1.    Nature of Operations, Risks and Uncertainties and Liquidity

Nature of Operations.    Emisphere Technologies, Inc. (“Emisphere”, “our”, “us”, the “company” or “we”) is a biopharmaceutical company that focuses on a unique and improved delivery of therapeutic molecules and pharmaceutical compounds using its Eligen ^® Technology. These molecules and compounds are currently available or are under development.

Our core business strategy is to develop oral forms of drugs or medical foods that are not currently available or have poor bioavailability in oral form, by applying the Eligen^® Technology to those drugs or medical foods. Our development efforts are conducted internally or in collaboration with corporate development partners. Typically, the drugs that we target are at an advanced stage of development, or have already received regulatory approval, and are currently available on the market.

Risks and Uncertainties.    We have no prescription products currently approved for sale by the U.S. FDA. There can be no assurance that our research and development will be successfully completed, that any products developed will obtain necessary government regulatory approval or that any approved products will be commercially viable. In addition, we operate in an environment of rapid change in technology and are dependent upon the continued services of our current employees, consultants and subcontractors.

Liquidity.    As of December 31, 2011, we had approximately $3.1 million in cash, approximately $33.2 million in working capital deficiency, a stockholders’ deficit of approximately $64.5 million and an accumulated deficit of approximately $465.9 million. Our net income for the year ended December 31, 2011 was $15.1 million and our operating loss for the year ended December 31, 2011 was approximately $8.1 million. On January 31, 2012, the Company received approximately $1.5 million from the sale of NJ State Net Operating Losses from prior periods through the 2011 Technology Business Tax Certificate Transfer Program, sponsored by the New Jersey Economic Development Authority. This payment is sufficient to support the Company’s continuing operations for approximately three months. At January 31, 2012, the Company had approximately $4.2 million in cash, which we anticipate will enable us to continue operations through approximately September 26, 2012, at which time the MHR Convertible Notes, described below, come due, or earlier if unforeseen events or circumstances arise that negatively affect our liquidity.

Since our inception in 1986, we have generated significant losses from operations. We have limited capital resources and operations to date have been funded with the proceeds from collaborative research agreements, public and private equity and debt financings and income earned on investments. We anticipate that we will continue to generate significant losses from operations for the foreseeable future, and that our business will require substantial additional investment that we have not yet secured. Further, we have significant future commitments and obligations. On September 26, 2005, we executed a Senior Secured Loan Agreement (the “Loan Agreement”) with MHR Fund Management, LLC and entities affiliated with it (collectively, “MHR”). The Loan Agreement, as amended, provides for a seven year, $15 million secured loan from MHR to us at an interest rate of 11% (the “Loan”). Under the Loan Agreement, MHR requested, and on May 16, 2006 we effected, the exchange of the Loan for 11% senior secured convertible notes (the “MHR Convertible Notes”) with substantially the same terms as the Loan Agreement, except that the MHR Convertible Notes are convertible, at the sole discretion of MHR or any assignee thereof, into shares of our common stock at a price per share of $3.78. Interest will be payable in the form of additional MHR Convertible Notes rather than in cash. The MHR Convertible Notes are secured by a first priority lien in favor of MHR on substantially all of our assets. As of December 31, 2011, the book value of MHR Notes outstanding including principal, interest and discount for warrant purchase option and embedded conversion features is $25.44 million. The amount payable at maturity will be approximately $30.5 million.

The MHR Convertible Notes provide for certain events of default including, among other things, failure to perfect liens in favor of MHR created by the transaction, failure to observe any covenant or agreement, failure to maintain the listing and trading of our common stock, sale of a substantial portion of our assets, merger with another entity without the prior consent of MHR, or the occurrence of any governmental action that renders us unable to honor or perform our obligations under the MHR Convertible Notes or results in a material adverse effect on our operations. If an event of default occurs, the MHR Convertible Notes provide for the immediate repayment of the Notes and certain additional amounts as set forth in the MHR Convertible Notes. On September 26, 2012, the maturity date of the MHR Convertible Notes, or earlier if an event of default occurs, we may not be able to make the required payments, and the resulting default would enable MHR to foreclose on all of our assets. Any of the foregoing events would have a material adverse effect on our business and on the value of our stockholders’ investments in our common stock. We currently have a waiver from MHR for failure to perfect liens on certain intellectual property rights through September 26, 2012.

While our plan is to raise capital when needed and/or to pursue partnering opportunities, we cannot be sure that our plans will be successful. These conditions raise substantial doubt about our ability to continue as a going concern. Consequently, the audit reports prepared by our independent registered public accounting firm relating to our financial statements for the years ended December 31, 2011, 2010 and 2009 include an explanatory paragraph expressing the substantial doubt about our ability to continue as a going concern. We are pursuing new as well as enhanced collaborations and exploring other financing options, with the objective of minimizing dilution and disruption. If we fail to raise additional capital or obtain substantial cash inflows from existing partners prior to September 26, 2012, we could be forced to cease operations. No adjustment has been made in the accompanying financial statements to the carrying amount and classification of recorded assets and liabilities should we be unable to continue operations.

In the event that we are successful in raising additional capital to continue operations, our business will still require substantial additional investment to fully develop new products or technologies. Expenses may be partially offset with income-generating license agreements, if possible. However, we cannot assure you that financing will be available on favorable terms or at all. For further discussion, see Part I, Item 1A “Risk Factors.”