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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 March 31, 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, or 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 (Do not check if a smaller reporting company)  x |  | 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 April 30, 2008: 17,505,449









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##### Table of Contents

NEUROGESX, INC.

(A DEVELOPMENT STAGE COMPANY)

TABLE OF CONTENTS FOR FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2008



|                                                                                                                                                                           |  |     
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                                                           |  | Page
|PART I. FINANCIAL INFORMATION                                                                                                                                              |  | 1   
|Item 1. Financial Statements (unaudited)                                                                                                                                   |  | 1   
|Condensed Consolidated Balance Sheets as of March 31, 2008 and December 31, 2007                                                                                           |  | 1   
|Condensed Consolidated Statements of Operations for the three months ended March 31, 2008 and 2007, and the period from May 28, 1998 (date of inception) to March 31, 2008 |  | 2   
|Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007, and the period from May 28, 1998 (date of inception) to March 31, 2008 |  | 3   
|Notes to Condensed Consolidated Financial Statements (unaudited)                                                                                                           |  | 4   
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                              |  | 12  
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                                                                         |  | 21  
|Item 4T. Controls and Procedures                                                                                                                                           |  | 21  
|                                                                                                                                                                           | 
|PART II. OTHER INFORMATION                                                                                                                                                 |  | 23  
|Item 1. Legal Proceedings                                                                                                                                                  |  | 23  
|Item 1A. Risk Factors                                                                                                                                                      |  | 23  
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                        |  | 43  
|Item 3. Defaults Upon Senior Securities                                                                                                                                    |  | 43  
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                |  | 43  
|Item 5. Other Information                                                                                                                                                  |  | 43  
|Item 6. Exhibits                                                                                                                                                           |  | 44  
|                                                                                                                                                                           | 
|SIGNATURES                                                                                                                                                                 |  | 45  
|                                                                                                                                                                           | 
|EXHIBIT INDEX                                                                                                                                                              |  | 46  



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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)



|                                                 |  |               |          |   |                  |   |          |  
|------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                 |  | March 31,2008 |          |   | December 31,2007 |  
|                                                 |  | (unaudited)   |          |   | (Note 1)         |  
|Assets                                           |  |               |          |   |                  |   |          |  
|Current assets:                                  |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                        |  | $             | 12,370   |   |                  | $ | 31,478   |  
|Short term investments                           |  |               | 33,983   |   |                  |   | 21,373   |  
|Prepaid expenses and other current assets        |  |               | 332      |   |                  |   | 585      |  
|                                                 |  |               |          |   |                  |   |          |  
|Total current assets                             |  |               | 46,685   |   |                  |   | 53,436   |  
|Property and equipment, net                      |  |               | 477      |   |                  |   | 453      |  
|Restricted cash                                  |  |               | 240      |   |                  |   | 240      |  
|Other assets                                     |  |               | 45       |   |                  |   | 56       |  
|                                                 |  |               |          |   |                  |   |          |  
|Total assets                                     |  | $             | 47,447   |   |                  | $ | 54,185   |  
|                                                 |  |               |          |   |                  |   |          |  
|Liabilities and Stockholders Equity             |  |               |          |   |                  |   |          |  
|Current liabilities:                             |  |               |          |   |                  |   |          |  
|Accounts payable                                 |  | $             | 941      |   |                  | $ | 1,712    |  
|Accrued compensation                             |  |               | 643      |   |                  |   | 680      |  
|Accrued research and development                 |  |               | 2,555    |   |                  |   | 1,198    |  
|Other accrued expenses                           |  |               | 856      |   |                  |   | 1,848    |  
|Notes payable - current portion                  |  |               | 3,981    |   |                  |   | 3,859    |  
|                                                 |  |               |          |   |                  |   |          |  
|Total current liabilities                        |  |               | 8,976    |   |                  |   | 9,297    |  
|Non-current liabilities:                         |  |               |          |   |                  |   |          |  
|Notes payable  non-current portion              |  |               | 1,982    |   |                  |   | 3,024    |  
|Deferred rent                                    |  |               | 227      |   |                  |   | 156      |  
|Accrued research and development  non-current   |  |               |         |   |                  |   | 347      |  
|                                                 |  |               |          |   |                  |   |          |  
|Total non-current liabilities                    |  |               | 2,209    |   |                  |   | 3,527    |  
|Commitments and contingencies                    |  |               |          |   |                  |   |          |  
|Stockholders equity:                            |  |               |          |   |                  |   |          |  
|Common stock                                     |  |               | 17       |   |                  |   | 17       |  
|Additional paid-in capital                       |  |               | 208,103  |   |                  |   | 205,417  |  
|Deferred stock-based compensation                |  |               | (12      | ) |                  |   | (15      | )
|Accumulated other comprehensive income           |  |               | 253      |   |                  |   | 51       |  
|Deficit accumulated during the development stage |  |               | (172,099 | ) |                  |   | (164,109 | )
|                                                 |  |               |          |   |                  |   |          |  
|Total stockholders equity                       |  |               | 36,262   |   |                  |   | 41,361   |  
|                                                 |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity       |  | $             | 47,447   |   |                  | $ | 54,185   |  
|                                                 |  |               |          |   |                  |   |          |  

See accompanying notes.



1



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##### Table of Contents

NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations

(in thousands, except share
and per share data)

(unaudited)



|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | -------------------------------------------------- | - | ------- | - |  | - | -------- | -
|                                                                                            |  | Three Months EndedMarch 31, |            |   | Period fromMay 28, 1998(inception) toMarch 31,2008 |  
|                                                                                            |  | 2008                        |            |   | 2007                                               |   |        
|Operating expenses:                                                                         |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Research and development(1)                                                                 |  | $                           | 5,781      |   |                                                    | $ | 6,196   |   |  | $ | 101,168  |  
|General and administrative(2)                                                               |  |                             | 2,487      |   |                                                    |   | 1,653   |   |  |   | 31,360   |  
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Total operating expenses                                                                    |  |                             | 8,268      |   |                                                    |   | 7,849   |   |  |   | 132,528  |  
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Loss from operations                                                                        |  |                             | (8,268     | ) |                                                    |   | (7,849  | ) |  |   | (132,528 | )
|Interest income                                                                             |  |                             | 504        |   |                                                    |   | 203     |   |  |   | 4,419    |  
|Interest expense                                                                            |  |                             | (243       | ) |                                                    |   | (332    | ) |  |   | (2,169   | )
|Other income (expense), net                                                                 |  |                             | 17         |   |                                                    |   | 59      |   |  |   | (2,917   | )
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Net loss before cumulative effect of change in accounting principle                         |  |                             | (7,990     | ) |                                                    |   | (7,919  | ) |  |   | (133,195 | )
|Cumulative effect of change in accounting principle                                         |  |                             |           |   |                                                    |   |        |   |  |   | (32      | )
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Net loss                                                                                    |  |                             | (7,990     | ) |                                                    |   | (7,919  | ) |  |   | (133,227 | )
|Accretion of redeemable convertible preferred stock                                         |  |                             |           |   |                                                    |   | (3,437  | ) |  |   | (38,872  | )
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Loss attributable to common stockholders                                                    |  | $                           | (7,990     | ) |                                                    | $ | (11,356 | ) |  | $ | (172,099 | )
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Net loss per common share  basic and diluted:                                              |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Loss per share attributable to common stockholders                                          |  | $                           | (0.46      | ) |                                                    | $ | (17.25  | ) |  |   |          |  
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Shares used to compute basic and diluted loss per share attributable to common stockholders |  |                             | 17,468,395 |   |                                                    |   | 658,364 |   |  |   |          |  
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|Non-cash stock-based compensation expense included in operating expenses:                   |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|(1) Research and development                                                                |  | $                           | 198        |   |                                                    | $ | 348     |   |  |   |          |  
|(2) General and administrative                                                              |  |                             | 201        |   |                                                    |   | 482     |   |  |   |          |  
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  
|                                                                                            |  | $                           | 399        |   |                                                    | $ | 830     |   |  |   |          |  
|                                                                                            |  |                             |            |   |                                                    |   |         |   |  |   |          |  

See accompanying notes.



2



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NeurogesX, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)



|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|--------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | -------------------------------------------------- | - | ------ | - |  | - | -------- | -
|                                                                                        |  | Three Months EndedMarch 31, |         |   | Period fromMay 28, 1998(inception) toMarch 31,2008 |  
|                                                                                        |  | 2008                        |         |   | 2007                                               |   |       
|Operating activities                                                                    |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Net loss                                                                                |  | $                           | (7,990  | ) |                                                    | $ | (7,919 | ) |  | $ | (133,227 | )
|Adjustments to reconcile net loss to net cash used in operating activities:             |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Depreciation and amortization                                                           |  |                             | 39      |   |                                                    |   | 28     |   |  |   | 1,404    |  
|Amortization of debt issuance costs                                                     |  |                             | 50      |   |                                                    |   | 50     |   |  |   | 344      |  
|Amortization of investment premiums                                                     |  |                             | (301    | ) |                                                    |   | (16    | ) |  |   | (737     | )
|Stock-based compensation                                                                |  |                             | 399     |   |                                                    |   | 830    |   |  |   | 7,354    |  
|(Gain)/loss on disposal of fixed assets                                                 |  |                             |        |   |                                                    |   |       |   |  |   | 82       |  
|Revaluation of preferred stock warrant liability                                        |  |                             |        |   |                                                    |   | (59    | ) |  |   | 2,888    |  
|Changes in operating assets and liabilities:                                            |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Prepaid expenses and other current assets                                               |  |                             | 253     |   |                                                    |   | (1,317 | ) |  |   | (332     | )
|Other assets                                                                            |  |                             |        |   |                                                    |   |       |   |  |   | (116     | )
|Accounts payable                                                                        |  |                             | (771    | ) |                                                    |   | 1,675  |   |  |   | 941      |  
|Accrued compensation                                                                    |  |                             | (37     | ) |                                                    |   | 171    |   |  |   | 643      |  
|Accrued research and development                                                        |  |                             | 1,010   |   |                                                    |   | 173    |   |  |   | 2,555    |  
|Deferred rent                                                                           |  |                             | 71      |   |                                                    |   |       |   |  |   | 227      |  
|Other accrued expenses                                                                  |  |                             | (991    | ) |                                                    |   | (268   | ) |  |   | 863      |  
|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Net cash used in operating activities                                                   |  |                             | (8,268  | ) |                                                    |   | (6,652 | ) |  |   | (117,111 | )
|Investing activities                                                                    |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Purchases of short-term investments                                                     |  |                             | (30,385 | ) |                                                    |   | (2,217 | ) |  |   | (153,265 | )
|Proceeds from maturities and sales of short-term investments                            |  |                             | 18,278  |   |                                                    |   | 2,001  |   |  |   | 120,272  |  
|Change in restricted cash                                                               |  |                             |        |   |                                                    |   |       |   |  |   | (240     | )
|Proceeds from disposal of property and equipment                                        |  |                             |        |   |                                                    |   |       |   |  |   | 6        |  
|Purchases of property and equipment                                                     |  |                             | (63     | ) |                                                    |   | (16    | ) |  |   | (1,969   | )
|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Net cash used in investing activities                                                   |  |                             | (12,170 | ) |                                                    |   | (232   | ) |  |   | (35,196  | )
|Financing activities                                                                    |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Proceeds from notes payable                                                             |  |                             |        |   |                                                    |   |       |   |  |   | 11,092   |  
|Repayment of notes payable                                                              |  |                             | (959    | ) |                                                    |   | (448   | ) |  |   | (4,932   | )
|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                                                  |  |                             | 2,275   |   |                                                    |   | 9      |   |  |   | 62,180   |  
|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Net cash provided by financing activities                                               |  |                             | 1,330   |   |                                                    |   | 9,644  |   |  |   | 164,677  |  
|Net increase/(decrease) in cash and cash equivalents                                    |  |                             | (19,108 | ) |                                                    |   | 2,760  |   |  |   | 12,370   |  
|Cash and cash equivalents, beginning of period                                          |  |                             | 31,478  |   |                                                    |   | 11,908 |   |  |   |         |  
|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Cash and cash equivalents, end of period                                                |  | $                           | 12,370  |   |                                                    | $ | 14,668 |   |  | $ | 12,370   |  
|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Supplemental cash flow information                                                      |  |                             |         |   |                                                    |   |        |   |  |   |          |  
|Cash paid for interest                                                                  |  | $                           | 203     |   |                                                    | $ | 190    |   |  | $ | 1,726    |  
|                                                                                        |  |                             |         |   |                                                    |   |        |   |  |   |          |  

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, has completed three pivotal Phase 3 clinical trials that have met their primary endpoints, two in
postherpetic neuralgia (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. The subsidiary has no assets other than the initial formation capital totaling one Pound Sterling.

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 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.

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 the unaudited condensed consolidated interim financial statements have read or have access to the audited 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, filed on March 26, 2008.



4



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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 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 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 estimated expenses of approximately $1,200,000, totaled $23,800,000.

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 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 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.



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The Company recognized stock-based compensation expense as follows (in thousands):



|                               |  |                             |     |      |   |    
|------------------------------ |  | --------------------------- | --- | ---- | - | ---
|                               |  | Three Months EndedMarch 31,
|                               |  | 2008                        |     | 2007
|Research and development       |  | $                           | 198 |      | $ | 348
|General and administrative     |  |                             | 201 |      |   | 482
|                               |  |                             |     |      |   |    
|Total stock-based compensation |  | $                           | 399 |      | $ | 830
|                               |  |                             |     |      |   |    

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



|                                                                                                    |  |                             |     |      |   |    
|--------------------------------------------------------------------------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                                                                                    |  | Three Months EndedMarch 31,
|                                                                                                    |  | 2008                        |     | 2007
|Share based payments granted subsequent to December 31, 2005 under SFAS No. 123R                    |  | $                           | 396 |      | $ | 389
|Compensation expense related to non-employee options and variable accounting for stock-based awards |  |                             |    |      |   | 60 
|Compensation expense related to forgiveness of non-recourse promissory notes                        |  |                             |    |      |   | 379
|Amortization of deferred stock-based compensation                                                   |  |                             | 3   |      |   | 2  
|                                                                                                    |  |                             |     |      |   |    
|Total stock-based compensation                                                                      |  | $                           | 399 |      | $ | 830
|                                                                                                    |  |                             |     |      |   |    

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 expense recognition under SFAS No. 123R.

The following table shows the assumptions used to compute stock-based compensation expense for the stock options granted to employees and directors and
for the Companys Employee Stock Purchase Plan (ESPP) during the three-month periods ended March 31, 2008 and 2007 using the Black-Scholes valuation model:



|                         |  |                             |   |  |      |  
|------------------------ |  | --------------------------- | - |  | ---- | -
|                         |  | Three Months EndedMarch 31, |  
|                         |  | 2008                        |   |  | 2007 |  
|Stock Options            |  |                             |   |  |      |  
|Expected dividend yield  |  | 0                           | % |  | 0    | %
|Expected volatility      |  | 70                          | % |  | 77   | %
|Expected life (in years) |  | 6.0                         |   |  | 6.0  |  
|Risk-free interest rate  |  | 3.1                         | % |  | 4.6  | %
|ESPP                     |  |                             |   |  |      |  
|Expected dividend yield  |  | 0                           | % |  | N/A  |  
|Expected volatility      |  | 44  68                     | % |  | N/A  |  
|Expected life (in years) |  | 0.5  1.0                   |   |  | N/A  |  
|Risk-free interest rate  |  | 3.6  5.0                   | % |  | N/A  |  



6



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##### Table of Contents

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 for stock options granted to non-employees during the
three-month periods ended March 31, 2008 and 2007 using the Black-Scholes valuation model:



|                         |  |                             |   |  |           |  
|------------------------ |  | --------------------------- | - |  | --------- | -
|                         |  | Three Months EndedMarch 31, |  
|                         |  | 2008                        |   |  | 2007      |  
|Expected dividend yield  |  | 0                           | % |  | 0         | %
|Expected volatility      |  | 70                          | % |  | 77        | %
|Expected life (in years) |  | 7.8                         |   |  | 7.0  8.9 |  
|Risk-free interest rate  |  | 3.5                         | % |  | 4.5       | %

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 which 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. We recorded approximately $202,000 and $2,000 for the three months ended March 31, 2008 and 2007, respectively, as unrealized gains on our available-for-sale investments.

Net Loss Per Share

Basic loss
per share is calculated by dividing the loss applicable 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.



7



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##### Table of Contents

Diluted loss per share is computed by dividing the loss applicable 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, as well as preferred stock prior to the IPO, 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 EndedMarch 31,                   |           
|                                                                                                                                                                   |  | 2008                                          |            |   | 2007 |  
|                                                                                                                                                                   |  | (in thousands except share andper share data) |           
|Numerator:                                                                                                                                                         |  |                                               |            |   |      |   |           |  
|Net loss                                                                                                                                                           |  | $                                             | (7,990     | ) |      | $ | (7,919    | )
|Accretion of redeemable convertible preferred stock                                                                                                                |  |                                               |           |   |      |   | (3,437    | )
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  
|Loss applicable to common stockholders                                                                                                                             |  | $                                             | (7,990     | ) |      | $ | (11,356   | )
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  
|Denominator:                                                                                                                                                       |  |                                               |            |   |      |   |           |  
|Weighted-average common shares outstanding                                                                                                                         |  |                                               | 17,470,306 |   |      |   | 663,161   |  
|Less: Weighted-average unvested common shares subject to repurchase                                                                                                |  |                                               | (1,911     | ) |      |   | (4,797    | )
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  
|Denominator for basic and diluted loss per share applicable to common stockholders                                                                                 |  |                                               | 17,468,395 |   |      |   | 658,364   |  
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  
|Basic and diluted loss per share applicable to common stockholders                                                                                                 |  | $                                             | (0.46      | ) |      | $ | (17.25    | )
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  
|Historical outstanding securities not included in diluted loss per share applicable to common stockholder calculation as of March 31,
2008 and 2007, respectively: |  |                                               |            |   |      |   |           |  
|Redeemable convertible preferred stock                                                                                                                             |  |                                               |           |   |      |   | 8,722,013 |  
|Options to purchase common stock                                                                                                                                   |  |                                               | 1,431,101  |   |      |   | 792,117   |  
|Warrants outstanding                                                                                                                                               |  |                                               | 1,265,846  |   |      |   | 59,573    |  
|Common stock subject to repurchase                                                                                                                                 |  |                                               | 1,533      |   |      |   | 4,623     |  
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  
|                                                                                                                                                                   |  |                                               | 2,698,480  |   |      |   | 9,578,326 |  
|                                                                                                                                                                   |  |                                               |            |   |      |   |           |  

Recently Issued Accounting Standards

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 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.

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



8



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##### Table of Contents

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. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157 (FSP 157-2), which allows entities to elect a
one year deferral of the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis. As allowed under FSP 157-2, we have elected to defer our adoption of SFAS
No. 157 for such non-financial assets and non-financial liabilities until January 1, 2009. Therefore, as of January 1, 2008, the Company has adopted the provisions of SFAS No. 157 with respect to its financial assets and
financial liabilities only. 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 priced 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 to adopt the fair value option under this Statement.

Note 3. Preferred Stock Warrant Liability and Redeemable Convertible Preferred Stock

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. The Company recognized approximately $59,000 as other income related to the change in fair value of the warrant liability upon exercise of these warrants.



9



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##### Table of Contents

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 March 31, 2008, warrants to purchase 56,000 shares of the Companys common stock automatically exercise in the event of an acquisition of the Company.

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:



|                        |  |                                 |  
|----------------------- |  | ------------------------------- | -
|                        |  | Three MonthsEnded March 31,2007 |  
|Expected dividend yield |  | 0                               | %
|Expected volatility     |  | 74                              | %
|Expected life           |  | 6.3  6.8                       |  
|Risk-free interest rate |  | 4.6                             | %

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 |        | UnrealizedGain/(Loss) |   | EstimatedFair Value
|As of March 31, 2008:       |  |      |        |                       |   |                     |  |   |       
|Cash and money market funds |  | $    | 8,871  |                       | $ |                    |  | $ | 8,871 
|U.S. Treasury bills         |  |      | 1,999  |                       |   |                    |  |   | 1,999 
|Commercial paper            |  |      | 35,230 |                       |   | 253                 |  |   | 35,483
|                            |  |      |        |                       |   |                     |  |   |       
|                            |  | $    | 46,100 |                       | $ | 253                 |  | $ | 46,353
|                            |  |      |        |                       |   |                     |  |   |       
|Reported as:                |  |      |        |                       |   |                     |  |   |       
|Cash and cash equivalents   |  |      |        |                       |   |                     |  | $ | 12,370
|Short term investments      |  |      |        |                       |   |                     |  |   | 33,983
|                            |  |      |        |                       |   |                     |  |   |       
|                            |  |      |        |                       |   |                     |  | $ | 46,353
|                            |  |      |        |                       |   |                     |  |   |       
|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  |                       |   |                    |  |   | 5,751 
|Asset-backed securities     |  |      | 4,732  |                       |   | 4                   |  |   | 4,736 
|                            |  |      |        |                       |   |                     |  |   |       
|                            |  | $    | 52,800 |                       | $ | 51                  |  | $ | 52,851
|                            |  |      |        |                       |   |                     |  |   |       
|Reported as:                |  |      |        |                       |   |                     |  |   |       
|Cash and cash equivalents   |  |      |        |                       |   |                     |  | $ | 31,478
|Short term investments      |  |      |        |                       |   |                     |  |   | 21,373
|                            |  |      |        |                       |   |                     |  |   |       
|                            |  |      |        |                       |   |                     |  | $ | 52,851
|                            |  |      |        |                       |   |                     |  |   |       

At March 31, 2008 and December 31, 2007, the contractual maturities of investments held
were less than one year.



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##### Table of Contents

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 March 31, 2008 (in thousands):



|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       
|--------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ----- | ----------------------------------------- | - | ------ |  | - | ------
|                                                                                  |  | Fair Value Measurements atMarch 31, 2008 Using             |       | Total                                    
|                                                                                  |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |       | SignificantOtherObservableInputs(Level 2) |  
|Components of cash equivalents and short term investments measured at fair value: |  |                                                            |       |                                           |   |        |  |   |       
|Money market funds                                                                |  | $                                                          | 8,405 |                                           | $ |       |  | $ | 8,405 
|U.S. Treasury bills                                                               |  |                                                            |      |                                           |   | 1,999  |  |   | 1,999 
|Commercial paper                                                                  |  |                                                            |      |                                           |   | 35,483 |  |   | 35,483
|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 8,405 |                                           | $ | 37,482 |  |   | 45,887
|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |       |                                           |   |        |  |   |       
|Operating cash                                                                    |  |                                                            | 466  
|Total of cash and cash equivalents and short term investments                     |  |                                                            |       |                                           |   |        |  | $ | 46,353
|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       

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 March 31, 2008 the Company granted options to purchase a total of 317,250 shares of the Companys common stock to employees with a fair value of approximately $1,093,000 that is
expected to be amortized through 2012. During the three months ended March 31, 2007, the Company granted options to purchase a total of 121,324 shares of the Companys common stock to employees and consultants with a fair value of
approximately $1,448,000 that is expected to be amortized through 2011, as of March 31, 2008.



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|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:



| |  |  | the filing for regulatory approval of NGX-4010 with the U.S. Food and Drug Administration, or FDA, the timing of such filing, and the scope of indications
potentially covered by such filing;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the filing of additional data in connection with our marketing approval application, or MAA, for NGX-4010 and the potential effect, if any, on the timing of the MAA
review process as a result of filing such additional information or alterations in the scope of indications for which we are seeking approval under such MAA;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential partners for commercialization of NGX-4010 or other product candidates in the European Union;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | the sufficiency of existing resources to fund our operations for at least the next 12 months;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | potential receipt of product candidate regulatory approval, and the timing of the review process in connection with such approval, if any;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | plans and efforts to extend possible labeling in the United States beyond PHN to potentially include PDN and HIV-DSP either with NGX-4010 or other product
candidates and the timing of such efforts;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, 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;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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);
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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 the
management of 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, has completed three pivotal Phase 3 clinical trials that met their primary endpoints, two in PHN and one in HIV-DSP. The results of these
successful studies demonstrated 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. We intend to submit a new drug application, or NDA, with the FDA for NGX-4010 for PHN in 2008 based on our two successfully completed Phase 3 studies in PHN.



13



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##### Table of Contents

In September 2007, our MAA, which was based upon our then available clinical trials data including two
Phase 3 studies that met their primary endpoints, one each in PHN and HIV-DSP, was accepted for review by the European Medicines Agency, or EMEA. This application was accepted under the centralized procedure and seeks approval for NGX-4010 for
peripheral neuropathic pain. We intend to supplement our MAA filing with 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. The incorporation of significant additional clinical data to our MAA could delay the EMEAs decision. Subsequent to our submitting this additional data, and after evaluating the EMEAs response to that data, we could decide to
continue, or to withdraw and potentially resubmit, our MAA. We intend to pursue with the European regulatory authorities the possible approval for peripheral neuropathic pain. However, our MAA may be limited to specific neuropathic pain indications,
such as PHN.

We expect to define our path forward for our clinical program in HIV-DSP and PDN in 2008. We are also developing a non-patch
liquid formulation of synthetic capsaicin, NGX-1998, which we anticipate will continue Phase 1 clinical trials in 2008, and are developing an opioid analgesic for use in managing pain associated with other chronic pain conditions. We hold all
worldwide commercial rights to our product candidates and are actively engaged in discussions with potential commercial partners.

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, the initiation of clinical and
preclinical evaluation of new product candidates, such as NGX-1998 and our opioid analgesic prodrug platform.

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 March 31, 2008, we had a
deficit accumulated during the development stage of approximately $172.1 million, of which approximately $38.9 million represents non-cash charges for the accretion of redeemable convertible preferred stock. We expect our operating losses to
increase over the next several years as we continue our clinical development of our product candidates, seek regulatory approvals for NGX-4010 and, if these efforts are successful, commence commercialization activities.

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 three months ended March 31, 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 tables show the assumptions used to compute stock-based compensation expense for stock options granted to employees and non-employees and for our 2007 Employee Stock Purchase Plan during the three months
ended March 31, 2008 and 2007 using the Black-Scholes option valuation method:



14



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|                         |  |                             |   |  |      |  
|------------------------ |  | --------------------------- | - |  | ---- | -
|                         |  | Three Months EndedMarch 31, |  
|                         |  | 2008                        |   |  | 2007 |  
|Employees:               |  |                             |   |  |      |  
|Stock Options            |  |                             |   |  |      |  
|Expected dividend yield  |  | 0                           | % |  | 0    | %
|Expected volatility      |  | 70                          | % |  | 77   | %
|Expected life (in years) |  | 6.0                         |   |  | 6.0  |  
|Risk-free interest rate  |  | 3.1                         | % |  | 4.6  | %
|                         |  |                            
|ESPP                     |  |                             |   |  |      |  
|Expected dividend yield  |  | 0                           | % |  | N/A  |  
|Expected volatility      |  | 44  68                     | % |  | N/A  |  
|Expected life (in years) |  | 0.5  1.0                   |   |  | N/A  |  
|Risk-free interest rate  |  | 3.6  5.0                   | % |  | N/A  |  



|                         |  |                              |   |  |           |  
|------------------------ |  | ---------------------------- | - |  | --------- | -
|                         |  | Three Months Ended March 31, |  
|                         |  | 2008                         |   |  | 2007      |  
|Non-employees:           |  |                              |   |  |           |  
|Expected dividend yield  |  | 0                            | % |  | 0         | %
|Expected volatility      |  | 70                           | % |  | 77        | %
|Expected life (in years) |  | 7.8                          |   |  | 7.0  8.9 |  
|Risk-free interest rate  |  | 3.5                          | % |  | 4.5       | %

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 SFAS No. 123R.

We recognized stock-based compensation expense, which includes the fair value of options granted since January 1, 2006 under Statement of Financial
Accounting Standards No. 123R, Share-Based Payment, 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 March 31,
|                               |  | 2008                         |     | 2007
|Research and development       |  | $                            | 198 |      | $ | 348
|General and administrative     |  |                              | 201 |      |   | 482
|                               |  |                              |     |      |   |    
|Total stock-based compensation |  | $                            | 399 |      | $ | 830
|                               |  |                              |     |      |   |    



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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.

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



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In accordance with SFAS No. 157, the following table represents our 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 March 31, 2008 (in thousands):



|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       
|--------------------------------------------------------------------------------- |  | ---------------------------------------------------------- | ----- | ----------------------------------------- | - | ------ |  | - | ------
|                                                                                  |  | Fair Value Measurements atMarch 31, 2008 Using             |       | Total                                    
|                                                                                  |  | Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1) |       | SignificantOtherObservableInputs(Level 2) |  
|Components of cash equivalents and short term investments measured at fair value: |  |                                                            |       |                                           |   |        |  |   |       
|Money market funds                                                                |  | $                                                          | 8,405 |                                           | $ |       |  | $ | 8,405 
|U.S. Treasury bills                                                               |  |                                                            |      |                                           |   | 1,999  |  |   | 1,999 
|Commercial paper                                                                  |  |                                                            |      |                                           |   | 35,483 |  |   | 35,483
|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       
|Total financial assets measured at fair value                                     |  | $                                                          | 8,405 |                                           | $ | 37,482 |  |   | 45,887
|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       
|Components of cash and cash equivalents not measured at fair value:               |  |                                                            |       |                                           |   |        |  |   |       
|Operating cash                                                                    |  |                                                            | 466  
|Total of cash and cash equivalents and short term investments                     |  |                                                            |       |                                           |   |        |  | $ | 46,353
|                                                                                  |  |                                                            |       |                                           |   |        |  |   |       

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 costs and external costs. Our internal costs are primarily employee salaries and benefits, allocated facility and other overhead costs. Our external costs are
primarily expenses related to our clinical trials, such as the cost of clinical research organizations and clinical investigators, as well as expenses related to formulation development, manufacturing process development and costs associated with
the preparation and filing of regulatory submissions and non-clinical studies.

Since our inception, NGX-4010 has accounted for in excess
of 90% of our external research and development expenses. Specifically, in the three-month periods ended March 31, 2008 and 2007, our external research and development expenses totaled approximately $3.4 million and $4.0 million, respectively,
and of these amounts 92% and 96%, 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 and clinical trial may be affected by a variety of factors, including, among others, patient enrollment, manufacturing capabilities, successful clinical results, 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 clinical stages of our product candidates 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. We filed an MAA, which was accepted by the EMEA in September 2007, and we currently plan to file an NDA in the United States in 2008. We believe that the clinical development efforts to
attain initial market approval for NGX-4010 are now substantially complete. Our clinical development efforts with respect to possible label extension beyond PHN for NGX-4010 and our full clinical development program for NGX-1998 are currently being
evaluated and as such, we anticipate that our overall research and development expenses, excluding non-cash stock-based compensation expense, in the coming quarters may be lower than recent historical levels but will likely increase again late this
year or in the first half of next year as we begin larger scale studies in one or both product candidates.



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Our general and administrative expenses consist primarily of salaries and benefits, professional fees
related to our administrative, finance, human resource, legal and information technology functions, marketing expenses, 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. We anticipate that our general and administrative expenses will increase in absolute dollars and also as a percentage of total expenses over the next several quarters and
potentially over the next several years. These increases are likely to be attributable to increasing marketing activities in anticipation of and upon receipt of, required regulatory approvals, the costs of hiring and deploying a sales force in the
United States to support a commercial launch of our product should we achieve FDA approval, and the costs of being a public company, as well as the need to add additional personnel in all of the key functional areas that support growth of our
general operations, including accounting and finance, legal and human resources.

Comparison of Three Months Ended March 31,
2008 and 2007



|                                    |  |                                    |        |   |                    |   |        |                      |  |   |      |   |  |     |   
|----------------------------------- |  | ---------------------------------- | ------ | - | ------------------ | - | ------ | -------------------- |  | - | ---- | - |  | --- | --
|                                    |  | Three Months EndedMarch 31,        |        |   | Increase(Decrease) |   |        | % Increase(Decrease) | 
|                                    |  | 2008                               |        |   | 2007               |   |        |                     
|                                    |  | (in thousands, except percentages) |       
|Research and development expenses   |  | $                                  | (5,781 | ) |                    | $ | (6,196 | )                    |  | $ | (415 | ) |  | (7  | %)
|General and administrative expenses |  |                                    | (2,487 | ) |                    |   | (1,653 | )                    |  |   | 834  |   |  | 50  | % 
|Interest income                     |  |                                    | 504    |   |                    |   | 203    |                      |  |   | 301  |   |  | 148 | % 
|Interest expense                    |  |                                    | (243   | ) |                    |   | (332   | )                    |  |   | (89  | ) |  | (27 | %)
|Other income (expense), net         |  |                                    | 17     |   |                    |   | 59     |                      |  |   | (42  | ) |  | (71 | %)

Research and Development Expenses.Research and development expenses decreased
approximately $0.4 million, or 7%, to $5.8 million in the three months ended March 31, 2008 from $6.2 million for the same period in 2007. Research and development expenses decreased primarily as a result of a $0.7 million decrease in clinical
study related costs associated with NGX-4010. During the first quarter of 2007, we were conducting two Phase 3 clinical trials, whereas in the first quarter of 2008, we were in the process of completing our one remaining active Phase 3 clinical
trial. Also contributing to the decrease was a $0.2 million decrease in non-cash stock-based compensation expense. These decreases were partially offset by a $0.2 million increase in regulatory expenses related to an increase in staffing and
consulting in support of our MAA filing and preparation for an NDA filing later this year, a $0.2 million increase in manufacturing activities including expenses associated with the growth of our pharmaceutical sciences organization, and a $0.1
million increase in development work related to new product areas including work to support our planned investigational new drug application, or IND, for NGX-1998 as well as research in support of our new product initiatives.

General and Administrative Expenses. General and administrative expenses increased approximately $0.8 million, or 50%, to $2.5 million in the
three months ended March 31, 2008 from $1.7 million in the three months ended March 31, 2007. General and administrative expenses increased primarily as a result of a $0.5 million increase in general and administrative employee related
expenses as a result of an increase in staffing in finance and administration in support of being a public company and in marketing in support of our pre-commercialization activities. Employee related general and administrative expense also
increased as a result of the initiation of our board compensation program upon completion of our IPO. Also contributing to the increase was a $0.4 million increase in non-staffing related marketing expenses including consulting and analysis in
support of our pricing and reimbursement strategies, and other pre-commercialization market research and other pre-launch activities. In addition, as a result of our IPO and costs attendant to being a public company, there was a $0.3 million
increase in professional and



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corporate fees, including legal fees, directors and officers insurance expense and 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 $0.3 million decrease in non-cash stock- based compensation expense.

Interest income. Interest income increased approximately $0.3 million, or 148%, to $0.5 million in the three months ended March 31, 2008 from
$0.2 million for the same period in 2007. This increase was primarily attributable to an increase in invested assets due to both the completion of our IPO on May 7, 2007 and our private placement of common stock and warrants to purchase common
stock on December 28, 2007 and January 3, 2008.

Interest expense. Interest expense decreased approximately $0.1 million
to $0.2 million in the three months ended March 31, 2008 from $0.3 million for the same period in 2007. This decrease was related to the reduction in the outstanding principal balance of certain notes payable as a result of the repayment of
principal on such notes payable since March 31, 2007.

Liquidity and Capital Resources

Since our inception through March 31, 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 March 31, 2008, we have received approximately $158.5 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 March 31, 2008, we had approximately $46.4 million in cash, cash equivalents and short-term
investments. Our cash and investment balances are held in a variety of interest bearing instruments including obligations of U.S. government agencies, 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 certain credit facilities including mortgage-backed securities and auction-rate
securities. In response to these events we evaluated, and continue to evaluate, our investment portfolio and subsequent to December 31, 2007, we either sold, at a gain, or realized the full value of asset backed securities and other relatively
higher risk investments from our portfolio. While our invested balances do not include either mortgage backed securities or auction-rate securities and our invested assets contain only highly liquid money market investments and high quality
corporate or government obligations, we can not predict what effects a continued deterioration in credit markets may have on the companies that issued the corporate obligations, and how such potential effects may impact the liquidity, principal
balances or rates of return of our cash equivalents and short-term investments. Further, there can be no assurance against future impairment of our investments if the sub-prime market crisis spreads to other sectors of the economy or if credit
markets deteriorate further.

Net cash used in operating activities was approximately $8.3 million and $6.7 million during the three months
ended March 31, 2008 and 2007, respectively. Net cash used in each of these periods was primarily a result of external research and development expenses, internal personnel costs associated with our research



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and development 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 accounts payable and accrued research and development expenses that are primarily dependent upon our research and development activities as well as the timing of our payments to our
suppliers, vendors and employees.

Net cash used in investing activities was approximately $12.2 million and $0.2 million during the three
months ended March 31, 2008 and 2007, respectively. Investing activities consist primarily of the purchase, sale and maturity of marketable securities and, to a lesser extent, the purchase of capital equipment. Net cash used in investing
activities was significantly higher in the three months ended March 31, 2008 compared to the same period in 2007 due to the investment of a majority of the net proceeds generated from our private placement transaction, completed on
January 3, 2008, in short-term investments. Purchases of property and equipment were not significant during these periods. However, we expect that property and equipment expenditures may increase over the next 12 to 24 months as a result of
potential requirements to support increased personnel as we continue to build our organization in anticipation of the planned commercial launch of NGX-4010.

Net cash provided by financing activities was approximately $1.3 million and $9.6 million during the three months ended March 31, 2008 and 2007, respectively. Financing activities consisted primarily of net
proceeds from the sale of our common stock in the three months ended March 31, 2008 and net proceeds from the exercise of warrants underlying our preferred stock in the three months ended March 31, 2007, partially offset by principal
repayments on our venture loan financing arrangements made during both periods.

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



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



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



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



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



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



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



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



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



| |  |  | 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.
| | - |  | ----------------------------------------------------------------------------------------



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We believe that our existing cash and investments will be sufficient to meet our projected operating
requirements for at least the next twelve months. To date, however, 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 the sale of other equity securities, strategic collaboration agreements and debt financing. 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 renegotiate 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 issuing equity securities, substantial dilution to existing stockholders would likely result. If we raise additional funds by incurring
debt financing, the terms of the debt may involve significant cash payment obligations as well as covenants and specific financial ratios that may restrict our ability to operate our business.

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 2007 Form 10-K, filed on March 26, 2008.



|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 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.



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(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 substantially 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. 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 and we are continuing to analyze the data from our most recent study in HIV-DSP and are evaluating whether or not to seek approval for that indication or alternatively whether
more studies may be required to achieve an HIV-DSP approval. If we decide to seek approval in HIV-DSP, we will likely do so no sooner than after the FDA has completed its review of the PHN NDA submission, which we anticipate would take approximately
12 months from the date of our submission being accepted by the FDA, 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.



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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 are currently in the process of responding to those questions. As part of our response, we intend to submit additional data that may include 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. As a result of
this significant addition of data to our response to the EMEAs initial questions, we have requested and have been granted an extension of time to submit our response to the EMEA. Due to the significant amount of additional data we intend to
include in the MAA, the EMEAs decision regarding our MAA could be delayed. Subsequent to our submitting this additional data, and after evaluating the EMEAs response to that data, 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.

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 trails 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. We have also observed a gender difference in how patients experience pain and respond to both the treatment and the low concentration
control. Although we have designed our protocols in ongoing studies to address gender differences and other factors, there can be no assurance that our protocol designs will be adequate or that factors that we may or may not be aware of



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or anticipate, will not have a negative effect on the results of our ongoing clinical trials, which could significantly disrupt our efforts to obtain
regulatory approvals and commercialize our product candidates. Furthermore, 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 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 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. In addition 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.



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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 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 four contract manufacturers as single source suppliers for the components of our NGX-4010 product
candidate: synthetic capsaicin, the dermal patch, the associated cleansing gel and the fully assembled NGX-4010 treatment kit. To date, we have entered into long term commercial supply agreements for the dermal patch and our cleansing gel, but have
not yet entered into long term supply agreements with either of our other contract manufacturers and these manufacturers could terminate their relationships with us at any time and for any reason. 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;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | 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.



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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. The FDA could increase 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.

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 are in Phase 2 clinical trials 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.

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. NGX-4010 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.



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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 planned 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:



| |  |  | addressing issues raised by the FDA or European health authorities regarding safety, design, scope and objectives of future clinical studies, particularly in regard
to our PDN and NGX-1998 planned clinical programs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | recruiting and enrolling patients to participate in a clinical trial;
| | - |  | ---------------------------------------------------------------------



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



| |  |  | reaching agreement on acceptable terms with prospective clinical research organizations and trial sites;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | manufacturing sufficient quantities of a product candidate; and
| | - |  | ---------------------------------------------------------------



| |  |  | obtaining institutional review board approval to conduct a clinical trial at a prospective site.
| | - |  | ------------------------------------------------------------------------------------------------

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.

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



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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 with respect to any questions raised or determinations made by the EMEA, that delay
or prevent approval for a broad label or otherwise or that arise from our planned supplementation of our MAA with data from PHN and HIV-DSP trials completed after its original submission, 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, our strategy may change and we may instead, seek a collaboration partner. If we decide to seek 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:



| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------------------



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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.

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.

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 and when 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.



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Lidoderm, a self-administered topical patch for treating PHN, is covered under Medicare Part D, the
outpatient prescription drug benefit that took effect in 2006. 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 determine 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.

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 well-established products marketed by large pharmaceutical
companies with far greater name recognition and resources than we have. NGX-4010 will also compete with medications used off-label. 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 and depression.

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;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | 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.

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 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 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 five-year data exclusivity to the first applicant to gain approval of an NDA under specific provisions of the Food, Drug and Cosmetic Act for a product using an active ingredient that the FDA has not previously approved.
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 Hatch-Waxman exclusivity. This data exclusivity will not prevent the FDA from approving a competitors NDA if the competitors NDA is based on studies it has performed
and not on our studies.



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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, because it does not contain a new active molecule. 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.

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 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 seek orphan drug status for other
indications. 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.



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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 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.

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 three months ended March 31, 2008 was approximately $8.0 million. As of March 31, 2008 we had an accumulated deficit of approximately $172.1 million. We expect to incur increasing losses for several years, as we
develop, seek regulatory approvals for and commercialize NGX-4010, and continue other research and development activities. If NGX-4010 fails in clinical trials, 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.



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We will require substantial additional funding and may be unable to raise capital when needed,
which would force us to delay, reduce or eliminate our development programs or commercialization efforts.

We had cash, cash
equivalents and short term investments totaling $46.4 million at March 31, 2008 and during the three months ended March 31, 2008, we used cash of $8.3 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 marketable securities will be sufficient to fund our operations for at least the next 12 months, the development and regulatory approval of NGX-4010 and other product candidates and the acquisition and development of additional products or
product candidates by us, as well as the development of our sales and marketing capabilities, will require the commitment of substantial funds. Our future capital requirements will depend on, and could increase significantly as a result of, many
factors, including:



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



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



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



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



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



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------

We intend to seek additional funding through strategic alliances or through public or private sales of our equity securities. In addition, we may obtain
equipment leases and may pursue opportunities to obtain debt financing in the future. There can be no assurance, however, that strategic alliances, additional equity or debt financing 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 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



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related to ciscapsaicin, and suggested that our synthetic capsaicin formulation could infringe this patent. We responded in August 2005 by denying any
infringement. In 2007, Winston has reiterated its claim and offered to discuss a license to its patent. We have 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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##### Table of Contents

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;
| | - |  | -------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------



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



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------



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



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



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------



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



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| |  |  | 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
| | - |  | ------------------------------------------------



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

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.

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 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. The lock-up agreements delivered by our executive
officers and directors and other stockholders in connection with our initial public offering on May 1, 2007, expired on October 29, 2007. Subject to applicable securities law restrictions and other agreements between the company and
certain of such stockholders, these shares are now freely tradable.

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 70% of the outstanding
shares of our common stock as of March 31, 2008 (after giving effect to the exercise of all 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.

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



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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 increased the risk that
cash equivalents and short-term investments may not be fully available to fund operations or that investments could lose principal value.

Recent events in the credit markets have caused a liquidity crisis in certain credit facilities including mortgage-backed securities and auction-rate securities. In response to these events we have evaluated our investment portfolio and
subsequent to December 31, 2007, we have either sold, at a gain, or realized the full value of asset backed securities and other relatively higher risk investments from our portfolio. While our invested balances do not include either
mortgage-backed securities or auction-rate securities and our invested assets contain only highly liquid money market investments and high quality corporate or government obligations, we can not predict what effects a continued deterioration in
credit markets may have on the companies that issued the corporate obligations, and how such potential effects may impact either the liquidity, principal balances, or rates of return of our cash equivalents and short-term investments. Further, there
can be no assurance that there wont be any future impairment of our investments if the sub-prime market crisis spreads to other sectors of the economy or if credit markets deteriorate further.

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 March 31, 2008, approximately $18.9 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, $2.1 million in the development of our new product initiatives, NGX-1998 and our opioid prodrug platform, and $9.8 million for general corporate
purposes including the repayment of notes payable, in accordance with their scheduled amortization. The remaining net proceeds have been invested in accordance with our investment policy. There have been no material changes to our planned use of
proceeds from our IPO as described in our final prospectus dated May 1, 2007 filed with the SEC pursuant to Rule 424(b)(4).

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
|------- | -----------------

In February 2008, we paid
bonuses to our executive officers for corporate and individual performance in 2007. The disclosures pertaining to these bonuses are incorporated by reference into this Item 5 from, and are further described in, our definitive proxy statement,
where they appear under the heading Executive Compensation and Other Matters.



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|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.                                                                                                                                
|              | 
|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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



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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: May 15, 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.                                                                                                                                
|              | 
|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.
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46