Restless legs syndrome is a common, under-diagnosed neurological disorder that frequently manifests itself as a sleep disorder. According to the National Institute of Neurological Disorders and Stroke, RLS is the third largest sleep disorder, after insomnia and sleep apnea. Although the exact prevalence rate of RLS is uncertain, a recent study has indicated that approximately 10% of patients visiting primary care physicians in the United States and four European countries experience RLS symptoms at least weekly, with approximately 2% of patients visiting primary care physicians suffering from symptoms severe enough to disrupt their quality of life.

Neuropathic pain is pain that results from damage to nerves. The damage may result from a variety of causes, including injury or illnesses such as diabetes, cancer, HIV and shingles. The aggregate prevalence in 2003 of all forms of neuropathic pain was estimated to be 62.6 million patients in the United States and six other major pharmaceutical markets, collectively. The prevalence of PHN during 2003 was estimated to be 272,000 patients in the United States and six other major pharmaceutical markets, collectively.

GERD is a digestive system disorder caused by inappropriate relaxations of the lower esophageal sphincter, which is a combination of muscles that controls the junction between the esophagus and the stomach. Approximately $10 billion is spent worldwide each year on GERD and heartburn medications, and approximately 6% of the global population experiences GERD symptoms daily.

Spasticity is a widespread and debilitating condition that is associated with some common neurological disorders, such as multiple sclerosis, stroke and cerebral palsy. Reports indicate that the prevalence of spasticity due to multiple sclerosis, stroke and cerebral palsy in 2002 was approximately 5.2 million patients in the United States and six other major pharmaceutical markets, collectively. For the 12 months ended August 31, 2004, there were approximately 2.3 million prescriptions written for baclofen in the United States.

XP13512 is a Transported Prodrug of gabapentin that the Company has shown to be effective in a Phase 2a clinical trial for the treatment of RLS, which is a neurological disorder that frequently manifests itself as a sleep disorder. The Company expects to commence a Phase 2b clinical trial for the treatment of RLS using once-daily doses of XP13512 in the first half of this year, and, upon successful completion of this Phase 2b clinical trial, it expectd to enter Phase 3 clinical trials for the treatment of RLS.

The Company is also conducting a Phase 2a clinical trial of XP13512 for the management of PHN. PHN is a chronic type of neuropathic pain, which is pain resulting from nerve damage, that can follow the resolution of shingles. The Company also intends to develop XP13512 for other neuropathic pain conditions, such as painful diabetic neuropathy.

XP19986 is a Transported Prodrug of R-baclofen that is in development for the treatment of gastroesophageal reflux disease, or GERD, which is the frequent, undesirable passage of stomach contents into the esophagus. GERD causes symptoms such as heartburn and, in some cases, damage to the lining of the esophagus. The Company plans to file an investigational new drug application, known as an IND, with the U.S. Food and Drug Administration, or FDA, in the first half of this year for XP19986. The Company expects that XP19986 will enter Phase 1 clinical trials shortly thereafter. The Company is also developing XP19986 for the treatment of spasticity.

XP20925 is a Transported Prodrug of propofol that is in preclinical development for the treatment of migraine and chemotherapy-induced nausea and vomiting. The Company expects to file an IND for XP20925 in 2006.

General and administrative expenses were $2.30 million for the three months ended March 31, 2005, an increase of $686 thousand or 42% compared to general and administrative expenses of $1.62 million for the three months ended March 31, 2004.

Research and development costs were $10.43 million for the three months ended March 31, 2005, an increase of $3.73 million or 56% compared to research and development costs of $6.70 million for the three months ended March 31, 2004.

Interest income was $338 thousand for the three months ended March 31, 2005, an increase of $170 thousand or 101% compared to interest income of $168 thousand for the three months ended March 31, 2004.

Interest expenses were $71 thousand for the three months ended March 31, 2005, a decrease of $20 thousand or 22% compared to $91 thousand for the three months ended March 31, 2004.