.                                      
|              | 
|4.5 (1)       |  | Warrant to Purchase Series B Preferred Stock by and between NeurogesX, Inc. and Silicon Valley Bank, dated as of May 1, 2002.                                            
|              | 
|4.6 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company II LLC, dated as of July 7, 2006.          
|              | 
|4.7 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Horizon Technology Funding Company III LLC, dated as of July 7, 2006.         
|              | 
|4.8 (1)       |  | Warrant to Purchase Shares of Series C2 Preferred Stock by and between NeurogesX, Inc. and Oxford Finance Corporation, dated as of July 7, 2006.                         
|              | 
|4.9 (1)       |  | Form of First Warrant to Purchase Series C2 Preferred Stock.                                                                                                             
|              | 
|4.10 (1)      |  | Form of Second Warrant to Purchase Series C2 Preferred Stock.                                                                                                            
|              | 
|4.11 (2)      |  | Registration Rights Agreement by and between NeurogesX, Inc. and certain investors, dated as of December 23, 2007.                                                       
|              | 
|4.12 (2)      |  | Form of Warrant to Purchase Common Stock.                                                                                                                                
|              | 
|10.1 (3)     |  | Manufacturing and Supply Agreement with Formosa Laboratories, effective as of August 19, 2008.                                                                           
|              | 
|31.1          |  | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|              | 
|31.2          |  | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                  
|              | 
|32.1          |  | Certifications of the Principal Executive Officer and the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.
Section 1350).



|(1) | Incorporated by reference from our registration statement on Form S-1, registration number 333-140501, declared effective by the Securities and Exchange Commission on May 1,
2007.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 28, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference from our Current Report on Form 8-K, filed with the Securities and Exchange Commission on August 22, 2008.
|--- | ------------------------------------------------------------------------------------------------------------------------------------



| | Confidential treatment has been requested for portions of this exhibit. These portions have been omitted from this filing and have been filed separately with the Securities and
Exchange Commission.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



48