Neurobiological Technologies (NTII)

LIQUIDITY AND CAPITAL RESOURCES

Since our inception in 1987, we have applied the majority of our resources to research and development programs and have generated only limited operating revenue. We have experienced operating losses in every year since inception, other than in fiscal 2001, resulting from funding the development and clinical testing of our drug candidates. We expect to continue to incur losses at least through fiscal 2009 resulting from our ongoing research and development efforts.

As of December 31, 2007, we had cash, cash equivalents and total investment securities available for sale of $52,791,000, which increased by $43,887,000 from cash, cash equivalents and total investment securities of $8,904,000 as of June 30, 2007, resulting principally from funds received from financing activities offset by the cash used in operations during the six months ended December 31, 2007.

Cash flows from operating activities

Our operating activities used $11,036,000 of cash during the six months ended December 31, 2007, resulting primarily from the net loss of $7,805,000, reduced by non-cash adjustments of $181,000. Cash flows from operating activities were further reduced by a decrease in deferred revenue of $2,750,000 from the sale of XERECEPT, a decrease of $997,000 in accounts payable and accrued liabilities, and cash flow was increased by the decrease of $622,000 in prepaid expenses and other current assets.

Cash flows from investing activities

Investing activities used $17,109,000 of cash during the six months ended December 31, 2007, resulting primarily from the purchases of securities of $19,275,000 offset by the maturity and sale of investment securities of $2,165,000.

Cash flows from financing activities

On September 12, 2007, the Company completed a $6 million debt and equity financing under its effective shelf registration statement. In the financing, the Company issued $6 million in principal amount of senior secured promissory notes and 392,857 shares of common stock. The notes accrued interest at a rate of 15% per annum and were due on the earlier of January 15, 2008 or seven days after the completion of an underwritten public offering of the Company’s common stock. Interest is payable in cash monthly starting October 15, 2007 and, upon the occurrence of an event of default, interest would have begun to accrue at a rate of 19% per annum.

On November 2, 2007, the Company completed an underwritten public offering of 21,818,181 shares of common stock at a $2.75 per share, which offering raised $60 million in gross proceeds and $55 million of net proceeds after underwriting discounts and estimated expenses.

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Management believes that the Company’s cash and investment resources at December 31, 2007 will provide adequate liquidity to fund the Company’s operations at least through fiscal 2009. Nevertheless, we may seek to raise additional funds when market conditions permit; however, there can be no assurance that funding will be available or that, if available, it will be on acceptable terms.

Our future capital requirements will depend on a number of factors, including:

We do not have any off-balance sheet arrangements as defined by rules recently enacted by the Securities and Exchange Commission and Financial Accounting Standards Board, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities. As of December 31, 2007, the fair value of our cash, cash equivalents and investments maturing in one year or less was $32.3 million and represented 61.2% of our cash, cash equivalents and investment portfolio. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

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Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2007, the end of the period covered by this report.

LIQUIDITY AND CAPITAL RESOURCES

Since our founding in 1987, we have applied the majority of our resources to research and development programs and have generated only limited operating revenue. We have experienced operating losses in every year since inception, other than in fiscal 2001, resulting from funding the development and clinical testing of our drug candidates. We expect to continue to incur losses in the future resulting from our ongoing research and development efforts.

As of March 31, 2007, we had cash, cash equivalents and total investment securities available for sale of $5,562,000 which decreased by $9,686,000 from cash, cash equivalents and total investment securities of $15,248,000 as of June 30, 2006, resulting principally from the cash used in operations during the nine months.

Cash Flows from Operating Activities

Our operating activities used $10,390,000 of cash during the nine months ended March 31, 2007, resulting primarily from the net loss of $9,942,000 along with a decrease in deferred revenue of $4,125,000 resulting from the sale of XERECEPT. Cash flows from operating activities were also decreased by a increase of $166,000 in accounts receivable, a reduction of $1,305,000 in accounts payable and accrued liabilities as we used cash to reduce these liabilities, offset by a decrease of $388,000 in prepaid expenses and other assets, a decrease of $18,000 in interest receivable and a decrease of $4,000,000 in notes receivable.

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Cash Flows from Investing Activities

Investing activities provided $2,114,000 of cash resulting primarily from the sale and maturity of investment securities of $47,218,000, which exceed securities purchases of $45,071,000 by $2,147,000.

Cash Flows from Financing Activities

Financing activities provided $722,000 of cash resulting from an increase in the bank overdraft of $375,000 and the issuance of common stock for proceeds of $347,000.

We believe that our available cash, cash equivalents and investment balances of $5,562,000 as of March 31, 2007, our $10 million credit facility, along with the reimbursement of our ongoing development costs for XERECEPT, and anticipated royalties from sales of Memantine, will provide adequate liquidity to fund our operations through at least June 30, 2007. We may seek to raise additional funds when market conditions permit, including through the sale of common stock or other securities pursuant to the shelf registration statement previously filed with the SEC. In April 2007, we had received proceeds of approximately $6.5 million net of expenses from the sale pursuant to the shelf registration statement of approximately 3 million shares of common stock and warrants to purchase an equivalent number of shares. Following this offering, we may sell up to an additional $21 million of securities under the shelf, although we expect that the shelf will become inactive starting in the first quarter of fiscal 2008 due to the late filing of an SEC report in fiscal 2007. However, the amount of money we can access from our credit facility may be limited based on certain liquidity covenants, and we may seek to raise additional liquidity to fund our operations in periods thereafter or to acquire development projects for our pipeline. Accordingly, we may seek to raise additional funds when market conditions permit, including through the sale of common stock pursuant to the shelf registration statement previously filed with the SEC. However, there can be no assurance that funding will be available or that, if available, it will be on acceptable terms.

Our future capital requirements will depend on a number of factors, including:

We do not have any off-balance sheet arrangements as defined by rules recently enacted by the SEC and FASB, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities. As of March 31, 2007, the fair value of our cash, cash equivalents and investments maturing in one year or less was $2,197,000 and represented 40% of our cash, cash equivalents and investment portfolio. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

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Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2007, the end of the period covered by this report.

LIQUIDITY AND CAPITAL RESOURCES

Since our founding in 1987, we have applied the majority of our resources to research and development programs and have generated only limited operating revenue. We have experienced operating losses in every year since inception, other than in fiscal 2001, resulting from funding the development and clinical testing of our drug candidates. We expect to continue to incur losses in the future resulting from our ongoing research and development efforts.

As of December 31, 2006, we had cash, cash equivalents and total investment securities available for sale of $7,427,000, which decreased by $7,821,000 from cash, cash equivalents and total investment securities of $15,248,000 as of June 30, 2006, resulting principally from the cash used in operations during the six months.

Cash Flows from Operating Activities

Our operating activities used $7,836,000 of cash during the six months ended December 31, 2006, resulting primarily from the net loss of $5,528,065 along with a decrease in deferred revenue of $2,750,000 resulting from the sale of XERECEPT. Cash flows from operating activities were also increased by a decrease of $580,000 in accounts receivable, a reduction of $371,000 in accounts payable and accrued liabilities, as we used cash to reduce these liabilities, and an increase of $207,000 in prepaid expenses and other assets.

Cash Flows from Investing Activities

Investing activities provided $707,000 of cash resulting primarily from the sale and maturity of investment securities of $41,678,000, which exceeded securities purchases of $40,948,000 by $730,000.

Cash Flows from Financing Activities

Financing activities provided $24,000 of cash during the six months ended December 31, 2006, and consisted of the proceeds from common stock that we issued through the 2003 ESP Plan.

We believe that our available cash, cash equivalents and investment balances of $7,427,000 as of December 31, 2006, our $10 million credit facility, the payment of $4 million received from Celtic in January 2007, along with the reimbursement of our ongoing development costs for XERECEPT, and anticipated royalties from sales of Memantine, will provide adequate liquidity to fund our operations through at least June 30, 2007. However, the amount of money we can access from our credit facility may be limited based on certain liquidity covenants, and we may seek to raise additional capital to fund our operations in periods thereafter or to acquire development projects for our pipeline. Accordingly, we may seek to raise additional funds when market conditions permit, including through the sale of up to $25 million of common stock pursuant to the shelf registration statement previously filed with the SEC. However, there can be no assurance that funding will be available or that, if available, it will be on acceptable terms.

Our future capital requirements will depend on a number of factors, including:

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We do not have any off-balance sheet arrangements as defined by rules recently enacted by the SEC and FASB, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities. As of December 31, 2006, the fair value of our cash, cash equivalents and investments maturing in one year or less was $3.6 million and represented 49% of our cash, cash equivalents and investment portfolio. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2006, the end of the period covered by this report.

LIQUIDITY AND CAPITAL RESOURCES

Since our founding in 1987, we have applied the majority of our resources to research and development programs and have generated only limited operating revenue. We have experienced operating losses in every year since inception, other than in fiscal 2001, resulting from funding the development and clinical testing of our drug candidates. We expect to continue to incur losses in the future resulting from our ongoing research and development efforts.

As of September 30, 2006, we had cash, cash equivalents and total investment securities available for sale of $11,142,000, which decreased by $4,106,000 from cash, cash equivalents and total investment securities of $15,248,000 as of June 30, 2006 resulting principally from the cash used in operations during the quarter.

Cash Flows from Operating Activities

Our operating activities used $4,098,000 of cash during the quarter ended September 30, 2006, resulting primarily from the net loss of $2,418,000 along with a decrease in deferred revenue of $1,375,000 resulting from the sale of XERECEPT. Cash flows from operating activities were also reduced by an increase of $247,000 in accounts receivable, a reduction of $266,000 in accounts payable and accrued liabilities as we used cash to reduce these liabilities and an increase of $72,000 in prepaid expenses and other assets.

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Cash Flows from Investing Activities

Investing activities provided $195,000 of cash resulting primarily from the sale and maturity of investment securities of $33,017,000, which exceed securities purchases of $32,804,000 by $213,000.

Cash Flows from Financing Activities

There was no cash received from financing activities during the quarter ended September 30, 2006.

We believe that our available cash, cash equivalents and investment balances of $11,142,000 as of September 30, 2006, our $10 million credit facility, the expected payment of $4 million by Celtic in January 2007, along with the reimbursement of our ongoing development costs for XERECEPT, and anticipated royalties from sales of Memantine, will provide adequate liquidity to fund our operations through at least June 30, 2007. However, the amount of money we can access from our credit facility may be limited based on certain liquidity covenants, and we may seek to raise additional liquidity to fund our operations in periods thereafter or to acquire development projects for our pipeline. Accordingly, we may seek to raise additional funds when market conditions permit, including through the sale of up to $25 million of common stock pursuant to the shelf registration statement previously filed with the SEC. However, there can be no assurance that funding will be available or that, if available, it will be on acceptable terms.

Our future capital requirements will depend on a number of factors, including:

We do not have any off-balance sheet arrangements as defined by rules recently enacted by the Securities and Exchange Commission and Financial Accounting Standards Board, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

In the normal course of business, our financial position is subject to a variety of risks, including market risk associated with interest rate movements. We regularly assess these risks and have established policies and business practices to protect against these and other exposures. As a result, we do not anticipate material potential losses in these areas.

The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in widely diversified short-term and long-term investments, consisting primarily of investment grade securities. As of September 30, 2006, the fair value of our cash, cash equivalents and investments maturing in one year or less was $7.9 million and represented 70% of our cash, cash equivalents and investment portfolio. A hypothetical 50 basis point increase in interest rates would not result in a material decrease or increase in the fair value of our available-for-sale securities. We have no investments denominated in foreign country currencies and therefore our investments are not subject to foreign currency exchange risk.

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Our Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended) for our company. Based on their evaluation of our disclosure controls and procedures (as defined in the rules promulgated under the Securities Exchange Act of 1934), our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2006, the end of the period covered by this report.

LIQUIDITY AND CAPITAL RESOURCES

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Since our founding in 1987, we have applied the majority of our resources to research and development programs and have generated only limited operating revenue. We have experienced operating losses in every year since inception, other than in fiscal 2001, resulting from funding the development and clinical testing of our drug candidates. We expect to continue to incur losses in the future resulting from our ongoing research and development efforts.

As of December 31, 2005, we had cash, cash equivalents and total investment securities available for sale of $17,347,000 which increased by $8,841,000 from cash, cash equivalents and total investment securities of $8,506,000 as of June 30, 2005 resulting from our operating, investing and financing activities during the six months ended December 31, 2005.

Cash Flows from Operating Activities

Our operations provided $11,057,000 of cash during the six months ended December 31, 2005, resulting primarily from net loss of $12,370,000, but not including the non-cash expenses of $3,865,000 for the charge-off of acquired in-process research and development, $566,000 of amortization and depreciation and $459,000 of stock-based compensation. Cash flows from operating activities were reduced by an increase in accounts and notes receivable of $13,633,000 we obtained for certain of our reported revenues, a reduction of $471,000 in accounts payable and accrued liabilities as we used cash to reduce these liabilities, and by the $16,000 increase in interest receivable representing earned but uncollected interest income. These reductions in operating cash were offset by an increase in deferred revenue of $32,542,000, a reduction of $109,000 in prepaid expenses and other current assets and $7,000 in deposits.

Cash Flows from Investing Activities

Cash flows used in investing activities was $1,764,000 of cash primarily for the $2,000,000 payment to the Empire selling stockholders for the contingent acquisition payment made to the Empire selling shareholders in December 2005, from the sale and maturity of investment securities which was partially offset by purchases of investment and purchases of property and equipment for our new office facilities in Emeryville, California and Edgewater, New Jersey.

Cash Flows from Financing Activities

Financing activities provided $39,000 of cash during the six months ended December 31, 2005, and consisted of the value of common stock that we issued for the exercise of options and for shares issued to the our employee stock purchase plan.

We believe that our available cash, cash equivalents and investment balances of $17,347,000 as of December 31, 2005, our $10 million credit facility, the $5 million we received from Celtic in January 2006, and the additional $8 million in non-contingent installment payments we expect to receive from Celtic in June 2006, and January 2007, together the reimbursement of the ongoing direct development costs for XERECEPT, will provide adequate liquidity to fund our operations through at least the next twelve months. However, we may seek to raise additional liquidity to fund our operations in periods thereafter, and we may seek to increase our pipeline by acquisition of or investment in complementary businesses, products and technologies. Accordingly, we may seek to raise additional funds when market conditions permit, including through the sale of up to $25 million of common stock pursuant to the shelf registration statement filed in February 2005. However, there can be no assurance that funding will be available or that, if available, it will be on acceptable terms.

Our future capital requirements will depend on a number of factors, including:

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We do not have any off-balance sheet arrangements as defined by rules recently enacted by the Securities and Exchange Commission and Financial Accounting Standards Board, and accordingly, no such arrangements are likely to have a current or future effect on our financial position, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.