**UNITED
      STATES SECURITIES AND EXCHANGE COMMISSION**




**WASHINGTON,
      D.C. 20549**




**FORM
      10-K**




**[X]
      ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES**




**EXCHANGE
      ACT OF 1934**




For
      the
      fiscal year ended December 31, 2005





**[
      ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
      OF
      1934**




COMMISSION
      FILE NUMBER 0-31114





**JAVELIN
      PHARMACEUTICALS, INC.**




(Exact
      name of registrant as specified in its charter)




Delaware
            88-0471759(State
                or other jurisdiction of incorporation or organization)
            (IRS
                Employer Identification No.)





130
                West 42nd Street, 12th Floor, New York, NY 10036(Address
                of principal executive offices) (Zip Code)(212)
                554-4550(Registrant’s
                telephone number, including area code)







Securities
      Registered under Section 12(b) of the Exchange Act: None





Securities
      Registered under Section 12(g) of the Exchange Act: Common Stock, $.001 par
      value





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act Yes
      [ ]
      No [ X ]





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [ X ]





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 if disclosure of delinquent filers pursuant to Item 405 of
      Regulation S-K contained is not contained herein, and will not be contained,
      to
      the best of registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-K or any
      amendment to this Form 10-K. [X]





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (Check
      one):





Large
                accelerated filer [ ]
            Accelerated
                filer [ ]
            Non-accelerated
                filer [X]





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


Yes
      [
      ]  No
      [X]





State
      the
      aggregate market value of the voting stock held by nonaffiliates of the
      registrant as of March 10, 2006 $138,997,496.




Index




The
      number of shares of the registrant’s common stock outstanding as of March 1,
      2006: 40,404,977 shares.








DOCUMENTS
      INCORPORATED BY REFERENCE: [None.]




Index




**INDEX**




Page
      No.




PART
                I.
            
            4Item
                1.
            Business
            4Item
                1A.
            Risk
                Factors
            23Item
                1B.
            Unresolved
                Staff Comments
            34Item
                2.
            Properties
            34Item
                3.
            Legal
                Proceedings
            35Item
                4.
            Submission
                of Matters to a Vote of Security
                Holders
            35PART
                II.
            
            35Item
                5.
            Market
                for Registrant’s Common Equity, Related Stockholder
                Matters and Issuer Purchases of Equity Securities
            35Item
                6.
            Selected
                Financial Data
            36Item
                7.
            Discussion
                Management’s and Analysis of Financial Condition
                and Results of Operation
            38Item
                7A.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            46Item
                8.
            Financial
                Statements and Supplementary
                Data
            48Item
                9.
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            78Item
                9A.
            Controls
                and Procedures
            78Item
                9B.
            Other
                Information
            78PART
                III.
            
            79Item
                10.
            Directors
                and Executive Officers of the
                Registrant
            79Item
                11.
            Executive
                Compensation
            81Item
                12.
            Security
                Ownership of Certain Beneficial Owners and
                Management and Related Stockholder Matters
            84Item
                13.
            Certain
                Relationships and Related
                Transactions
            86Item
                14.
            Principal
                Accountant Fees and Services
            86PART
                IV
            
            87Item
                15.
            Exhibits
                and Financial Statement
                Schedules
            87SIGNATURES
            
            89




Index





**PART
      I.**




**ITEM
                1.**
            **BUSINESS**




**Background**




Javelin
      Pharmaceuticals, Inc. (“Javelin”) was incorporated in July 2005 in the State of
      Delaware by Intrac, Inc., a Nevada corporation (“Intrac”), for the purpose of
      migrating the Intrac corporate entity to Delaware. The migratory merger was
      effective on September 7, 2005, at which time Javelin continued the business
      previously conducted by Intrac. In December 2004, Innovative Drug Delivery
      Systems, Inc. (“IDDS”), a private corporation merged with a subsidiary of
      Intrac, which was then a public shell, for the purpose of becoming a public
      entity. Intrac had been formed in September 2000 and had ceased business
      operations in 2001. Upon the Intrac-IDDS merger, the former IDDS stockholders
      became holders of approximately 95.5% of the Intrac shares outstanding after
      the
      merger. IDDS executive officers and directors then also became our executive
      officers and directors. These persons now comprise substantially all of our
      executive officers and directors. The shares of common stock described in this
      report give effect to the IDDS merger and the migratory merger.




**Overview**




We
      are a
      specialty pharmaceutical company that applies proprietary technologies to
      develop new products and improved formulations of existing drugs that target
      current unmet and underserved medical need primarily in the pain management
      market. We are developing simple and user-friendly products, including new
      modes
      and routes of delivery for drugs optimized for relieving moderate-to-severe
      pain. In doing so, we intend to offer novel proprietary products that in some
      cases can be administered in a less invasive manner and generally should offer
      either improved safety or efficacy, or both, when compared to the currently
      available formulations on the market. In addition, the product choices currently
      available for the treatment of moderate-to-severe pain are limited in the doses
      that may be given due to side effects, including cardiovascular depression,
      tolerance and addiction, respiratory depression, constipation, sedation and
      general diminution of quality of life. Our product candidates are focused,
      in
      part, on treating a variety of pain disorders ranging from acute and episodic
      moderate-to-severe pain associated with breakthrough cancer pain, post-operative
      pain, post-trauma pain, such as orthopedic injury pain, procedural pain and
      burn
      pain. We believe that our products, assuming regulatory approvals, will offer
      the medical community and patients significant benefit and alternatives to
      the
      prescription pain medications available to pain sufferers today.




Our
      plan
      of operations for the next 12 months involves conducting the necessary research
      and development to advance each of our three late stage product candidates,
      DylojectTM, RylomineTM and PMI-150, through the drug development process. The
      development program is designed to support global product registration, although
      special emphasis is placed upon U.S. and European filings for drug approval
      and
      product registration. Currently, RylomineTM, DylojectTM and PMI-150 are in the
      Phase II product development stage based upon U.S. regulatory classification.
      Over the coming year, development activity will focus on fulfilling the
      manufacturing requirements and generating the necessary clinical data to support
      the submission package in request of the FDA End-of-Phase II meeting and the
      initiation and implementation the phase III development plan. The End-of-Phase
      II meeting is required in order to progress into Phase III trials and ultimately
      product registration. The FDA typically targets scheduling of the End-of-Phase
      II meeting within six weeks of the meeting request, if accepted. If not
      accepted, the FDA informs the company of insufficiencies necessary to rectify
      in
      order to reschedule. The design, timing and cost of the Phase III development
      program will be largely determined by the clinical safety and efficacy data
      and
      feedback from the FDA at the End-of-Phase II meeting.




Our
      lead
      product candidate in Europe is DylojectTM. In July 2005, we announced that we had
      met our primary endpoint in the pivotal European Phase II/III study for
      DylojectTM. In September 2005, at the European Society of Regional Anaesthesia
      and Pain Therapy (ESRA) annual meeting, we presented comprehensive results
      of
      this randomized, double-blind, placebo- and comparator-controlled Phase II/III
      pivotal clinical trail comparing the safety, efficacy and therapeutic
      equivalency of DylojectTM to Voltarol®. The MAA submission for approval to sell
      this product in Europe was filed in September 2005. The MAA review process
      typically takes one to several years for approval, rejection, or approval
      subject to completion of additional requirements imposed on the company by
      the
      regulatory agency at the time of review completion.




4
 Index





In
      January 2006, we announced that we had met our primary endpoint of a linear
      dose
      response for pain relief over six hours in a Phase IIb US study of DylojectTM.
      The preliminary results of this randomized, double-blind, placebo- and
      comparator-controlled clinical trial comparing the safety and efficacy of
      DylojectTM to IV ketorolac demonstrated that patients with moderate-to-severe
      pain after oral surgery who received DylojectTM or IV ketorolac experienced
      statistically significant pain relief over six hours compared to patients who
      received a placebo. In addition, five minutes after intravenous injection,
      DylojectTM demonstrated superior onset of pain relief compared to ketorolac as
      measured by statistically significant reductions in pain intensity and pain
      relief using both the VAS and categorical scales. The Company intents to hold
      an
      End-of-Phase II meeting with the FDA and feedback from the Agency will determine
      the design, cost and timing for initiation of the US Phase III
      program.




RylomineTM
      and PMI-150 are in Phase II clinical trials. In October 2005, we announced
      that
      we had met our primary endpoint of a linear dose response for pain relief over
      four hours in a Phase IIb study of RylomineTM. In February 2006, at the American
      Academy of Pain Medicine (AAPM) annual meeting, we presented comprehensive
      results of this randomized, double-blind, placebo- and comparator-controlled
      clinical trial comparing the safety and efficacy of RylomineTM to IV morphine.
      This study demonstrated that patients with moderate-to-severe pain after
      orthopedic surgery who received RylomineTM or intravenous morphine experienced
      statistically significant pain relief over four hours compared to patients
      who
      received a placebo. Over the coming year, we will focus on seeking regulatory
      and scientific advice from the FDA, French regulatory experts and the EMEA.
      The
      results of the clinical trials along with feedback from the regulatory agencies
      will determine the timing, extent and cost of the US and European RylomineTM
Phase III programs and product filings. Lastly, we are advancing our PMI-150
      Phase II clinical trials in the U.S. and pending the results expect to begin
      Phase III clinical trials in the second half of 2006.




Javelin
      has licensed the worldwide exclusive rights to develop and commercialize
      proprietary formulations of DylojectTM (injectable diclofenac), RylomineTM
(intranasal morphine), and PMI-150 (intranasal ketamine). The existing
      formulations of these parent drugs, including oral diclofenac, oral and
      injectable morphine, and injectable ketamine, are well-known prescription
      medications with well-documented profiles of safety, efficacy and
      cost-effectiveness.




All
      three
      of the product candidates are in mid-to-late stage clinical trials as shown
      below:




**Product
                candidate**
            **Indication**
            
            **Development
                stage**DylojectTM
              (injectable
                diclofenac)
            U.S.
              Europe
            Post-operative
                pain
              Post-operative
                pain, anti-inflammatory
            Phase
                II
              MAA
                ReviewRylomineTM
              (intranasal
                morphine)
            U.S.
              Europe
            Acute
                pain
              Acute
                moderate-to-severe pain
            Phase
                II
              Phase
                IIPMI-150
              (intranasal
                ketamine)
            U.S.
              Europe
            Acute
                moderate-to-severe pain
              Acute
                moderate-to-severe pain
            Phase
                II
              Phase
                II




Fulfillment
      of both European and U.S. regulatory requirements typically takes several years,
      depending upon the type, complexity and novelty of the product candidate, and
      requires substantial resources towards product filing and approval. We have
      successfully completed bioequivalency studies and completed the pivotal clinical
      program of DylojectTM for the European markets and in October 2005 our MAA was
      accepted for review. In the U.S., we expect hold an End-of-Phase II meeting
      with
      the FDA for DylojectTM in 2006. Lastly, we are completing PMI-150 Phase II
      clinical trials in the U.S. and are expected to begin Phase III clinical trials
      in the second half of 2006.




Through
      December 31, 2005, we had invested approximately $46.4 million in research
      and
      development activities. The proprietary technology used to develop the product
      candidates is protected by patents filed and/or approved both in the United
      States and worldwide. Since inception, we have been awarded approximately $5
      million in competitive and peer-reviewed government funding, including contracts
      from the U.S. Department of Defense and grants from the National Institutes
      of
      Health/National Cancer Institute.




5
 Index




**Pain
      Pharmaceuticals Market Overview**




The
      value
      of the global pharmaceutical market for pain relief was approximately $23
      billion in 2004 (www.arrowheadpublishers.com/PainTherapeutics.html). Two-thirds
      of the dollar volume of the U.S. prescription pain medication market is for
      drugs used to treat chronic pain, and one-third is for drugs used for
      indications associated with acute pain. Our products are designed to fulfill
      unmet and underserved medical needs for a number of moderate-to-severe pain
      indications, including breakthrough cancer pain, post-operative pain,
      breakthrough lower back pain, orthopedic injury pain, and burn pain. Despite
      advances in medicine and the development of new prescription pain medications,
      we believe that treatment for these indications remains a critical area of
      unmet
      and underserved medical need.




**Market
      Opportunity**




Despite
      advances in medicine and the development of new drugs, pain relief remains
      a
      critical area of unmet and underserved medical need. Increasingly, patients,
      advocacy groups, and the media are highlighting the shortcomings of pain
      management. The Joint Commission for the Accreditation of Healthcare
      Organizations has recently introduced new standards for pain assessment and
      control, but the methods to achieve these standards are still not optimal.
      Commercially available oral pain medications provide a slow onset of pain
      relief, generally taking 15-20 minutes and sometimes as long as 40 minutes.
      Undertreatment or overtreatment often results from the difficulty in matching
      the doses of currently available drugs to the patient’s level of pain. Further,
      these currently available drugs can be simply ineffective. Other shortcomings
      of
      existing pain drugs include poor side effect profiles and the invasive,
      resource-intensive nature of intravenous administration.




We
      are
      developing differentiated pain control products that provide the flexibility
      and
      versatility required to adequately address the limitations of existing
      prescription pain pharmaceuticals. First, all three of our product candidates
      appear to work faster than the oral formulations of the currently available
      prescription pain products. These product formulations rapidly deliver our
      drugs
      into the bloodstream following either IV or intranasal administration and
      provide appreciable relief of moderate-to-severe pain within ten minutes
      according to initial clinical results.




Second,
      RylomineTM and PMI-100/150 product candidates address patient and provider
      preferences for self-medication and less invasive administration. Both have
      IV-like pharmacokinetics without the invasive nature of IV administration or
      the
      need for costly and cumbersome patient controlled analgesia devices. These
      product candidates present a significant opportunity for drug therapy both
      inside the hospital setting and in other medically supervised settings. The
      economic benefit is compelling as the nasal route of administration eliminates
      the need for personnel and equipment necessary to establish an IV line. In
      addition, a non-invasive route of delivery reduces the incidence of needle-stick
      injuries and the potential for transmission of blood-born viruses. Finally,
      the
      ability to self-regulate provides an important benefit of control to the patient
      and avoids doses that are higher than necessary to achieve safe and effective
      management of pain.




Third,
      DylojectTM and PMI-100/150 product candidates provide alternatives to the use of
      opioids such as morphine for treating moderate-to-severe pain. Opioid
      administration to trauma patients must be undertaken with great caution,
      vigilance and repeated titration of very small doses due to their recognized
      risks of lowering blood pressure and causing respiratory depression. PMI-100/150
      has been used off-label to treat trauma pain, as it does not have the same
      potentially lethal, dose-limiting side effects as an opioid. The typical
      treatment of breakthrough pain requires a combination of various opioids. When
      used in combination with opioids, ketamine has been reported to reduce the
      dependence on opioids, thereby reducing the requirement for narcotics, and
      enhancing the patient’s overall quality of life.




D ylojectTM
      has the potential to provide an attractive alternative to opioids for the
      treatment of post-operative pain. Our most significant U.S. competitor in the
      injectable nonsteroidal anti-inflammatory drugs (“NSAID”) category is ketorolac
      tromethamine. In January 2006, we announced the results of a Phase IIb US study
      in which DylojectTM demonstrated superior onset of action compared to ketorolac,
      five minutes after intravenous injection. When first launched, this drug had
      significant sales prior to FDA’s imposing a black box warning limiting the
      combined duration of IV plus oral use of Toradol® to five days because of the
      risk of serious adverse events. Oral diclofenac can be used safely in excess
      of
      five days and has a considerably superior safety profile. Our




6
 Index





DylojectTM
      product candidate would be the first injectable version of diclofenac to be
      marketed in the U.S. Europe presents a meaningful opportunity for DylojectTM as
      well because injectable Voltarol® (diclofenac sodium) has significant drawbacks,
      including the need to freshly prepare, buffer and dilute at the pharmacy and
      infuse to the patient slowly over 30 minutes.




Oral
      diclofenac is a leading prescribed product in the post-operative pain category.
      DylojectTM would provide the medical healthcare provider, for the first time, an
      injectable version of this drug for use in the immediate post-operative,
      in-hospital period. We anticipate the consistency of parent drug and the drug’s
      dosage and administration regimen will allow for easy transition from injectable
      to oral diclofenac when post-operative patients are able to resume oral intake,
      thereby lowering the barrier to entry and driving product adoption.




**Pain
      Indications**




The
      following describes the five key pain indications targeted by
      Javelin.




*--* ***Breakthrough
      Cancer Pain***




The
      prevalence of cancer pain is growing due to the progressive aging of the general
      population and further increases in cancer survival rates as a result of new
      therapies and treatments. Cancer pain represents the sum of continuous or
      baseline pain, for which round-the-clock regimens of long-acting analgesics
      are
      generally recommended, plus intermittent or breakthrough pain, for which the
      current standard of care is to administer as-needed, immediate-release oral
      opiods (www.ncbi.nlm.nih.gov/books/bv.fcgi?rid=hstat6.chapter.18803).
      Breakthrough cancer pain is characterized by episodes of acute,
      moderate-to-sever pain that suddenly flare up and overcome a standing,
      by-the-clock pain management regimen
      (www.whocancerpain.wisc.edu/eng/17_4/Interview). This type of pain is
      particularly difficult to treat due to its severity, rapid onset, and the often
      unpredictable nature of its occurrence. On average, patients suffering from
      breakthrough cancer pain experience one to five breakthrough episodes per day.
      Based upon careful estimates of the prevalence of cancer breakthrough pain
      conducted both within the US. and internationally
      (www.whocancerpain.wisc.edu/eng/17_4/Research), we estimate that about
      two-thirds of the approximately 785,000 patients in the U.S. suffering from
      moderate-to-severe cancer pain require treatment for breakthrough pain. We
      believe, based upon the properties that our product candidates have displayed
      in
      our clinical trials to date, that one or more of them might provide a
      faster-acting and more effective alternative treatment for breakthrough cancer
      pain.




***--
      Post-Operative Pain***




Post-operative
      pain is typically attributable to acute, moderate-to-severe pain and is the
      direct result of a surgical procedure and the resulting inflammation associated
      with the trauma of surgery. Each year in the U.S., 15 million surgeries are
      performed that require opioid therapy. Post-operative pain following minor
      surgical procedures is usually treated with oral or parenteral NSAIDs or a
      weak
      oral opioid. More invasive surgical procedures require hospitalization for
      monitoring and management of post-operative pain. Intravenous patient-controlled
      analgesia (“PCA”) with opioids is the therapy of choice for treating this latter
      patient population prior to discharge from the hospital. PCA allows a patient
      to
      receive drugs on demand by using an infusion pump that is programmed by the
      physician to intermittently administer a single dose of a drug, typically
      morphine or a similar opioid, when the patient pushes a button. The addition
      of
      parenteral or oral NSAIDs to this regimen is gaining broader use as NSAIDs
      have
      been demonstrated to decrease the requirement for opioids. We believe that
      one
      or more of our product candidates might be effective for the management of
      pain
      following minor surgical procedures and offer a readily acceptable alternative
      to IV PCA for the management of moderate-to-severe pain and breakthrough pain
      following major surgical procedures.




***--
      Breakthrough Back Pain***




Lower
      back pain is the most common medical complaint in developed countries. Thus,
      the
      patient population is extremely large, and while a host of physiotherapy, nerve
      block and surgical approaches are available, analgesics are the mainstay of
      most
      therapeutic treatment program. According to the National Institutes of Health,
      Americans spend $50 million each year on lower back pain




7
 Index





(www.ninds.nih.gov/disorders/backpain/detail_backpain.htm),
      the most common cause of job-related disability and a leading contributor to
      missed work. The most severe episodes require the use of opioids. We believe
      that one or more of our product candidates might effectively treat the subset
      of
      patients suffering from breakthrough episodes of lower back pain whose cases
      are
      severe enough to be activity-limiting.




***--
      Orthopedic Injury***




Treatment
      of fractures can involve the realignment of bones, a procedure referred to
      as
      reduction. Although fractures and dislocations are generally due to minor
      injuries, the time leading up to and during reduction of a fracture or the
      correction of a dislocation is often associated with acute, moderate-to-severe
      pain. According to the National Center for Health Statistics’ Annual Health
      Survey published in 2001, there were approximately 15 million emergency
      department visits due to fractures or dislocations in the U.S. annually in
      from
      1992-1999. (www.cdc.gov/nchs/data/series/sr_13/sr13_150.pdf) We believe that
      emergency departments have an economic incentive to use any therapy that can
      speed patient discharge from the hospital and avoid expenses associated with
      administration of intravenous drugs. We also believe that one or more of our
      product candidates might satisfy the underserved medical need for agents that
      are fast-acting, safe, and easily titrated to treat moderate-to-severe pain
      associated with orthopedic injury in the emergency department
      setting.




***--
      Burn Pain***




According
      to the American Burn Association, there are over one million burn injuries
      each
      year in the U.S. of which 700,000 present to emergency rooms and 45,000 require
      hospitalization (www.ameriburn.org/pub/BurnIncidenceFactSheet.htm). Burn pain
      in
      the latter group is typically immediate and of moderate-to-severe intensity
      as a
      result of injuries sustained after thermal, chemical or electrical trauma to
      skin and deeper tissue, as well as the removal or reapplication of dressings
      applied to the initial burn. Burn pain is often more challenging to control
      than
      post-operative pain and is currently treated with potent intravenous opioids,
      oral opioids, and other oral analgesics. Pain associated with burn trauma
      continues to impair the lives of burn victims long after the initial injury
      and
      hospitalization. The published research on pain in this population is much
      less
      extensive than for post-operative or cancer pain, and we believe the burn pain
      patient population to be largely underserved. We believe that one or more of
      our
      product candidates might be effective for the management of pain following
      in-patient burn treatments, as well as for treating various forms of procedural
      pain, including wound care treatments and dressing reapplications.




**Strategy**




Our
      goal
      is to become a successful specialty pharmaceutical company by focusing our
      efforts on developing new prescription pain medications that are simple, user
      friendly and cost-effective for the potential future treatment of patients
      with
      underserved pain management needs. Key elements of this commercialization
      strategy are:




·   **Focus
      on unmet and underserved medical needs in the prescription pain medication
      market** .
      Despite
      advances in medicine and the development of new drugs, pain relief remains
      a
      critical area of unmet and underserved medical need. Increasingly, patients,
      advocacy groups and the media are highlighting the shortcomings of pain
      management. We will continue to focus on developing and commercializing
      differentiated pain control products that provide the flexibility and
      versatility required to adequately address the limitations of existing
      prescription pain drugs.




·   **Efficiently
      select product candidates to minimize risk and maximize
      opportunity** .
      We will
      continue to use in-house experience and capabilities in product development,
      business development, regulatory affairs, risk management and portfolio
      management to build and maintain an attractive product portfolio and candidate
      pipeline.




·   **Develop
      new products with reduced clinical and regulatory risk** .
      Following the specialty pharmaceutical business model, we will seek to develop
      branded pharmaceuticals with novel




8
 Index





formulations,
      routes of administration, methods and modes of delivery and new indications
      from
      existing approved drugs with established safety profiles.




·   **Retain
      sales and marketing rights to product candidates through late stage
      development** .
      We
      currently retain U.S. and worldwide marketing and distribution rights for our
      products. We may retain marketing rights for narrow distribution channels in
      the
      U.S. and license out broader distribution channels and non U.S.
      rights.




**Products**




We
      are
      developing differentiated pain control products that provide the flexibility
      and
      versatility required to adequately address the limitations of existing
      prescription pain pharmaceuticals. The current pipeline includes three lead
      product candidates, each of which is protected by different intellectual
      property and is based on different technology. We selected these product
      candidates based on our belief that each offered significantly lower clinical,
      regulatory, and commercial risk profiles as compared to new chemical
      entities.




**DylojectTM
      (diclofenac sodium injectable)**




*Background* .
      After
      operations or trauma, injured tissue becomes inflamed. This inflammation is
      painful. Common drugs that reduce inflammation fall into two broad classes.
      First, are the steroids (short for corticosteroids, such as cortisone). These
      are potent anti-inflammatory drugs but their use even for short intervals
      carries substantial risks such as weakening of the bones or a tendency towards
      infections. Thus, corticosteroids are not routinely used after operations.
      The
      second class comprises nonsterodial anti-inflammatory drugs (NSAIDs), that
      include prescription drugs for the treatment of moderate-to-severe pain, as
      well
      as the more common and numerous over-the-counter prescription drugs for the
      treatment of mild-to-moderate pain, such as aspirin. NSAIDs are widely used
      for
      all types of pain, but relatively few can treat the moderate-to-severe pain
      typically experienced following operations. NSAIDs reduce pain and inflammation
      through several mechanisms, principal among which is their ability to interfere
      with the enzyme class known as cyclo-oxygenases. This enzyme acts upon certain
      fatty acids made by the body to generate pain-mediating substances known as
      prostaglandins. Inhibition of the cyclo-oxygenases by NSAIDS reduces
      prostaglandin levels decreasing inflammation and thus reducing the pain
      associated with the inflammatory response. Diclofenac is a prescription NSAID
      that is widely prescribed to treat post-operative pain due to its combination
      of
      effectiveness and tolerability.




Currently
      available formulations of the popular drug diclofenac are poorly soluble in
      water. We have successfully improved the solubility of diclofenac by the
      addition of a doughnut-shaped molecule that has the technical name
      hydro xypropyl-beta-cyclodextrin
      (HPβCD). Diclofenac and HPβCD can be formulated to easily dissolve in water.
      This resultant product is more amenable for injection into a muscle or a vein,
      where the solubilized material is able to directly enter the bloodstream. HPβCD
      is one example of a broader family of ring-shaped sugar molecules called
      cyclodextrins. Cyclodextrins have been used to improve the solubility of many
      hard-to-dissolve drugs. There are many types of cyclodextrins and most are
      toxic. Only modified cyclodextrins such as HPβCD are regarded as safe for
      injection. Our HPβCD is used in higher concentrations in the FDA-approved
      injectable antifungal drug, Sporanox® (itraconazole).




NSAIDs
      offer several advantages over opioids for the management of post-operative
      pain.
      NSAIDs have limited effects on the central nervous system, do not depress
      respiration and are non-sedating. This latter attribute is of special importance
      in short-stay or ambulatory surgery because NSAIDs can provide analgesia without
      delaying patient discharge from the hospital or outpatient setting. In addition,
      NSAIDs are also useful in patients who for any reason are unable to take
      opioids. About a decade ago it became clear that there are at least two forms
      of
      the enzyme cyclo-oxygenase (abbreviated “COX”). COX 1 plays a role in protecting
      the stomach from forming ulcers, and also for allowing blood to clot in the
      first minute after a cut or incision. COX 2 becomes active after inflammation
      or
      trauma, and also is important for normal kidney function. The recognition that
      COX 1 and COX 2 serve different functions led to the development and wide use
      of
      drugs that selectively inhibited COX 2 and not COX 1, based upon the potential
      for such drugs to reduce pain and inflammation with fewer stomach ulcers, and
      less effect upon blood clotting, than the nonselective NSAIDs. However, in
      the
      past several years it has also become clear that some COX 2 inhibitors (also
      called “coxibs”) interfere with the health of blood vessels in the heart and
      those going to the brain,




9
 Index





and
      increase the risk of heart attack or stroke. The expanding concerns about heart
      attacks and strokes associated with long-term use of COX 2 inhibitors and,
      most
      recently, naproxen do not necessarily apply to the short-term, perioperative
      administration of these compounds for acute pain. Clinical trials to date have
      not demonstrated increased cardiovascular and cerebrovascular risk associated
      with the short-term use of COX 2 inhibitors and naproxen to treat acute
      postsurgical pain. On the other hand, clinician’s global concerns including
      fears of litigation associated with any medical complications after prescribing
      oral or injectable COX 2 inhibitors may reduce the current and projected market
      share of COX 2 inhibitors for the treatment of acute pain. Diclofenac is not
      considered to be a selective COX 2 inhibitor because it inhibits COX 1 and
      COX 2
      alike.




There
      still exists an underserved medical need for a safe and effective injectable
      NSAID in the hospital setting. For example, ketorolac tromethamine is an
      injectable NSAID that had significant sales prior to FDA’s imposing a black box
      warning limiting the combined duration of IV plus oral use to five days because
      of the risk of serious adverse events. Oral diclofenac can be used safely in
      excess of five days and has a safety profile, considered superior to oral
      ketorolac. Diclofenac is currently approved for use in the U.S. in a variety
      of
      oral formulations as well as a topical and ophthalmic formulation. An injectable
      formulation of diclofenac is commercially available in Europe, but has
      significant drawbacks, including the need to buffer and dilute it at the
      pharmacy and a lengthy infusion period (over thirty minutes). The development
      of
      injectable formulations of diclofenac has been limited by the drug’s poor
      solubility. We believe that the proprietary formulation of injectable diclofenac
      that we are developing has the potential to overcome these issues and to provide
      an effective and safe treatment of moderate-to-severe acute pain.




*Clinical
      Results* .
      DylojectTM is in development in the U.S. for the treatment of post-operative pain
      and in Europe for the treatment of acute forms of pain, including renal colic,
      exacerbations of osteo- and rheumatoid arthritis, acute back pain, acute gout,
      acute trauma, pain associated with fractures in addition to post-operative
      pain.




Initial
      studies of DylojectTM, when administered by intravenous or intramuscular
      injection, have demonstrated its safety along with a safe rapid onset of action.
      DylojectTM has also demonstrated bioequivalence to Voltarol®. Published results
      from a Phase II 269-patient randomized, placebo-controlled, double-blind
      clinical trial demonstrated that DylojectTM provides a rapid drop in
      post-operative pain intensity. At all dosage levels tested, DylojectTM provided
      statistically significant post-operative pain relief through 6 hours (p
<0.05) and was safe and well-tolerated by patients. The results of this
      clinical study were published in 2000 in the European Journal of Clinical
      Pharmacology.




In
      October 2003, we completed a randomized, four-way cross-over Phase I trial
      comparing the pharmacokinetics, bioequivalence and safety of DylojectTM to
      Voltarol®. DylojectTM was bioequivalent to Voltarol® regardless of intravenous
      infusion time as defined and required by the Medicines and Health Products
      Regulatory Agency (“MHRA”).




In
      March
      2004, we completed a randomized, four-way cross-over Phase I clinical study
      comparing the pharmacokinetic, bioequivalence and safety of DylojectTM to
      Voltarol® when administered intravenously and intramuscularly. DylojectTM was
      found to be bioequivalent to Voltarol® regardless of the route of administration
      and was safe and well tolerated.




In
      July
      2004, we initiated a randomized, double-blind, placebo- and
      comparator-controlled Phase II/III pivotal clinical trail comparing the safety,
      efficacy and therapeutic equivalency of DylojectTM to Voltarol®. In July 2005, we
      announced that we had met our primary endpoint in the pivotal European Phase
      II/III study. In September 2005, at the European Society of Regional Anesthesia
      and Pain Therapy (ESRA) annual meeting, we presented the final results of this
      randomized, double-blind, placebo- and comparator-controlled Phase II/III
      pivotal clinical trial comparing the safety, efficacy and therapeutic
      equivalency of DylojectTM to Voltarol®. An MAA (marketing authorization
      application) submission for approval to sell this product in Europe was filed
      in
      September 2005 and the MHRA granted allowance in October 2005. The review and
      approval process typically takes one to several years for approval, rejection,
      or approval subject to completion of additional requirements imposed on the
      company by the regulatory agency at the time of review completion.




In
      January 2006, we announced that we had met our primary endpoint of a linear
      dose
      response for pain relief over six hours in a Phase IIb US study of DylojectTM.
      The preliminary results of this randomized, double-




10
 Index





blind,
      placebo- and comparator-controlled clinical trial comparing the safety and
      efficacy of DylojectTM to IV ketorolac demonstrated that patients with
      moderate-to-severe pain after oral surgery who received DylojectTM or IV
      ketorolac experienced statistically significant (p<0.05) pain relief over six
      hours compared to patients who received a placebo. In addition, five minutes
      after intravenous injection, DylojectTM demonstrated superior onset of pain
      relief compared to ketorolac as measured by statistically significant
      (p<0.05) reductions in pain intensity and pain relief using both the VAS and
      categorical scales.




**RylomineTM
      (intranasal morphine)**




*Background* .
      RylomineTM is in development in the U.S. and Europe for the treatment of acute
      moderate-to-severe pain and breakthrough pain. Breakthrough pain is acute pain
      that overcomes or breaks through a patient’s fixed, by-the-clock doses of pain
      medicine. Morphine, the active pharmaceutical ingredient in RylomineTM, is the
      analgesic standard to which all other opioids are usually compared, and has
      potent effects upon the mu-opioid receptor that is found in many nerve cells
      with pain pathways. When morphine binds to this receptor, it interferes with
      the
      transmission of pain signals from nerve endings and across nerve pathways to
      the
      spinal cord and brain. The power of morphine to reduce the level of physical
      distress places it among the most important naturally occurring compounds.
      Morphine is a strong analgesic used for the relief of moderate-to-severe acute
      and chronic pain, pre-operative sedation, and as a supplement to anesthesia.
      It
      is the drug of choice for treating moderate-to-severe pain associated with,
      in
      part, surgical operations, myocardial infarction and cancer.




*ChiSysTM
      Delivery Platform* .
      We have
      a proprietary drug delivery technology that allows us to deliver morphine and
      to
      achieve therapeutic blood levels of the drug in a predictable fashion that
      was
      previously unattainable when administered through the nasal route. The key
      to
      this technology is ChiSysTM, a naturally occurring carbohydrate polymer that,
      while pharmaceutically inert by itself, enhances the absorption of compounds
      across mucosal membranes such as those of the nasal cavity, and thereby provides
      the potential to deliver drugs through such routes. This enhancement of drug
      delivery is particularly important for compounds such as morphine that are
      poorly absorbed across mucosal barriers, in particular, the nasal membrane.
      The
      contribution of ChiSysTM to enhancing mucosal drug absorption is reported to be
      due to several factors including its potent mucoadhesive property, which
      prevents drug washout.




Conventional
      oral formulations of morphine do not provide rapid relief of pain in many
      patients. Aside from its slow and variable onset of action, oral morphine
      demonstrates considerable patient-to-patient variability in absorption.
      Clinicians therefore must rely on injection of morphine into a muscle or a
      vein
      to assure rapid and effective pain relief. Administration of injectable morphine
      requires professional assistance or hospitalization. Therefore, alternative
      formulations of morphine that are easy to administer by a patient or caregiver,
      and deliver rapid onset of action with clinically meaningful blood levels of
      active drug would provide significant medical benefit. We believe that RylomineTM
represents such an alternative nasal formulation that combines patient
      convenience, ease of use, and cost-effectiveness with rapid onset of pain relief
      and well-accepted potency equivalent to injectable delivery routes.




Previous
      single- and multiple-dose Phase I clinical studies of RylomineTM have
      demonstrated similar pharmacokinetics to intravenous morphine. RylomineTM is
      rapidly absorbed to produce blood levels of morphine typically associated with
      analgesic effectiveness. These data were presented at the 2002 International
      Association for the Study of Pain 10th. World Congress on Pain, in San Diego,
      CA.




In
      December 2002, we completed a large randomized, placebo- and
      comparator-controlled, double-blind, phase II trial evaluating the safety and
      effectiveness of RylomineTM in 225 patients suffering from moderate-to-severe
      post-operative pain. RylomineTM provided statistically superior pain relief as
      compared to placebo (p <0.05) with appreciable pain relief occurring five to
      ten minutes following nasal administration. RylomineTM delivered a statistically
      similar onset of action and total pain relief outcome as compared to intravenous
      morphine infused over 10 minutes. RylomineTM also demonstrated a lower side
      effect profile and faster onset of action compared to oral
      morphine.




In
      October 2005, we announced that we had met our primary endpoint of a linear
      dose
      response for pain relief over four hours in a Phase IIb study of RylomineTM. In
      February 2006, at the American Academy of Pain Medicine (AAPM) annual meeting,
      we presented the final results of this randomized, double-blind, placebo-
      and




11
 Index





comparator-controlled
      clinical trial comparing the safety and efficacy of RylomineTM to IV morphine.
      Patients with moderate-to-severe pain after orthopedic surgery who received
      RylomineTM 15 mg or 30 mg or intravenous morphine 7.5 mg experienced
      statistically significant (p <0.01) pain relief over four hours compared to
      patients who received a placebo. One nasal spray of RylomineTM 7.5 mg was
      determined to be the minimally effective dose and equivalent to a 5 mg bolus
      IV
      injection of morphine. In this study, RylomineTM 7.5 mg and 15 mg were effective
      at relieving pain over 24 hours with the higher dose showing superior efficacy
      and the lower dose showing better tolerability. There were no serious adverse
      events and most side effects were reported as mild to moderate in intensity.
      General side effects were dose related and typical of morphine administration.
      Local adverse events were typical of nasally administered drugs and included
      bad
      taste, nasal congestion, nasal discomfort, throat irritation, sneezing and
      rhinorrhoea.




**PMI-100/150
      (intranasal ketamine)**




*Background* .
      PMI-100/150, a proprietary nasal formulation of ketamine, is currently under
      development by us for treatment of acute moderate-to-severe pain, including
      breakthrough pain. Ketamine, a non-opiate, is an N-methyl-D-aspartate (“NMDA”),
      receptor antagonist that has been in clinical use for over 30 years as a general
      anesthetic. Since its approval by the FDA, ketamine has been safely used as
      an
      anesthetic in tens of thousands of patients. NMDA receptors are located in
      the
      central nervous system and play a role in the perception of acute and chronic
      pain as well as in the development of analgesic tolerance to opioids. Ketamine
      blocks NMDA receptors and therefore is a logical drug candidate for use as
      an
      analgesic for syndromes associated with acute pain, as well as breakthrough
      pain. Ketamine, at lower doses than that approved for use as an anesthetic,
      has
      been reported in the medical literature to be an effective analgesic in settings
      such as post-operatively, during medical procedures, and for neuropathic
      pain.




As
      reported in recent medical literature, the use of ketamine as an analgesic,
      while not yet approved by the FDA, is gaining clinician acceptance as a result
      of its effectiveness and minimal impact on cardiovascular and respiratory
      functions. Since ketamine is not approved for use as an analgesic, physicians
      have resorted to using the drug off-label. We believe that an FDA-approved
      formulation of ketamine for the treatment of moderate-to-severe pain will
      provide physicians with an accepted and regulated alternative to off-label
      use.
      In addition, in 1998, ketamine was scheduled by the DEA as a Schedule III
      controlled substance. We believe this will only improve the prospects of our
      intended use of ketamine, as the scheduling of ketamine by the DEA provides
      additional protection with respect to controlling distribution, prescribing
      patterns, and disposal, thereby reducing the potential for misuse.




*Clinical
      Results* .
      PMI-100/150 is in development in the U.S. and Europe for the treatment of acute
      moderate-to-severe pain and breakthrough pain. We believe that PMI-100/150
      is
      optimized for use as a pain medication and potentially offers a safe, non-opioid
      alternative for the treatment of moderate-to-severe pain.




Previous
      randomized, double-blinded, placebo-controlled phase II clinical studies have
      demonstrated statistically significant (p<0.05) relief of moderate-to-severe
      post-operative and breakthrough pain. PMI-100/150 was fast-acting, with
      statistically significant (p<0.05) pain relief occurring as early as 4
      minutes post administration of PMI-100/150. PMI-100/150 also appeared to be
      safe
      and well-tolerated by patients. These results were presented at the American
      Society for Clinical Pharmacology and Therapeutics in Atlanta, Georgia in April
      2002 and the American Society of Clinical Oncology in Orlando, Florida in May
      2002.




In
      May
      2003, following the presentation of clinical data at the plenary session of
      the
      Advanced Technology Application for Combat Casualty Care conference in Orlando,
      Florida, the U.S. Department of Defense awarded an approximately $4.3 million
      funding extension to IDDS to aid in the development of PMI-100/150. This award
      is based on the need of the military for a fast-acting, non-invasive, and
      non-sedating alternative to the intravenous and oral medications commonly used
      for treatment of combat-related injuries, such as burns, bullet wounds and
      blunt
      trauma.




In
      June
      2004, the Company had an End-of-Phase II meeting with representatives of the
      FDA. The purpose of the meeting was to review the intended clinical use and
      the
      proposed product development plan for PMI-100/150. The FDA provided guidance
      and
      defined the requirements for NDA submission. In
      2005,
      we completed the PMI-150 and PMI-100 formulation and device bioequivalency
      programs and initiated additional phase II studies. Lastly,




12
 Index





we
      are
      advancing our PMI-150 Phase II clinical trials in the U.S. and pending the
      results expect to begin Phase III clinical trials in the second half of 2006.




**Competitive
      Grants**




The
      Company has received the following grants that provide both financial and
      development support for several of its clinical programs.




***--
      U.S. Department of Defense***




The
      U.S.
      Department of Defense has awarded the Company a total of approximately $5.5
      million in contracts and grants to develop PMI-100/150 for the treatment of
      acute moderate-to-severe pain in military personnel and for mass casualty
      management. These contracts reimburse the Company for expenses associated with
      some aspects of the non-clinical, clinical, and manufacturing sub-projects
      required to support an NDA submission.




**Strategic
      Agreements**




***--
      Shimoda Agreement***




In
      December 2001, IDDS entered into a license agreement with Shimoda Biotech,
      Ltd.
      and its wholly-owned subsidiaries, Farmarc N.A.N.V. (Netherlands Antilles)
      and
      Farmarc Netherlands B.V. under which IDDS received certain worldwide, exclusive
      rights to develop and commercialize products related to a proprietary
      formulation of the injectable delivery of diclofenac. Shimoda Biotech, Ltd.
      and
      Farmarc’s rights to the formulation were originally licensed from Janssen
      Pharmaceutica Products, L.P. Under the terms of this agreement, IDDS agreed
      to
      use commercially reasonable efforts to bring to market products that use the
      technology it licensed from Farmarc and Shimoda, continue active marketing
      efforts for those products, and comply with the commercialization timelines
      imposed on Shimoda by IDDS that licensed some of this technology to Shimoda.
      IDDS is currently in compliance with the agreement and has positive relations
      with its license partners. Shimoda agreed that it will not grant to any third
      party any right or license under any of Shimoda’s intellectual property rights
      involving the use of any cyclodextrin product related to pain management,
      anesthesia or sedation without first offering IDDS the right on the same terms
      and conditions. Under the license agreement with Shimoda Biotech (Proprietary)
      Ltd., we are also obligated to pay an aggregate of $6.0 million upon the
      occurrence of specified developmental milestones, which include the filing
      of an
      NDA with the FDA for DylojectTM, the approval of an NDA by the FDA and the first
      commercial sale of a licensed product and pay a royalty based upon our and
      our
      sublicensees’ sales of products. In December 2005, the agreement was amended to
      include allowance of an MAA by the MHRA, submission of an NDA with the FDA,
      approval of an NDA by the FDA and one year following the date of first sale
      of a
      licensed product. As of December 31, 2005, we had paid Shimoda an aggregate
      of
      $1.9 million in cash since the inception of this agreement. Under this
      agreement, the timing of the remaining milestones is dependent upon factors
      that
      are beyond our control, including our ability to recruit patients, the outcome
      of future clinical trials and any requirements imposed on our clinical trials
      by
      the FDA. If the FDA imposes more stringent requirements on our clinical trials,
      the length and number of such trials may be increased resulting in additional
      research and development expenses. We are obligated to pay Shimoda and Farmarc,
      on a country-by-country basis, a royalty on the sales, net of various customary
      cash discounts, attributable to these products.




***--
      West Pharmaceutical Agreements***




In
      August
      2000, IDDS entered into a license agreement, which was amended in October 2001
      and October 2003, with West Pharmaceutical under which IDDS had a worldwide,
      exclusive right to develop and commercialize intranasal morphine under patents
      held by West Pharmaceutical for the transmucosal delivery of morphine to humans
      and animals for the treatment of pain. The licensed patent portfolio from West
      Pharmaceuticals provides U.S. protection until 2014 and worldwide protection
      through 2016. The term of the license remains in effect until the last to expire
      of the Licensed Patents. We believe that IDDS’ recently filed patent
      applications, if approved, will significantly expand the life of these patents.
      In the future, we may be required to pay West Pharmaceutical an aggregate of
      $5.0 million for research and development milestones if certain defined events
      occur, which include the first filing of a marketing authorization application
      with a regulatory agency, first approval of a marketing




13
 Index





authorization
      application and the first commercial sale of a licensed product. As of December
      31, 2005, we had paid West an aggregate of $5.6 million in cash since the
      inception of this agreement. The timing of the remaining milestones is dependent
      upon factors that are beyond our control, including our ability to recruit
      patients, the outcome of future clinical trials and any requirements imposed
      on
      our clinical trials by regulatory agencies. If regulatory agencies impose more
      stringent requirements on our clinical trials, the length and number of such
      trials may be increased resulting in additional research and development
      expenses. The Company is obligated to pay West Pharmaceutical a royalty on
      the
      sales, net of various customary cash discounts, attributable to intranasal
      morphine.




In
      February 2005, West Pharmaceutical sold a substantial majority interest in
      its
      drug delivery business to Archimedes Pharma Limited (“Archimedes”), a new
      company formed by Warburg Pincus Private Equity VIII and Warburg Pincus
      International Partners. As part of the sale, West Pharmaceutical assigned the
      IDDS License Agreement and related agreements to Archimedes, and Archimedes
      assumed all of West Pharmaceutical’s obligations thereunder.




In
      February 2006, we settled a litigation with West Pharmaceutical regarding its
      assignment of the IDDS License Agreements to Archimedes. Under the terms of
      the
      settlement on March 1, 2006, West paid us approximately $600,000 to resolve
      all
      claims, and the parties exchanged mutual releases.




***--
      Ketamine License***




In
      September 2000, IDDS assumed a license agreement with Dr. Stuart Weg upon the
      closing of its merger with Pain Management, Inc., another specialty
      pharmaceutical company. The license grants IDDS the exclusive, worldwide rights
      for the intellectual property surrounding intranasal ketamine. The term of
      the
      license agreement remains in effect until the last to expire of the patent
      rights. Under the license agreement with Dr. Weg, we are obligated to make
      aggregate milestone payments of approximately $1.6 million to Dr. Weg, Mr.
      Brotspies and Calgar & Associates. As of December 31, 2005, we had paid Dr.
      Weg, Herbert Brotspies and Calgar & Associates an aggregate of $950,000 in
      cash and issued 236,298 shares of common stock in lieu of cash payments of
      $600,000. We are also obligated to pay Dr. Weg, Mr. Brotspies, and Calgar &
Associates a royalty on the sales, net of various customary cash discounts,
      attributable to intranasal ketamine.




**Sales
      and Marketing**




Our
      commercialization efforts will focus on a dual-path marketing and distribution
      strategy as a result of our areas of therapeutic focus. A narrow channel of
      distribution will target hospitals, chronic care facilities, palliative care
      providers, long-term care centers, pain specialists, high-prescribing
      oncologists, oncology clinics, burn clinics, and customers such as the U.S.
      Department of Defense. This focused approach allows for the creation of a small
      internal sales and marketing organization. In addition to building our own
      sales
      and marketing organization, we are also evaluating the utilization of a broader
      channel of distribution such as large, established pharmaceutical companies
      and
      contract sales organizations to assist in the broadest commercialization of
      our
      product candidates. In order to cover all of the key prescribing physicians
      at
      an adequate level of reach and frequency, we would need to significantly expand
      our proposed sales force or partner with a company with a substantial sales
      organization. Outside of the U.S. we intend to sublicense distribution and
      marketing rights to one or more pharmaceutical companies with established sales
      forces in the targeted territories.




**Competition**




Our
      success will depend, in part, upon our ability to achieve market share at the
      expense of existing, established products and future products in the relevant
      target markets. Existing and future products, therapies, technological
      innovations, and delivery systems will compete directly with our products.
      Competing products and technologies may provide greater therapeutic benefit
      for
      a specific indication or may offer comparable performance at a lower cost.
      Alternative technologies are being developed to improve the delivery of drugs
      within the prescription pain management industry, several of which may be in
      the
      clinical trials stage or are awaiting approval from the FDA.




14
 Index





We
      compete with fully integrated pharmaceutical companies, smaller companies that
      are collaborating with larger pharmaceutical companies, academic institutions,
      government agencies, and other public and private research institutions. Many
      companies, for example, currently sell either generic or proprietary
      prescription pain formulations. Companies that currently sell both generic
      and
      proprietary opioid formulations include among others Abbott Laboratories, Alza
      Pharmaceuticals, AstraZeneca, Cephalon, Endo Pharmaceuticals, Elkins-Sinn,
      Janssen Pharmaceutica, McNeil Consumer Healthcare, Purdue Pharma, Roxane
      Laboratories and Watson Laboratories. Alternative technologies are being
      developed to improve or replace the use of opioids for pain management, several
      of which are in clinical trials or are awaiting approval from the FDA. These
      alternatives include Elan’s Prialt, Pfizer’s Lyrica as well as combination
      products from Endo Pharmaceuticals. In addition, companies pursuing different
      but related fields represent substantial competition. Such competitors may
      also
      have access to more resources, financial and otherwise, which may allow these
      institutions to develop and market competing products more rapidly and more
      effectively than we have. Many of these competitors, either alone or together,
      with their collaborative partners, operate larger research and development
      programs and have substantially greater financial resources than we do, as
      well
      as significantly greater experience in developing drugs, undertaking preclinical
      testing and human clinical trials, obtaining FDA and other regulatory approvals
      of drugs, formulating and manufacturing drugs and launching, marketing and
      selling drugs.




**Intellectual
      Property**




Our
      goal
      is to obtain, maintain and enforce patent protection for our products,
      formulations, processes, methods and other relevant proprietary technologies,
      preserve our trade secrets and operate without infringing on the proprietary
      rights of other parties, both in the United States and in other countries.
      Our
      policy has been to actively seek to obtain, where appropriate, the broadest
      intellectual property protection possible for our product candidates,
      proprietary information and proprietary technology through a combination of
      contractual arrangements and patents.




IDDS
      currently has certain exclusive license rights under the eight US patents listed
      below as well as similar rights to a number of related foreign patents and
      patent applications filed under Patent Cooperation Treaties. The US patents
      are:




Patent
                  Numbers
              Product
                  Candidate
              Expiration
                  Date5,989,582
              Ketamine
              Feb.
                  25, 20146,248,789
              Ketamine
              Feb.
                  25, 20145,543,434
              Ketamine
              Feb.
                  25, 20145,679,714
              Ketamine
              Oct.
                  21, 20145,744,166
              Morphine
              Aug.
                  21, 20115,629,011
              Morphine
              May
                  13, 20145,554,388
              Morphine
              Sept.
                  10, 20135,679,660
              Diclofenac
              Dec.
                  2, 2014


We
      also
      depend upon the skills, knowledge, and experience of our scientific and
      technical personnel, as well as that of our advisors, consultants, and other
      contractors, none of which is patentable. To help protect our proprietary
      know-how which is not patentable, and for inventions for which patents may
      be
      difficult to enforce, we will rely on trade secret protection and
      confidentiality agreements to protect our interests. To this end, we require
      all
      employees, consultants, advisors and other contractors to enter into
      confidentiality agreements that prohibit the disclosure of confidential
      information and, where applicable, require disclosure and assignment to us
      of
      the ideas, developments, discoveries and inventions important to our
      business.




**Manufacturing**




We
      do not
      own any manufacturing facilities. We contract with qualified third parties
      that
      must comply with current good manufacturing practices and procedures reviewed
      by
      the FDA for the manufacture of bulk active




15
 Index





pharmaceutical
      ingredients and finished product. We have not entered into any commercial
      manufacturing agreements to date. Historically, we have worked with several
      manufacturing vendors including and most recently DPT Lakewood, Inc. for the
      clinical supply of RylomineTM and PMI-100/150, and with Precision Pharma for the
      clinical supply of DylojectTM. We were advised that the FDA has inspected and
      approved both DPT Lakewood, Inc. and Precision Pharma facilities and that both
      facilities were determined to be in compliance with good manufacturing
      practices.




We
      believe that the raw materials needed for production of our product candidates
      are readily available from alternative supplies. However, as part of the
      regulatory approval process we must specify the manufacturing process and the
      particular raw materials to be used. Changes in the materials or the
      manufacturer could be subject to prior regulatory approval.




**Government
      Regulation**




The
      FDA
      and comparable regulatory agencies in foreign countries as well as pharmacy
      regulators in state and local jurisdictions, impose substantial requirements
      upon the clinical development, manufacture and marketing of pharmaceutical
      products. These agencies and other federal, state and local entities regulate
      research and development activities and the testing, manufacture, quality
      control, safety, effectiveness, labeling, storage, record keeping, approval,
      advertising, and promotion of our products.




The
      process required by the FDA under the drug provisions of the United States
      Food,
      Drug, and Cosmetic Act before our initial products may be marketed in the U.S.
      generally involves the following:




·
            Preclinical
                laboratory and animal tests;




·
            Submission
                of an IND, which must become effective before human clinical trials
                may
                begin;




·
            Adequate
                and well-controlled human clinical trials to establish the safety
                and
                efficacy of the product candidate for its intended
                use;




·
            Submission
                to the FDA of a NDA; and




·
            FDA
                review and approval of a NDA.




The
      testing and approval process requires substantial time, effort, and financial
      resources, and we cannot be certain that any approval will be granted on a
      timely basis, if at all.




Preclinical
      tests include laboratory evaluation of the product candidate, its chemistry,
      formulation and stability, as well as animal studies to assess the potential
      safety and efficacy of the product candidate. Certain preclinical tests must
      be
      conducted in compliance with good laboratory practice regulations. Violations
      of
      these regulations can, in some cases, lead to invalidation of the studies,
      requiring such studies to be replicated. In some cases, long-term preclinical
      studies are conducted while clinical studies are ongoing.




We
      then
      submit the results of the preclinical tests, together with manufacturing
      information and analytical data, to the FDA as part of an IND, which must become
      effective before we may begin human clinical trials. The IND automatically
      becomes effective 30 days after receipt by the FDA, unless the FDA, within
      the
      30-day time period, raises concerns or questions about the conduct of the trials
      as outlined in the IND and imposes a clinical hold. In such a case, the IND
      sponsor and the FDA must resolve any outstanding concerns before clinical trials
      can begin. Our submission of an IND may not result in FDA authorization to
      commence clinical trials. All clinical trials must be conducted under the
      supervision of a qualified investigator in accordance with good clinical
      practice regulations. These regulations include the requirement that all
      subjects provide informed consent. Further, an independent Institutional Review
      Board (“IRB”) at each medical center proposing to conduct the clinical trials
      must review and approve any clinical study. The IRB also continues to monitor
      the study and must be kept aware of the study’s progress, particularly as to
      adverse events and changes in the research. Progress reports detailing the
      results of the clinical trials must be submitted at least annually to the FDA
      and more frequently if adverse events occur.




16
 Index





Human
      clinical trials are typically conducted in three sequential phases that may
      overlap:




·   Phase
      I:
      The drug is initially introduced into healthy human subjects or patients and
      tested for safety, dosage tolerance, absorption, metabolism, distribution,
      and
      excretion.




·   Phase
      II:
      The drug is studied in a limited patient population to identify possible adverse
      effects and safety risks, to determine the efficacy of the product for specific
      targeted diseases and to determine dosage tolerance and optimal
      dosage.




·   Phase
      III: When Phase II evaluations demonstrate that a dosage range of the drug
      is
      effective and has an acceptable safety profile, Phase III trials are undertaken
      to further evaluate dosage and clinical efficacy and to further test for safety
      in an expanded patient population, often at geographically dispersed clinical
      study sites.




We
      cannot
      be certain that we will successfully complete Phase I, Phase II, or Phase III
      testing of our product candidates within any specific time period, if at all.
      Furthermore, the FDA or the IRB or IDDS as IND sponsor may suspend clinical
      trials at any time on various grounds, including a finding that the subjects
      or
      patients are being exposed to an unacceptable health risk.




Under
      the
      Pediatric Research Equity Act of 2003, a sponsor is also required to include
      an
      assessment, generally based on clinical study data, on the safety and efficacy
      of its drugs for all relevant pediatric populations before it submits a NDA.
      The
      statute provides for waivers or deferrals in certain situations, and IDDS
      intends to submit applications for such waivers or deferrals, but we can make
      no
      assurances that such situations will apply to our products or that the waivers
      or deferrals will be granted.




We
      also
      must finalize a process for manufacturing the product in accordance with current
      good manufacturing practice (“GMP”) requirements. The manufacturing process must
      be capable of consistently producing quality batches of the product, and we
      must
      develop methods for testing the quality, purity, and potency of the final
      products. Additionally, appropriate packaging must be selected and tested and
      stability studies must be conducted to demonstrate that the product does not
      undergo unacceptable deterioration over its shelf-life.




The
      results of product development, pre-clinical studies, and clinical studies
      are
      submitted to the FDA as part of a NDA for approval of the marketing and
      commercial shipment of the product. The FDA conducts an initial review of each
      NDA submitted to assess whether it is acceptable for filing. The FDA may refuse
      to file the NDA and may request additional information. In this event, the
      application must be resubmitted with the additional information. The resubmitted
      application is also subject to review before the FDA accepts it for filing.
      Once
      the FDA accepts the NDA for filing, the agency begins an in-depth review of
      the
      NDA. The FDA has substantial discretion in the approval process and may disagree
      with our interpretation of the data submitted in the NDA. The review process
      may
      be significantly extended by the FDA requests for additional information or
      clarification regarding information already provided. Also, as part of this
      review, the FDA may refer the application to an appropriate advisory committee,
      typically a panel of clinicians, for review, evaluation and a recommendation.
      The FDA is not bound by the recommendation of an advisory committee.
      Manufacturing establishments often also are subject to inspections prior to
      NDA
      approval to assure compliance with GMPs.




Under
      the
      Prescription Drug User Fee Act (“PDUFA”), submission of a NDA with clinical data
      requires payment of a fee. For fiscal year 2005, that fee is $767,400. In
      return, the FDA assigns a goal of ten months for standard NDA reviews from
      acceptance of the application to the time the agency issues its response. It
      is
      not certain that FDA will meet its performance goal of ten months for its
      review. The FDA’s response to the NDA will be in the form of an approval letter,
      or a non-approvable letter. Any response from the FDA that is not approval
      of
      the NDA may require us to submit additional information, which may include
      additional clinical data. Even if the FDA approves the NDA, the agency may
      decide later to withdraw product approval if compliance with regulatory
      standards is not maintained or if safety problems occur after the product
      reaches the market. The FDA may require post-approval studies, also known as
      Phase IV studies, to develop additional information regarding the product.
      In
      addition, the FDA requires post-approval adverse event reporting, and the agency
      has the power to require changes in labeling or to prevent further marketing
      of
      a product. The agency may also decide later to withdraw product




17
 Index





approval
      if compliance with regulatory standards is not maintained or if safety problems
      occur after the product reaches the market.




Satisfaction
      of the above FDA requirements or requirements of state, local and foreign
      regulatory agencies typically takes several years, and the actual time required
      may vary substantially based upon the type, complexity and novelty of the
      pharmaceutical product. Government regulation may delay or prevent marketing
      of
      potential products for a considerable period of time and impose costly
      procedures upon our activities. We cannot be certain that the FDA or any other
      regulatory agency will grant approval for any of our products under development
      on a timely basis, if at all. Success in preclinical or early-stage clinical
      trials does not assure success in later-stage clinical trials. Data obtained
      from pre-clinical and clinical activities are not always conclusive and may
      be
      susceptible to varying interpretations that could delay, limit or prevent
      regulatory approval. Even if a product receives regulatory approval, the
      approval may be significantly limited to specific indications or uses. Further,
      even after regulatory approval is obtained, later discovery of previously
      unknown problems with a product may result in restrictions on the product or
      even complete withdrawal of the product from the market. Delays in obtaining,
      or
      failures to obtain regulatory approvals would have a material adverse effect
      on
      our business.




Any
      products we manufacture or distribute pursuant to the FDA clearances or
      approvals are subject to pervasive and continuing regulation by the FDA,
      including record-keeping requirements, reporting of adverse experiences with
      the
      drug, submitting other periodic reports, drug sampling and distribution
      requirements, notifying the FDA and gaining its approval of certain
      manufacturing or labeling changes, complying with the FDA promotion and
      advertising requirements. The FDA has actively enforced regulations prohibiting
      the marketing of products for unapproved uses. However, in certain
      circumstances, and subject to very stringent requirements, the FDA will permit
      the dissemination of peer-reviewed scientific reprints related to unapproved
      uses. Drug manufacturers and their subcontractors are required to register
      their
      facilities with the FDA and state agencies and are subject to periodic
      unannounced inspections by the FDA and state agencies for compliance with
      current good manufacturing practices, which impose procedural and documentation
      requirements upon us and our third-party manufacturers. Failure to comply with
      these regulations could result, among other things, in warning letters,
      suspension of regulatory approval, refusal to approval pending applications
      or
      supplements to approved applications filed by Javelin, recalls, suspension
      or
      closure of production or injunctions, seizures, or civil or criminal sanctions.
      We cannot be certain that we or our present or future subcontractors will be
      able to comply with those regulations and other FDA regulatory
      requirements.




We
      and
      our product candidates are also subject to a variety of state laws and
      regulations in those states or localities where its products are or will be
      marketed. Any applicable state or local regulations may hinder our ability
      to
      market our products in those states or localities.




The
      FDA’s
      policies may change, and additional government regulations may be enacted which
      could prevent or delay regulatory approval of IDDS’ potential products.
      Moreover, increased attention to the containment of health care costs in the
      U.S. and in foreign markets could result in new government regulations that
      could have a material adverse effect on our business. We cannot predict the
      likelihood, nature or extent of adverse governmental regulation that might
      arise
      from future legislative or administrative action, either in the U.S. or
      abroad.




In
      addition, whether or not FDA approval has been obtained, approval of a
      pharmaceutical product by comparable governmental regulatory authorities in
      foreign countries must be obtained prior to the commencement of clinical trials
      and subsequent sales and marketing efforts in those countries. The approval
      procedure varies in complexity from country to country, and the time required
      may be longer or shorter than that required for FDA approval. We may incur
      significant costs to comply with these laws and regulations now or in the
      future.




**Other
      Regulatory Requirements**




The
      U.S.
      Federal Trade Commission and the Office of the Inspector General of the U.S.
      Department of Health and Human Services (“HHS”) also regulate certain
      pharmaceutical marketing practices. Thus, reimbursement practices of the HHS
      covering medicine and medical services are important to the success of our
      products.




18
 Index





The
      federal Controlled Substances Act (“CSA”) imposes various registration,
      record-keeping and reporting requirements, procurement and manufacturing quotas,
      import and export controls, labeling and packaging requirements, security
      controls, and a restriction on prescription refills on certain pharmaceutical
      products. Most states impose similar controls over controlled substances under
      state law as regulated by the Board of Pharmacy or other state regulatory
      authorities. The CSA is administered by the DEA, a division of the Department
      of
      Justice. To meet its responsibilities, the DEA conducts periodic inspections
      of
      registered establishments that handle controlled substances. Failure of
      companies to maintain compliance, particularly as manifested in loss or
      diversion, can result in regulatory action including civil and criminal
      penalties, refusal to renew necessary registrations, or initiating proceedings
      to revoke those registrations. If a manufacturer or distributor has its
      registration revoked, it can no longer lawfully possess or distribute controlled
      substances meaning effectively that the operations of such an organization
      must
      cease with respect to controlled substances. In certain circumstances,
      violations also can lead to criminal proceedings.




A
      principal factor in determining the particular requirements, if any, applicable
      to a product is its actual or potential abuse profile. A pharmaceutical product
      may be “scheduled” as a Schedule I, II, III, IV or V substance, with Schedule II
      substances considered to present the highest risk of substance abuse for any
      product with a medical use, and Schedule V substances the lowest. Morphine
      and
      ketamine are classified as Schedule II and III substances, respectively. As
      a
      Schedule III substance, each substance prescription for our ketamine product
      would be limited to five refills. Morphine, however, as a Schedule II substance
      would be subject to higher regulation including no refills for prescriptions,
      special transactions reporting to DEA, special DEA-supplied order forms for
      all
      transactions, and written prescriptions instead of phoned or faxed to a
      pharmacy. The DEA also limits the quantity of the Schedule II controlled
      substance inventories used by pharmaceutical manufacturers in the production
      of
      controlled substances. As part of the commercialization of our morphine product,
      we, our subcontractors or our vendors will be required to file for and obtain
      quotas from the DEA for the procurement and manufacture of controlled substance
      active ingredients and finished drug products.




We
      are
      also subject to numerous federal, state and local laws relating to such matters
      as safe working conditions, manufacturing practices, environmental protection,
      fire hazard control, and disposal of hazardous or potentially hazardous
      substances. We may incur significant costs to comply with these laws and
      regulations now or in the future. We cannot assure you that any portion of
      the
      regulatory framework under which we currently operate will not change and that
      such change will not have a material adverse effect on our current and
      anticipated operations.




Currently,
      DylojectTM, RylomineTM and PMI-100/150 are in the Phase II product development
      stage based upon U.S. regulatory classification.




**Product
                candidate**
            **Indication**
            **Development
                stage**DylojectTM
              (injectable
                diclofenac)
            Post-operative
                pain
            Phase
                IIRylomineTM
              (intranasal
                morphine)
            Acute
                moderate-to-severe pain
            Phase
                IIPMI-150
              (intranasal
                ketamine)
            Acute
                moderate-to-severe pain
            Phase
                II





Over
      the
      coming year, development activity will focus on fulfillment of the manufacturing
      requirements and generation of the necessary clinical data to support the
      submission package in request of the FDA End-of-Phase II meeting and initiation
      and implementation of the Phase III clinical programs. The End-of-Phase II
      meeting is usually required in order to progress into Phase III trials and
      ultimately product registration. FDA typically schedules the End-of-Phase II
      meeting within six weeks of the meeting request, if accepted. If not accepted,
      the FDA informs the company of insufficiencies necessary to rectify in order
      to
      reschedule. The design, timing and cost of the Phase III development program
      will be largely determined by the clinical safety and efficacy data and feedback
      from the FDA at the End-of-Phase II meeting.




19
 Index





**European
      Product Approval**




Prior
      regulatory approval for human healthy volunteer studies (Phase I studies) is
      required in member states of the E.U. Following successful completion of Phase
      I
      studies, data is submitted in summarized format to the applicable regulatory
      authority in the member state in respect of applications for the conduct of
      later Phase II studies. The regulatory authorities in the E.U. typically have
      between one and three months to raise any objections to the proposed study,
      and
      they often have the right to extend this review period at their discretion.
      In
      addition, one or more independent ethics committees, which typically operate
      similarly to an Institutional Review Board in the U.S., will review the ethics
      of conducting the proposed research.




In
      order
      to gain marketing approval in the E.U., we must submit a dossier to the relevant
      authority for review, which is known in the E.U. as a MAA. The format is usually
      specific and laid out by each authority, although in general it will include
      information on the quality of the chemistry, manufacturing and pharmaceutical
      aspects of the product as well as the non-clinical and clinical
      data.




In
      the
      E.U. there is, for many products, a choice of two different authorization
      routes: centralized and decentralized. Under the centralized route, which we
      are
      pursuing for our intranasal morphine product, one marketing authorization is
      granted for the entire E.U., while under the decentralized route, which we
      are
      pursuing for IV diclofenac, a series of national marketing authorizations are
      granted. In the centralized system the application will be reviewed by members
      of the Committee for Proprietary Medicinal Products (“CPMP”), on behalf of EMEA.
      The EMEA will, based upon the review of the CPMP, provide an opinion to the
      European Commission on the safety, quality and efficacy of the product. The
      decision to grant or refuse an authorization is made by the European Commission.
      In circumstances where use of the centralized route is not mandatory, we can
      choose to use the decentralized route, in which case the application will be
      reviewed by one member state’s regulatory agency. If the regulatory agency
      grants the authorization, other member states’ regulatory authorities are asked
      to “mutually recognize” the authorization granted by the first member state’s
      regulatory agency.




Approval
      can take several months to several years, or can be denied. The approval process
      can be affected by a number of factors. Additional studies or clinical trials
      may be requested during the review and may delay marketing approval and involve
      unbudgeted costs. The regulatory authorities may conduct an inspection of
      relevant facilities and review manufacturing procedures, operating systems
      and
      personnel qualifications. In addition to obtaining approval for each product,
      in
      many cases each drug manufacturing facility must be approved. Further
      inspections may occur over the life of the product. An inspection of the
      clinical investigation sites by a competent authority may be required as part
      of
      the regulatory approval procedure. As a condition of marketing approval, the
      regulatory agency may require post-marketing surveillance to monitor for adverse
      effects, or other additional studies as deemed appropriate. After approval
      for
      the initial indication, further clinical studies are usually necessary to gain
      approval for any additional indications. The terms of any approval, including
      labeling content, may be more restrictive than expected and could affect the
      marketability of a product.




Failure
      to comply with applicable regulatory requirements after obtaining regulatory
      approval can, among other things, result in the suspension of regulatory
      approval, as well as possible civil and criminal sanctions. Renewals in Europe
      may require additional data, which may result in a license being withdrawn.
      In
      the E.U., regulators have the authority to revoke, suspend or withdraw approvals
      of previously approved products, to prevent companies and individuals from
      participating in the drug approval process, to request recalls, to seize
      violative products and to obtain injunctions to close manufacturing plants
      not
      operating in conformity with regulatory requirements and to stop shipments
      of
      violative products.




20
 Index





Our
      lead
      product in Europe is DylojectTM for which we have submitted an MAA for approval
      to sell this product. RylomineTM and PMI-150 are in Phase II clinical
      trials.




**Product
                candidate**
            **Indication**
            **Development
                stage**DylojectTM
              (injectable
                diclofenac)
            Post-operative
                pain/anti-inflammatory
            MAA
                ReviewRylomineTM
              (intranasal
                morphine)
            Acute
                moderate-to-severe pain
            Phase
                IIPMI-150
              (intranasal
                ketamine)
            Acute
                moderate-to-severe pain
            Phase
                II




In
      July 2005,
      we announced that we had met our primary endpoint in the pivotal European Phase
      II/III study. In September 2005, at the European Society of Regional Anesthesia
      and Pain Therapy (ESRA) annual meeting, we presented the final results of this
      randomized, double-blind, placebo- and comparator-controlled Phase II/III
      pivotal clinical trial comparing the safety, efficacy and therapeutic
      equivalency of DylojectTM to Voltarol®. An MAA (marketing authorization
      application) submission for approval to sell this product in Europe was filed
      in
      September 2005 and the MHRA granted allowance in October 2005. The review and
      approval process typically takes one to several years for approval, rejection,
      or approval subject to completion of additional requirements imposed on the
      company by the regulatory agency at the time of review completion.




In
      September 2004, the CHMP appointed France as the Rapporteur country that will
      be
      responsible along with Germany for reviewing the RylomineTM MAA filing. In
      October 2005, we announced that we had met our primary endpoint of a linear
      dose
      response for pain relief over four hours in a Phase IIb study of RylomineTM. The
      results of this randomized, double-blind, placebo- and comparator-controlled
      clinical trial comparing the safety and efficacy of RylomineTM to IV morphine
      demonstrated that patients with moderate-to-severe pain after orthopedic surgery
      who received RylomineTM or intravenous morphine experienced statistically
      significant pain relief over four hours compared to patients who received a
      placebo. Over the coming year, we will focus on completing other clinical
      studies in addition to seeking regulatory and scientific advice from the EMEA
      and the French regulatory agencies. The results of the clinical trials along
      with feedback from the regulatory agencies will determine the timing, extent
      and
      cost of the RylomineTM filing.




**Pricing
      Controls**




Before
      a
      pharmaceutical product may be marketed and sold in certain foreign countries
      the
      proposed pricing for the product must be approved. The requirements governing
      product pricing vary widely from country to country and can be implemented
      disparately at the national level.




The
      E.U.
      generally provides options for its member states to control the prices of
      medicinal products for human use. A member state may approve a specific price
      for the medicinal product or it may instead adopt a system of direct or indirect
      controls on the profitability of the company placing the medicinal product
      on
      the market. For example, the regulation of prices of pharmaceuticals in the
      United Kingdom is generally designed to provide controls on the overall profits
      that pharmaceutical companies may derive from their sales to the U.K. National
      Health Service. The U.K. system is generally based on profitability targets
      or
      limits for individual companies which are normally assessed as a return on
      capital employed by the company in servicing the National Health Service market,
      comparing capital employed and profits.




In
      comparison, Italy generally establishes prices for pharmaceuticals based on
      a
      price monitoring system. The reference price is the European average price
      calculated on the basis of the prices in four reference markets: France, Spain,
      Germany and the U.K. Italy typically establishes the price of medicines
      belonging to the same therapeutic class on the lowest price for a medicine
      belonging to that category. Spain generally establishes the selling price for
      new pharmaceuticals based on the prime cost, plus a profit margin within a
      range
      established each year by the Spanish Commission for Economic Affairs.
      Promotional advertising costs are limited.




21
 Index





There
      can
      be no assurance that any country that has price controls or reimbursement
      limitations for pharmaceuticals will allow favorable reimbursement and pricing
      arrangements for our products.




**Third-Party
      Reimbursements**




In
      the
      U.S., E.U. and elsewhere, sales of therapeutic and other pharmaceutical products
      are dependent in part on the availability and adequacy of reimbursement to
      the
      consumer or the health care provider from third party payers, such as government
      and private insurance plans. Third party payers are increasingly challenging
      the
      prices charged for medical products and services, and new products that are
      more
      expensive than existing treatments may have difficulty finding ready acceptance
      unless there is a clear therapeutic benefit.




In
      the
      U.S., the willingness of consumers to choose treatment with a self-administered
      outpatient prescription drug over a different drug, or over another form of
      treatment, is often dependent in part upon the success of the manufacturer
      in
      obtaining placement of the product on their health plan’s formulary or drug
      list, because favorable formulary placement means lower out of pocket costs.
      Obtaining favorable formulary placement typically requires that the product
      be
      less expensive than what the health plan determines to be therapeutically
      equivalent products, and often requires manufacturers to offer discounts or
      rebates. Federal law also requires manufacturers to pay rebates to state
      Medicaid programs in order to have their products reimbursed by Medicaid. In
      addition, the federal Medicare program, which covers most Americans over age
      65
      and the disabled, currently provides no coverage for self-administered
      outpatient prescription drugs absent a specific statutory provision. Beginning
      in the summer of 2004, Medicare sponsored a prescription drug discount card
      program that is intended to reduce costs for prescription drugs, and beginning
      in 2006, a new Medicare Part D will offer eligible beneficiaries limited
      coverage for outpatient prescription drugs. Both of these programs will also
      rely on formularies. Also beginning in 2004, Medicare is adopting new payment
      formulas for prescription drugs administered in a provider setting, such as
      a
      hospital or physician’s office, that are generally expected to lower
      reimbursement for those drugs.




The
      E.U.
      generally provides options for its member states to restrict the range of
      medicinal products for which their national health insurance systems provide
      reimbursement. Member states in the E.U. can opt to have a “positive” or a
“negative” list. A positive list is a listing of all medicinal products covered
      under the national health insurance system, whereas a negative list designates
      which medicinal products are excluded from coverage. The E.U., the U.K. and
      Spain use a negative list approach, while France uses a positive list approach.
      In Canada, each province decides on reimbursement measures. In some countries,
      in addition to positive and negative lists, products may be subject to a
      clinical and cost effectiveness review by a health technology assessment body.
      A
      negative determination by such a body in relation to one of IDDS’ products could
      affect the prescribing of the product. For example, in the U.K., the National
      Institute for Clinical Excellence (“NICE”) provides guidance to the National
      Health Service on whether a particular drug is clinically effective and cost
      effective. Although presented as “guidance,” doctors are expected to take the
      guidance into account when choosing a drug to prescribe. In addition, health
      authorities may not make funding available for drugs not given a positive
      recommendation by the NICE. There is a risk that a negative determination by
      the
      NICE will mean fewer prescriptions. Although the NICE will consider drugs with
      orphan status, there is a degree of tension on the application by the NICE
      of
      the standard cost assessment for orphan drugs, which are often priced more
      highly to compensate for the limited market. It is unclear whether the NICE
      will
      adopt a more relaxed approach toward the assessment of orphan
      drugs.




We
      cannot
      assure you that any of our products will be considered cost effective and that
      reimbursement to the consumer or the health care provider will be available
      or
      will be sufficient to allow us to sell our products on a competitive and
      profitable basis.




**Fraud
      and Abuse Laws**




A
      federal
      law commonly known as the federal healthcare program anti-kickback law, and
      several similar state laws, prohibit any remuneration that is intended to induce
      physicians or others either to refer patients, or to acquire or arrange for
      or
      recommend the acquisition of health care products or services. While the federal
      law applies only to referrals, products or services for which payment may be
      made by a federal health care program, the state laws often apply regardless
      of
      whether federal funds may be involved. Other federal and state laws prohibit
      anyone from presenting or causing to be presented claims for payment to health
      care payers that are false, fraudulent or are for items or services not provided
      as claimed. Several recent and current enforcement actions by federal and




22
 Index





state
      prosecutors have targeted some sales and marketing activities of prescription
      drug manufacturers under these statutes. As we begin to market our products
      to
      health care providers, such as physicians and hospitals, the relationships
      we
      form, including compensation of physicians for speaking or consulting services,
      financial support of continuing medical education or research programs, and
      assisting customers with obtaining third-party reimbursement for its products,
      could be challenged under these broad laws. A successful challenge could lead
      to
      civil or criminal penalties, including the exclusion of our products from
      reimbursement under Medicare, Medicaid, U.S. military health care or other
      federally-funded health care programs. Even an unsuccessful challenge could
      cause adverse publicity and be costly to respond to, and thus could have a
      material adverse effect on our business, results of operations and financial
      condition. It is our intention to consult with experienced counsel concerning
      the potential application of these and other laws to our business and to attempt
      to structure our sales, marketing and other activities to comply with all such
      laws. However, given the broad reach of these laws and the increasing attention
      being given to them by law enforcement authorities, we cannot assure you that
      some of our activities will not be subject to challenge in the
      future.




**Employees**




As
      of
      December 31, 2005, we had 15 full-time employees and three temporary employees.
      We intend to employ additional employees or retain persons as consultants as
      needed, depending on the availability of such persons.




**ITEM
                1A.**
            **RISK
                FACTORS**




Following
      are some specific factors that should be considered for a better understanding
      of our operations and financial condition. These factors and the other matters
      discussed herein are important factors that could cause actual results or
      outcomes for us to differ materially from those discussed in the forward-looking
      statements included elsewhere in this document. New factors emerge from time
      to
      time, and it is not possible for management to predict all of the factors,
      nor
      can it assess the effect of each factor on our business or the extent to which
      any factor, or combination of factors, may cause actual results to differ
      materially from those contained in any forward-looking statement.




**Risks
      Related to Our Business**




**We
      currently have no product revenues and cannot estimate when product revenues
      may
      commence.**




To
      date,
      we have devoted significant financial resources to research and development
      of
      our products. Until, and if, we receive approval from the FDA and from
      regulatory authorities in foreign jurisdictions for our product candidates,
      we
      cannot sell our products and we will not have product revenues. As a result,
      we
      have generated significant operating losses. As of December 31, 2005, we had
      an
      accumulated deficit of $61.6 million, excluding approximately $3.6 million
      deemed dividend; although, $18.6 million of this amount was related to a
      non-cash charge we incurred in connection with a research and development
      write-off related to our formation. We used substantial amounts of cash to
      date
      and expect capital outlays and operating expenditures to increase over the
      next
      several years as we expand our infrastructure and research and development
      activities. We will fund our operations and capital expenditures from cash
      on
      hand, government grants and contracts and additional financing.




**We
      expect to need additional financing to operate our business, which financings
      may not be available on satisfactory terms or at all, thereby causing dilution
      to existing holders or reduction of research activities.**




We
      believe that our existing cash and cash equivalents will be sufficient to
      support the current operating plan for at least through March 31, 2007. However,
      funding requirements may change as a result of many factors, including delays
      in
      development activities, underestimates of budget items, unanticipated cash
      requirements, increased regulatory requirements with attendant time delays,
      limitation of development of new potential products, future product
      opportunities with collaborators, future licensing opportunities and future
      business combinations. Consequently, we may need to seek additional sources
      of
      financing, which may not be available on favorable terms, if at
      all.




23
 Index





If
      needed, we would seek to raise additional financing through public or private
      equity offerings, debt financings or additional corporate collaboration and
      licensing arrangements. To the extent we raise additional capital by issuing
      equity securities, our stockholders may experience dilution. To the extent
      that
      we raise additional capital by issuing debt securities, we would incur
      substantial costs relating to interest payments, may be required to pledge
      assets as security for the debt and may be constrained by restrictive financial
      and/or operational covenants. To the extent that we raise additional funds
      through collaboration and licensing arrangements, it may be necessary to
      relinquish some rights to our technologies or product candidates, or grant
      licenses on terms that are not favorable to us.




If
      we do
      not succeed in raising additional funds on acceptable terms, we may be unable
      to
      complete planned pre-clinical and clinical trials or obtain approval of our
      product candidates from the FDA and other regulatory authorities. In addition,
      we could be forced to discontinue product development, curtail operations,
      reduce or forego sales and marketing efforts and lose attractive business
      opportunities.




**We
      are not currently profitable and may never achieve or sustain
      profitability.**




We
      have a
      history of losses and expect to incur substantial losses and negative operating
      cash flows for the foreseeable future, and we may not achieve or maintain
      profitability. For the years ended December 31, 2003, 2004 and 2005, we had
      operating losses of $3.2 million, $7.0 million and $10.6 million, respectively.
      Our current “burn rate” (amount of cash we spend to fund operations) is
      approximately $900,000 per month. Even if we succeed in developing and
      commercializing one or more of the product candidates, we expect to incur
      substantial losses for the foreseeable future and may never become profitable.
      We also expect to continue to incur significant operating and capital
      expenditures for the next several years and anticipate that our expenses will
      increase substantially in the foreseeable future as we:




·   continue
      to undertake pre-clinical development and clinical trials for the product
      candidates;




·   seek
      regulatory approvals for the product candidates;




·   implement
      additional internal systems and infrastructure;




·   lease
      additional office facilities;




·   hire
      additional personnel; and




·   expand
      research and development activities.




We
      also
      expect to experience negative cash flows for the foreseeable future as we fund
      our operating losses and capital expenditures. As a result, we will need to
      generate significant revenues in order to achieve and maintain profitability.
      We
      may not be able to generate these revenues or achieve profitability in the
      future. Our failure to achieve or maintain profitability could negatively impact
      the value of our common stock.




**We
      have a limited operating history upon which to base an investment
      decision.**




We
      are a
      development-stage company and have not yet demonstrated our ability to perform
      the functions necessary for the successful commercialization of any of the
      product candidates. The successful commercialization of our product candidates
      will require us to perform a variety of functions, including:




·   continuing
      to undertake preclinical development and clinical trials;




·   participating
      in regulatory approval processes;




·   formulating
      and manufacturing products; and




·   conducting
      sales and marketing activities.




24
 Index




Our
      operations have been limited to
      organizing and staffing, acquiring, developing and securing our proprietary
      technology and undertaking pre-clinical trials and clinical trials of our
      principal product candidates. These operations provide a limited basis to assess
      our ability to commercialize our product candidates and the advisability of
      investing in our common stock.




**If
      we fail to obtain or maintain the necessary U.S. or worldwide regulatory
      approvals for the product candidates, we will be unable to commercialize
      them.**




Government
      regulations in the U.S. and other countries have a significant impact on our
      business and affect the research and development, manufacture and marketing
      of
      our products. We will require FDA approval to commercialize our product
      candidates in the U.S. and approvals from similar regulatory authorities in
      foreign jurisdictions to commercialize our product candidates in those
      jurisdictions. In order to obtain FDA approval of any of our product candidates,
      we must submit to the FDA a New Drug Application (“NDA”), demonstrating that the
      product candidate is safe for humans and effective for its intended use. This
      demonstration requires significant research and animal testing, which are
      referred to as pre-clinical studies, as well as human studies, which are
      referred to as clinical trials. We cannot predict whether our research and
      clinical approaches will result in drugs that the FDA considers safe for humans
      and effective for indicated uses. The FDA has substantial discretion in the
      drug
      approval process and may either refuse to accept our application, or may decide
      after review of our application that the data is insufficient to allow approval
      of the relevant product. If the FDA does not accept or approve our application,
      it may require us to conduct additional pre-clinical testing, manufacturing
      studies or clinical studies and submit that data before it will reconsider
      our
      application. The FDA may also require us to perform post-approval studies.
      The
      approval process may also be delayed by changes in government regulation, future
      legislation or administrative action or changes in FDA policy that occur prior
      to or during our regulatory review. Delays in obtaining regulatory approvals
      may:




·   delay
      commercialization of, and our ability to derive product revenues from, the
      product candidates;




·   impose
      costly procedures; and




·   diminish
      competitive advantages that we may otherwise enjoy.




Even
      if
      we comply with all FDA requests, the FDA may ultimately reject one or more
      of
      our NDAs. We cannot be certain that we will ever obtain regulatory clearance
      for
      any of our product candidates. Failure to obtain FDA approval of any of our
      principal product candidates will severely undermine our business by reducing
      the number of potential salable products and, therefore, corresponding product
      revenues. Also, the FDA might approve one or more of the product candidates
      but
      may also approve competitors’ products possessing characteristics that offer
      their own treatment advantages.




Before
      we
      submit our NDAs, we plan to request waivers or deferrals from the requirement
      under the Pediatric Research Equity Act of 2003 to include an assessment,
      generally based on clinical study data, of the safety and efficacy of our drugs
      for all relevant pediatric populations. We can make no assurances that the
      FDA
      will grant our waiver or deferral requests. If we are required to conduct
      clinical research studies in pediatric patients, this could delay the
      development and possible approval of our products and increase the overall
      costs
      of product approvals.




In
      addition, even after these product candidates are marketed, the products and
      the
      manufacturers are subject to continual vigilance and review by applicable
      regulatory authorities, including FDA adverse event reporting requirements
      and
      FDA requirements governing product distribution, advertising and promotion.
      At
      any stage of development or commercialization, the discovery of previously
      unknown problems with the product candidates, our own manufacturing or the
      manufacture by third-party manufacturers may result in restrictions on the
      products or the manufacture, including withdrawal of the product from the
      market.




In
      foreign jurisdictions, we must receive approval from the appropriate regulatory,
      pricing and reimbursement authorities before we can commercialize and market
      our
      drugs. Foreign regulatory approval processes generally include all of the risks
      associated with the FDA approval procedures described above. Pursuing




25
 Index





foreign
      regulatory approvals will be time-consuming and expensive. The regulations
      vary
      among countries, and foreign regulatory authorities may require different or
      additional clinical trials than we conducted to obtain FDA approval for our
      product candidates. We cannot give any assurance that we will receive the
      approvals necessary to commercialize the product candidates for sale outside
      the
      United States.




Because
      we have limited foreign regulatory, clinical and commercial resources, we may
      plan to commercialize some products internationally through collaborative
      relationships with foreign partners. Future partners are critical to our
      international success. We may not be able to enter into collaboration agreements
      with appropriate partners for important foreign markets on acceptable terms,
      or
      at all. Future collaborations with foreign partners may not be effective or
      profitable for us.




**The
      product candidates contain controlled substances, the supply of which may be
      limited by U.S. government policy and the availability of which may generate
      public controversy, thereby reducing or restricting any future marketing
      arrangements or sales.**




The
      active ingredients in some of the current product candidates, including morphine
      and ketamine, are regulated by the U.S. Drug Enforcement Administration (“DEA”),
      as Schedule II or III substances under the Controlled Substances Act of 1970.
      Most states place similar controls over these products under the Board of
      Pharmacy or similar agency. Consequently, their manufacture, shipment (including
      import and export), storage, sale and use are subject to the highest degree
      of
      regulation and accountability. For example, all regular Schedule II drugs must
      be prescribed by a physician, or under a physician’s direction, and may not be
      refilled within 30 days. Furthermore, the amount of Schedule II substances
      we
      can obtain for clinical trials, manufacturing and commercial distribution is
      limited by the DEA under a quota system, and our allotment may not be sufficient
      to complete clinical trials or meet commercial demand, if any.




Products
      containing controlled substances may generate public controversy. The World
      Health Organization advocates balance in national analgesic policies, so as
      to
      meet medical needs for opioids and other controlled substances while reducing
      opportunities for drug abuse, misuse and diversion. Opponents of these products,
      however, may seek restrictions on marketing and withdrawal of any regulatory
      approvals. In addition, these opponents may seek to generate negative publicity
      in an effort to persuade the medical community to reject these products.
      Political pressures and adverse publicity could lead to delays in the
      introduction and marketing of the product candidates, increased expenses for
      marketing, and/or restricted availability of its product candidates. Our
      contract manufacturers that make and handle controlled substances also are
      subject to inspections by DEA and state authorities to evaluate ongoing
      compliance with security and other requirements under relevant federal and
      state
      controlled substance law and regulations. We do not have control over the
      contract manufacturers’ compliance with these regulations and standards. Failure
      to comply with applicable law and regulatory requirements may result in action
      such as civil penalties, refusal to renew necessary registrations, or initiating
      proceedings to revoke those registrations and, in certain circumstances,
      criminal proceedings. If one of these manufacturers has its registration
      revoked, denied or suspended, it can no longer lawfully possess or distribute
      controlled substances, thereby possibly resulting in a negative impact on our
      business.




**The
      product candidates are in the middle-to-late stages of clinical trials and
      there
      is no assurance that final approval will be obtained.**




The
      product candidates may never be successfully marketed or manufactured. The
      three
      principal product candidates, DylojectTM, RylomineTM and PMI-100/150, are in the
      middle-to-late stages of clinical testing on a limited number of patients.
      For
      some medical uses for which we hope to market the product, to date there have
      been few or no studies to determine the efficacies of the specific product
      candidates. It also is possible that the FDA will disagree with our current
      clinical and pre-clinical research plans and require us to conduct more
      extensive studies than we currently anticipate before that agency will consider
      our products for marketing approval. Some of our future studies involve drug
      exposures for durations that are significantly longer than we have tested thus
      far. The longer-term studies could reveal safety or other issues that could
      have
      an adverse impact on the ability to gain marketing approval. The FDA has raised
      certain issues with respect to some of the products, such as irritation seen
      in
      animals treated with the diclofenac product candidate and known toxicities
      of
      cyclodextrins other than the hydroxypropyl-beta-cyclodextrin that is employed
      to
      solubilize diclofenac in our product candidate. We need to commit substantial
      time and additional resources in order to conduct further clinical trials before
      we can submit an




26
 Index





NDA
      with
      respect to any of these product candidates. We cannot predict with any certainty
      if or when we might submit an NDA for regulatory approval of any of our product
      candidates.




**Clinical
      trials are expensive, time-consuming and difficult to design and implement
      which
      could affect allocations of funds and time from other
      programs.**




Clinical
      trials are expensive and difficult to design and implement, in part because
      they
      are subject to rigorous regulatory requirements. Further, the medical,
      regulatory and commercial environment for pharmaceutical products changes
      quickly and often in ways that we may not be able to accurately predict. The
      clinical trial process is also time-consuming. We estimate that clinical trials
      of the product candidates will take several more years to complete. Furthermore,
      as failure can occur at any stage of the trials, we could encounter problems
      that cause us to abandon or repeat clinical trials. The commencement and
      completion of clinical trials may be delayed by several factors,
      including:




·
            changes
                to applicable regulatory
                requirements;




·
            unforeseen
                safety issues;




·
            determination
                of dosing issues;




·
            lack
                of effectiveness in the clinical
                trials;




·
            slower
                than expected rates of patient
                recruitment;




·
            inability
                to monitor patients adequately during or after
                treatment;




·
            inability
                or unwillingness of medical investigators to follow our clinical
                protocols;




·
            inability
                to maintain a supply of the investigational drug in sufficient quantities
                to support the trials; and




·
            suspension
                or termination of clinical trials for various reasons, including
                noncompliance with regulatory requirements or changes in the clinical
                care
                protocols and standards of care within the institutions in which
                our
                trials take place.




In
      addition, we or the FDA may suspend the clinical trials at any time if it
      appears that we are exposing participants to unacceptable health risks or if
      the
      FDA finds deficiencies in our Investigational New Drug Application (“IND”)
      submissions or the conduct of these trials.




A
      number
      of companies in the biotechnology and drug development industry have suffered
      significant setbacks in advanced clinical trials despite promising results
      in
      earlier trials. In the end, we may be unable to develop marketable
      products.




**The
      results of the clinical trials may not support the product candidate
      claims.**




Even
      if
      the clinical trials are completed as planned, we cannot be certain that the
      results will support the product candidate claims or that the FDA or government
      authorities will agree with our conclusions regarding such results. Success
      in
      preclinical testing and early clinical trials does not ensure that later
      clinical trials will be successful, and we cannot be sure that the results
      of
      later clinical trials will replicate the results of prior clinical trials and
      pre-clinical testing. The clinical trial process may fail to demonstrate that
      the product candidates are safe for humans and effective for indicated uses.
      This failure would cause us to abandon a product candidate and may delay
      development of other product candidates. Any delay in, or termination of, the
      clinical trials will delay the filing of NDAs with the FDA and, ultimately,
      our
      ability to commercialize the product candidates and generate product revenues.
      In addition, the clinical trials involve a small patient population. Because
      of
      the small sample size, the results of these clinical trials may not be
      indicative of future results.




27
 Index





**Delays
      in patient enrollment for clinical trials could increase costs and delay
      regulatory approvals.**




The
      rate
      of completion of clinical trials will depend on the rate of patient enrollment.
      There may be substantial competition to enroll patients in clinical trials
      for
      other products in development. This competition has delayed the clinical trials
      of other biotechnology and drug development companies in the past. In addition,
      ongoing improvements in drug therapy, particularly for pain management drugs,
      may make it more difficult for us to enroll patients in our clinical trials
      as
      the eligible patient population may choose to enroll in clinical trials
      sponsored by other companies or choose other recently-approved therapies. Delays
      in patient enrollment can result in increased development costs and delays
      in
      regulatory approvals.




**Physicians
      and patients may not accept and use our drugs which would cause a change in
      the
      business strategy with attendant delays and needs for capital for any new
      business, and possibly the cessation of business.**




Even
      if
      the FDA approves our drugs, physicians and patients may not accept and use
      them.
      Acceptance and use of these drugs will depend upon a number of factors
      including:




·
            perceptions
                by members of the health care community, including physicians, about
                the
                safety and effectiveness of these drugs and the use of controlled
                substances;




·
            cost-effectiveness
                of these drugs relative to competing
                products;




·
            availability
                of reimbursement for the products from government or other healthcare
                payers; and




·
            effectiveness
                of marketing and distribution efforts by us and our licensees and
                distributors, if any.




Because
      we expect sales of the current product candidates, if approved, to generate
      substantially all of our product revenues for the foreseeable future, the
      failure of any of these drugs to find market acceptance would harm our business
      and could require us to seek additional financing.




**Our
      ability to generate product revenues will be diminished if the drugs sell for
      inadequate prices or patients are unable to obtain adequate levels of
      reimbursement thereby reducing future levels of revenues and the ability to
      achieve profitability.**




Our
      ability to commercialize the drugs, alone or with collaborators, will depend
      in
      part on the extent to which reimbursement will be available from:




·
            government
                and health administration
                authorities;




·
            private
                health maintenance organizations and health insurers;
                and




·
            other
                healthcare payors.




Significant
      uncertainty exists as to the reimbursement status of newly approved healthcare
      products. Healthcare payors, including Medicare, routinely challenge the prices
      charged for medical products and services. Government and other healthcare
      payers increasingly attempt to contain healthcare costs by limiting both
      coverage and the level of reimbursement for drugs. Even if the product
      candidates are approved by the FDA, insurance coverage may not be available,
      and
      reimbursement levels may be inadequate to cover such drugs. If government and
      other healthcare payors do not provide adequate coverage and reimbursement
      levels for any of the products, the post-approval market acceptance of our
      products could be diminished.




28
 Index




**The
      drug-development programs depend in large part upon third-party researchers
      who
      are outside our control.**




We
      depend
      upon independent investigators and collaborators, such as universities, medical
      institutions and clinical research organizations, to conduct our pre-clinical
      and clinical trials under agreements with us. These collaborators are not our
      employees, and we cannot control the amount or timing of resources that they
      devote to our programs. These investigators may not assign as great a priority
      to our programs or pursue them as diligently as we would if we were undertaking
      such programs ourselves. If outside collaborators fail to devote sufficient
      time
      and resources to these drug-development programs, or if their performance is
      substandard, the approval of our FDA applications, if any, and our introduction
      of new drugs, if any, will be delayed. These collaborators may also have
      relationships with other commercial entities, some of which may compete with
      us.
      If these collaborators assist our competitors at our expense, our competitive
      position would be harmed.




**We
      will rely exclusively on third parties to manufacture our product candidates,
      without any direct control over timing for production and delivery, thereby
      possibly affecting any future revenues.**




We
      have
      relied exclusively on a limited number of vendors to supply raw materials and
      finished goods for our product candidates, and the loss of one of these parties
      could harm our business. The FDA and regulatory agencies in other countries
      also
      periodically inspect manufacturing facilities, including third parties who
      manufacture products or active ingredients for us. The FDA may not believe
      that
      the chosen manufacturers have sufficient experience making the dosage forms
      that
      we have contracted with them to produce, and may subject those manufacturers
      to
      increased scrutiny. Pharmaceutical manufacturing facilities must comply with
      applicable good manufacturing practice standards, and manufacturers usually
      must
      invest substantial funds, time and effort to ensure full compliance with these
      standards. We will not have control over our contract manufacturers’ compliance
      with these regulations and standards. Failure to comply with applicable
      regulatory requirements can result in sanctions, fines, delays or suspensions
      of
      approvals, seizures or recalls of products, operating restrictions,
      manufacturing interruptions, costly corrective actions, injunctions, adverse
      publicity against us and our products and possible criminal
      prosecutions.




If
      we are
      unable to obtain sufficient supplies of raw materials or if there is a
      significant increase in the price of raw materials, our business would be
      seriously harmed. If any of the product candidates receives FDA approval, we
      expect to rely on one or more third-party contractors to supply our drugs.
      If
      the current or future third-party suppliers cease to supply the drugs in the
      quantity and quality we need to manufacture the drug candidates or if the
      current or future third-party suppliers are unable to comply with good
      manufacturing practice and other government regulations, the qualification
      of
      additional or replacement suppliers could be a lengthy process, and there may
      not be adequate alternatives to meet our needs, which would negatively affect
      our business. We may not be able to obtain the necessary drugs used in our
      products in the future on a timely basis, if at all.




**If
      we are unable to hire additional qualified personnel, our ability to grow the
      business may be harmed. We must hire and retain skilled employees in a tight
      labor market and will be subject to high labor costs and related increased
      employment expenses.**




We
      will
      also need to hire additional qualified personnel with expertise in preclinical
      testing, clinical research and testing, government regulation, formulation
      and
      manufacturing, finance and accounting and sales and marketing. We will compete
      for qualified individuals with numerous biopharmaceutical companies,
      universities and other research institutions. Competition for such individuals,
      particularly in the New York City and the Boston areas, is intense, and we
      cannot be certain that our search for such personnel will be successful.
      Attracting and retaining qualified personnel will be critical to our
      success.




Skilled
      employees in the industry are in great demand. We are competing for employees
      against companies located in the New York and Boston metropolitan areas that
      are
      more established than we are and have the ability to pay more cash compensation
      than we do. We will require scientific personnel in many fields, some of which
      are addressed by relatively few companies. As a result, depending upon the
      success and the timing of clinical tests, we may experience difficulty in hiring
      and retaining highly skilled employees, particularly scientists. If we are
      unable to hire and retain skilled scientists, our business, financial condition,
      operating results and future prospects could be materially adversely
      affected.




29
 Index





We
      currently have no designated sales and marketing staff, nor any internal sales
      or distribution capabilities. In order to commercialize the products, if any
      are
      approved, we intend to develop internal sales, marketing and distribution
      capabilities to target particular markets for our products, as well as make
      arrangements with third parties to perform these services for us with respect
      to
      other markets for our products. We may not be able to establish these
      capabilities internally or hire sales personnel with appropriate expertise
      to
      market and sell the products, if approved. In addition, even if we are able
      to
      identify one or more acceptable collaborators to perform these services for
      us,
      we may not be able to enter into any collaborative arrangements on favorable
      terms, or at all.




If
      we
      enter into any collaborative arrangements for the marketing or sale of our
      products, our product revenues are likely to be lower than if we marketed and
      sold our products ourself. In addition, any revenues we receive would depend
      upon the efforts of our collaborators, which may not be adequate due to lack
      of
      attention or resource commitments, management turnover, change of strategic
      focus, business combinations or other factors outside of our control. Depending
      upon the terms of the collaboration, the remedies we may have against an
      underperforming collaborator may be limited. If we were to terminate the
      relationship, it may be difficult or impossible to find a replacement
      collaborator on acceptable terms, if at all.




**If
      we cannot compete successfully for market share against other drug companies,
      we
      may not achieve sufficient product revenues, and our business will
      suffer.**




The
      market for our product candidates is characterized by intense competition and
      rapid technological advances. If the product candidates receive FDA approval,
      they will compete with a number of existing and future drugs and therapies
      developed, manufactured and marketed by others. Existing or future competing
      products may provide greater therapeutic convenience or clinical or other
      benefits for a specific indication than the products, or may offer comparable
      performance at a lower cost. If the products fail to capture and maintain market
      share, we may not achieve sufficient product revenues, and our business will
      suffer.




We
      will
      compete against fully integrated pharmaceutical companies and smaller companies
      that are collaborating with larger pharmaceutical companies, academic
      institutions, government agencies and other public and private research
      organizations. Many of these competitors have prescription analgesics already
      approved or in development. In addition, many of these competitors, either
      alone
      or together, with their collaborative partners, operate larger research and
      development programs and have substantially greater financial resources than
      we
      do, as well as significantly greater experience in:




·
            developing
                drugs;




·
            undertaking
                preclinical testing and human clinical
                trials;




·
            obtaining
                FDA and other regulatory approvals of
                drugs;




·
            formulating
                and manufacturing drugs; and




·
            launching,
                marketing and selling drugs.




The
      United States Food, Drug, and Cosmetic Act and FDA regulations and policies
      provide incentives to manufacturers to challenge patent validity or create
      modified, noninfringed versions of a drug in order to facilitate the approval
      of
      abbreviated new drug application for generic substitutes. These same incentives
      also encourage manufacturers to submit new drug applications, known as 505(b)(2)
      applications, that rely on literature and clinical data not generated by or
      for
      the drug sponsor. In light of these incentives and especially if our products
      are commercially successful, other manufacturers may submit and gain approval
      for either an abbreviated new drug application or a 505(b)(2) application that
      will compete directly with our products.




**Developments
      by competitors may render our products or technologies obsolete or
      noncompetitive.**




Companies
      that currently sell both generic and proprietary opioid formulations include
      among others Abbott Laboratories, Alza Pharmaceuticals, AstraZeneca, Cephalon,
      Endo Pharmaceuticals, Elkins-Sinn, Janssen




30
 Index




Pharmaceutica,
      McNeil Consumer Healthcare, Purdue Pharma, Roxane Laboratories and Watson
      Laboratories. Alternative technologies are being developed to improve or replace
      the use of opioids for pain management, several of which are in clinical trials
      or have recently been approved by the FDA. These alternatives include Elan’s
      Prialt, Pfizer’s Lyrica, and combination products from Endo Pharmaceuticals. In
      addition, companies pursuing distinct but related fields such as neuromodulation
      devices represent substantial competition. Many of these organizations competing
      with us have substantially greater capital resources, larger research and
      development staffs and facilities, longer drug development history in obtaining
      regulatory approvals and greater manufacturing and marketing capabilities than
      us. These organizations also compete with us to attract qualified personnel,
      parties for acquisitions, joint ventures or other collaborations.




**If
      we fail to adequately protect or enforce our intellectual property rights or
      secure rights to patents of others, the value of our intellectual property
      rights would diminish.**




Our
      success, competitive position and future revenues will depend in part on our
      ability and the abilities of our licensors to obtain and maintain patent
      protection for our products, methods, processes and other technologies, to
      preserve our trade secrets, to prevent third parties from infringing on our
      proprietary rights and to operate without infringing the proprietary rights
      of
      third parties. We are aware of a third party which could allege that certain
      uses of our product candidates infringe upon certain of such third party’s
      proprietary rights. Although we do not intend to market our product candidates
      for such uses and we are not aware of any such uses currently in practice,
      we
      may not be able to avoid claims made by such third party as a result of our
      product candidates being used by consumers for purposes other than as marketed
      by us.




We
      hold
      certain exclusive patent rights, including rights under U.S. patents and U.S.
      patent applications as well as rights under foreign patents and patent
      applications. We anticipate filing additional patent applications both in the
      U.S. and in other countries, as appropriate. However, we cannot
      predict:




·
            the
                degree and range of protection any patents will afford us against
                competitors including whether third parties will find ways to challenge,
                invalidate or otherwise circumvent our
                patents;




·
            if
                and when patents will issue;




·
            whether
                or not others will obtain patents claiming aspects similar to those
                covered by our patents and patent applications;
                or




·
            whether
                we will need to initiate litigation or administrative proceedings
                which
                may be costly whether we win or
                lose.




Our
      success also depends upon the skills, knowledge and experience of our scientific
      and technical personnel, our consultants and advisors as well as our licensors
      and contractors. To help protect our proprietary know-how and inventions for
      which patents may be unobtainable or difficult to obtain, we rely on trade
      secret protection and confidentiality agreements. To this end, we require all
      of
      our employees, consultants, advisors and contractors to enter into agreements
      which prohibit the disclosure of confidential information and, where applicable,
      require disclosure and assignment to us of the ideas, developments, discoveries
      and inventions important to our business. These agreements may not provide
      adequate protection for our trade secrets, know-how or other proprietary
      information in the event of any unauthorized use or disclosure or the lawful
      development by others of such information. If any of these trade secrets,
      know-how or other proprietary information is disclosed, the value of our trade
      secrets, know-how and other proprietary rights would be significantly impaired,
      and our business and competitive position would suffer.




**If
      we infringe the rights of third parties, we could be prevented from selling
      products, forced to pay damages, and incur substantial costs in defending
      litigations.**




If
      our
      products, methods, processes and other technologies infringe the proprietary
      rights of other parties, we could incur substantial costs, and we may have
      to:




31
 Index




·
            obtain
                licenses, which may not be available on commercially reasonable terms,
                if
                at all;




·
            redesign
                our products or processes to avoid
                infringement;




·
            stop
                using the subject matter claimed in the patents held by
                others;




·
            pay
                damages; or




·
            defend
                litigation or administrative proceedings which may be costly whether
                we
                win or lose, and which could result in a substantial diversion of
                our
                management resources.




**We
      may be exposed to liability claims associated with the use of hazardous
      materials and chemicals.**




Our
      research and development activities involve the controlled use of hazardous
      materials and chemicals. Although we believe that our safety procedures for
      using, storing, handling and disposing of these materials comply with federal,
      state and local laws and regulations, we cannot completely eliminate the risk
      of
      accidental injury or contamination from these materials. In the event of such
      an
      accident, we could be held liable for any resulting damages, and any liability
      could materially adversely affect our business, financial condition and results
      of operations. In addition, the federal, state and local laws and regulations
      governing the use, manufacture, storage, handling and disposal of hazardous
      or
      radioactive materials and waste products may require us to incur substantial
      compliance costs that could materially adversely affect its business, financial
      condition and results of operations.




**We
      may incur substantial liabilities and may be required to limit commercialization
      of our products in response to product liability lawsuits.**




The
      testing and marketing of medical products entail an inherent risk of product
      liability. Although side effects from clinical trials thus far have been
      generally limited to symptoms known to be associated with these well-established
      medications, such as dysphoria (a feeling of malaise), and nausea, we may be
      held liable if any more serious adverse reactions from the use of our product
      candidates occurs. The product candidates involve new methods of delivery for
      potent drugs that require greater precautions to prevent unintended use,
      especially since they are designed for patients’ easy self-use rather than for
      administration by medical professionals. For example, the FDA may require us
      to
      develop a comprehensive risk management program for our product candidates
      to
      reduce the risk of improper patient selection, diversion and abuse. The failure
      of these measures could result in harmful side effects or death. As a result,
      consumers, regulatory agencies, pharmaceutical companies or others might make
      claims against us. If we cannot successfully defend ourself against product
      liability claims, we may incur substantial liabilities or be required to limit
      commercialization of the product candidates. Our inability to obtain sufficient
      product liability insurance at an acceptable cost to protect against potential
      product liability claims could prevent or inhibit the commercialization of
      pharmaceutical products we develop, alone or with corporate collaborators.
      We
      currently carry clinical trial insurance but do not carry product liability
      insurance. We, or any corporate collaborators, may not be able to obtain
      insurance at a reasonable cost, if at all. Even if our agreements with any
      future corporate collaborators entitle us to indemnification against losses,
      such indemnification may not be available or adequate if any claim
      arises.




**Risk
      Related to Management**




**We
      may not successfully manage our growth, thereby preventing achievement of our
      business plan.**




Our
      success will depend upon the expansion of our operations and the effective
      management of our growth, which will place a significant strain on our
      management and on our administrative, operational, and financial resources.
      To
      manage this growth, we must expand our facilities, augment our operational,
      financial and management systems, and hire and train additional qualified
      personnel. If we are unable to manage our growth effectively, our business
      would
      be harmed.




32
 Index





**We
      rely on key executive officers and scientific and medical advisors whose
      knowledge of our business and technical expertise would be difficult to
      replace.**




We
      are
      highly dependent on Daniel B. Carr, MD, Chief Executive Officer and Chief
      Medical Officer, as well as other executive officers, including Fred
      Mermelstein, PhD, President, and Douglas A. Hamilton, Chief Operating and Chief
      Financial Officer. (In February 2006, the Company announced that Douglas A.
      Hamilton would be stepping down as Chief Operating Officer and Chief Financial
      Officer but would remain in his positions until a successor is named.) We do
      not
      have “key person” life insurance policies for any of our officers. We do not
      have employment agreements with any person other than with Dr. Carr. The loss
      of
      the technical knowledge and management and industry expertise of any of our
      key
      personnel could result in delays in product development, loss of customers
      and
      sales, if any, and diversion of management resources, which could adversely
      affect operating results.




In
      addition, we rely on members of our scientific advisory board and consultants
      to
      assist us in formulating our research and development strategy. All of the
      members of our scientific advisory board and our clinical advisors have other
      jobs and commitments and may be subject to non-disclosure obligations that
      may
      limit their availability to work with us.




**Market
      Risks**




**The
      market price of our common stock on the OTC Bulletin Board may fluctuate
      significantly which may cause certain investors to avoid purchasing our
      shares.**




The
      market price of our common stock traded on the OTC Bulletin Board may fluctuate
      significantly in response to factors, some of which are beyond our control,
      such
      as:




·
            announcement
                of new products or product enhancements by us or our
                competitors;




·
            results
                of the testing and regulatory approval of our
                products;




·
            developments
                concerning intellectual property rights and regulatory approvals
                and
                concerns;




·
            quarterly
                variations in our and our competitors’ results of
                operations;




·
            changes
                in earnings estimates or recommendations by securities
                analysts;




·
            developments
                in our industry; and




·
            general
                market conditions and other factors, including factors unrelated
                to our
                own operating performance.




Further,
      the OTC Bulletin Board market in general has recently experienced extreme price
      and volume fluctuations. Continued market fluctuations could result in extreme
      volatility in the price of our common stock, which could cause a decline in
      the
      value of such shares, which price volatility might be worse if the trading
      volume of our common stock is low.




**There
      is only a volatile limited market for our common stock that may accelerate
      price
      swings.**




Recent
      history relating to the market prices of public companies indicates that, from
      time to time, there may be periods of extreme volatility in the market price
      of
      our securities because of factors unrelated to the operating performance of,
      or
      announcements concerning, the issuers of the affected stock, and especially
      for
      stock traded on the OTC Bulletin Board. Our common stock is not actively traded
      and the bid and asked prices for our common stock have fluctuated significantly.
      For the past two fiscal years, the common stock traded on the OTC Bulletin
      Board
      from a high of $4.20 to a low of $0.15 per share, and since the December 2004
      acquisition of IDDS the market prices of the common stock have ranged from
      $1.90
      to $4.20 per share. See Item 5, “Market For




33
 Index




Registrant’s
      Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
      Securities.” General market price declines, market volatility, especially for
      low priced securities, or factors related to the general economy or to us in
      the
      future could adversely affect the price of the common stock.




**We
      may be subject to “Penny Stock” regulations that would restrict brokerage firms
      in recommending our common stock.**




The
      SEC
      has adopted regulations which generally define Penny Stocks to be an equity
      security that has a market price less than $5.00 per share or an exercise price
      of less than $5.00 per share, subject to certain exemptions. As of March 15,
      2006, the closing price for our common stock was $3.75 per share and therefore
      it may be designated a “Penny Stock.” Although since December 6, 2004, we have
      met the net worth exemption from the “Penny Stock’ definition, no assurance can
      be given that such exemption will be maintained. As a Penny Stock, our common
      stock may become subject to Rule 15g-9 under the Exchange Act of 1934, or the
      Penny Stock Rule. This rule imposes additional sales practice requirements
      on
      broker-dealers that sell such securities to persons other than established
      customers and “accredited investors” (generally, individuals with a net worth in
      excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together
      with their spouses). For transactions covered by Rule 15g-9, a broker-dealer
      must make a special suitability determination for the purchaser and have
      received the purchaser’s written consent to the transaction prior to sale. As a
      result, this rule may affect the ability of broker-dealers to sell our
      securities and may affect the ability of purchasers to sell any of our
      securities in the secondary market.




For
      any
      transaction involving a penny stock, unless exempt, the rules require delivery,
      prior to any transaction in a penny stock, of a disclosure schedule prepared
      by
      the SEC relating to the penny stock market. Disclosure is also required to
      be
      made about sales commissions payable to both the broker-dealer and the
      registered representative and current quotations for the securities. Finally,
      monthly statements are required to be sent disclosing recent price information
      for the penny stock held in the account and information on the limited market
      in
      penny stock.




There
      can
      be no assurance that our common stock will qualify for exemption from the penny
      stock restrictions. In any event, even if our common stock were exempt from
      the
      Penny Stock restrictions, we would remain subject to Section 15(b)(6) of the
      Exchange Act, which gives the SEC the authority to restrict any person from
      participating in a distribution of penny stock, if the SEC finds that such
      a
      restriction would be in the public interest.




We
      plan
      to list our common stock on the American Stock Exchange. Assuming such listing,
      we will no longer be subject to the penny stock rules. No assurance can be
      given
      that our listing application will be approved or that even if so listed we
      can
      maintain the listing standards.




**We
      have never paid dividends and we do not anticipate paying dividends in the
      future.**




We
      do not
      believe that we will pay any cash dividends on our common stock in the future.
      We have never declared any cash dividends on our common stock, and if we were
      to
      become profitable, it would be expected that all of such earnings would be
      retained to support our business.




**ITEM
                1B.**
            **UNRESOLVED
                STAFF COMMENTS**




Currently,
      we do not have any unresolved comments from the SEC staff with respect to our
      prior filings.




**ITEM
                2.**
            **PROPERTIES**




Our
      principal executive offices consist of approximately 5,500 square feet of leased
      space at 130 West 42nd Street, 12th Floor, New York, NY 10036 under a three-year
      lease expiring in November 2006 at an annual base rental of $125,000, with
      3%
      annual escalations. On May 1, 2005, we began leasing approximately 3,131 square
      feet of office space in Cambridge, MA under a three-year lease at an annual
      base
      rent of $81,720. We believe that these premises are sufficient for our current
      needs.




34
 Index





Our
      website is located at http://www.javelinpharmaceuticals.com




**ITEM
                3.**
            **LEGAL
                PROCEEDINGS**




We
      are
      not a party to any material legal proceedings nor are we aware of any
      circumstance that may reasonably lead a third party to initiate material legal
      proceedings against us.




**ITEM
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**




No
      matters were submitted to a vote of security holders during the fourth quarter
      of 2005.




**PART
      II.**




**ITEM
                5.**
            **MARKET
                FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
                PURCHASES OF EQUITY
                SECURITIES**




**Principal
      Market and Market Prices**




Our
      common stock has traded in the over-the-counter market on the OTC Electronic
      Bulletin Board (OTCBB) under the symbol JVPH since September 7, 2005 (having
      been traded under the symbol ITRD prior thereto). The following table sets
      forth
      for the indicated periods the high and low bid prices of the common stock for
      the two fiscal years ended December 31, 2005, as reported on the OTCBB. These
      prices are based on quotations between dealers, and do not reflect retail
      mark-up, mark-down or commissions, and may not necessarily represent actual
      transactions.




**Fiscal
                Period**
            **Fiscal
                Year Ended**
              **12/31/05**
            **Fiscal
                Year Ended**
              **12/31/04**High
            Low
            High
            LowFirst
                Quarter
            $4.20
            $2.50
            $0.20
            $0.15Second
                Quarter
            3.02
            1.90
            0.75
            0.15Third
                Quarter
            3.85
            2.30
            0.85
            0.40Fourth
                Quarter
            3.49
            1.95
            3.35
            0.25





**Approximate
      Number of Holders of Our Common Stock**




On
      February 16, 2006, there were approximately 570 stockholders of record of our
      common stock, excluding record holders of IDDS common stock who have not yet
      exchanged the certificates for their IDDS shares for our common stock. In
      addition, a number of shares of common stock are held in street or nominee
      name,
      so it is believed that there are a substantial number of additional beneficial
      owners of our common stock.




**Dividends**




We
      do not
      intend to pay any cash dividends on our common stock in the foreseeable future.
      All cash resources are expected to be invested in our business.




**Transfer
      Agent**




American
      Stock Trust & Transfer Company, New York, New York, is the transfer agent
      for our common stock.




**Recent
      Sales of Unregistered Securities**




(1)  In
      connection with the November 2005 equity financing, we sold 14,222,215 shares
      of
      our common stock at a price of $2.25 per share and warrants for the purchase
      of
      711,111 shares of common stock at an exercise price of $2.25 per share to 29
      investors. As part of the placement agents’ fee, we granted to the placement




35
 Index




agents
      warrants to purchase an aggregate of 853,333 shares of common stock exercisable
      at $2.48 per share for five years. We relied on the exemption from the
      registration requirements of the Securities Act provided in Section 4(2) thereof
      and Rule 506 thereunder.




(2)   In
      connection with the September 2005 migratory merger, we issued an aggregate
      of
      26,128,271 shares of our common stock to the former holders of Intrac common
      stock at an exchange ratio of 1 share of our common stock for each share of
      Intrac common stock. We relied on the exemption from the registration
      requirements of the Securities Act provided in Section 3(a)(9) thereof and
      Rule
      145(a)(2) thereunder.




(3)   In
      connection with the December 2004 Intrac-IDDS merger, effective as of December
      6, 2004, we issued an aggregate of 24,473,246 shares of our common stock to
      the
      former holders of IDDS common stock at an exchange ratio of 1.0184107 shares
      of
      our common stock for each share of IDDS common stock. We relied on the exemption
      from the registration requirements of the Securities Act provided in Section
      4(2) thereof and Rule 506 thereunder.




(4)   Immediately
      prior to the Intrac-IDDS merger, we issued an aggregate of 1,053,201 shares
      of
      common stock to seven persons upon conversion of outstanding 8% Series SPA
      Senior Subordinated Convertible Redeemable Debentures due November 30, 2004.
      We
      relied on the exemption from the registration requirements of the Securities
      Act
      provided in Section 3(a)(9) thereof.




(5)   Immediately
      prior to the Intrac-IDDS merger, all outstanding shares of the IDDS Series
      A
      Preferred Stock, Series B Preferred Stock and Series C Preferred Stock were
      converted into IDDS Common Stock. IDDS relied on the exemption from the
      registration requirements of the Securities Act provided in Section 3(a)(9)
      thereof.




(6)   Immediately
      prior to the Intrac-IDDS merger, IDDS sold 6,139,913 shares of common stock
      at a
      price of $2.95 per share to 39 investors. As part of the fee to the placement
      agent, IDDS issued warrants to purchase 920,987 shares of common stock at $2.95
      per share exercisable for five years. IDDS relied on the exemption from the
      registration requirements of the Securities Act provided in Section 4(2) thereof
      and Rule 506 thereunder.




(7)   On
      November 5, 2004, IDDS issued an aggregate of $1,000,000 principal amount of
      10%
      Senior Secured Debentures due November 4, 2005 to two institutional investors.
      As part of the purchase, the investors received Common Stock Purchase Warrants
      for the purchase of an aggregate of 226,314 shares of common stock at an
      exercise price of $2.65 per share for a period of five years. IDDS relied on
      the
      exemption from the registration requirements of the Securities Act provided
      in
      Section 4(2) thereof and Rule 506 thereunder.




(8)   In
      August
      2003, IDDS issued an aggregate of 2,954,350 shares of IDDS Series C Preferred
      Stock for an aggregate purchase price of $4,520,147 to existing IDDS
      stockholders in a rights offering, and one purchaser who converted a $500,000
      promissory note. IDDS relied on the exemption from the registration requirements
      of the Securities Act provided in Section 4(2) and Rule 506 promulgated
      thereunder (and Section 3(a)(9) as to the noteholder).




**ITEM
                6.**
            **SELECTED
                FINANCIAL DATA**




The
      selected financial data presented below should be read in conjunction with
      Item
      7. “Management’s Discussion and Analysis of Financial Condition and Results of
      Operations” and our consolidated financial statements and the notes thereto
      included elsewhere in this Annual Report. Our statement of operations data
      for
      the years ended December 31, 2005, 2004 and 2003 and our balance sheet data
      as
      of December 31, 2005 and 2004 have been derived from our audited consolidated
      financial statements included elsewhere in this report. Our statement of
      operations data for the years ended December 31, 2002 and 2001 and our balance
      sheet data as of December 31, 2003, 2002 and 2001 have been derived from our
      audited consolidated financial statements, which are not presented in this
      report. All share and per share amounts have been adjusted to reflect the 1.018
      per share exchange ratio in the
      December 2004 reverse merger and the 1.016-for-1 stock split on March 12, 2002.
      Historical results are not necessarily indicative of the results to be expected
      in the future.




36
 Index




**Year
                    Ended December 31,**
                
                
                **Cumulative
                    from****February
                    23, 1998****(Inception)
                    to****December
                    31,****2001**
                
                
                **2002**
                
                
                **2003**
                
                
                **2004**
                
                
                **2005**
                
                
                **2005****(In
                      thousands, except per share data)****Statement
                    of Operations Data:**Revenues:Government
                    grants & contracts
                
                $
                882
                
                $
                287
                
                $
                1,102
                
                $
                837
                
                $
                1,548
                
                $
                4,963Operating
                    expenses:Research
                    and development
                
                
                7,009
                
                
                2,415
                
                
                2,217
                
                
                4,806
                
                
                7,213
                
                
                46,364General
                    and administrative
                
                
                2,287
                
                
                5,975
                
                
                2,013
                
                
                2,703
                
                
                5,222
                
                
                20,122Depreciation
                
                
                3
                
                
                13
                
                
                24
                
                
                32
                
                
                44
                
                
                117Total
                    operating expenses
                
                
                9,299
                
                
                8,403
                
                
                4,254
                
                
                7,541
                
                
                12,479
                
                
                66,603Operating
                    loss
                
                
                (8,417
                )
                
                (8,116
                )
                
                (3,152
                )
                
                (6,704
                )
                
                (10,931
                )
                
                (61,640
                )Other
                    income
                
                
                —
                
                
                —
                
                
                —
                
                
                4
                
                
                —
                
                
                4Interest
                    expense
                
                
                —
                
                
                (3
                )
                
                (17
                )
                
                (356
                )
                
                —
                
                
                (944
                )Interest
                    income
                
                
                349
                
                
                60
                
                
                14
                
                
                9
                
                
                319
                
                
                940Other
                    income (expense)
                
                
                349
                
                
                57
                
                
                (3
                )
                
                (343
                )
                
                319
                
                
                —Net
                    loss
                
                
                (8,068
                )
                
                (8,059
                )
                
                (3,155
                )
                
                (7,047
                )
                
                (10,612
                )
                
                (61,640
                )Deemed
                    dividend related to beneficial conversion feature of Series B
                    convertible
                    preferred stock.
                
                
                (3,559
                )
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (3,559
                )Net
                    los attributable to common stockholders
                
                $
                (11,627
                )
                $
                (8,059
                )
                $
                (3,155
                )
                $
                (7,047
                )
                $
                (10,612
                )
                $
                (65,199
                )Net
                    loss per share attributableto
                    common
                  stockholders:
                  Basic
                    and diluted
                
                $
                (1.17
                )
                $
                (0.81
                )
                $
                (0.32
                )
                $
                (0.64
                )
                $
                (0.38
                )Weighted
                    average shares
                
                
                9,904
                
                
                9,917
                
                
                9,918
                
                
                10,937
                
                
                27,831








**As
                of December 31,****2001**
            
            
            **2002**
            
            
            **2003**
            
            
            **2004**
            
            
            **2005****(In
                thousands)****Balance
                Sheet Data:**Cash
                and cash equivalents
            
            $
            7,744
            
            $
            2,172
            
            $
            3,151
            
            $
            14,783
            
            $
            33,307Working
                capital
            
            
            6,805
            
            
            1,496
            
            
            2,366
            
            
            12,173
            
            
            32,988




37
 Index




****Convertible
                preferred stock
            
            
            18,795
            
            
            18,795
            
            
            23,183
            
            
            —
            
            
            —Total
                assets
            
            
            8,845
            
            
            2,903
            
            
            3,510
            
            
            15,156
            
            
            34,439Stockholders
                equity (deficit)
            
            
            (11,142
            )
            
            (17,689
            )
            
            (20,673
            )
            
            12,342
            
            
            33,202





**ITEM
                7.**
            **MANAGEMENT’S
                DISCUSSION AND ANALYSIS****OR
                FINANCIAL CONDITION AND RESULTS OF
                OPERATION**




This
      discussion and analysis should be read in conjunction with our financial
      statements and accompanying notes included elsewhere in this Annual Report.
      This
      discussion includes forward-looking statements that involve risks and
      uncertainties. Operating results are not necessarily indicative of results
      that
      may occur in future periods.




**Forward
      Looking Statements**




We
      are
      including the following cautionary statement in this Annual Report on Form
      10-K
      to make applicable and take advantage of the safe harbor provisions of the
      Private Securities Litigation Reform Act of 1995 for any forward-looking
      statements made by or on our behalf. Forward looking statements include
      statements concerning plans, objectives, goals, strategies, future events or
      performance and underlying assumptions and other statements which are other
      than
      statements of historical facts. Certain statements contained herein are
      forward-looking statements and accordingly involve risks and uncertainties
      which
      could cause actual results or outcomes to differ materially from those expressed
      in good faith forward-looking statements. Our expectations, beliefs and
      projections are expressed in good faith and are believed by us to have a
      reasonable basis, including without limitation, management’s examination of
      historical operating trends, data contained in our records and other data
      available from third parties, but there can be no assurance that management’s
      expectations, beliefs or projections will result or be achieved or accomplished.
      Any forward-looking statement contained in this document speaks only as of
      the
      date on which the statement is made. We undertake no obligation to update any
      forward-looking statement or statements to reflect events or circumstances
      that
      occur after the date on which the statement is made or to reflect the occurrence
      of unanticipated events.




In
      addition to other factors and matter discussed elsewhere herein, the following
      are important factors that in our view, could cause actual results to differ
      materially from those discussed in the forward-looking statements: the
      carrying-out of our research and development program for our product candidates,
      including demonstrating their safety and efficacy at each stage of testing;
      the
      timely obtaining of regulatory approvals and patents; the commercialization
      of
      our product candidates, at reasonable costs; the ability to compete against
      products intended for similar use by recognized and well capitalized
      pharmaceutical companies; our ability to raise capital when needed, and without
      adverse and highly dilutive consequences to stockholders; and our ability to
      retain management and obtain additional employees as required. We are also
      subject to numerous risks relating to our product candidates, manufacturing,
      regulatory, financial resources, competition and personnel as set forth in
      the
      section “Risk Factors” in this report. Except to the extent required by
      applicable laws or rules, we disclaim any obligations to update any forward
      looking statements to reflect events or circumstances after the date
      hereof.




**Overview**




We
      are a
      specialty pharmaceutical company that applies innovative proprietary
      technologies to develop new drugs and improved formulations of existing drugs
      that target current unmet and underserved medical need in the pain management
      market. Our product candidates are designed to offer enhanced pain relief,
      fewer
      adverse side effects and faster relief of pain compared to other currently
      available treatments. We have three late stage product candidates in clinical
      development: DylojectTM (diclofenac sodium injectable), RylomineTM (intranasal
      morphine) and PMI-100/150 (intranasal ketamine).




We
      have
      devoted substantially all of our resources since we began our operations in
      February 1998 to the development of proprietary pharmaceutical products for
      the
      treatment of pain. We have not generated any revenues from product sales. Since
      our inception, we have incurred an accumulated net loss attributable to our
      common stockholders of approximately $61.6 million through December 31, 2005,
      excluding approximately $3.6 million




38
 Index




deemed
      dividend. These losses have resulted principally from costs incurred in research
      and development activities, including acquisition of technology rights and
      general and administrative expenses. Research and development activities include
      costs associated with nonclinical and clinical trials, process development
      and
      improvement, clinical and commercial scale manufacturing. General and
      administrative related costs include salary, temporary and consulting expense
      in
      addition to non-cash stock based compensation associated with stock option
      grants issued to employees and non-employees.




On
      September 7, 2005, we completed a merger with Intrac, Inc. (Intrac”), for the
      purpose of migrating the Intrac corporate entity to Delaware, at which time
      Javelin Pharmaceuticals, Inc. (“Javelin”) continued the business conducted by
      Intrac. Javelin Pharmaceuticals was incorporated in July 2005 in the State
      of
      Delaware by Intrac, a Nevada corporation.




On
      December 6, 2004, we completed a reverse merger transaction with IDDS, whereby
      Intrac Merger Sub, Inc., a newly-formed wholly-owned subsidiary of Intrac,
      Inc.,
      merged with and into IDDS, with IDDS remaining as the surviving corporation
      and
      a wholly-owned subsidiary of Intrac. In consideration for their shares of IDDS,
      the former stockholders of IDDS received approximately 95.5% of the outstanding
      common stock of Intrac, Inc. After the merger, the executive officers and
      directors of IDDS become the executive officers and directors of Intrac,
      Inc.




For
      accounting purposes, the merger transaction was treated as a reverse acquisition
      with IDDS as the acquiror and Intrac as the acquired party. Therefore, when
      we
      refer to our business and financial information relating to periods prior to
      the
      merger, we are referring to the business and financial information of IDDS.
      The
      merger with Intrac did not have any significant effects on our assets or
      liabilities or on our results of operations subsequent to the date of the
      merger.




Since
      our
      inception, we have incurred approximately $46.4 million of research and
      development costs. The major research projects undertaken by us include the
      development of DylojectTM, RylomineTM and PMI-100/150. Total research and
      development costs incurred to date for each of these products was approximately
      $6.5 million, $10.4 million and $9.3 million, respectively. In addition, there
      was approximately $1.6 million of research and development costs incurred since
      inception which do not relate to our major research projects and we incurred
      a
      charge of approximately $18.6 million related to our merger with Pain
      Management, Inc. and the acquisition of a licensing agreement.




For
      various reasons, many of which are outside our control, including timing and
      results of our clinical trials, obtaining regulatory approval and dependence
      on
      third parties, we cannot estimate the total remaining costs to be incurred
      to
      commercialize our products, nor is it possible to estimate when, if ever, any
      of
      our products will be approved by regulatory agencies for commercial sale. In
      addition, we may experience adverse results in the development of our products,
      which could result in significant delays in obtaining approval to sell our
      products, additional costs to be incurred to obtain regulatory approval or
      failure to obtain regulatory approval. In the event any of our product
      candidates were to experience setbacks, it would have a material adverse effect
      on our financial position and operating results. Even if we successfully
      complete developments and obtain regulatory approval of one or more of our
      products, failure of physicians and patients to accept our products as a safe,
      cost-effective alternative compared to existing products would have a material
      adverse effect on our business.




Our
      financial statements have been prepared on a going-concern basis, which assumes
      realization of assets and settlement of liabilities in the ordinary course
      of
      business. We have limited capital resources, net operating losses and negative
      cash flows from operations since inception and expect these conditions to
      continue for the foreseeable future. In addition, it is anticipated that we
      likely will not generate revenues from product sales during the year ending
      March 31, 2007. Management estimates that we have sufficient cash resources
      to
      fund our planned operations beyond twelve months. The Company may raise
      additional funds through the private and/or public sale of its equity
      securities. We may also seek to raise capital through collaborative arrangements
      with corporate sources or other sources of financing. There can be no assurance
      that such additional financing, if at all available, can be obtained
      on terms reasonable to us. In the event that the sufficient funds are not
      available, we will need to postpone or discontinue future planned operations
      and
      project.




39
 Index




**Results
      of Operations**




***Revenues*** .
      With
      the exception of revenues derived from government grants and contracts, we
      have
      generated no operating revenues since our inception and do not expect operating
      revenues for the foreseeable future. In October 2000, the Company received
      a
      grant of $1.2 million from the U.S. Department of Defense (“DOD”). In May 2003,
      the DOD extended funding of the development of PMI-100/150 by awarding the
      Company a $4.3 million contract. The DOD reimburses us for certain research
      and
      development costs related to the PMI-100/150 development program which can
      fluctuate from period to period. The DOD contract was the sole source of
      contract and grant revenue. The DOD contract is billed monthly as costs are
      incurred.




***Research
      and Development Expenses*** .
      Research and development expenses consist primarily of salaries and related
      expenses for personnel, materials and supplies used to develop our product
      candidates. Other research and development expenses include compensation paid
      to
      consultants and outside service providers and the costs to license acquired
      technologies that have no alternative future use. We expense research and
      development costs as incurred. We expect that we will continue to incur
      significant research and development expenses in the future as our three product
      candidates enter pivotal clinical trials and progress through the later stages
      of product development.




***General
      and Administrative Expenses*** .
      General
      and administrative expenses consist primarily of salaries and other related
      costs for personnel in executive, finance, accounting, information technology
      and human resource functions. Other costs include facility costs and
      professional fees for legal and accounting services.




***Interest
      Income and Expense*** .
      Interest income consists of interest earned on our cash and cash equivalent
      balances. Interest expense consists of interest incurred on loans.




***Years
      Ended December 31, 2005 and 2004***




***Revenues*** .
      Contract revenue increased from approximately $837,000 for the year ended
      December 31, 2004 to approximately $1.5 million for the year ended December
      31,
      2005. During 2005, the DOD contract was the sole source of contract revenue.
      The
      increase is attributable to increased activity associated with expenditures
      billable to the DOD contract. In addition, during the year ended December 31,
      2005 the Company recognized reimbursable indirect project costs of approximately
      $57,000 and $52,000 for the years ended December 31, 2003 and 2004,
      respectively.




***Research
      and Development Expenses*** .
      Research and development expenses increased from approximately $4.8 million
      for
      the year ended December 31, 2004 to $7.2 million for the year ended December
      31,
      2005. The increase in research and development expense resulted from the
      advancement of each of our three late stage product candidate development
      programs. Research and development salaries, temporary labor and benefits
      increased by approximately $575,000 as compared to the same period of the prior
      year. The increase was due primarily to the addition of full time personnel.
      Expenses associated with clinical trials and clinical manufacturing and process
      development increased by approximately $1.9 million and $319,000, respectively
      as compared to the same period of the prior year. Milestone expenses decreased
      from approximately $1.0 million for the year ended December 31, 2004 to $200,000
      for the year ended December 31, 2005.




DylojectTM
      product development costs increased from approximately $1.6 million for the
      year
      ended December 31, 2004 to $3.0 million for the year ended December 31, 2005.
      By
      July 2005, we completed a 155 patient European phase II/III pivotal study and
      by
      September 2005 had completed and submitted the MAA (marketing authorization
      application) to the MHRA. Regulatory costs, milestone fees payable to a licensor
      and European regulatory filing fees associated with the MAA filing were
      approximately $470,000, $200,000 and $42,000, respectively for the year ended
      December 31, 2005. Also in 2005 we initiated a 353 patient dose-response US
      phase IIb clinical study and completed patient enrollment by the year ended
      December 31, 2005. Clinical trial costs increased to $1.5 million for the year
      ended December 31, 2005 as the DylojectTM program advanced toward phase III in
      the US and product filing in Europe. Costs associated with the clinical drug
      supply and the ongoing DylojectTM stability program was approximately $381,000
      for the year ended December 31, 2005.




40
 Index




RylomineTM
      product development costs increased from $0.6 million for the year ended
      December 31, 2004 to $2.5 million for the year ended December 31, 2005. Clinical
      trial expenses were approximately $1.4 million for the year ended December
      31,
      2005. In 2005, we initiated a 187 patient multi-center dose-response phase
      IIb
      clinical study and by December 2005 we had completed patient enrollment and
      analysis of the data. Clinical manufacturing and regulatory expenses were
      approximately $452,000 and $121,000, respectively for the year ended December
      31, 2005. In 2005 clinical manufacturing costs were associated primarily the
      ongoing formal stability program and the development and validation of test
      methods in support of regulatory submissions. Regulatory expenses were
      associated primarily with the preparation for future FDA regulatory
      meetings.




PMI-100/150
      product development costs decreased from $2.6 million for the year ended
      December 31, 2004 to $1.7 million for the year ended December 31, 2005. Clinical
      trial expenses for the year ended December 31, 2005 were approximately $751,000
      and were associated the ongoing phase II program. In 2005 we completed the
      PMI-150 and PMI-100 bioequivalency program and initiated a US phase II study
      which we completed enrollment by December 2005. Clinical manufacturing and
      regulatory expenses were approximately $471,000 and $80,000, respectively for
      the year ended December 31, 2005. Milestone payments decreased by approximately
      $1.0 million as compared to the same period of the prior year.




We
      expect
      our research and development expenses to continue to increase in the next few
      years as we expand our development efforts and our drug candidates enter into
      phase III clinical trials and file for regulatory approvals. Research and
      development expenses may fluctuate from period to period due to the time and
      nature of clinical trial expenditures and regulatory filings.




***General
      and Administrative Expenses*** .
      General
      and administrative expenses increased from approximately $2.7 million for the
      year ended December 31, 2004 to $5.2 million for the year ended December 31,
      2005. Salary
      and benefit expense increased by approximately $654,000 due to an increase
      in
      full time headcount that was partially offset by a decrease of approximately
      $298,000 in consulting and temporary headcount expense. Liquidated damages
      associated with our December 2004 financing totaled approximately $468,000
      for
      the year ended December 31, 2005. Non-cash compensation increased to
      approximately $388,000 from amortization of deferred stock option expense and
      warrant expense. Due to activities associated with being a public company,
      we
      incurred higher accounting, investor/public relations, legal, travel and
      insurance expenses of approximately $219,000, $213,000, $162,000, $150,000,
      $146,000, respectively. Costs associated with recruitment of personnel and
      relocation of existing personnel to our Cambridge office increased by $193,000
      and $80,000, respectively. Rent, office and communication expense increased
      due
      to the costs associated with opening of our Cambridge Massachusetts head office
      by $58,000, $25,000, and $23,000, respectively. Website fees increased by
      $10,000 associated with the redesign and launch of our new web site in 2005.




We
      expect
      general and administrative expenses to increase further primarily as a result
      of
      increased recruitment and personnel costs and the expansion of our Cambridge,
      Massachusetts office space and closing of our New York City office space.




***Interest
      Income*** .
      Interest income increased from approximately $9,000 for the year ended December
      31, 2004 to approximately $320,000 for the year ended December 31, 2005 due
      to
      higher average invested balances of cash and cash equivalents in
      2005.




***Interest
      Expense*** .
      Interest expense decreased from approximately $356,000 for the years ended
      December 31, 2004 to approximately $65.00 for the year ended December 31, 2005
      due primarily to the
      interest charges of approximately $315,000 associated with a Debenture Note
      that
      was issued and retired in 2004.




***Years
      Ended December 31, 2004 and 2003***




***Revenues*** .
      Contract revenue decreased from approximately $1.1 million for the year ended
      December 31, 2003 to approximately $837,000 for the year ended December 31,
      2004. During 2004, the DOD contract was the sole source of contract revenue.
      The
      decrease is attributable to reduced external clinical trial expenditures
      billable to the DOD contract.




41
 Index





***Research
      and Development Expenses*** .
      Research and development expenses increased from approximately $2.2 million
      for
      the year ended December 31, 2003 to $4.8 million for the year ended December
      31,
      2004. The increase in research and development expense resulted from the
      advancement of each of our three late stage product candidate development
      programs.




DylojectTM
      clinical development and manufacturing costs increased as the development
      program transitioned to the pivotal phase in Europe. In the first quarter of
      2004, we completed a bioequivance trial and in the third quarter, initiated
      patient enrollment in the pivotal European registration trial. Also in 2004,
      we
      completed process development, scale-up and manufacturing of three DylojectTM
production lots.




RylomineTM
      regulatory, biostatistical and manufacturing costs increased associated with
      advancing the clinical development program in the US and greater regulatory
      activity in Europe. In the third quarter of 2004, we submitted a pre-submission
      meeting request package to the EMEA and in the fourth quarter of 2004, a pre-MAA
      meeting was held with the Agency. Also in 2004, we completed process
      development, scale-up and preparation activities associated with the future
      manufacturing of RylomineTM.




PMI-100/150
      clinical and regulatory costs increased associated with preparation for the
      end-of-phase II meeting held with the FDA in the second quarter of 2004.
      Expenses associated with achievement of certain clinical and regulatory
      milestones under the terms of the license agreement increased by approximately
      $750,000 in 2004. Nonclinical expenses associated with the initiation of the
      carcinogenicity program for PMI-100/150 and contract laboratory expenses
      increased by approximately $260,000.




Clinical
      development expenses increased by approximately $1.2 million due to an increase
      in the number of patients enrolled into clinical studies and an increase in
      contract research costs in support of the DylojectTM and PMI-100/150 programs.
      Manufacturing expenses increased by approximately $474,000 due to increased
      activity associated with compliance to European regulatory filing requirements
      for RylomineTM and DylojectTM, and clinical drug supply requirements for
      PMI-100/150 clinical trials. Regulatory expenses increased by approximately
      $119,000 due to increased regulatory activity associated with each of the three
      development programs.




***General
      and Administrative Expenses*** .
      General
      and administrative expenses increased from approximately $2.0 million for the
      year ended December 31, 2003 to $2.7 million for the year ended December 31,
      2004.




Salary
      expenses declined by approximately $70,000 due to a reduction in full time
      headcount that was partially offset by temporary headcount and consulting costs
      which increased by approximately $428,000. Due to financing and merger
      activities, we incurred higher legal, accounting, travel and printing expenses,
      approximately $221,000, $198,000, $64,000, and $29,000, respectively. Rent
      expenses decreased by approximately $235,000 following the relocation of our
      New
      York head office in December 2003 to our present location.




***Interest
      Income*** .
      Interest income decreased from approximately $14,000 for the year ended December
      31, 2003 to approximately $9,000 for the year ended December 31, 2004 due to
      lower average invested balances of cash and cash equivalents in
      2004.




***Interest
      Expense*** .
      Interest expense increased from approximately $18,000 for the years ended
      December 31, 2003 to approximately $356,000 for the year ended December 31,
      2004
      due to an increase in interest charges of approximately $315,000 associated
      with
      a Debenture Note issued in November 2004 and retired in December 2004 and
      approximately $8,000 associated with deferral of a milestone payment associated
      with a license agreement.




**Liquidity
      and Capital Resources**




Since
      inception, we have financed our operations primarily through the private
      placement of our equity securities, debt financings and grant revenue primarily
      from the U.S. Department of Defense. We intend to continue to use the proceeds
      from these sources to fund research and development activities, capital
      expenditures, working capital requirements and other general purposes. As of
      December 31, 2005, we had cash and cash equivalents of approximately $33.3
      million.




42
 Index




On
      November 7, 2005 we closed a private placement consisting of the sale of
      approximately 14.2 million shares of our common stock and 711,111 warrants
      for
      net proceeds of approximately $29.8 million. In December 2004, we raised
      approximately $18.1 million through the sale of approximately 6.1 million shares
      of Common Stock at $2.95 per share in a private placement. Management estimates
      that we have sufficient cash resources to fund our planned operations beyond
      March 31, 2007. The Company may raise additional funds through the private
      and/or public sale of its equity securities. We may need to raise additional
      funds to meet long-term planned goals. There can be no assurance that additional
      financing, if at all available, can be obtained on terms acceptable to us.
      If we
      are unable to obtain such additional financing, future operations will need
      to
      be scaled back or discontinued.




As
      a
      development stage enterprise, our primary efforts, to date, have been devoted
      to
      conducting research and development, raising capital, forming collaborations
      and
      recruiting staff. We have limited capital resources and revenues, have
      experienced a $65.2 million net loss attributable to our common stockholders
      and
      have had negative cash flows from operations since inception. These losses
      have
      resulted principally from costs incurred in research and development activities,
      including acquisition of technology rights and general and administrative
      expenses. As of December 31, 2005, we have paid an aggregate of $5.6 million
      and
      $1.9 million in cash since inception to West Pharmaceutical and Shimoda Biotech
      (Proprietary) Ltd., respectively. We expect to incur additional operating losses
      until such time as we generate sufficient revenue to offset expenses, and we
      may
      never achieve profitable operations.




We
      expect
      our cash requirements for operating activities will increase due to the
      following future activities:




·   Conduct
      commercialization activities in support of DylojectTM product launch including
      pre-launch planning, development of market plans, pricing and reimbursement
      application, development of regional sales and marketing capabilities;




·
            Conduct
                remaining nonclinical programs, including carcinogenicity studies
                to
                support both RylomineTM and PMI-100/150 regulatory submission and label
                extensions;




·   Conduct
      clinical programs, including phase III clinical trials to support regulatory
      submissions and label extensions of our product candidates;




·   Continue
      to support GMP drug supply requirements of our nonclinical and clinical trials;
      complete formal stability testing, analytical development, methods development,
      specification development and commercial scale-up;




·   Maintain,
      protect and expand our intellectual property;




·   Develop
      expanded internal infrastructure; and




·   Hire
      additional personnel.




From
      inception through December 31, 2005, net cash used in operating activities
      was
      approximately $36.6 million. Net cash used in operating activities increased
      to
      approximately $11.3 million for the year ended December 31, 2005 from
      approximately $4.5 million for the year ended December 31, 2004.




The
      increase in net cash used for operating activities was due primarily to higher
      cash outflows associated with an increase in general and administrative and
      research and development activity in 2005. Further contributing to the increase
      were non-cash compensation expenses of approximately $346,000 due to
      amortization of deferred stock options and warrants, as well as the $373,000
      non-cash expense associated with common stock issued to private placement
      investors for liquidated damages. Also in 2005, our outstanding payables
      decreased by approximately $1.1 million. Our outstanding receivable from the
      DOD
      increased by approximately $458,000 for the year ended December 31, 2005.




Net
      cash
      used in operating activities increased to approximately $4.5 million for the
      year ended December 31, 2004 from approximately $2.8 million for the year ended
      December 31, 2003. Higher cash outflows for general




43
 Index





and
      administrative and research and development expenses were partially offset
      in
      2004, by an increase of approximately $1.3 million in accounts payable accrued
      expenses and a $0.5 million increase due to a license of PMI 100/150. Net
      cash
      used in operating activities decreased from approximately $6.8 million for
      the
      year ended December 31, 2002 to approximately $2.8 million for the year ended
      December 31, 2003. Net cash used in operating activities decreased in 2003
      primarily due to reduced general and administrative and research and development
      expenses. This decline was partially offset in 2002 by approximately $1.3
      million in non-cash charge associated with stock-based employee
      compensation.




From
      inception through December 31, 2005, net cash used in investing activities
      was
      approximately $248,000, primarily due to the acquisition of manufacturing
      equipment, furniture and fixtures and office equipment. Net cash used in
      investing activities was approximately $69,000 for the year ended December
      31,
      2005 compared to $119,000 in 2004 and approximately $35,000 in 2003.
      Fluctuations in net cash used in/provided by investing activities since
      inception are due primarily to changes in restricted cash balances and capital
      expenditures. From inception to December 31, 2005, capital expenditures have
      not
      been material resulting from our use of contract manufacturing facilities.
      We
      expect that cash used for investing activities will increase in 2006, associated
      primarily with investment in commercial scale manufacturing and filling
      equipment required for the advancement of our product candidates to late stage
      clinical development and commercial production.




From
      inception through December 31, 2005, net cash provided by financing activities
      was approximately $70.2 million. Net cash provided by financing activities
      increased to $29.9 million for the year ended December 31, 2005 from
      approximately $16.2 million for the year ended December 31, 2004 and
      approximately $3.8 million in 2003. Our financing activities raised net cash
      of
      approximately $29.8 million from the private placement of our common stock
      in
      2005, $16.2 million from the private placement of our common stock in 2004
      and
      $3.8 million from private placement of Series C Preferred Stock in 2003. In
      2002, $0.5 million in proceeds from a note payable were received.




**Commitments**




The
      following table summarizes our commitments as of December 31, 2005:




**Payments
                  Due By Period**Total
              
              <1Yr.
              
              1-3
                  Yr.
              
              3-5
                  Yr.
              
              Beyond
                  5 yr.Operating
                  Leases (1)
              
              $
              312,240
              
              $
              203,281
              
              $
              108,959
              
              
              -
              
              
              -Shimoda
                  License Agreement (2)
              
              $
              6,100,000
              
              $
              300,000
              
              $
              5,800,000
              
              
              -
              
              
              -Archimedes
                  License Agreements (3)
              
              $
              5,000,000
              
              
              -
              
              $
              5,000,000
              
              
              -
              
              
              -Total
              
              $
              11,412,240
              
              $
              503,281
              
              $
              10,908,959
              
              
              -
              
              
              -





The
      known
      due dates of our commitments do not extend beyond three years, however see
      footnotes below.




(1)  We
      lease
      approximately 8,800 square feet of general office space in addition to small
      equipment leases.




(2)  Under
      the
      license agreement with Shimoda Biotech, Ltd. we are obligated to make aggregate
      milestone payments of approximately $6.1 million upon the occurrence of
      specified developmental milestones, which include the filing of an NDA with
      the
      FDA for DylojectTM, the approval of an NDA by the FDA and the first commercial
      sale of a licensed product and pay a royalty based upon our and our
      sublicensees’ sales of products, which is subject to change, as
      noted.




(3)  Under
      the
      license agreements with Archimedes Pharma Limited (assigned from West
      Pharmaceutical Services, Inc.), we may be required to pay an aggregate of $5.0
      million for research and





44
 Index




development
      milestones if certain defined events occur, which include the first filing
      of a
      marketing authorization application with a regulatory agency, first approval
      of
      a marketing authorization application and the first commercial sale of a
      licensed product, which is subject to change, as noted.




The
      timing of the remaining milestones is dependent upon factors that are beyond
      our
      control, including our ability to recruit patients, the outcome of future
      clinical trials and any requirements imposed on our clinical trials by
      regulatory agencies. However, for the purpose of the above table, we have
      assumed that the payment of the milestones will occur between one to three
      years, from December 31, 2005.




**Critical
      Accounting Policies and Significant Judgments and
      Estimates**




***Revenue
      Recognition*** .
      We have
      been awarded government grants and contracts from the U.S. Department of Defense
      (“DOD”) and the National Institutes of Health (the “NIH”), which are used to
      subsidize the Company’s research and development projects. The DOD reimburses us
      for certain research and development subproject costs related to the PMI-100/150
      development program. DOD and NIH revenue is recognized as subsidized project
      costs for each period are incurred. Contact and grant revenue is derived from
      internal headcount expense and external contractual expense, both of which,
      are
      highly dependent on the timing, order and relationship of individual
      reimbursable subprojects. Our grant submissions may fluctuate from period to
      period due to the timing and scope of these activities and the results of
      studies and clinical trials.




***Research
      and Development Costs*** .
      Since
      our inception, we have incurred approximately $46.4 million of research and
      development costs. The major research projects undertaken by us include the
      development of DylojectTM, RylomineTM and PMI-100/150. We expense all research and
      development costs as incurred for which there is no alternative future use.
      For
      various reasons, many of which are outside our control, including timing and
      results of our clinical trials, obtaining regulatory approval and dependence
      on
      third parties, we cannot estimate the total remaining costs to be incurred
      to
      commercialize our products, nor is it possible to estimate when, if ever, any
      of
      our products will be approved by regulatory agencies for commercial sale. In
      addition, we may experience adverse results in the development of our products,
      which could result in significant delays in obtaining approval to sell our
      products, additional costs to be incurred to obtain regulatory approval or
      failure to obtain regulatory approval. In the event any of our product
      candidates were to experience setbacks, it would have a material adverse effect
      on our financial position and operating results. Even if we successfully
      complete developments and obtain regulatory approval of one or more of our
      products, failure of physicians and patients to accept our products as a safe,
      cost-effective alternative compared to existing products would have a material
      adverse effect on our business.




***Stock
      Based Compensation*** .
      We use
      the intrinsic-value method of accounting for stock-based awards granted to
      employees in accordance with Accounting Principles Board Opinion No. 25 (“APB
      No. 25”) and its related interpretations. Accordingly, we recognize compensation
      expense in our financial statements in connection with stock options granted
      to
      employees if the terms of the option grant are not fixed or the exercise price
      is less than the fair value of the Company’s Common Stock at the time the stock
      option is granted.




The
      fair
      value of the options and warrants granted to non-employees for financing, goods
      or services are included in our financial statements and expensed over the
      life
      of the debt, as the good are utilized or services performed, respectively.
      Securities issued in connection with services or financings were valued based
      on
      the estimate of fair value of the securities issued as determined by management.
      While we were a privately held company, the fair value of our common stock
      for
      purposes of determining compensation expense, if any, under APB No. 25 was
      based
      on amounts paid by outside investors for our preferred stock in recent
      financings, the progress of our research and development programs and other
      related factors. The fair value of options granted to non-employees is estimated
      using a Black-Scholes option valuation model. This model has a number of
      variables, including expected volatility of our common stock, expected term,
      dividend yield and risk free interest rate. Volatility, while the Company was
      privately held, was based upon the average volatility of publicly traded peer
      companies in the biopharmaceutical industry. The expected term is the median
      expiration period of the underlying options. The risk free interest rate was
      calculated from the weighted average yield of the zero coupon bond corresponding
      to the same issue and expiration date of the option. A change in any of the
      assumptions noted herein could have a material impact on our reported operating
      results.




45
 Index




**Income
      Taxes**




As
      of
      December 31, 2005, we had approximately $30.9 million of net operating loss
      carryforwards available to offset future taxable income. These carryforwards
      will expire between 2019 and 2025. We have incurred operating losses since
      inception and have established valuation allowances equal to the total deferred
      tax assets due to the uncertainty with respect to achieving profitable
      operations in the future. Should the uncertainty regarding our ability to
      achieve profitable operations change in the future, we would reverse all or
      a
      portion of the valuation allowance, the effect of which could be material to
      our
      financial statements.




**Off
      Balance Sheet Arrangements**




Certain
      warrants issued in conjunction with our common stock financing are equity linked
      derivatives and accordingly represent an off balance sheet arrangement. These
      warrants meet the scope exception in paragraph 11(a) of FAS 133 and are
      accordingly not accounted for as derivatives for purposes of FAS 133, but
      instead included as a component of equity. See Footnote 5 to the financial
      statements and the Statement of Shareholders' Equity for more
      information.




**Recent
      Accounting Pronouncements**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”),
      Share-Based Payment. SFAS No. 123R revises SFAS Statement No. 123, Accounting
      for Stock-Based Compensation and supersedes APB No. 25, Accounting for Stock
      issued to Employees, and its related implementation guidance. The provisions
      of
      SFAS No. 123R require a public entity to expense, in the income statement,
      the
      fair value of awards of equity instruments exchanged for employee services,
      based on the grant-date fair value of those awards. The grant-date fair value
      of
      equity instruments will be estimated using an appropriate option pricing model
      and will be recognized over the vesting period of the awards. SFAS No. 123R
      will
      be effective, for public companies, for interim or annual reporting periods
      that
      begin after June 15, 2005. SFAS No. 123R allows companies to choose from several
      transition methods for recognizing the cost of share-based awards granted to
      employees prior to adoption of the Standard. The Company is in the process
      of
      analyzing the appropriate transition method to adopt and expects the adoption
      of
      SFAS No. 123R to have a material impact on its financial statements by
      increasing operating expenses, net loss attributable to common stockholders
      and
      net loss per share attributable to common stockholders.




In
      May
      2005 the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections."
      SFAS No. 154 replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides
      guidance on the accounting for and reporting of accounting changes and error
      corrections. SFAS No. 154 is effective for accounting changes and corrections
      of
      errors made in fiscal years beginning after December 15, 2005. The Company
      will
      adopt this Statement beginning January 1, 2006.




**ITEM
                7A.**
            **QUANTITATIVE
                AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK**




**Market
      Risk Related to Interest Rates and Foreign Currency**




We
      are
      exposed to market risks related to changes in interest rates and foreign
      currency exchange rates, however, we believe those risks to be not material
      in
      relation to our operations. We do not have any derivative financial
      instruments.




**Interest
      Rate Risk**




As
      of
      December 31, 2005, our cash included approximately $33 million of money market
      securities. Due to the short term duration of our investment portfolio, an
      immediate 10% change in interest rates would not have a material effect on
      the
      fair market value of our portfolio, therefore, we would not expect our operating
      results or cash flows to be affected to any significant degree by the effect
      of
      a sudden change in market interest rates on our securities
      portfolio.




46
 Index





**Foreign
      Currency Exchange Risk**




All
      of
      our revenues are denominated in U.S. dollars and, as a result, we have
      relatively little exposure to foreign currency exchange risk with respect to
      current revenues. A minor portion of our research expenses are payable in
      foreign currency. We do not use forward exchange contracts to hedge exposures
      denominated in foreign currencies or any other derivative financial instruments
      for trading or speculative purposes. The effect of an immediate 10% change
      in
      exchange rates would not have a material impact on our future operating results
      or cash flows.




47
 Index




**ITEM
      8.**   **FINANCIAL
      STATEMENTS** **AND SUPPLEMENTARY DATA**




Index
      to
      Financial Statements





PageReport
                of Independent Registered Public Accounting Firm
            49Consolidated
                Balance Sheets as of December 31, 2004 and 2005
            50Consolidated
                Statements of Operations for the years ended December 31, 2003, 2004,
                and
                2005, and the cumulative period from February 23, 1998 (inception)
                to
                December 31, 2005
            51Consolidated
                Statements of Changes in Redeemable Preferred Stock and Stockholders’
                Equity (Deficit) for the period from February 23, 1998 (inception)
                to
                December 31, 2005 including the years ended December 31, 2003, 2004
                and
                2005
            52Consolidated
                Statements of Cash Flows for the years ended December 31, 2003, 2004
                and
                2005, and the cumulative period from February 23, 1998 (inception)
                to
                December 31, 2005
            54Notes
                to the Consolidated Financial Statements
            56




48
 Index




**Report
      of Independent Registered Public Accounting Firm**




To
      the
      Board of Directors and Stockholders of Javelin Pharmaceuticals,
      Inc.:




In
      our
      opinion, the accompanying consolidated balance sheets and the related
      consolidated statements of operations, changes in redeemable preferred stock
      and
      stockholders’ equity (deficit) and cash flows present fairly, in all material
      respects, the financial position of Javelin Pharmaceutical, Inc. (formally
      Intrac, Inc.) and its subsidiary (a development stage enterprise) (the
“Company”) at December 31, 2005 and 2004, and the results of their operations
      and their cash flows for each of the three years in the period ended December
      31, 2005 and the cumulative period from February 23, 1998 (inception) to
      December 31, 2005 in conformity with accounting principles generally accepted
      in
      the United States of America. These financial statements are the responsibility
      of the Company’s management. Our responsibility is to express an opinion on
      these financial statements based on our audits. We conducted our audits of
      the
      statements in accordance with the standards of the Public Company Accounting
      Oversight Board (United States). Those standards require that we plan and
      perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. An audit includes examining,
      on a
      test basis, evidence, supporting the amounts and disclosures in the financial
      statements, assessing the accounting principles used and significant estimates
      made by management, and evaluating the overall financial statement presentation.
      We believe that our audits provide a reasonable basis for our
      opinion.




As
      discussed in Note 2 to the financial statements, the Company has recurring
      losses and limited capital resources.




/s/
      PricewaterhouseCoopers LLP




New
      York,
      New York


April
      14,
      2006




49
 Index





**Javelin
      Pharmaceuticals** , **Inc.
      and Subsidiary**


**(A
      Development Stage Enterprise)**


**Consolidated
      Balance Sheets**





**December
                31,****2004**
            
            **2005****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            14,782,980
            
            $
            33,307,449Grant
                receivable
            
            
            115,174
            
            
            573,501Prepaid
                expenses and other current assets
            
            
            87,986
            
            
            343,958**Total
                current assets**
            
            
            14,986,140
            
            
            34,224,908Fixed
                assets, at cost, net of accumulated depreciation
            
            
            137,651
            
            
            161,866Other
                assets
            
            
            31,750
            
            
            52,188**Total
                assets**
            
            
            15,155,541
            
            
            34,438,962**Liabilities,
                Redeemable Convertible Preferred Stock and****Stockholders’
                Equity**Current
                liabilities:Accounts
                payable and accrued expenses
            
            
            2,296,472
            
            
            1,207,626Deferred
                revenue
            
            
            -
            
            
            19,522Deferred
                lease liability
            
            
            17,101
            
            
            9,871Due
                to Licensor
            
            
            500,000
            
            
            -**Total
                current liabilities**
            
            
            2,813,573
            
            
            1,237,019Commitments
                and contingencies**Stockholders’
                equity**Preferred
                stock, $0.001 par value, 5,000,000 shares authorized as of December
                31,
                2004 and 2005, none of which is outstanding
            
            
            -
            
            
            -Common
                stock, $0.001 par value; 500,000,000 and 100,000,000 shares authorized
                as
                of December 31, 2004 and December 31, 2005, respectively 25,626,437
                shares
                issued and outstanding December 31, 2004 and 40,404,977 shares issued
                and
                outstanding at December 31, 2005
            
            
            25,626
            
            
            40,404Additional
                paid-in capital
            
            
            64,294,992
            
            
            95,355,368Unearned
                compensation
            
            
            (950,349
            )
            
            (553,756
            )Deficit
                accumulated during the development stage
            
            
            (51,028,301
            )
            
            (61,640,073
            )**Total
                stockholders’ equity**
            
            
            12,341,968
            
            
            33,201,943**Total
                liabilities**
              **and
                stockholders’ equity**
            
            $
            15,155,541
            
            $
            34,438,962




The
      accompanying notes are an integral part of the financial
      statements.




50
 Index





**Javelin
      Pharmaceuticals** , **Inc.
      and Subsidiary**


**(A
      Development Stage Enterprise)**


**Consolidated
      Statements of Operations**


**Cumulative
                from**
              **February
                23, 1998**
              **(inception)
                to December 31,****Year
                Ended December 31****2003**
            
            
            
            **2004**
            
            
            
            **2005**
            
            
            
            **2005**Revenues:Government
                grants and contracts
            
            $
            1,102,420
            
            
            
            
            $
            836,841
            
            
            
            
            $
            1,547,753
            
            
            
            
            $
            4,962,653Operating
                expenses:Research
                and development
            
            
            2,216,429
            
            
            
            
            
            4,806,073
            
            
            
            
            
            7,212,801
            
            
            
            
            
            46,363,597General
                and administrative (1)
            
            
            2,013,385
            
            
            
            
            
            2,702,673
            
            
            
            
            
            5,222,104
            
            
            
            
            
            20,121,995Depreciation
                and amortization
            
            
            24,382
            
            
            
            
            
            31,796
            
            
            
            
            
            44,321
            
            
            
            
            
            117,605**Total
                operating expenses**
            
            
            4,254,196
            
            
            
            
            
            7,540,542
            
            
            
            
            
            12,479,226
            
            
            
            
            
            66,603,197Operating
                loss
            
            
            (3,151,776
            )
            
            
            
            
            (6,703,701
            )
            
            
            
            
            (10,931,473
            )
            
            
            
            
            (61,640,544
            )Other
                income (expense):Interest
                expense
            
            
            (17,712
            )
            
            
            
            
            (356,370
            )
            
            
            
            
            (65
            )
            
            
            
            
            (943,912
            )Interest
                income
            
            
            14,396
            
            
            
            
            
            9,016
            
            
            
            
            
            319,766
            
            
            
            
            
            940,156Other
                income
            
            
            -
            
            
            
            
            
            4,227
            
            
            
            
            
            -
            
            
            
            
            
            4,227(3,316
            )
            
            
            
            
            (343,127
            )
            
            
            
            
            319,701
            
            
            
            
            
            471**Net
                loss**
            
            
            (3,155,092
            )
            
            
            
            
            (7,046,828
            )
            
            
            
            
            (10,611,772
            )
            
            
            
            
            (61,640,073
            )Deemed
                dividend related to beneficial conversion feature of Series B redeemable
                convertible preferred stock
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            -
            
            
            
            
            
            (3,559,305)Net
                loss attributable to common stockholders
            
            $
            (3,155,092
            )
            
            
            
            $
            (7,046,828
            )
            
            
            
            $
            (10,611,772
            )
            
            
            
            $
            (65,199,378
            )Net
                loss per share attributable to common stockholdersBasic
                and diluted
            
            
            ($0.32
            )
            
            
            
            
            ($0.64
            )
            
            
            
            
            ($0.38
            )Weighted
                average shares
            
            
            9,918,104
            
            
            
            
            
            10,936,922
            
            
            
            
            
            27,831,188




(1) Includes
      related party transaction of $1,075,182 cumulative from February 23, 1998
      (inception) through December 31, 2005 respectively (see note 11).





The
      accompanying notes are an integral part of the financial
      statements.




51
 Index




****Javelin
                  Pharmaceuticals, Inc.****
                ****(A
                  Development Stage Enterprise)****
                ****Statements
                  of Redeemable Preferred Stock andStockholders' Equity
                  (Deficit)****
                **For
                  the period from February 23, 1998 (inception to December 31,
                  2005, including the yearsended December 31, 2003, 2004 and
                  2005**
              **Series
                  ARedeemablePreferred Stock**
              **Series
                  BRedeemablePreferred Stock**
              **Series
                  CRedeemablePreferred Stock**
              **Common
                  Stock**
              **AdditionalPaid-in**
              **UnearnedCom-**
              **StockSub-scription**
              **DeficitAccumulatedduring
                  theDevelopment**
              **TotalStockholders'
                  Equity****Shares**
              **Amount**
              **Shares**
              **Amount**
              **Shares**
              **Amount**
              **Shares**
              **Amount**
              **Capital**
              **pensation**
              **Receivable**
              **Stage**
              **(Deficit)**Sale
                  of Common Stock to founders at inception for cash ($0.001 per
                  share)
              
              
              
              
              
              
              4,540,812
              $4,541
              $457
              
              ($3,749)
              
              $1,249Value
                  of services provided by an affiliate (see Note 11)
              
              
              
              
              
              
              
              
              89,531
              
              
              
              89,531Net
                  loss for the period February 23, 1998 (inception) to December 31,
                  1998
              
              
              
              
              
              
              
              
              
              
              
              ($470,200)
              (470,200**)****Balance
                  at December 31, 1998**
              
              
              
              
              
              
              4,540,812
              4,541
              89,988
              
              (3,749)
              (470,200)
              (379,420)Issuance
                  of 236,128 warrants in June in connection withbridge
                  financing (see Note 6)
              
              
              
              
              
              
              
              
              101,564
              
              
              
              101,564Issuance
                  of Common Stock to consultant in June for services (see Note
                  5)
              
              
              
              
              
              
              192,985
              193
              93,263
              
              (106)
              
              93,350Issuance
                  of 204,336 warrants to consultants in August for services
              
              
              
              
              
              
              
              
              98,598
              
              
              
              98,598Value
                  of services provided by an affiliate (see Note 11)
              
              
              
              
              
              
              
              
              155,917
              
              
              
              155,917Net
                  loss for the year ended December 31, 1999
              
              
              
              
              
              
              
              
              
              
              
              (1,205,559)
              (1,205,559)**Balance
                  at December 31, 1999**
              
              
              
              
              
              
              4,733,797
              4,734
              539,330
              
              (3,855)
              (1,675,759)
              (1,135,550)Issuance
                  of 15,522 warrants to an advisor for services in connection
                  withsales
                  of Series A redeemable preferred stock in August (see Note
                  5)
              
              ($55,790)
              
              
              
              
              
              
              55,790
              
              
              
              55,790Exercise
                  of warrants by consultants
              
              
              
              
              
              
              204,336
              204
              (6)
              
              
              
              198Issuance
                  of Common Stock in connection with acquisition of a license in
                  September
                  (see Note 1)
              
              
              
              
              
              
              5,174,257
              5,175
              18,599,825
              
              
              
              18,605,000Sale
                  of 160.565 Units for cash in September ($100,000 per
                  Unit),net of offering expenses of $1,157,572
              4,014,125
              14,898,928
              
              
              
              
              
              
              
              
              
              
              -Issuance
                  of Preferred A warrants in September (see Note 5)
              
              (960,361)
              
              
              
              
              
              
              960,361
              
              
              
              960,361Issuance
                  of Preferred A Finders Units for services in September(see
                  Note 5)
              
              (107,825)
              
              
              
              
              
              
              107,825
              
              
              
              107,825Payment
                  of stock subscription receivable
              
              
              
              
              
              
              
              
              
              
              3,201
              
              3,201Non-cash
                  compensation in connection with issuance of stock optionsto non-employees in August and November (see Note 9)
              
              
              
              
              
              
              
              
              707,550
              
              
              
              707,550Value
                  of services provided by an affiliate (see Note 11)
              
              
              
              
              
              
              
              
              163,376
              
              
              
              163,376Net
                  loss for the year ended December 31, 2000
              
              
              
              
              
              
              
              
              
              
              
              (23,023,842)
              (23,023,842)**Balance
                  at December 31, 2000**
              4,014,125
              13,774,952
              
              
              
              
              10,112,390
              10,113
              21,134,051
              
              (654)
              (24,699,601)
              (3,556,091)Issuance
                  of Series B Preferred with a beneficial conversion feature
                  forcash in December (see Note 5)
              
              
              989,991
              $1,935,044
              
              
              
              
              3,559,305
              
              
              
              3,559,305Expenses
                  in connection with sale of Series B stock
              
              
              
              (474,317)Deemed
                  dividend related to beneficial conversion feature ofSeries B stock (see Note 5)
              
              
              
              3,559,305
              
              
              
              
              (3,559,305)
              
              
              
              (3,559,305)Payment
                  of stock subscription receivable
              
              
              
              
              
              
              
              
              
              
              544
              
              544Exercise
                  of warrants by a consultant
              
              
              
              
              
              
              15,522
              15
              
              
              
              
              15Exercise
                  of bridge warrants
              
              
              
              
              
              
              15,893
              16
              138
              
              
              
              154Value
                  of services provided by an affiliate (see Note 11)
              
              
              
              
              
              
              
              
              481,299
              
              
              
              481,299Net
                  loss for the year ended December 31, 2001
              
              
              
              
              
              
              
              
              
              
              
              (8,067,699)
              (8,067,699)**Balance
                  at December 31, 2001**
              4,014,125
              13,774,952
              989,991
              5,020,032
              
              
              10,143,805
              10,144
              21,615,488
              
              (110)
              (32,767,300)
              (11,141,778)Issuance
                  of compensatory stock options to members of theBoard of Directors (see Note 9)
              
              
              
              
              
              
              
              
              1,431,498
              ($1,431,498)
              
              
              -Amortization
                  of unearned compensation
              
              
              
              
              
              
              
              
              
              1,264,522
              
              
              1,264,522Value
                  of services provided by an affiliate (see Note 11)
              
              
              
              
              
              
              
              
              185,059
              
              
              
              185,059Non-cash
                  compensation in connection with issuance of stock options
                  toa non-employee in September (see Note 9)
              
              
              
              
              
              
              
              
              62,564
              
              
              
              62,564Reversal
                  of subscription receivable
              
              
              
              
              
              
              
              
              
              
              110
              
              110Net
                  loss for the period ended December 31, 2002
              
              
              
              
              
              
              
              
              
              
              
              (8,059,081)
              (8,059,081)**Balance
                  at December 31, 2002**
              4,014,125
              13,774,952
              989,991
              5,020,032
              
              
              10,143,805
              10,144
              23,294,609
              (166,976)
              
              (40,826,381)
              (17,688,604)
  52
 Index
  ****Javelin
                        Pharmaceuticals, Inc.****
                      ****(A
                        Development Stage Enterprise)****
                      ****Statements
                        of Redeemable Preferred Stock andStockholders' Equity
                        (Deficit)****
                      **For
                        the period from February 23, 1998 (inception to December 31,
                        2005, including the yearsended December 31, 2003, 2004 and
                        2005**
                  **Series
                      A**
                    **Receemable**
                    **Preferred
                      Stock**
                  **Series
                      B**
                    **Redeemable**
                    **Preferred
                      Stock**
                  **Series
                      C**
                    **Redeemable**
                    **Preferred
                      Stock**
                  **Common
                      Stock**
                  **Additional**
                    **Paid-in**
                  **Unearned**
                    **Com-**
                  **Stock**
                    **Sub-scription**
                  **Deficit**
                    **Accumulated**
                    **during
                      the Development**
                  **Total**
                    **Stockholders'
                      Equity****Shares**
                  **Amount**
                  **Shares**
                  **Amount**
                  **Shares**
                  **Amount**
                  **Shares**
                  **Amount**
                  **Capital**
                  **pensation**
                  **Receivable**
                  **Stage**
                  **(Deficit)**Amortization
                      of unearned compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  113,069
                  
                  
                  113,069Issuance
                    of Series C Preferred as license payment in August (seeNote
                         7b)
                  
                  
                  
                  
                  65,360
                  $100,000Conversion
                      of Merger Note to Series C stock in August (see Note 6d)
                  
                  
                  
                  
                  339,736
                  519,795Sale
                      of Series C Preferred for cash in August ($1.53 per share),
                      net ofissuance
                      expenses of $132,496
                  
                  
                  
                  
                  2,549,254
                  3,767,856Non-cash
                      compensation in connection with issuance of stockoptions
                      to a non-employee in October (see Note 9)
                  
                  
                  
                  
                  
                  
                  
                  
                  57,672
                  
                  
                  
                  57,672Exercise
                      of bridge warrants (see Note 6)
                  
                  
                  
                  
                  
                  
                  2,270
                  2
                  20
                  
                  
                  
                  22Net
                      loss for the period ended December 31, 2003
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (3,155,092)
                  (3,155,092)**Balance
                      at December 31, 2003**
                  4,014,125
                  13,774,952
                  989,991
                  5,020,032
                  2,954,350
                  4,387,651
                  10,146,075
                  10,146
                  23,352,301
                  (53,907)
                  
                  (43,981,473)
                  (20,672,933)Conversion
                      of Series A, B and C Preferred Stock toCommon
                      Stock (see Note 5)
                  (4,014,125)
                  (13,774,952)
                  (989,991)
                  (5,020,032)
                  (2,954,350)
                  (4,387,651)
                  8,187,259
                  8,187
                  23,174,448
                  
                  
                  
                  23,182,635Sale
                      of common stock in a private placement(net
                      of expense of $1,853,224) (see Note 5)
                  
                  
                  
                  
                  
                  
                  6,139,913
                  6,140
                  16,227,307
                  
                  
                  
                  16,233,447Merger
                      transaction with Intrac, Inc. (see Note 1)
                  
                  
                  
                  
                  
                  
                  1,153,190
                  1,153
                  (1,153)
                  
                  
                  
                  -Non-cash
                      compensation in connection with issuance ofstock
                      options to non-employees (see Note 9)
                  
                  
                  
                  
                  
                  
                  
                  
                  132,501
                  
                  
                  
                  132,501Issuance
                      of compensatory stock options to employees (see Note 9)
                  
                  
                  
                  
                  
                  
                  
                  
                  1,094,793
                  (1,094,793)
                  
                  
                  -Amortization
                      of unearned compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  198,351
                  
                  
                  198,351Issuance
                      of 226,314 warrants in November in connection withBridge
                      Debenture financing (see Note 6)
                  
                  
                  
                  
                  
                  
                  
                  
                  314,795
                  
                  
                  
                  314,795Net
                      loss for the period ended December 31, 2004
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (7,046,828)
                  (7,046,828)**Balance
                      at December 31, 2004**
                  -
                  -
                  -
                  -
                  -
                  -
                  25,626,437
                  25,626
                  64,294,992
                  (950,349)
                  
                  (51,028,301)
                  12,341,968Sale
                      of common stock in a private placement(net
                      of expense of $2,225,411) (see Note 5)
                  
                  
                  
                  
                  
                  
                  14,222,215
                  14,222
                  29,760,351
                  
                  
                  
                  29,774,573Cancellation
                      of compensatory stock options to employees
                  
                  
                  
                  
                  
                  
                  
                  
                  (50,921)
                  50,921
                  
                  
                  -Modification
                      of employee stock options
                  
                  
                  
                  
                  
                  
                  
                  
                  125,897
                  
                  
                  
                  125,897Issuance
                      of 80,184 warrants to consultants (see Note 5)
                  
                  
                  
                  
                  
                  
                  
                  
                  152,290
                  
                  
                  
                  152,290Issuance
                      of 40,000 options to consultants (see Note 5)
                  
                  
                  
                  
                  
                  
                  
                  
                  95,200
                  
                  
                  
                  95,200Exercise
                      of 1999 Bridge Warrants
                  
                  
                  
                  
                  
                  
                  217,964
                  217
                  1,962
                  
                  
                  
                  2,179Exercise
                      of Series A Warrants
                  
                  
                  
                  
                  
                  
                  26,518
                  27
                  102,598
                  
                  
                  
                  102,625Issuance
                      of stock for license payment
                  
                  
                  
                  
                  
                  
                  169,735
                  170
                  499,830
                  
                  
                  
                  500,000Exercise
                      of Stock Options
                  
                  
                  
                  
                  
                  
                  1,241
                  1
                  11
                  
                  
                  
                  12Issuance
                      of stock for liquidated damages
                  
                  
                  
                  
                  
                  
                  140,867
                  141
                  373,158
                  
                  
                  
                  373,299Amortization
                      of unearned compensation
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  345,672
                  
                  
                  345,672Net
                      loss for the period ended December 31, 2005
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (10,611,772)
                  (10,611,772)**Balance
                      at December 31, 2005**
                  -
                  -
                  -
                  -
                  -
                  -
                  40,404,977
                  40,404
                  95,355,368
                  (553,756)
                  
                  (61,640,073)
                  33,201,943
  Securities
          issued in connection with services or financings were valued based upon
          the
          estimate of fair value of the securities issued as determined by the Company’s
          Management.
 The
          accompanying notes are an integral part of the financial
          statements.
  53
 Index


**Javelin
                Pharmaceuticals, Inc. and Subsidiary**
              **(A
                Development Stage Enterprise)**
              **Consolidated
                Statement of Cash Flows**
            
            **Year
                Ended**
              **December
                31,**
            
            **Cumulative
                from**
              **February
                23, 1998**
              **(inception)
                to****2003**
            
            
            **2004**
            
            
            **2005**
            
            
            **December
                31, 2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (3,155,092
            )
            $
            (7,046,828
            )
            $
            (10,611,772
            )
            $
            (61,640,073
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            24,382
            
            
            31,796
            
            
            44,321
            
            
            117,605Amortization
                of deferred financing costs
            
            
            
            
            
            25,000
            
            
            -
            
            
            252,317Amortization
                of original issue discount
            
            
            -
            
            
            -
            
            
            -
            
            
            101,564Amortization
                of unearned compensation
            
            
            -
            
            
            -
            
            
            345,672
            
            
            345,672Non-cash
                expense recognized with issuance of Common Stock in connection with
                acquisition of a license
            
            
            -
            
            
            
            
            
            
            
            
            18,600,000Non-cash
                expense recognized with issuance of Preferred Stock for license
                milestone
            
            
            100,000
            
            
            -
            
            
            -
            
            
            100,000Non-cash
                expense recognized with issuance of Common Stock in connection of
                liquidation damages
            
            
            -
            
            
            -
            
            
            373,299
            
            
            373,299Amortization
                of discount on debenture
            
            
            
            
            
            314,795
            
            
            -
            
            
            314,795Stock
                options and warrants issued in consideration for services
                rendered
            
            
            170,741
            
            
            330,852
            
            
            373,387
            
            
            3,003,076Non-cash
                expense contributed by affiliate
            
            
            
            
            
            
            
            
            
            
            
            1,075,182Changes
                in assets and liabilities:(Increase)
                decrease in grant receivable
            
            
            202,129
            
            
            59,863
            
            
            (458,327
            )
            
            (573,501
            )(Increase)
                decrease in prepaid expenses, other current assets and other
                assets
            
            
            130,238
            
            
            13,799
            
            
            (276,410
            )
            
            (376,351
            )(Decrease)
                increase in accounts payable, accrued expenses and other
                liabilities
            
            
            (283,026
            )
            
            1,306,129
            
            
            (1,088,846
            )
            
            1,207,626Increase
                in deferred revenue
            
            
            -
            
            
            -
            
            
            19,522
            
            
            19,522(Decrease)
                increase in deferred lease liability
            
            
            (13,756
            )
            
            7,075
            
            
            (7,230
            )
            
            9,871Increase
                in due to Licensor
            
            
            
            
            
            500,000
            
            
            
            
            
            500,000**Net
                cash used in operating activities**
            
            
            (2,824,384
            )
            
            (4,457,519
            )
            
            (11,286,384
            )
            
            (36,569,396
            )Cash
                flows from investing activities:Capital
                expenditures
            
            
            (5,072
            )
            
            (118,629
            )
            
            (68,536
            )
            
            (279,471
            )Restricted
                cash
            
            
            40,000
            
            
            -
            
            
            -
            
            
            -**Net
                cash (used in) provided by investing activities**
            
            
            34,928
            
            
            (118,629
            )
            
            (68,536
            )
            
            (279,471
            )Cash
                flows from financing activities:Proceeds
                from exercise of warrants
            
            
            22
            
            
            -
            
            
            104,804
            
            
            105,568Proceeds
                from exercise of stock options
            
            
            -
            
            
            -
            
            
            12
            
            
            12Proceeds
                from sale of Common Stock
            
            
            
            
            
            18,086,671
            
            
            31,999,984
            
            
            50,096,274Proceeds
                from sale of Preferred Stock
            
            
            3,900,352
            
            
            -
            
            
            -
            
            
            25,451,201Expenses
                associated with sale of Common Stock
            
            
            
            
            
            (1,853,224
            )
            
            (2,225,411
            )
            
            (4,078,635
            )Expenses
                associated with sale of Preferred Stock
            
            
            (132,496
            )
            
            -
            
            
            -
            
            
            (1,764,385
            )Proceeds
                from notes payable
            
            
            
            
            
            
            
            
            -
            
            
            2,015,000Proceeds
                from issuance of debenture
            
            
            
            
            
            1,000,000
            
            
            -
            
            
            1,000,000Repayment
                of debenture
            
            
            
            
            
            (1,000,000
            )
            
            -
            
            
            (1,000,000
            )Expenses
                associated with notes payable
            
            
            
            
            
            (25,000
            )
            
            -
            
            
            (153,719
            )Repayment
                of notes payable
            
            
            
            
            
            
            
            
            
            
            
            (1,515,000
            )**Net
                cash provided by financing activities**
            
            
            3,767,878
            
            
            16,208,447
            
            
            29,879,389
            
            
            70,156,316**Net
                increase in cash and cash equivalents**
            
            
            978,422
            
            
            11,632,299
            
            
            18,524,469
            
            
            33,307,449Cash
                and cash equivalents at beginning of period
            
            
            2,172,259
            
            
            3,150,681
            
            
            14,782,980
            
            
            -Cash
                and cash equivalents at end of period
            
            $
            3,150,681
            
            $
            14,782,980
            
            $
            33,307,449
            
            $
            33,307,449Supplemental
                disclosures:Cash
                paid for interest:
            
            $
            17,712
            
            $
            16,575
            
            $
            -
            
            $
            271,633Supplemental
                disclosure of non cash investing and financing activities:Non
                cash issuance of common stock
            
            
            
            
            
            
            
            $
            500,000
            
            $
            500,000Options
                and warrants issued for services and financings
            
            
            
            
            
            
            
            
            
            
            $
            1,222,574




54
 Index




**Javelin
                  Pharmaceuticals, Inc. and Subsidiary**
                **(A
                  Development Stage Enterprise)**
                **Consolidated
                  Statement of Cash Flows**
              
              **Year
                  Ended**
                **December
                  31,**
              
              **Cumulative
                  from**
                **February
                  23, 1998**
                **(inception)
                  to****2003**
              
              
              **2004**
              
              
              **2005**
              
              
              **December
                  31, 2005**Conversion
                  of Merger Note and accrued interest to Series C stock
              
              $
              519,795
              
              
              
              
              
              
              
              $
              519,795Recapitalization
                  in connection with Merger with Intrac
              
              
              
              
              $
              1,153
              
              
              
              
              $
              1,153
 The
          accompanying notes are an integral part of the financial
          statements.




55
 Index




**Javelin
      Pharmaceuticals, Inc. and Subsidiary** **(A
      Development Stage Enterprise)** **Notes
      to the Consolidated Financial Statements**





**1.**   **Organization
      and Business**




Javelin
      Pharmaceuticals, Inc. and its wholly owned subsidiary Innovative Drug Delivery
      Systems, Inc. (the “Company” or “IDDS”) is a development stage enterprise
      engaged in the research, development and commercialization of innovative
      treatments for the relief of moderate to severe pain. The Company conducts
      operations in a single segment in the United States of America.




In
      addition, to the normal risks associated with a new business venture, there
      can
      be no assurance that the Company’s research and development will be successfully
      completed or that any approved product will be commercially viable. In addition,
      the Company operates in an environment of rapid change in technology, is
      dependent upon raising capital to fund operations, and is dependent upon the
      services of its employees, collaborators and consultants.




Javelin
      Pharmaceuticals, Inc. (“Javelin”) was incorporated in July 2005 in the State of
      Delaware by Intrac, Inc., a Nevada corporation (“Intrac”), for the purpose of
      migrating the Intrac corporate entity to Delaware. The migratory merger was
      effective on September 7, 2005, at which time Javelin Pharmaceuticals continued
      the business conducted by Intrac. Upon the reincorporation, each outstanding
      share of Intrac Common Stock was automatically exchanged for one share of
      Javelin Common Stock. On December 6, 2004, the Company consummated a merger
      with
      Intrac, a public shell company, (“the Merger”). For accounting purposes, the
      Merger has been treated as a recapitalization of the Company with the Company
      as
      acquirer (reverse acquisition) and with each share of Common Stock, stock
      options and warrants of the Company prior to the Merger converted to 1.018
      shares of Intrac common stock, stock options and warrants at the time of the
      Merger. Thus, all common share and per share data included herein have been
      adjusted as if the stock exchange had occurred at inception. Accordingly, the
      Company is considered to have issued shares of its Common Stock, stock options
      and warrants to shareholders of Intrac in exchange for the net assets of Intrac.
      For the three years prior to the merger, Intrac’s operations were nominal. The
      assets, liabilities and historical operating results prior to the Merger are
      those of the IDDS. Pro forma information giving effect to the acquisition has
      not been provided since the combination is not considered a business combination
      under Statement of Financial Accounting Standards No. 141, “Business
      Combinations.” At the time of the Merger, Intrac shareholders held 1,153,190
      shares of common stock and the net assets of Intrac were zero. Therefore, since
      the Merger is accounted for as a recapitalization of the Company, the Intrac
      common shares were included in the Merged Company’s stockholders equity at their
      par value with an offset to additional paid in capital of $1,153.




Pain
      Management, Inc. (the “Predecessor Company”) was incorporated in the State of
      Delaware on February 23, 1998. On August 14, 2000, the Predecessor Company
      agreed to merge with IDDS. The terms of the merger provided for each share
      of
      the Predecessor Company’s common stock to convert into approximately .908 shares
      of the Company’s common stock. Accordingly, the stockholders of the Predecessor
      Company exchanged 5,212,500 shares of the Predecessor Company’s common stock for
      4,733,797 shares of IDDS common stock. Prior to the merger, IDDS had outstanding
      5,174,257 shares of common stock. At the time the merger closed on September
      22,
      2000, the only asset held by IDDS was a licensing agreement with West
      Pharmaceutical Services, Inc. (see Note 7) executed on August 25, 2000. IDDS
      was
      incorporated on April 8, 1999, however, it remained dormant until executing
      the
      merger and licensing agreements noted above. The Predecessor Company’s Board of
      Directors and management assumed similar roles in the Company after the merger
      closed. For financial reporting purposes, the merger was accounted for as the
      acquisition of a licensing agreement by the Predecessor Company and a
      reorganization with the Company becoming the surviving entity. Consequently,
      the
      assets, liabilities and historic operating results of the Company prior to
      the
      merger are those of the Predecessor Company. The fair value of the licensing
      agreement was determined to be approximately $18.6 million based on the fair
      value of the common stock issued. The rights obtained under the licensing
      agreement related to an unproven technology that would require significant
      research and development effort to commercialize a product. There is also a
      significant uncertainty as to whether the research and development effort will
      be successful. Since the licensed technology has no alternative




56
 Index




future
      use, the fair value of the consideration issued to obtain the licensing
      agreement was expensed as research and development at the time the merger
      closed.




**2.**
            **Summary
                of Significant Accounting
                Policies**




**Basis
      of Preparation**




The
      consolidated financial statements include the accounts of Javelin
      Pharmaceuticals, Inc. and its wholly owned subsidiary. All intercompany balances
      and transactions have been eliminated.




The
      financial statements have been prepared on a going-concern basis, which assumes
      realization of all assets and settlement or payment of all liabilities in the
      ordinary course of business. The Company has limited capital resources, net
      operating losses and negative cash flows from operations since inception and
      expects these conditions to continue for the foreseeable future. In addition,
      it
      is anticipated that the Company may not generate revenues from product sales
      in
      the twelve months following December 31, 2005. Management estimates the Company
      has sufficient resources to fund its planned operations beyond March 31, 2007.
      In addition, Management has the ability to reduce discretionary spending to
      preserve cash. The Company may seek to raise additional funds through the
      private and/or public sale of its equity securities. The Company may also seek
      to raise capital through collaborative arrangements with corporate sources
      or
      other sources of financing. There can be no assurance that such additional
      financing, if at all available, can be obtained on terms reasonable to the
      Company. In the event that sufficient funds are not available, the Company
      will
      need to postpone or discontinue planned operations and projects. Continuance
      of
      the Company as a going concern is dependent upon, among other things, the
      Company’s ability to obtain adequate long-term financing, the success of its
      research and development program and its attainment of profitable operations.
      The financial statements do not include any adjustments that might result from
      the outcome of this uncertainty.




**Revenue
      Recognition**




The
      Company has been awarded government grants and contracts from the U.S.
      Department of Defense (“DOD”) and the National Institutes of Health (the “NIH”),
      which are used to subsidize the Company’s research and development projects
      (“Projects”). DOD and NIH revenue is recognized as subsidized Project costs for
      each period as incurred. For the year ended December 31, 2002, the Company’s
      revenue included $214,856 and $72,390 from the DOD and the NIH, respectively.
      In
      May 2003, the Company was granted an extension of a prior grant by DOD in the
      amount of a $4.3 million contract. For the years ended December 31, 2003, 2004
      and 2005, all of the Company’s research revenue came from reimbursements for
      costs incurred in relation to the contract from the DOD. For all periods
      presented, the Company’s only source of revenue was in the form of grants and
      contracts.




The
      Company had not been appropriately recognizing revenue and receivables related
      to reimbursable indirect project costs that were earned in prior periods,
      resulting in an understatement of revenue of approximately $57,000 and $52,000
      for the years ended December 31, 2003 and 2004, respectively. The Company
      corrected the cumulative effect of this error during 2005, resulting in an
      overstatement of grant and contract revenue by approximately $109,000 for the
      year ended December 31, 2005. Previously issued annual and quarterly financial
      statements have not been restated, as management does not believe that the
      impact of these errors is material to the financial statements for the year
      ended December 31, 2005 or to the financial statements of any period prior
      to
      the year ended December 31, 2005.




Interest
      income is recognized as earned.




**Research
      and Development Costs**




The
      Company expenses all research and development costs as incurred for which there
      is no alternative future use. Such expenses include licensing and upfront fees
      paid in connection with collaborative agreements. For the years ended December
      31, 2003, 2004 and 2005, expenses related to the Company’s grants and contracts
      were $1,102,420, $836,841 and $1,547,753, respectively.




57
 Index




**Concentrations
      of Credit Risk**




Financial
      instruments which potentially subject the Company to concentrations of credit
      risk consist of cash, cash equivalents, and receivables from the DOD. The
      Company has established investment guidelines that relate to credit quality
      and
      diversification and that limit exposure to any one issue of
      securities.




**Fixed
      Assets**




Furniture
      and fixtures, laboratory equipment and computer equipment and software are
      stated at cost and are depreciated on a straight-line basis over their estimated
      useful lives. Expenditures for maintenance and repairs which do not materially
      extend the useful lives of the assets are charged to expense as incurred. The
      cost and accumulated depreciation of assets retired or sold are removed from
      the
      respective accounts and any gain or loss is recognized in
      operations.




The
      estimated useful lives of fixed assets are as follows:




Leaseholds
            3
                yearsLaboratory
                equipment
            7
                yearsFurniture
                and
                fixtures
            5
                yearsComputer
                equipment and software
            3
                years




**Patents**




As
      a
      result of research and development efforts conducted by the Company, it has
      applied, or is applying, for a number of patents to protect proprietary
      inventions. All costs associated with patents are expensed as
      incurred.




**Cash
      and Cash Equivalents**




The
      Company considers all highly liquid investments which have maturities of three
      months or less, when acquired, to be cash equivalents. The carrying amount
      reported in the balance sheet for cash and cash equivalents approximates its
      fair value. Cash and cash equivalents subject the Company to concentrations
      of
      credit risk. At December 31, 2004 and 2005 the Company had invested
      approximately $14.8 million and $33.3 million, respectively, in funds with
      a
      single commercial bank. As of December 31, 2005 no losses had been incurred
      from
      deposits in excess of FDIC limits.




**Net
      Loss Per Share**




The
      Company prepares its per share data in accordance with Statement of Financial
      Accounting Standards No. 128, “Earnings Per Share” (“SFAS No. 128”). Basic net
      loss per share is computed on the basis of net loss for the period divided
      by
      the weighted average number of shares of common stock outstanding during the
      period. Since the Company has incurred net losses since inception, diluted
      net
      loss per share does not include the number of shares issuable upon exercise
      of
      outstanding options and warrants and the conversion of preferred stock since
      such inclusion would be anti-dilutive.




Disclosures
      required by SFAS No. 128 have been included in Note 8.




**Deferred
      Financing Costs**




Costs
      incurred in connection with issuance of notes payable are deferred and amortized
      using the interest method as interest expense over the term of the debt
      instrument.




58
 Index




**Income
      Taxes**




The
      Company accounts for income taxes in accordance with the provisions of Statement
      of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“SFAS
      No. 109”). SFAS No. 109 requires that the Company recognize deferred tax
      liabilities and assets for the expected future tax consequences of events that
      have been included in the financial statements or tax returns. Under this
      method, deferred tax liabilities and assets are determined on the basis of
      the
      difference between the tax basis of assets and liabilities and their respective
      financial reporting amounts (“temporary differences”) at enacted tax rates in
      effect for the years in which the temporary differences are expected to
      reverse.




**Comprehensive
      Loss**




Statement
      of Financial Accounting Standards No. 130, “Reporting Comprehensive Income”,
      established standards for reporting and display of comprehensive loss and its
      components in the financial statements. The Company has no other comprehensive
      items to report other than net loss.




**Impairment
      of Long-Lived Assets**




In
      accordance with Statement of Financial Accounting Standards No. 144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets”, the Company reviews its
      long-lived assets for impairment whenever events and circumstances indicate
      that
      the carrying value of an asset might not be recoverable. An impairment loss
      is
      recognized if the carrying amount of the long-lived asset is not recoverable
      and
      its carrying amount exceeds its fair value, which is based upon estimated
      undiscounted future cash flows. For all periods presented, there have been
      no
      impairment losses incurred.




**Equity
      Issuance Costs**




Costs
      associated with the issuance of the Company’s common or preferred stock are
      initially recorded as prepaid offering costs. Upon issuance of the securities,
      those costs are reclassified as a reduction of the offering proceeds. In the
      event that the offering is not completed, those costs would be expensed in
      the
      period the offering is determined to be unsuccessful. During the year ended
      December 31, 2002, the Company expensed prepaid offering costs of $776,819
      that
      were deferred as of December 31, 2001 related to a public equity offering that
      was terminated during 2002.




**Risks
      and Uncertainties**




The
      preparation of financial statements in conformity with generally accepted
      accounting principles requires management to make estimates and assumptions
      that
      affect the amounts reported in the financial statements and accompanying notes.
      Significant estimates relate to the valuation of equity instruments issued
      for
      services rendered, recoverability of fixed assets and deferred taxes. Actual
      results could differ from those estimates.




**Stock-Based
      Compensation**




The
      Company accounts for stock-based compensation to employees in accordance with
      APB Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”).
      Under APB No. 25, generally, no compensation expense is recognized in the
      financial statements in connection with the awarding of stock option grants
      to
      employees provided that, as of the grant date, all terms associated with the
      award are fixed and the fair value of the Company’s stock, as of the grant date,
      is equal to or less than the amount an employee must pay to acquire the stock.
      The Company will recognize compensation expense in situations where the terms
      of
      an option grant are not fixed or where the fair value of the Company’s common
      stock on the grant date is greater than the amount an employee must pay to
      acquire the stock.




The
      Company has a stock-based incentive plan, which is described in Note 9. The
      following table illustrates the effect on the Company’s net loss and net loss
      per share had compensation costs for the incentive plan been determined in
      accordance with the fair value based method of accounting for stock-based
      compensation as




59
 Index




prescribed
      by Statement of Financial Accounting Standards No. 123, “Accounting for
      Stock-Based Compensation” (“FAS 123”), as amended by Statement of Financial
      Accounting Standards No. 148, “Accounting for Stock-Based Compensation
      Transition and Disclosure, an amendment of SFAS 123” (“FAS 148”). Since option
      grants awarded during 2003, 2004, and 2005, vest over several years and
      additional awards are expected to be issued in the future, the pro forma results
      shown below are not likely to be representative of the effects on future years
      of the application of the fair value based method.




**Year
                  Ended December 31,****2003**
              
              **2004**
              
              **2005**Net
                  loss as reported
              
              $
              (3,155,092
              )
              $
              (7,046,828
              )
              $
              (10,611,772
              )Add:
                  Stock-based employee compensation included in net loss under APB
                  No.
                  25
              
              
              113,069
              
              
              198,351
              
              
              345,672Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value base methodfor all awards
              
              
              (1,263,739
              )
              
              (1,469,442
              )
              
              (1,796,017
              )Pro
                  forma net loss
              
              $
              (4,305,762
              )
              $
              (8,317,919
              )
              $
              (12,062,117
              )Proforma
                  net loss per share (basic and diluted)
              
              
              ($0.43
              )
              
              ($0.76
              )
              
              ($0.43
              )




For
      the
      purposes of the above pro forma calculations, the fair value of each option
      granted was estimated on the date of grant using the Black Scholes option
      pricing model. The weighted-average fair value of all options granted during
      2003, 2004 and 2005 was $0.96, $2.18 and $1.84, respectively. The following
      table summarizes the assumptions used in computing the fair value of option
      grants.




**2003**
              **2004**
              **2005**Expected
                  volatility
              80%
              80%
              80%Expected
                  life
              5
              5
              5Dividend
                  yield
              0%
              0%
              0%Risk
                  free interest rate
              3.5%
              4.5%
              3.4
                  - 4.5%




Other
      disclosures required by FAS No. 123 have been included in Note 9.




The
      fair
      value of options and warrants granted to non-employees for financing, goods
      or
      services are included in the financial statements and expensed over the life
      of
      the debt, as the goods are utilized or the services performed, respectively.
      Securities issued in connection with services or financings were valued based
      upon the estimate of fair value of the securities issued as determined using
      the
      Black Scholes option pricing model with the assumptions noted above. Such fair
      value was determined at each balance sheet date through the vesting period,
      in
      accordance with Emerging Issues Task Force No. 96-18 Accounting for Equity
      Instruments that are issued to other than employees for acquiring, or in
      conjunction with selling goods or services (“EITF 96-18”)




60
 Index




**Impact
      of Recently Issued Accounting Standards**




In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”),
      Share-Based Payment. SFAS No. 123R revises SFAS Statement No. 123, Accounting
      for Stock-Based Compensation and supersedes APB No. 25, Accounting for Stock
      issued to Employees, and its related implementation guidance. The provisions
      of
      SFAS No. 123R require a public entity to expense, in the operating statement,
      the fair value of awards of equity instruments exchanged for employee services,
      based on the grant-date fair value of those awards. The grant-date fair value
      of
      equity instruments will be estimated using an appropriate option pricing model
      and will be recognized over the vesting period of the awards. SFAS No. 123R
      will
      be effective, for public companies, for interim or annual reporting periods
      that
      begin after June 15, 2005. SFAS No. 123R allows companies to choose from several
      transition methods for recognizing the cost of share-based awards granted to
      employees prior to adoption of the Standard. The Company is in the process
      of
      analyzing the appropriate transition method to adopt and expects the adoption
      of
      SFAS No. 123R to have a material impact on its financial statements by
      increasing operating expenses, net loss attributable to common stockholders
      and
      net loss per share attributable to common stockholders




In
      May
      2005 the FASB issued SFAS No. 154 "Accounting Changes and Error Corrections."
      SFAS No. 154 replaces APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 provides
      guidance on the accounting for and reporting of accounting changes and error
      corrections. SFAS No. 154 is effective for accounting changes and corrections
      of
      errors made in fiscal years beginning after December 15, 2005. The Company
      will
      adopt this Statement beginning January 1, 2006.




**3.**
            **Fixed
                Assets**




Fixed
      assets consist of the following:


**December
                    31,****2004**
                
                **2005**Leaseholds
                
                $
                -
                
                $
                4,824Furniture
                    and fixtures
                
                
                34,335
                
                
                60,800Laboratory
                    equipment
                
                
                115,882
                
                
                116,901Computer
                    equipment
                
                
                51,176
                
                
                76,175Computer
                    software
                
                
                9,542
                
                
                20,771210,935
                
                
                279,471Less,
                    Accumulated depreciation
                
                
                (73,284
                )
                
                (117,605
                )$
                137,651
                
                $
                161,866




**4.**
            **Accounts
                Payable and Accrued
                Expenses**




Accounts
      payable and accrued expenses consist of the following:


**December
                  31,****2004**
              
              **2005**Accounts
                  payable
              
              $
              988,025
              
              $
              557,252Accrued
                  professional fees
              
              
              384,005
              
              
              434,886Accrued
                  research and development
              
              
              302,868
              
              
              56,897Accrued
                  payroll
              
              
              590,650
              
              
              133,044Accrued
                  expenses
              
              
              30,924
              
              
              25,547$
              2,296,472
              
              $
              1,207,626




61
 Index




The
      Company has contractual agreements to spend approximately $0.8 million for
      future clinical and development programs. However, such agreements may be
      cancelled, without cost, upon written notice to the other party.




**5.**
            **Stockholders’
                Equity**




The
      Company’s Certificate of Incorporation authorizes the Company to issue 100
      million shares of common stock (the “Common Stock”), $0.001 par value, and 5
      million shares of preferred stock (the “Preferred Stock”), $0.001 par value. At
      December 31, 2004, the Company's Certificate of Incorporation, as amended,
      authorized the Company to issue 500 million shares of common stock, $0.001
      par
      value, and 5 million shares of preferred stock, $0.001 par value. Prior to
      the Merger, IDDS’s Certificate of Incorporation, as amended, authorized the
      Company to issue 80 million shares of common stock, $0.001 par value, and 20
      million shares of preferred stock, $0.001 par value. The Company’s Board of
      Directors (the “Board”) has the authority to issue preferred stock, in series,
      with rights and privileges determined by the Board.




Prior
      to
      the Merger with Intrac, IDDS had outstanding three classes of redeemable
      preferred stock. The rights and provisions of the preferred stockholders
      included liquidation, voting, dividend, redemption and conversion. As the result
      of the Merger, all shares of preferred stock converted into 8,187,259 shares
      of
      common stock.




During
      1999, a consultant (the “Consultant”) was issued 192,985 shares of Common Stock
      for services rendered and a subscription receivable of $106. The fair value
      of
      the Consultant shares was $93,456, as estimated by the Company’s
      management.




In
      September 2000, the Company sold 160.565 units (“Units” or “Series A Financing”)
      to investors at a per Unit price of $100,000. Each Unit consisted of 25,000
      shares of Series A redeemable Preferred Stock (“Series A”) (convertible into
      25,872 shares of common stock) and 2,587 warrants (the “A Preferred Warrants”).
      Each A Preferred Warrant entitles the holder to purchase one share of Common
      Stock at an exercise price of $3.87 per share. The A Preferred Warrants contain
      certain antidilution provisions, as defined. The fair value of the A Preferred
      Warrants at issuance was $960,361. On October 13, 2005, 388,885 A Preferred
      Warrants expired unexercised. At December 31, 2005, 26,518 of the A Preferred
      Warrants had been exercised (see Note 10).




As
      partial consideration for the sale of the Units, an option to purchase 15.83
      units (the “Finders Units”) was issued to members of the firm responsible for
      obtaining the financing. Each Finders Unit entitles the holder to purchase
      25,000 shares of Series A Stock (convertible into 25,872 shares of Common Stock)
      and 2,587 A Preferred warrants (the “Finders Warrants”) for $110,000 per Finders
      Unit. The fair value of the Series A Stock included in the Finders Units, which
      was accounted for as a cost of the Series A Financing, totaled $1,071,331.
      Each
      Finders Warrant entitles the holder to purchase one share of Common Stock at
      a
      per share price of $3.87. The Finders Warrants expire in September 2007. The
      fair value of the Finders Warrants at the date of issue was $107,825. At
      December 31, 2005, none of the Finders Warrants had been exercised.




In
      2000,
      another consultant, acting as an advisor to the Series A Financing, received
      15,522 warrants to purchase shares of Common Stock at an exercise price of
      approximately $0.001 per share. The warrants expire in August, 2007. The fair
      value of the warrants, which has been accounted for as a cost of the Series
      A
      Financing, at the issuance date was $55,790. All of the warrants were exercised
      in 2001.




During
      December 2001, the Company issued shares of Series B Redeemable Preferred Stock
      (“Series B”).The Series B conversion price represented a discount from the
      estimated fair value of the Common Stock at the time of issuance. Accordingly,
      the discount amount is considered incremental yield (“the beneficial conversion
      feature”) to the preferred stockholders and has been accounted for as a deemed
      dividend to preferred stockholders. Based on the conversion terms of the Series
      B stock, a deemed dividend of approximately $3.6 million has been




62
 Index




added
      to
      the net loss in the calculation of net loss applicable to common stockholders
      in
      the year ended December 31, 2001.




In
      December 2004, the Company closed a private placement consisting of the sale
      of
      6,139,913 shares of Common Stock for proceeds of approximately $16.2 million,
      net of offering expenses of $1.9 million. As partial consideration for services
      rendered, the agent that had introduced investors to the Company, was granted
      fully vested warrants, to purchase 920,987 shares of Common Stock (the
“Placement Warrants”). Each Placement Warrant entitles the holder to purchase
      one share of common stock at an exercise price of $2.95 per share. The Placement
      Warrants expire in December 2009. The fair value of the Placement Warrants
      at
      issuance was approximately $1.8 million, as estimated by the Company’s
      management, using the method described in Note 2.




In
      March
      2005, in consideration of a termination fee, the Company granted to an entity
      warrants to purchase up to 10,184 shares of Common Stock at an exercise price
      of
      $2.49 per share. The warrants expire in March 2010. The fair value of the
      consultant warrants at the date of issuance was $18,840, as estimated by the
      Company’s management using the method described in Note 2.




Also in March 2005, as part of an engagement fee for investor and public
      relations services, the Company granted to an entity warrants to purchase up
      to
      25,000 shares of Common Stock at an exercise price of $3.00 per share. The
      warrants expire in March 2010. The fair value of the consultant warrants at
      the
      date of issuance was $44,000, as estimated by the Company’s management using the
      method described in Note 2.




In April 2005, in consideration for investor and public relations services,
      the
      Company granted to an entity warrants to purchase up to 20,000 shares of Common
      Stock at an exercise price of $3.00 per share. The warrants expire in April
      2010. The fair value of the consultant warrants at the date of issuance was
      $35,200, as estimated by the Company’s management using the method described in
      Note 2.




In
      September 2005, as partial consideration for investor and public relation
      services, we granted to an entity warrants to purchase up to 25,000 shares
      of
      Common Stock at an exercise price of $3.00 per share. The consultant warrants
      expire in September 2010. The fair value of the consultant warrants at the
      date
      of issuance was $54,250, as estimated by the Company’s management using the
      method described in Note 2.




In
      November 2005, the Company closed a private placement consisting of the sale
      of
      14,222,215 shares of Common Stock and 711,111 warrants (the “Investor Warrants”)
      for proceeds of approximately $29.8 million, net of offering expenses of $2.2
      million. Each Investor Warrant entitles the holder to purchase one share of
      Common Stock at an exercise price of $2.25 per share. The Investor Warrants
      expire in December 2010 and contain certain antidilution provisions and
      registration rights, as defined. The fair value of the Investor Warrants at
      issuance was $1,376,000, as estimated by the Company’s management, using the
      method described in Note 2. As partial consideration for services rendered,
      the
      agents that had introduced investors to the Company, were granted fully vested
      warrants, to purchase 853,333 shares of Common Stock (the “Placement Warrants”).
      Each Placement Warrant entitles the holder to purchase one share of common
      stock
      at an exercise price of $2.48 per share. The Placement Warrants expire in
      November 2010. The fair value of the Placement Warrants at issuance was
      approximately $1.6 million, as estimated by the Company’s management, using the
      method described in Note 2.




**6.**
            **Notes
                Payable**




a.
            During
                1998, the Company issued two notes payable to two banks with principal
                amounts of $145,000 and $80,000, respectively (the “Notes”). The Notes
                were due in September 2000 and bear interest of 1% over the Eurodollar
                rate and the bank’s prime rate, respectively. The Notes were guaranteed by
                one of the Company’s investors. At December 31, 1999, the outstanding
                balances on the Notes were $145,000 and $80,000, respectively, accrued
                interest totaled $1,400 and the weighted average interest rate was
                7.5%.
                During 2000, the $145,000 Note was increased to
                $245,000.




Both
      Notes were repaid in October 2000, following the issuance of Series A Stock
      (see
      Note 5).




63
 Index






b.
              During
                  1999, the Company raised $1.04 million by issuing notes payable
                  (the
                  “Bridge Notes”) and warrants (the “Bridge Warrants”).
                  The Bridge Notes accrued interest at 12% per annum for the first
                  twelve
                  months and 15% per annum for up to anadditional
                  year. At December 31, 1999, accrued interest on the Bridge Notes
                  was
                  approximately $86,000. In November, 2000,after
                  issuance of Series A stock, the principal plus accrued interest
                  totaling
                  approximately $1,238,000 was
                  repaid .


In
      connection with the Bridge Notes, 236,127 Bridge Warrants to purchase an equal
      number of shares of Common Stock, with an exercise price of approximately $0.01,
      were issued to the Bridge Noteholders. The Bridge warrants contain anti-dilution
      provisions and expire in September, 2005. The fair value of the Bridge Warrants
      at the date of issue was $101,564. Accordingly, the Bridge Notes were recorded
      at an original issue discount of $101,564, which was amortized to interest
      expense over the term of the Bridge Notes. At December 31, 1999, the Bridge
      Notes were recorded at $980,256. During the years ended December 31, 2001,
      2003,
      and 2005, Bridge Warrants to purchase 15,893 shares, 2,270 shares and 217,964
      shares of Common Stock, respectively, were exercised. At December 31, 2005,
      all
      Bridge Warrants were exercised prior to their expiration (see Note
      10).




Professional
      fees incurred in connection with the Bridge Notes, amounting to $128,719, were
      accounted for as deferred financing costs.




In
      1999,
      three consultants, who had arranged the sale of Bridge Notes received a total
      of
      204,336 warrants, exercise price of approximately $0.001, to purchase shares
      of
      Common Stock. The warrants expire in August 2007. The fair value of the
      warrants, which were accounted for as deferred financing costs, at the issuance
      date was $98,598. All of the warrants were exercised in 2000.




c.
            In
                July 2000, the Company entered into a note (the “Second Note”) with a
                commercial bank with principal amount of $150,000 and bearing interest,
                payable monthly, based on the Eurodollar rate plus 1% due in July,
                2001.
                The Second Note was guaranteed by one of the Company’s investors. In
                October 2000, following the closing of the sale of Series A stock,
                the
                Second Note was repaid.




d. In
      November 2002, the Company issued a $500,000 convertible note, due on November
      24, 2004, to eXegenics, Inc., pursuant to an agreement for the termination
      of a
      proposed merger with that company (the “Merger Note”). The Merger Note bears
      interest of prime plus 1%, as defined, which is due and payable annually. The
      Merger Note and accrued interest, will automatically convert into shares of
      the
      Company’s equity securities in the event that the Company completes a private
      placement, as defined, before November 24, 2004, or in the event of a
      consolidation, merger, combination, or reorganization, as defined. In the event
      of a private placement, the Merger Note and accrued interest will be converted
      into the same series of securities offered in the private placement, at the
      same
      per share price paid by investors. At December 31, 2002, accrued interest on
      the
      Merger Note totaled $2,625. In August 2003, following a private placement,
      the
      principal and accrued interest, totaling $519,795, was converted into 339,736
      shares of Series C Redeemable Preferred Stock (see Note 5).




e. In
      November 2004, the Company entered into a Securities Purchase Agreement and
      raised $1.0 million by issuing a Senior Secured Debenture (the “Bridge
      Debentures”) and warrants (the “Warrants”). The Bridge Debentures accrued
      interest at 10% per annum for a maximum term of 12 months. Subject to certain
      terms and conditions the Company granted to investors in the Bridge Debenture
      a
      security interest in the assets of the Company. At December 6, 2004, upon the
      sale of Common Stock (see Note 5), the principal plus accrued interest totaling
      $1,008,611 was repaid, and the security interest in the assets was
      released.




64
 Index




In
      connection with the Bridge Debentures, 226,314 Warrants to purchase an equal
      number of shares of Common Stock, with an exercise price of $2.65, were issued
      to the investors of the Bridge
      Debentures. The Warrants contain anti-dilution provisions and expire in
      November, 2009. The Company allocated the total proceeds to the fair value
      of
      the Bridge Debentures and the Warrants in accordance with APB No. 14, which
      resulted in $314,795 being allocated to the Warrant. This amount was accounted
      for as debt discount and amortized to interest expense over the term of the
      Bridge Debentures. Professional fees incurred in connection with the Debentures,
      amounting to $25,000, were accounted for as deferred financing costs and
      amortized as additional interest expense during the year ended December 31,
      2004.




**7.**   **Commitments
      and Contingencies**




a.  Operating
      Lease




On
      September 5, 2002, the Company entered into a sublease (the “Sublease”) for
      office space with a term from December 7, 2002 through December 30, 2003.
      Minimum rent for the Sublease is $371,000 per annum, payable in equal monthly
      installments of $30,917, except that no rent payment was due for the first
      30
      days of the Sublease term (the “Free Rent Period”). In addition, upon execution
      of the Sublease, the Company prepaid rent for the first two months following
      the
      Free Rent Period and the last two months of the Sublease term, totaling
      $123,667. The Company is also required to pay additional rent, as defined.
      The
      Company recognizes rental expense for leases with rental holidays on the
      straight-line basis over the life of the lease. On September 22, 2003, the
      Company entered into a lease for office space with a term from December 1,
      2003
      through November 30, 2006. Minimum rent for the lease is initially $125,000
      per
      annum with a 3% rent escalation every 12 months thereafter, payable in equal
      monthly installments, except that no rent payment was due for the first 60
      days
      of the lease term (the “Free Rent Period”). In addition, upon execution of the
      lease, the Company paid a security deposit of $31,250. The Company is also
      required to pay additional rent, as defined. On May 1, 2005, the Company entered
      into a lease for the Cambridge office space with a term from May 1, 2005 through
      May 1, 2008. Minimum rent for the lease is payable in equal monthly installments
      of $6,810 over the lease term. The Company recognizes rental expense for leases
      with rental holidays on the straight-line basis over the life of the lease.
      For
      the years ended December 31, 2003, 2004 and 2005, the Company recognized rent
      expense of $381,026, $122,355 and $176,771 respectively. Deferred lease
      liability of $10,026, $17,101 and $9,871 at December 31, 2003, 2004 and 2005,
      respectively, was recorded for rent expense in excess of amounts paid; the
      amount of additional rent paid was immaterial.




b.  Legal
            Proceedings
 From
          time
          to time, the Company is involved in disputes or legal proceedings arising
          in the
          ordinary course of business including one dispute currently scheduled for
          arbitration.  However, management of the Company does not believe that any
          such  dispute, arbitration or pending litigation would have a material
          adverse effect on the Company's financial position, results of operations
          or
          cash flows.




c.  Research
          Collaboration, Licensing and Consulting Agreements




(i)  As
      part
      of the formation of the Company, in September 2000, the Company assumed a
      license agreement between the Predecessor Company and Stuart Weg, M.D. The
      license granted the Company exclusive worldwide rights, including the right
      to
      grant sublicenses, for the intellectual property surrounding transnasal
      ketamine. In connection therewith, the Company made an upfront payment to Dr.
      Weg, Herbert Brotspies, and Calgar & Associates (collectively the
“Founders”) and issued the Founders shares of Common Stock, of which a portion
      is held in escrow and will be released to the Founders, if at all, upon the
      successful completion of the Phase III trial. The issuance of the shares from
      escrow is not contingent on the Founders’ performance. The Company also
      reimbursed,the Founders for patent and other costs. The Company will pay
      semi-annual royalty payments to the Founders based on a percentage of net sales
      of transnasal ketamine by the Company or its sublicensees. In addition, the
      Company shall pay the Founders a defined percentage of all sublicensing fees
      or
      other lump sum payments. Under the terms of the license agreement, the Company
      is also obligated to make aggregate future payments upon the earlier of certain
      defined dates or satisfaction of certain clinical and regulatory milestones,
      which includes the filing of a New Drug Application







65
 Index




(“NDA”)
      with the Food & Drug Administration
      (“FDA”), the approval of an NDA by the FDA and the first commercial sale of a
      licensed product. A defined percentage
      of such milestone payments shall be creditable against royalties earned;
      provided, however, that in no event shall royalties earned be reduced by more
      than a certain percentage in any applicable semi-annual period. The Company
      may
      satisfy a portion of the milestone payments through the issuance of shares
      of
      Common Stock of the Company; provided that the Company is publicly traded at
      the
      time such milestone payment accrues. In April 2003 the license agreement was
      amended (Amendment No. 1) to allow for the payment of the August 2003 milestone
      to be paid in cash and Series C stock. The Founders agreed to accept 65,360
      shares of Series C Stock, valued at $0.1 million plus $0.15 million in cash
      as
      payment in full for the milestone. In November 2004, the license agreement
      was
      amended (Amendment No. 2) with Dr. Stuart Weg to defer payment of the $500,000
      milestone from August 25, 2004, to a date on or before December 31, 2004. The
      Company was required to pay interest, at a rate of 4.75% per annum, on the
      amount of the milestone payment for the period from August 25, 2004 to the
      amended payment date. On December 21, 2004 the Company paid the milestone
      payment plus accrued interest totaling $507,964. On December 31, 2004 the
      Company accrued the final milestone payment of $500,000 and on April 7, 2005,
      the Company, entered into an agreement and issued 169,735 shares of Common
      Stock
      as settlement of this final milestone payment, under the License Agreement,
      dated February 25, 1998. The fair value of the shares issued was $500,000,
      as
      determined by the equity price of $2.95 on the date of grant.




(ii) In
      connection with the above license agreement, in February 1998 the Predecessor
      Company entered into a three year Consulting Agreement, renewable upon mutual
      consent, with each of Dr. Weg and Dr. Gary. Pursuant to such Consulting
      Agreements, both Dr. Weg and Dr. Gary will provide the Company with such
      consulting services as the Company may reasonably request. In consideration
      for
      such services the Company has agreed to pay to each of Dr. Weg and Dr. Gary
      a
      consulting fee equal to $75,000 per year, payable in equal monthly installments.
      These agreements expired March 2001 and were not renewed.




(iii) On
      August
      25, 2000, the Company entered into a license agreement with West Pharmaceutical
      Services, Inc. (“West”) for rights to develop and commercialize intranasal
      morphine, fentanyl and other products. Under the terms of the agreement, the
      Company was granted an exclusive, worldwide, royalty bearing license, including
      the right to grant sublicenses, for the rights to the intellectual property
      covering these products. The license agreement will expire with the last to
      expire of the license patents in 2016. In consideration of the license, the
      Company paid and expensed on September 22, 2000 an up front fee. In addition,
      under the license agreement for morphine, fentanyl and other products the
      Company is obligated to make royalty payments to West based upon net sales
      of
      products by the Company or its sublicensees, if any, as defined. The Company
      is
      also obligated to pay West a minimum annual royalty for each licensed product
      that receives approval by a regulatory agency to be marketed in any major market
      country, as defined. The Company is also obligated to pay West a defined amount
      of any up-front license fees in the event that the Company sublicenses any
      rights to any third party. In addition, under a Development Milestone and Option
      Agreement entered into by the Company and West in connection with the license
      agreement, the Company is obligated to make aggregate future payments totaling
      $5.0 million upon reaching certain defined development milestones, which
      includes the filing of an NDA with the FDA, the approval of an NDA by the FDA
      of
      a licensed product. Milestone payments can be paid in cash or equity upon the
      satisfaction of certain clinical and regulatory milestones and provided that
      the
      Company is publicly traded at the time such milestone payment accrues. The
      Company’s ability to pay the upfront payment for the license agreement and the
      M-6-G




66
 Index




fee
      (see below) was guaranteed by an affiliate of the Company. The guarantee expired
      upon the payments by the Company of amounts owed to West. In addition, the
      Company granted West the right of first refusal to enter into a clinical
      manufacturing agreement for nasal morphine (see (iv)(a), below).




The
      license agreement and related agreements (see (iv)(a) to (iv)(d) below) may
      be
      terminated by mutual consent of the parties at any time or by either party
      upon
      written notice of default, including non-performance, by the other party that
      is
      not cured within 30 days.




(iv)   In
      connection with the West license agreement, the Company entered into the
      following additional agreements:




(a)
            A
                clinical manufacturing agreement, whereby the Company will buy from
                West
                100% of the nasal morphine product required for conducting the clinical
                trials subject to West’s ability to supply 100% of the required product.
                West will manufacture and package the clinical product for the Company.
                This agreement was terminated effective September
                2002.




(b) An
      option
      agreement, whereby the Company was granted an option to include morphine -6-
      glucuronide (“M-6-G”) as an identified compound under the license agreement. The
      Company paid and expensed a non-refundable fee in consideration of the option,
      which expired unexercised on December 22, 2000.




(c) On
      October 24, 2000, the Company expanded its license agreement to include an
      additional development agreement with West for rights to develop and
      commercialize intranasal fentanyl. The Company will undertake a development
      program for intranasal fentanyl with West. The parties will endeavor to complete
      the development program within the defined time table. However, the Company
      can
      use other suppliers should West be unable to either provide competitive cost
      bids or complete the program within a reasonable timeframe. In addition, under
      the development agreement, the Company is obligated to make aggregate future
      payments totaling $6.3 million upon reaching certain defined development
      milestones, which includes completion of proof-of-principle studies, successful
      completion of a phase I/II clinical trial, commencement of a phase III clinical
      trial, filing of an NDA with the FDA and the approval of an NDA by the FDA
      of a
      licensed product. These milestone payments can be paid in cash or equity upon
      the satisfaction of certain clinical and regulatory milestones and provided
      that
      the Company is publicly traded at the time such milestone payment accrues.
      In
      October 2003, the Company and West amended the license agreement to exclude
      further development of fentanyl by the Company. All rights, duties and
      obligations of the Company and West related to fentanyl were terminated,
      including aggregate remaining future milestone payments of $6.3
      million.




(d) On
      November 17, 2000, the Company entered into a clinical manufacturing agreement
      with West to manufacture, package, purchase and sell to the Company nasal
      ketamine clinical product according to agreed upon clinical product
      specifications and price schedule. The agreement expired in November
      2001.




(v) On
      February 8, 2005, the Company consented to the assignment of the license
      agreements with West to Archimedes Pharma Limited (“Archimedes”) in connection
      with the sale of West’s Drug Delivery business to Archimedes. Under the terms of
      the assignment, Archimedes has agreed to assume all of West’s obligations and
      liabilities





67
 Index




under
      the assigned
      agreements that by their respective terms are required to be paid, performed
      or


discharged.




(vi) On
      December 14, 2001 (the “Effective Date”), the Company entered into an agreement
      (the “Shimoda Agreement”) with Shimoda Biotech (Proprietary) Ltd. and certain
      affiliated entities (“Shimoda”), for an exclusive worldwide license to
      commercialize formulations of pharmaceutical products containing diclofenac.
      The
      Company will pay: (i) a license fee to Shimoda and reimbursement for expenses,
      if certain defined events occur; (ii) two percent of the net proceeds, as
      defined, of the Company’s initial public offering (“IPO”) to Shimoda, but not
      less than $1 million or in excess of $2 million; (iii) aggregate future
      milestone payments of $6.0 million payable upon the satisfaction of certain
      clinical and regulatory milestones which includes submission of an NDA with
      the
      FDA, approval of an NDA by the FDA and one year following the date of first
      sale
      of a licensed product; and (iv) royalty payments to Shimoda based upon the
      sales
      of products by the Company or its sublicensees, if any, as defined. Upon
      achievement of a milestone, Shimoda has the option to receive payment in cash
      or
      shares of common stock. In the event Shimoda elects to receive common stock,
      the
      number of shares to be issued is based on a formula whereby the defined
      milestone payment is divided by the per share price of the Company’s common
      stock in an initial public offering as defined. Should common stock be issued
      in
      satisfaction of milestones, the Company will record a non-cash charge based
      on
      the fair value of the consideration paid at the date the milestone is achieved.
      Such charge could be material and could result in a material dilution to per
      share amounts. The Shimoda Agreement may be terminated (i) by either party
      due
      to breach by the other party that is not cured within 60 days of written notice;
      (ii) by Shimoda in the event of default by the Company for non-payment of
      amounts due that is not cured with 60 days of written notice; or (iii) by the
      Company at any time by giving 90 days written notice to Shimoda.




(vii)  In
      December 2005, the Company amended the license agreement with Shimoda Biotech,
      Ltd. Under the terms of the amendment, the total aggregate future milestone
      payments of $6.0 million payable upon the satisfaction of certain clinical
      and
      regulatory milestones remains unchanged although as amended include allowance
      of
      an MAA by the MHRA, submission of an NDA with the FDA, approval of an NDA by
      the
      FDA and one year following the date of first sale of a licensed
      product.




**8.**
            **Net
                Loss per Share**




The
      Company’s basic net loss per share amounts have been computed by dividing net
      loss by the weighted-average number of common shares outstanding during the
      period. For all periods presented, the Company reported a net loss and,
      therefore, common stock equivalents were not included since such inclusion
      would
      have been anti-dilutive. In addition, for all periods presented, 227,044 shares
      of Common Stock were held in escrow. These shares have been excluded from the
      calculation of basic and diluted per share amounts.




The
      calculation of net loss per share, basic and diluted, is as
      follows:


**Net
                  Loss (Numerator)**
              
              **Weighted
                  Average Common**
              
              **Per
                  Share Amount****Shares
                  (Denominator)**The
                  year ended December 31, 2003 Basic and diluted
              
              $
              (3,155,092
              )
              
              9,918,104
              
              
              ($0.32
              )The
                  year ended December 31, 2004 Basic and diluted
              
              $
              (7,046,828
              )
              
              10,936,922
              
              
              ($0.64
              )The
                  year ended December 31, 2005 Basic and diluted
              
              $
              (10,611,772
              )
              
              27,831,188
              
              
              ($0.38
              )




68
 Index




Common
      stock equivalents and shares issuable upon conversion of redeemable convertible
      preferred stock which have been excluded from diluted per share amounts because
      their effect would have been anti-dilutive, include the following:




**For
                  the Years Ended December 31,****2003**
              
              **2004**
              
              **2005****Weighted
                  Average Number**
              
              **Weighted
                  Average Exercise Price**
              
              **Weighted
                  Average Number**
              
              **Weighted
                  Average Exercise Price**
              
              **Weighted
                  Average Number**
              
              **Weighted
                  Average Exercise Price**Options
              
              
              2,287,818
              
              $
              3.81
              
              
              3,730,257
              
              $
              3.06
              
              
              4,889,467
              
              $
              2.91Warrants
              
              
              1,084,834
              
              
              3.23
              
              
              770,226
              
              
              2.65
              
              
              1,922,888
              
              
              2.81Convertible
                  Preferred Stock
              
              
              6,239,871
              
              
              
              
              
              7,648,919
              
              
              
              
              
              -Total
              
              
              9,612,523
              
              
              
              
              
              12,149,402
              
              
              
              
              
              6,812,355


**9.**  **Stock
      Incentive Plan**




In
      February 2001, the Board and stockholders approved the adoption of the 2000
      Omnibus Stock Incentive Plan (the “Plan”). The Plan, as amended, provides for
      the issuance of 4,200,000 shares of Common Stock to be awarded to employees,
      consultants, directors and other individuals who render services to the Company
      (collectively, “Awardees”). Awards include options, restricted shares, bonus
      shares, stock appreciation rights and performance shares (the “Awards”). The
      Plan contains certain anti-dilution provisions in the event of a stock split,
      stock dividend or other capital adjustment, as defined. The Plan includes an
      automatic option grant program for non-employee directors, under which option
      grants will automatically be made at periodic intervals to non-employee board
      members to purchase shares of common stock as defined. The Plan provides for
      a
      Committee of the Board of Directors (the “Committee”) to grant Awards to
      Awardees and to determine the exercise price, vesting term, expiration date
      and
      all other terms and conditions of the Awards, including acceleration of the
      vesting of an Award at any time. All options granted under the Plan are intended
      to be non-qualified (“NQO”) unless specified by the Committee to be incentive
      stock options (“ISO”), as defined by the Internal Revenue Code. NQO’s may be
      granted to employees, consultants or other individuals at an exercise price,
      equal to, below or above the fair value of the Common Stock on the date of
      grant. ISO’s may only be granted to employees of the Company and may not be
      granted at exercise prices below fair value of the Common Stock on the date
      of
      grant (110% of fair value for employees who own 10% or more of the Company).
      The
      period during which an option may be exercised may not exceed ten years from
      the
      date of grant (five years for grants of ISO’s to employees who own 10% or more
      of the Company). Under the Plan, for a period of one year following the
      termination of an Awardee’s employment or active involvement with the Company,
      the Company has the right, should certain contingent events occur, to repurchase
      any or all shares of Common Stock acquired upon exercise of an Award held by
      the
      Awardee at a purchase price defined by the Plan. The Plan will terminate at
      the
      earliest of (i) its termination by the Committee, (ii) February 4, 2011 or
      (iii)
      the date on which all of the shares of Common Stock available for issuance
      under
      the Plan have been issued and all restrictions on such shares have lapsed.
      Awards granted before termination of the Plan will continue under the Plan
      until
      exercised, cancelled or expired.




Just
      prior to and as a condition of the IDDS merger, the Company adopted the 2004
      Omnibus Stock Incentive Plan (the “2004 Plan”) covering the grant of stock
      options, restricted stock and other employee awards, subject to stockholder
      ratification. The 2004 Plan follows the IDDS Amended and Restated 2000 Omnibus
      Stock




69
 Index




Incentive
      Plan (the “Plan”). The 2004 Plan authorizes awards of up to 5,000,000 shares of
      common stock. Upon the Merger, the outstanding options under the Plan were
      exchanged for options under the 2004 Plan with the number of option shares
      and
      the exercise prices adjusted to reflect the merger exchange ratio (see Note
      1).
      On September 7, 2005 at the Annual Meeting of Shareholders, the Company’s
      shareholders ratified the adopted the 2004 Omnibus Stock Incentive Plan (the
      “2004 Plan”) covering the grant of stock options, restricted stock and other
      employee awards. Upon the migratory merger, the Javelin 2005 Omnibus Stock
      Incentive Plan became effective and the outstanding options under the 2004
      Plan
      were exchanged for similar options under the Javelin 2005 Plan.




As
      of
      December 31, 2005, under the Javelin 2005 Plan, options for the purchase of
      an
      aggregate of 3,711,555 shares of Common Stock have been granted and are
      outstanding. The number of options remaining to be granted totals 1,288,445.
      In
      addition, as of December 31, 2005, the Company had outstanding 1,184,058 options
      which were granted outside of the Javelin 2005 Plan.




The
      following table summarizes non-plan stock option information for the options
      as
      of December 31, 2005:




**Options
                  Outstanding**
              **Options
                  Exercisable****Range
                  of****Exercise
                  Price**
              **Number
                  Outstanding**
              **Weighted
                  Average Remaining****Contractual****Life**
              **Weighted
                  Average Exercise Prices**
              **Number
                  Exercisable**
              **Weighted**
                **Average**
                ******Exercise****Price**$3.87
              1,184,058
              4.9
                  years
              $3.87
              1,184,058
              $3.87




Transactions
      involving non-plan stock options during the years ended December 31, 2003,
      2004
      and 2005 are summarized as follows:




**Number**
                  **of**
                  **Shares**
                
                **Weighted-**
                  **Average**
                  **Exercise
                    Price**
                
                **Number**
                  **Exercisable**
                
                **Weighted-**
                  **Average**
                  **Exercise
                    Price**Balance
                    outstanding, December 31, 2002
                
                
                1,392,271
                
                $
                3.87
                
                
                1,150,805
                
                $
                3.872003:
                    Canceled
                
                
                (51,742
                )
                $
                3.87
                
                
                
                
                $
                3.87Balance
                    outstanding, December 31, 2003
                
                
                1,340,529
                
                $
                3.87
                
                
                1,340,529
                
                $
                3.872004:
                    Canceled
                
                
                (155,230
                )
                $
                3.87
                
                
                
                
                $
                3.87Balance
                    outstanding, December 31, 2004
                
                
                1,185,299
                
                $
                3.87
                
                
                1,185,299
                
                $
                3.872005:
                    Exercised
                
                
                (1,241
                )
                $
                0.01
                
                
                
                
                $
                0.01Balance
                    outstanding, December 31, 2005
                
                
                1,184,058
                
                $
                3.87
                
                
                1,184,058
                
                $
                3.87




70
 Index




The
      following table summarizes stock option information for options granted under
      the 2004 Plan as of December 31, 2005:




**Options
                Outstanding****Range
                of Exercise Prices**
            
            
            **Number
                Outstanding**
            
            
            **Weighted-Average
                Remaining Contractual Life**
            
            
            **Weighted-Average
                Exercise Price**
            
            
            **Number
                Exercisable**
            
            
            **Weighted-Average
                Exercise Price**$1.50
            
            
            661,969
            
            
            7.2
                years
            
            $
            1.50
            
            
            661,969
            
            $
            1.50$1.90
            
            
            50,000
            
            
            9.5
                years
            
            $
            1.90
            
            
            -
            
            
            -$1.96
            
            
            1,451,743
            
            
            8.1
                years
            
            $
            1.96
            
            
            704,912
            
            $
            1.96$1.97
            
            
            6,620
            
            
            8.5
                years
            
            $
            1.97
            
            
            6,620
            
            $
            1.97$2.60
            
            
            50,000
            
            
            9.5
                years
            
            $
            2.60
            
            
            -
            
            
            -$2.70
            
            
            635,750
            
            
            9.3
                years
            
            $
            2.70
            
            
            150,000
            
            $
            2.70$2.80
            
            
            75,000
            
            
            9.2
                years
            
            $
            2.80
            
            
            -
            
            
            -$2.85
            
            
            260,000
            
            
            9.7
                years
            
            $
            2.85
            
            
            75,000
            
            $
            2.85$3.05
            
            
            9,000
            
            
            9.6
                years
            
            $
            3.05
            
            
            -
            
            
            -$3.33
            
            
            75,000
            
            
            9.6
                years
            
            $
            3.33
            
            
            -
            
            
            -$3.45
            
            
            25,000
            
            
            9.7
                years
            
            $
            3.45
            
            
            -
            
            
            -$3.87
            
            
            50,921
            
            
            6.7
                years
            
            $
            3.87
            
            
            50,921
            
            $
            3.87$5.36
            
            
            309,631
            
            
            4.1
                years
            
            $
            5.36
            
            
            309,631
            
            $
            5.36$5.40
            
            
            50,921
            
            
            6.3
                years
            
            $
            5.40
            
            
            50,921
            
            $
            5.40$1.50
                - $5.40
            
            
            3,711,555
            
            
            8.0
                years
            
            $
            2.49
            
            
            2,009,974
            
            $
            2.56




71
 Index




Transactions
      involving options granted under the 2004 Plan during the years ended December
      31, 2003, 2004 and 2005 are summarized as follows:




**Number
                  of Shares**
              
              **Weighted-Average
                  Exercise Price**
              
              **Number
                  Exercisable**
              
              **Weighted-Average
                  Exercise Price**Balance
                  outstanding, December 31, 2002
              
              
              591,339
              
              $
              5.23
              
              
              265,008
              
              $
              5.082003:
                  Canceled
              
              
              (103,485
              )
              $
              5.362003:
                  Granted
              
              
              1,508,776
              
              $
              1.67Balance
                  outstanding, December 31, 2003
              
              
              1,996,630
              
              $
              2.53
              
              
              456,781
              
              $
              4.592004:
                  Canceled
              
              
              (385,468
              )
              $
              1.642004:
                  Granted
              
              
              1,101,413
              
              $
              1.96Balance
                  outstanding, December 31, 2004
              
              
              2,712,575
              
              $
              2.32
              
              
              1,405,358
              
              $
              2.662005:
                  Canceled
              
              
              (314,770
              )
              $
              2.142005:
                  Granted
              
              
              1,313,750
              
              $
              2.75Balance
                  outstanding, December 31, 2005
              
              
              3,711,555
              
              $
              2.49
              
              
              2,009,974
              
              $
              2.56






(1)
            Included
                in the balance outstanding at December 31, 2002, were the following
                options granted to members of the Board: (i) 362,194 options on February
                25, 2002, with an exercise price of $5.36, approximately two-thirds
                of
                which were vested immediately with the remainder vesting through
                February
                2003 and (ii) 50,921 options with an exercise price of $5.40 on April
                1,
                2002, one-quarter vesting immediately and the remainder vesting over
                three
                years. On the dates of grant, the fair value of the Company’s common stock
                was deemed to be $8.84 per share. Thus, in accordance with APB No.
                25, the
                Company recorded unearned compensation of $1,431,498, which was equal
                to
                the total intrinsic value of those options on the respective dates
                of
                grant. The Company will amortize unearned compensation as compensation
                expense, respectively, over the respective vesting periods of the
                options.
                For the years ended December 31, 2002, 2003, 2004 and 2005, the Company
                recognized $1,264,522, $113,069, $43,125 and $10,782 of compensation
                expense respectively for those
                options.




Included
      in the options above, during the years ended December 31, 2000, 2002 and 2003
      the Company granted 305,676 fully vested non-plan options, 50,921 fully vested
      options and 76,381 options vesting over one year under the Plan to non-employees
      (“Non-employee Options”) with average exercise prices of $3.87, $5.36 and $1.50,
      respectively, which are accounted for in accordance with EITF 96-18. The
      estimated fair values of the Non-employee Options on the grant dates in 2000
      and
      2002, totaling $707,550 and $62,564, respectively, were recognized as
      compensation expense in the years ended December 31, 2000 and 2002,
      respectively. During the year ended December 31, 2003, the Company recognized
      an
      expense of $57,672, in connection with Non-employee Options.




During
      2004, two consultants (the “Consultants”) received a total of 6,620 options to
      purchase shares of Common Stock at an exercise price of $1.97 per share. The
      options will be fully vested upon the first anniversary of the grant and expire
      in June 2014. As of December 31, 2004, the Company recognized $14,498 of
      compensation expense for these options based upon their fair value as estimated
      by the Company’s management, at the grant date




72
 Index




using
      the
      Black Scholes option pricing model. In addition, $118,003 of compensation
      expense was recognized in connection with the Non-employee Option that had
      been
      granted in 2003.




During
      2004, the Company granted to four employees and a Board member, a total of
      1,094,793 stock options with an exercise price of $1.96 per share, each vesting
      over three years. The deemed per share fair value of the Company’s Common Stock
      at the time of the stock option grant was $2.95, based upon the sale of Common
      Stock to investors in December 2004 (see Note 5). Accordingly, unearned
      compensation of $1,094,793, representing the intrinsic value of the options
      granted during 2004, was recorded. Such amount will be amortized to compensation
      expense ratably over the respective vesting periods of the options. The total
      amortized compensation expense associated with the options granted in 2004
      totaled $155,227 for the year ended December 31, 2004 and 334,890 for the year
      ended December 31, 2005.




During
      2005, one person and one entity received a total of 40,000 options to purchase
      shares of Common Stock at an exercise price of $2.85 per share. The options
      were
      fully vested upon the grant date and expire in September 2015. As of December
      31, 2005, the Company recognized $95,200 of compensation expense for these
      options based upon their fair value as estimated by the Company’s management, at
      the grant date using the Black Scholes option pricing model.




**10.**   **Warrants
      and Units**




The
      following table summarizes warrant and unit activity for the period from
      February 23, 1998 (inception) to December 31, 2005:


**Placement
                  Warrants**
              
              **Debenture
                  Warrants**
              
              **Bridge
                  Warrants**
              
              **Investor
                  Warrants**
              
              **Consultants
                  Warrants**
              
              **Finders
                  Units**Issuance
                  of Bridge Warrants (see Note 6)
              
              
              
              
              
              
              
              
              236,127Issuance
                  of Consultants Warrants (see Note 6)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              204,336Balance
                  outstanding, December 31, 1999
              
              
              -
              
              
              -
              
              
              236,127
              
              
              -
              
              
              204,336
              
              
              -Issuance
                  of Preferred A Warrants (see Note 5)
              
              
              
              
              
              
              
              
              
              
              
              415,403Exercise
                  of Consultants Warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (204,336
              )Issuance
                  of Finders Units (see Note 5)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15.83
              
              
              (1)Issuance
                  of Consultants Warrants (see Note 5)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,523Balance
                  outstanding, December 31, 2000
              
              
              -
              
              
              -
              
              
              236,127
              
              
              415,403
              
              
              15,523
              
              
              15.83Exercise
                  of Bridge Warrant
              
              
              
              
              
              
              
              
              (15,893
              )Exercise
                  of Consultants Warrants
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (15,523
              )Balance
                  outstanding, December 31, 2001 and 2002
              
              
              -
              
              
              -
              
              
              220,234
              
              
              415,403
              
              
              -
              
              
              15.83Exercise
                  of Bridge Warrants (see Note 6)
              
              
              -
              
              
              -
              
              
              (2,270
              )Balance
                  outstanding, December 31, 2003
              
              
              -
              
              
              -
              
              
              217,964
              
              
              415,403
              
              
              -
              
              
              15.83Issuance
                  of Debenture Warrants (see Note 6)
              
              
              
              
              
              226,314Issuance
                  of Placement Warrants (see Note 5)
              
              
              920,987Balance
                  outstanding, December 31, 2004
              
              
              920,987
              
              
              226,314
              
              
              217,964
              
              
              415,403
              
              
              -
              
              
              15.83Exercise
                  of Bridge and Investor Warrants
              
              
              
              
              
              
              
              
              (217,964
              )
              
              (26,518
              )Expiry
                  of Preferred A Warrant (see Note 5)
              
              
              
              
              
              
              
              
              
              
              
              (388,885
              )Issuance
                  of Consultants Warrants (see Note 5)
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              80,184
  73
 Index
  Issuance
                  of 2005 Investor Warrants (see Note 5)
              
              
              
              
              
              
              
              
              
              
              
              711,111Issuance
                  of 2005 Placement Warrants (see Note 5)
              
              
              853,333Balance
                  outstanding, December 31, 2005
              
              
              1,774,320
              
              
              226,314
              
              
              -
              
              
              711,111
              
              
              80,184
              
              
              15.83


(1)
            Each
                Finders Unit entitles the holder to purchase 28,459 shares of Common
                Stock. Total issuance entitles holders to purchase 450,506 shares
                Common
                Stock.




See
      Note
      2 for the description of the method and assumptions used to determine the fair
      value of the warrants issued.




**11.**   **Related
      Party Transactions**




The
      Company, from its inception, through the year ended December 31, 2002, received
      financial assistance from a principal stockholder in the form of office space
      and management and legal assistance provided at no cost. In accordance with
      the
      Staff Accounting Bulletin No. 79, the value of such assistance has been
      reflected in the accompanying financial statements as an expense in the period
      benefited with a corresponding deemed capital contribution. The value of the
      financial assistance totaled $1,075,182 for the cumulative period from February
      23, 1998 (inception) to December 31, 2005.




**12.**   **Income
      Taxes**




There
      is
      no net provision (benefit) for federal or state income taxes for the years
      ended
      December 31, 2003, 2004 and 2005 since the Company has incurred operating losses
      and has established valuation allowances equal to the total deferred tax asset
      due to the uncertainty with respect to achieving taxable income in the
      future.




The
      tax
      effect of temporary differences and net operating losses as of December 31,
      2004
      and 2005 are as follows:




**December
                  31, 2004**
              
              **December
                  31, 2005**Deferred
                  tax assets and valuation allowanceNet
                  operating loss carry forwards
              
              $
              10,084,000
              
              $
              12,969,000Other
                  deferred tax assets
              
              
              3,595,000
              
              
              3,612,000Research
                  and development tax credit carryforwards
              
              
              1,193,000
              
              
              1,970,000Valuation
                  allowance
              
              
              (14,872,000
              )
              
              (18,551,000
              )—
              
              
              —




74
 Index




The
      Company’s effective tax rates for 2004 and 2005 are calculated as
      follows:


**2004**
              
              **2005**Amount
              
              Percent
              
              Amount
              
              PercentPre
                  tax income (loss)
              
              $
              (7,046,828
              )
              
              
              
              $
              (10,611,772
              )Federal
                  tax provision (benefit) at statutory rate
              
              
              (2,395,922
              )
              
              34.0
              %
              
              (3,608,002
              )
              
              34.0
              %State
                  income tax benefit net of federal tax benefit
              
              
              (722,216
              )
              
              10.2
              %
              
              (748,462
              )
              
              7.1
              %Permanent
                  differences
              
              
              163,617
              
              
              -2.3
              %
              
              427,039
              
              
              -4.0
              %R
                  & D credit
              
              
              (432,225
              )
              
              6.1
              %
              
              (776,328
              )
              
              7.3
              %Change
                  in valuation allowance
              
              
              3,510,000
              
              
              -49.8
              %
              
              3,679,000
              
              
              -34.7
              %Change
                  in rate
              
              
              -
              
              
              0.0
              %
              
              911,066
              
              
              -8.6
              %Other
              
              
              (123,254
              )
              
              1.7
              %
              
              115,687
              
              
              -1.1
              %Total
                  income tax provision / (benefit)
              
              $
              (0
              )
              
              0.0
              %
              $
              0
              
              
              0.0
              %




**13.**
            **Subsequent
                Events**




In
      February 2006, the Company settled a litigation with West Pharmaceutical
      Services, Inc. (“West”) regarding West’s assignment of certain license
      agreements to Archimedes Pharma Limited (“Archimedes”) as part of the sale
      West’s Drug Delivery business to Archimedes. Under the terms of the settlement,
      on March 1, 2006 West paid the Company approximately $600,000 to resolve all
      claims, and the parties exchanged mutual releases.




Also
      in
      February 2006, the Company announced that Douglas A. Hamilton would be stepping
      down as Chief Operating Officer and Chief Financial Officer but would remain
      in
      his positions until a successor is named.




75
 Index




**SUPPLEMENTARY
      FINANCIAL INFORMATION (UNAUDITED)**




The
      following tables set forth unaudited quarterly operating results for fiscal
      years 2004 and 2005 in dollars and as a percentage of net revenue. This
      information in these tables has been prepared on a basis consistent with the
      audited consolidated financial statements included elsewhere in this report
      and,
      in the opinion of management, all adjustments that management considers
      necessary for the fair presentation thereof. These unaudited results should
      be
      read in conjunction with the consolidated financial statements and notes
      appearing elsewhere in this report. The sum of the quarterly loss per share
      may
      not total annual amounts reported in the consolidated financial statements
      as a
      result of any quarterly changes in the amount of weighted average common shares
      used in the calculation of basic and diluted loss per share.




Quarterly
      results of operations




(In
      thousands, except per share data)




(All
      share and per share amounts have been adjusted to reflect the 1.018 per share
      exchange ratio on the December 2004 reverse merger).




Unaudited
                Quarter endedMarch
                31,
            
            June
                30,
            
            September
                30,
            
            December
                31,2004
            
            2004
            
            2004
            
            2004Government
                grants & contract revenue
            
            $
            445
            
            $
            182
            
            $
            148
            
            $
            62Operating
                expenseResearch
                and development
            
            
            763
            
            
            794
            
            
            1,929
            
            
            1,320General
                and administrative
            
            
            429
            
            
            464
            
            
            338
            
            
            1,472Depreciation
                and amortization
            
            
            6
            
            
            6
            
            
            18
            
            
            2Operating
                loss
            
            
            (753
            )
            
            (1,082
            )
            
            (2,137
            )
            
            (2,732
            )Other
                income/(expense)
            
            
            4
            
            
            7
            
            
            -
            
            
            (354
            )Net
                loss attributable to commonStockholders
            
            $
            (749
            )
            $
            (1,075
            )
            $
            (2,137
            )
            $
            (3,086
            )Net
                loss per share attributable tocommon
                stockholders:Basic
                and diluted
            
            $
            (0.08
            )
            $
            (0.11
            )
            $
            (0.22
            )
            $
            (0.22
            )Weighted
                average shares
            
            
            9,919
            
            
            9,919
            
            
            9,919
            
            
            13,957




76
 Index




Quarterly
      results of operations




(In
      thousands, except per share data)




(All
      share and per share amounts have been adjusted to reflect the 1.018 per share
      exchange ratio on the December 2004 reverse merger).




Unaudited
                Quarter EndedMarch
                31,
            
            June
                30,
            
            September
                30,
            
            December
                31,2005
            
            2005
            
            2005
            
            2005Government
                grants & contract revenue (1)
            
            $
            368
            
            $
            643
            
            $
            99
            
            $
            438Operating
                expenseResearch
                & development
            
            
            1,127
            
            
            2,226
            
            
            2,415
            
            
            1,445General
                and administrative
            
            
            1,021
            
            
            1,279
            
            
            1,202
            
            
            1,720Depreciation
                and amortization
            
            
            10
            
            
            12
            
            
            12
            
            
            10Operating
                loss
            
            
            (1,790
            )
            
            (2,874
            )
            
            (3,530
            )
            
            (2,737
            )Other
                income/(expense)
            
            
            -
            
            
            46
            
            
            55
            
            
            218Net
                loss attributable to commonStockholders
            
            $
            (1,790
            )
            $
            (2,828
            )
            $
            (3,475
            )
            $
            (2,519
            )Net
                loss per share attributable tocommon
                stockholders:Basic
                and diluted
            
            $
            (0.07
            )
            $
            (0.11
            )
            $
            (0.13
            )
            $
            (0.07
            )Weighted
                average shares
            
            
            25,399
            
            
            25,563
            
            
            25,824
            
            
            34,458





(1)
            Grant
                and contract revenue during the quarter ended June 30, 2005 was overstated
                by approximately $147,000 due to an error in the allocation of costs
                among
                projects. The overstatement was corrected in the quarter ended September
                30, 2005, resulting in an understatement of grant and contract revenue
                for
                the quarter. In addition, the Company had not been appropriately
                recognizing revenue and receivables related to reimbursable indirect
                project costs that were earned in prior periods, resulting in an
                understatement of revenue of approximately $57,000 and $52,000 for
                the
                years ended December 31, 2003 and 2004, respectively. The error also
                resulted in a $14,000 overstatement of revenue for the quarter ended
                March
                31, 2005 and a $12,000 understatement of revenue for the quarter
                ended
                June 30, 2005. The Company corrected the cumulative effect of this
                error
                during the quarter ended September 30, 2005, resulting in an overstatement
                of grant and contract revenue by approximately $107,000 for the quarter
                ended September 30, 2005.






77
 Index




**ITEM
      9. CHANGES IN AND
      DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**




During
      the fourth quarter of fiscal 2004, we reported on a Form 8-K for an event of
      December 13, 2004, reporting that on December 13, 2004, we changed our
      independent registered public accounting firm to PricewaterhouseCoopers LLP
      from
      Paritz & Company, P.A.




**ITEM
                9A.**
            **CONTROLS
                AND PROCEDURES**




We
      have
      disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
      of the Securities Exchange Act of 1934) to ensure that material information
      relating to us and our consolidated subsidiaries are recorded, processed,
      summarized and reported within the time periods specified by the SEC’s rules and
      forms, particularly during the period in which this annual report has been
      prepared.




Our
      principal executive officer and principal financial officer have reviewed and
      evaluated our disclosure controls and procedures as of the end of the period
      covered by this report. Based on such evaluation, our principal executive
      officer and principal financial officer have concluded that our disclosure
      controls and procedures are effective at ensuring that material information
      is
      recorded, processed, summarized and reported on a timely and accurate basis
      in
      our filings with the SEC.




We
      experienced turnover in a key financial management position in fourth quarter
      2005. Accordingly, we have increased the overall number of personnel in the
      finance department, recruited a temporary replacement for the open position
      and
      we are actively recruiting qualified candidates for a permanent replacement.
      In
      addition the Company is also actively recruiting additional financial personnel
      to meet the needs of our anticipated future growth.




In
      February 2006, the Company announced that Douglas A. Hamilton would be stepping
      down as Chief Operating Officer and Chief Financial Officer but would remain
      in
      his position until a successor is named.




Except
      as
      noted above, there has been no change in our internal control over financial
      reporting during our most recent fiscal quarter that has materially affected,
      or
      is reasonably likely to materially affect, our internal control over financial
      reporting.




**ITEM  9B****.**  **OTHER
      INFORMATION**




We
      filed
      Forms 8-K for the fourth quarter of fiscal 2005 disclosing therein all
      information required to be disclosed in a Form 8-K during that fiscal
      quarter.




78
 Index




**PART
      III.**




**ITEM
                10.**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**




**Executive
      Officers and Directors**




As
      of
      December 31, 2005, our executive officers and directors were:




Name
            Age
            PositionDouglas
                G. Watson1,2,3
            60
            Chairman
                of the Board and DirectorDaniel
                B. Carr, M.D.
            57
            Chief
                Executive Officer, Chief Medical Officer and DirectorFred
                H. Mermelstein, Ph.D.3
            46
            President,
                Secretary and DirectorDouglas
                A. Hamilton
            40
            Chief
                Operating Officer and Chief Financial OfficerJackie
                M. Clegg1,2,3
            43
            DirectorPeter
                M. Kash
            44
            DirectorWilliam
                P. Peters1
            54
            Director





1.  Member
      of
      Audit Committee


2.  Member
      of
      Compensation Committee


3.  Member
      of
      Corporate Governance Committee




Each
      director serves for a staggered three-year term, with two directors standing
      for
      election each year. The terms expire at the following annual meeting of
      stockholders: 2006-Messrs. Kash and Watson, 2007-Drs. Carr and Mermelstein,
      and
      2008-Ms. Clegg and Dr. Peters.




The
      principal occupations and brief summary of the background of each director
      and
      executive officer is as follows:




**Douglas
      G. Watson** has
      served as our Chairman of the Board and a director since December 2004, and
      as a
      director of IDDS since April 2002. He is the Chief Executive Officer of
      Pittencrieff Glen Associates, a consulting company, which he founded in June
      1999. From January 1997 to June 1999, Mr. Watson served as President, Chief
      Executive Officer and a director of Novartis Corporation, the U.S. subsidiary
      of
      Novartis A.G. Mr. Watson serves as Chairman of OraSure Technologies, Inc.
      [Nasdaq: OSUR], as a director of Engelhard Corporation, [NYSE:EC], Genta Inc.
      [Nasdaq:GNTA], and Dendreon Corporation [Nasdaq:DNDN] as well as BioElectronics
      Inc. and InforMedix Inc. Mr. Watson is the chairman of Freedom House Foundation
      and a director of the American Liver Foundation. Mr. Watson holds a M.A. in
      Mathematics from Churchill College, Cambridge University. He is also a member
      of
      the Chartered Institute of Management Accountants.




**Daniel
      B. Carr M.D.** has
      served as our Chief Executive Officer since July 2005, a director since December
      2004 and our Chief Medical Officer since September 2004 when he joined IDDS
      from
      his position as Saltonstall Professor of Pain Research at Tufts-New England
      Medical Center, and Professor of Anesthesiology and Medicine. He had held both
      positions since 1994. He ended his clinical responsibilities effective September
      2004. From 1995 to 2003, he was the Medical Director of the Pain Management
      Program at the New England Medical Center, that merged into the Pain Management
      program at Caritas St. Elizabeth’s Medical Center, another Tufts-affiliated
      program. Dr. Carr was a founder of the Pain Center at the Massachusetts General
      Hospital and served as Special Consultant to the U.S. Department of Health
      and
      Human Services and Co-Chair of the Agency for Health Care Policy and Research’s
      Clinical Practice Guidelines on Acute and Cancer Pain Management. He is
      Editor-in-Chief of Pain: Clinical Updates published by the International
      Association for the Study of Pain (“IASP”), and has served as a Director of the
      American Pain Society and the IASP. Dr. Carr holds a bachelors degree from
      Columbia College and an M.D. degree from Columbia University College of
      Physicians and Surgeons.




**Fred
      Mermelstein, Ph.D.** has
      served as our President, Secretary and a director since December 2004, having
      been our Chief Executive Officer from December 2004 through June 2005, and
      as a
      director of IDDS and as its President from inception in February 1998 through
      July 2003 when he also became Chief Executive Officer. From April 1996 to July
      2003, he was employed by Paramount Capital Investments, LLC where he became
      a
      Director of




79
 Index


Venture
      Capital and a member of Orion Biomedical GP, LLC. He currently serves as a
      director of Cardiome Pharma Corp [Nasdaq:CRME] and Adherex Technologies, Inc.
      [ASE:ADH]. From February 1997 until January 2000, Dr. Mermelstein was a founder
      and served as a director and the Chief Scientific Officer of PolaRx
      BioPharmaceuticals, an oncology-based biopharmaceutical company. Dr. Mermelstein
      also serves on the scientific advisory board of Cardiome Pharma Corp. Dr.
      Mermelstein holds a dual Ph.D. in Pharmacology and Toxicology from Rutgers
      University and University of Medicine and Dentistry of New Jersey (“UMDNJ”)
      Robert Wood Johnson Medical School. He completed his post-doctoral training
      supported by two grant awards, a National Institutes of Health fellowship and
      a
      Howard Hughes Medical Institute fellowship in the Department of Biochemistry
      at
      UMDNJ Robert Wood Johnson Medical School.




**Douglas
      A. Hamilton** has
      served as our Chief Operating Officer and Chief Financial Officer since December
      2004, and as IDDS’s Chief Financial Officer since March 1999 and as its Chief
      Operating Officer since April 2001. Mr. Hamilton concurrently served as Chief
      Financial Officer and Project Manager for Trisenox® at PolaRx BioPharmaceuticals
      from March 1999 to October 2000. From March 1999 to August 2002, Mr. Hamilton
      also concurrently served as Director, Business Development at Paramount Capital
      Investments, LLC. From October 1997 to March 1999, he served as Project Manager
      for Zithromax® and Vfend® in addition to being a member of the Strategic Asset
      Management (SAM) task force in Central Research at Pfizer, Inc. From August
      1993
      to October 1997, Mr. Hamilton served as Project Manager at Amgen Inc. for
      EPOGEN®, Aransep® and STEMGEN®, among other products, and assumed responsibility
      for developing and leading a research and development portfolio management
      system. Mr. Hamilton has also served in various capacities at other
      biopharmaceutical companies including sales and marketing at Pharmacia, business
      development at NPS Allelix Biopharmaceuticals, Inc. and research at Pasteur
      Merieux Connaught. Mr. Hamilton holds a M.B.A. from the Richard Ivey School
      of
      Business and a B.S. in Molecular Biology and Molecular Genetics from the
      Department of Medical Genetics at the University of Toronto.




**Jackie
      M. Clegg.** The
      Honorable Jackie M. Clegg has served as a director since December 2004, and
      as a
      director of IDDS since February 2004. In September 2001, she formed the
      international strategic consulting firm Clegg International Consultants, LLC
      (“CIC”) specializing in emerging markets. From May 1997 to July 2001, Ms. Clegg
      served as Vice Chair of the Board of Directors and First Vice President of
      the
      Export-Import Bank of the United States (“Ex-Im Bank”), having previously served
      in various positions from 1993 to 1997 at Ex-Im Bank, including Chief of Staff.
      Prior to joining Ex-Im Bank, Ms. Clegg worked for ten years in the United States
      Senate on the staff of both the Banking and the Appropriations Committees.
      Ms.
      Clegg is also currently serving as a director of Blockbuster Inc. [NYSE: BBI],
      Brookdale Senior Living, Inc. [NYSE: BKD], The Chicago Board of Trade [NYSE:
      BOT] and Cardiome Pharma Corp. [Nasdaq: CRME].




**Peter
      M. Kash** has
      served as a director since December 2004, and as a director of IDDS since
      February 2001 and served as Vice Chairman since December 2003. From 2001 to
      2004, he served as Vice Chairman and a director of Keryx BioPharmaceuticals,
      Inc. [Nasdaq:KERX]. In September 2004 Mr. Kash co-founded Two River Group
      Holdings, LLC, a biotechnology venture capital company, where he currently
      serves as Chairman. Additionally, Mr. Kash is the Chairman of Riverbank Capital
      Securities, Inc., a NASD member broker-dealer. Mr. Kash also serves on the
      board
      of directors of several privately held biotechnology companies. From 1991
      through August 2004, he was a director and Senior Managing Director of Paramount
      BioCapital, Inc. In addition, from 1996 to 2000, Mr. Kash had served as an
      Adjunct Professor at The Wharton School of Business; from 2000 to 2002, he
      was a
      Visiting Professor at Nihon University, Tokyo, Japan; and since January, 2004,
      he has been an Adjunct Professor at Sy Syms School of Business at Yeshiva
      University. Mr. Kash holds a M.B.A. in Finance and Banking from Pace
      University.




**William
      P. Peters M.D., Ph.D.** has
      served as a director since July 2005. Dr. Peters has been the Chief Executive
      Officer of Adherex Technologies, Inc. [ASE:ADH] since March 2003, the Chairman
      of its Board of Directors since February 2004, and a member of its Board of
      Directors since November 2002, having served from March 2003 to February 2004,
      as the Vice Chairman of the Board of Adherex. Dr. Peters has served on the
      faculty at Harvard University, Duke University and Wayne State University.
      He
      originated the solid tumor high-dose chemotherapy and bone marrow transplant
      program at the Dana-Farber Cancer Institute, and was Director of Bone Marrow
      Transplantation, Professor of Medicine at Duke University from 1984 to 1995
      and
      was an Associate Director of the Cancer Center. He then became President,
      Director and CEO of the Karmanos Cancer Institute from 1995 to 2001, and is
      currently President Emeritus. Simultaneously, he served as Associate Dean for
      Cancer at




80
 Index





Wayne
      State University and Senior Vice President for Cancer Services at the Detroit
      Medical Center. In 2001, he organized the Institute for Strategic Analysis
      and
      Innovation at the Detroit Medical Center of which he served as President. Dr.
      Peters has three Bachelor’s degrees (Biochemistry, Biophysics and Philosophy)
      from the Pennsylvania State University, and received his MPhil, MD and PhD
      degrees from the Columbia University College of Physicians & Surgeons. He
      earned his MBA at the Duke University Fuqua School of Business.




There
      is
      no family relationship among our officers and directors. Dr. Mermelstein serves
      on the Board of Directors of Adherex Technologies, Inc., of which Dr. Peters
      is
      Chief Executive Officer, and Dr. Mermelstein and Ms. Clegg both serve on the
      Board of Directors of Cardiome Pharma Corp.




**Board
      Committees**




We
      have
      an Audit Committee, a Compensation Committee and a Corporate Governance
      Committee.




The
      Audit
      Committee is responsible for (i) overseeing the corporate accounting and
      financing reporting practices, (ii) recommending the selection of our registered
      public accounting firm, (iii) reviewing the extent of non-audit services to
      be
      performed by the auditors, and (iv) reviewing the disclosures made in our
      periodic financial reports.




The
      Compensation Committee determines matters pertaining to the compensation of
      executive officers and other significant employees, and administers our stock
      and incentive plans.




The
      Corporate Governance Committee establishes internal corporate policies and
      nominates persons to serve on our Board of Directors.




**ITEM
      11.**   **EXECUTIVE
      COMPENSATION**




**Executive
      Compensation**




The
      following table sets forth certain information concerning all cash and non-cash
      compensation awarded to, earned by or paid to the Chief Executive Officer and
      other executive officers of Javelin with total compensation in excess of
      $100,000 during the three fiscal years ended December 31, 2005:




**Annual
                Compensation****Name
                and Principal Position**
            
            **Fiscal
                Year**
            
            **Salary**
            
            **Bonus**
            
            **Other
                Annual Compensation**
            
            **Long-Term
                Compensation Awards****Securities
                Underlying Options (1) (2) (3)**Daniel
                B. Carr, M.D.
            
            
            2005
            
            $
            350,000
            
            $
            190,000Chief
                Executive Officer and
            
            
            2004
            
            $
            111,506
            
            $
            50,000Chief
                Medical Officer (1)Fred
                H. Mermelstein, Ph.D.
            
            
            2005
            
            $
            228,000
            
            $
            75,000
            
            
            —
            
            
            —President
                (2)
            
            
            2004
            
            $
            190,000
            
            $
            80,000
            
            
            —
            
            
            —2003
            
            $
            148,250
            
            
            —
            
            
            —
            
            
            —Douglas
                A. Hamilton
            
            
            2005
            
            $
            235,000
            
            $
            115,000
            
            
            —
            
            
            —Chief
                Operating Officer and
            
            
            2004
            
            $
            165,000
            
            $
            75,000
            
            
            —
            
            
            —Chief
                Financial Officer (3)
            
            
            2003
            
            $
            205,182
            
            
            —
            
            
            —
            
            
            —




81
 Index




(1)
              Dr.
                  Carr was granted options for 12,500 shares at an exercise price
                  of $2.70
                  per share in 2005 and for 916,570 shares at an exercise price of
                  $1.96 per
                  share when Dr. Carr’s employment commenced on September 7,
                  2004.


(2)
            Dr.
                Mermelstein was granted options for 200,000 shares at exercise prices
                of
                $2.70 per share in 2005, no options 2004 and options for 381,904
                shares at
                exercise prices from $1.50 to $1.96 per share in 2003. The share
                information in these footnotes is based upon shares of the common
                stock
                giving effect to the Merger.




(3)
            Mr.
                Hamilton was granted options for 150,000 shares at exercise price
                of $2.70
                per share in 2005, no options in 2004 and options for 229,143 shares
                at
                exercise prices from $1.50 to $1.96 per share in
                2003.




Other
      than as described in the table above, we did not pay any executive officer
      any
      compensation, including incidental personal benefits, in excess of 10% of such
      executive officer’s salary.




**Directors’
      Compensation**




We
      compensate non-employee members of our Board for serving as a Board member
      up to
      $2,500 per meeting and through the grant of stock options on an annual basis
      and
      a per meeting basis, including committee meetings. Effective as of March 2006,
      our option policy is an initial grant of 50,000 shares of common stock to an
      outside director upon becoming a director vesting after one year, and thereafter
      a triennial grant of 75,000 shares, vesting annually as to 25,000 shares after
      one year.  In addition, a non-employee director would be granted an annual
      option award of 20,000 shares for serving as Chairman of the Board, 5,000 shares
      for serving on one or more Board committees, and a further 5,000 shares for
      serving as a committee chair except the chair of the Audit Committee would
      receive a further 10,000 shares, which options would vest after one year. 
The exercise price would be at fair market value at time of grant.




**Compliance
      with Section 16 (a)**




Based
      solely on its review of copies of Forms 3 and 4 received by us or
      representations from certain reporting persons, we believe that, during the
      fiscal year ended December 31, 2005, there was compliance with Section 16 (a)
      filing requirements applicable to our officers and directors.




**Employment
      Agreements**




The
      only
      employment agreement by us or IDDS with any executive officer is the agreement
      with Daniel B. Carr.




Effective
      as of September 7, 2004, Dr. Carr was appointed Chief Medical Officer and he
      became the Chief Executive Officer as of July 1, 2005. The employment agreement
      is for a term of three years, unless earlier terminated. Dr. Carr is receiving
      an initial annual base salary of $350,000, plus a guaranteed bonus of $50,000
      payable within 30 days of the first anniversary of the effective date of the
      agreement, plus certain incentive compensation at the discretion of the board
      of
      directors, if certain performance targets are met, of up to $320,000 or options
      for 200,000 shares of common stock. In addition, upon commencement of
      employment, Dr. Carr was granted an option to purchase 916,570 shares of common
      stock at an exercise price of $1.96 per share, as adjusted for the merger,
      vesting in three equal installments commencing upon the first anniversary of
      the
      agreement.




If
      Dr.
      Carr’s employment is terminated as a result of his death or disability, Dr. Carr
      or to Dr. Carr’s estate, as applicable, would receive his base salary and any
      accrued but unpaid bonus and expense reimbursement amounts through the date
      of
      his death or the disability occurs. All stock options that are scheduled to
      vest
      by the end of the calendar year in which such termination occurs would be
      accelerated and become vested as of the date of his disability or death, and
      all
      stock options that have not vested (or been deemed pursuant to the immediately
      preceding sentence to have vested) as of the date of his disability or death
      shall be deemed to have expired as of such date. If Dr. Carr’s employment is
      terminated for cause, he would be entitled to his base salary and expense
      reimbursement through the date of termination, and he shall have no further
      entitlement to any other compensation or benefits. All stock options that have
      not vested as of the date of termination be deemed to have expired as of such
      date and any stock options that have vested as of the date of Dr. Carr’s
      termination for cause would remain exercisable for a period of 90 days following
      the date of such termination. If Dr. Carr’s employment is terminated upon the
      occurrence of a change of control of within six months thereafter, we would
      be
      obligated to (i) continue to pay his salary for a period of six months following
      such termination, (ii) pay any accrued and unpaid bonus and (iii) pay




82
 Index




expense
      reimbursement amounts through the date of termination. All stock options that
      have not vested as of the ate of such termination would be accelerated and
      deemed to have vested as of such termination date. If Dr. Carr’s employment is
      terminated without cause, or by Dr. Carr for good reason, as defined, then
      we
      would be obligated to (i) continue to pay his base salary for a period of 12
      months from the date of such termination, (ii) pay the bonus he would have
      earned had he been employed for six months from the date which such termination
      occurs, and (iii) pay any expense reimbursement amounts owed through the date
      of
      termination. All stock options that are scheduled to vest in the contract year
      of the date of such termination shall be accelerated and deemed to have vested
      as of the termination date. All stock options that have not vested (or deemed
      to
      have vested pursuant to the preceding sentence) shall be deemed expired, null
      and void. Any stock options that have vested as of the date of Dr. Carr’s
      termination shall remain exercisable for a period as outlined in our omnibus
      stock option program.




**Option
      Grants, Option Exercises and Fiscal Year-End Values**




The
      following tables set forth certain information concerning the grant of stock
      options and the number and value of securities underlying exercisable and
      unexercisable stock options as of the fiscal year ended December 31, 2005 by
      the
      executive officers listed in the Summary Compensation Table above. None of
      these
      named persons has exercised any stock options.




**Options/SAR
                  Grants in Last Fiscal Year Individual Grants**(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)**Name**
              
              
              **Number
                  of Securities Underlying Options/SARs Granted**
              
              
              **%
                  of Total Options/SARS Granted to Employee(s) in Fiscal
                  Year**
              
              
              **Exercise
                  on Base Price ($/Sh**
              **)**
              
              **Expiration
                  Date**Daniel
                  B. Carr, MD
              
              
              12,500
              
              
              1.0%
              
              $
              2.70
              
              
              4/12/15Fred
                  H. Mermelstein, Ph.D.
              
              
              200,000
              
              
              15.2%
              
              $
              2.70
              
              
              4/12/15Douglas
                  A. Hamilton
              
              
              150,000
              
              
              11.4%
              
              $
              2.70
              
              
              4/12/15






**Aggregate
                  Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
                  Values**(a)
              
              (b)
              
              (c)
              
              (d)
              
              (e)Name
              
              
              Shares
                  Acquired on Exercise
              
              
              Value
                  Realized
              
              
              Number
                  of Securities Underlying Unexercised Options at Dec. 31, 2005 Exercisable/
                  Unexercisable
              
              
              Value
                  of Unexercised In-the-Money Options At Dec. 31, 2005 Exercisable
                  ($)/
                  Unexercisable ($)*Daniel
                  B. Carr, MD
              
              
              -0-
              
              
              —
              
              
              305,524/623,546
              
              $
              302,469/$608,061Fred
                  H. Mermelstein, Ph.D.
              
              
              -0-
              
              
              —
              
              
              620,619/167,433
              
              $
              471,944/$73,259Douglas
                  A. Hamilton
              
              
              -0-
              
              
              —
              
              
              433,911/100,460
              
              $
              290,667/$43,955




*Assuming
      a value of $2.95 per share at December 31, 2005.




83
 Index




**Stock
      Option Plans**




Prior
      to
      the IDDS merger, we adopted the 2004 Omnibus Stock Incentive Plan (the “Intrac
      Plan”) covering the grant of stock options, restricted stock and other employee
      awards, and in September 2005, stockholders ratified the Intrac Plan. The Intrac
      Plan followed the IDDS Amended and Restated 2000 Omnibus Stock Incentive Plan
      (the “IDDS Plan”). Upon the IDDS merger, the outstanding options under the IDDS
      Plan were exchanged for options under the Intrac Plan with the number of option
      shares and the exercise prices adjusted to reflect the merger exchange ratio.
      Upon the migratory merger, the Javelin 2005 Omnibus Stock Incentive Plan (the
      “Plan”) became effective and the outstanding options under the Intrac Plan were
      exchanged for similar options under the Plan. As of December 31, 2005, under
      the
      Plan, options for the purchase of an aggregate of 3,711,555 shares of our common
      stock were outstanding at exercise prices ranging from $1.50 to $5.40 per share.
      In addition, as of such date, there were outstanding options not granted under
      the plan for an aggregate of 1,184,058 shares of common stock at an exercise
      price of $3.87 per share.




**Compensation
      Committee Interlocks and Insider Participation**




The
      members of our Compensation Committee Mr. Watson, Chairman, and Ms. Clegg and
      Mr. Kash, none of whom is an executive officer or employee of the Company or
      its
      subsidiaries.




**ITEM
      12.**   **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




The
      following table sets forth information known to us with respect to the
      beneficial ownership of our Common Stock as of the close of business on December
      31, 2005 for (i) each person known by us to beneficially own more than 5% of
      our
      voting securities, (ii) each executive officer, (iii) each of our directors,
      and
      (iv) all of our executive officers and directors as a group.




Name
                and Address of Beneficial Owner (2)
              Shares
                  Beneficially Owned
                (1)Number
              PercentWexford
                  Capital LLC (3)
                411
                  West Putnam Avenue, Suite 125
                Greenwich,
                  CT 06930
              5,012,642
              12.3%Lindsay
                  A. Rosenwald (4)
                c/o
                  Paramount BioCapital Investments, LLC
                787
                  Seventh Avenue, 48th Floor
                New
                  York, NY 10019
              4,631,848
              11.5%NGN
                  Capital, LLC (5)
                369
                  Lexington Avenue, 17th Floor
                New
                  York, NY 10017
              3,111,111
              7.7%Peter
                  M. Kash (6)
              1,069,170
              2.6%Fred
                  H. Mermelstein (7)
              1,175,435
              2.9%Douglas
                  A. Hamilton (8)
              819,131
              2.0%Daniel
                  B. Carr (9)
              309,524
              0.8%Douglas
                  G. Watson (10)
              86,565
              0.2%Jackie
                  M. Clegg (11)
              50,921
              0.1%William
                  P. Peters (12)
              2,000
              0.0%All
                  officers and directors
                as
                  a group (13)
              3,512,746
              8.3%
  84
 Index


(1)
            The
                number of shares beneficially owned is determined under SEC rules,
                and the
                information is not necessarily indicative of beneficial ownership
                for any
                other purpose. Under those rules, beneficial ownership includes any
                shares
                as to which the individual has sole or shared voting power or investment
                power, and also any shares which the individual has the right to
                acquire
                within 60 days of December 31, 2005, through the exercise or conversion
                of
                any stock option, convertible security, warrant or other right (a
                “Presently Exercisable” security). Including those shares in the tables
                does not, however, constitute an admission that the named stockholder
                is a
                direct or indirect beneficial owner of those
                shares.




(2)
            Unless
                otherwise indicated, each person or entity named in the table has
                sole
                voting power and investment power (or shares that power with that
                person’s
                spouse) with respect to all shares of common stock listed as owned
                by that
                person or entity. Unless otherwise indicated, the address of each
                of the
                following persons is 130 West 42nd Street, 12th Floor, New York,
                NY
                10036.




(3)
            Includes
                (i) 2,568,198 shares owned of record by Wexford Spectrum Investors
                LLC and
                111,111 shares obtainable upon exercise of Presently Exercisable
                Warrants
                and (ii) 2,222,222 shares owned of record by Theta Investors LLC
                and
                111,111 shares obtainable upon exercise of Presently Exercisable
                Warrants,
                as reported on Schedule 13 G/A, filed on February 7,
                2006.




(4)
            Includes
                (i) an aggregate of 4,245,238 shares with sole voting and dispositive
                power and (ii) 386,610 shares owned by Horizon Biomedical Ventures,
                LLC,
                as reported on Schedule 13 G/A, filed on February 10, 2006.




(5)
            Includes
                (i) 1,805,689 shares owned of record by NGN Biomed Opportunity Fund
                L.P.
                and (ii) 1,305,422 shares owned of record by NGN Biomed Opportunity
                I GmbH
                & Co. Beteiligungs KG, and does not include 155,556 shares obtainable
                upon exercise of warrants not Presently Exercisable. In their Schedule
                13D, filed November 17, 2005, each of these persons expressly disclaimed
                membership in a “group” or beneficial ownership of any shares of common
                stock except for shares held of
                record.




(6)
            Includes
                72,856 shares owned by each of a family trust and members of his
                family.
                Mr. Kash disclaims beneficial ownership of these shares except to
                the
                extent of his pecuniary interest therein. Also, includes (i) 169,410
                shares obtainable upon exercise of Presently Exercisable options,
                (ii) a
                unit purchase option to acquire 170,393 shares and warrants to purchase
                17,039 shares, (iii) warrants to purchase 153,000, (iv) warrants
                to
                purchase 95,000 shares owned by a company for which Mr. Kash serves
                as
                President and Chairman, as to which shares Mr. Kash disclaims beneficial
                ownership except to the extent of his pecuniary interest therein.
                Excludes
                35,000 shares obtainable upon exercise of options not Presently
                Exercisable.




(7)
            Includes
                620,619 shares obtainable upon exercise of Presently Exercisable
                options.
                Excludes 167,433 shares obtainable upon exercise of options not Presently
                Exercisable.




(8)
            Includes
                433,911 shares obtainable upon exercise of Presently Exercisable
                options.
                Excludes 100,460 shares obtainable upon exercise of options not Presently
                Exercisable.




(9)
            Includes
                305,524 shares obtainable upon exercise of options not Presently
                Exercisable. Excludes 623,546 shares obtainable upon exercise of
                options
                not Presently Exercisable.




(10)
            Includes
                86,565 shares obtainable upon exercise of Presently Exercisable options.
                Excludes 45,000 shares obtainable upon exercise of options not Presently
                Exercisable.




(11)
            Includes
                50,921 shares obtainable upon exercise of Presently Exercisable options.
                Excludes 35,000 shares obtainable upon exercise of options not Presently
                Exercisable.




(12)
            Excludes
                50,000 shares obtainable upon exercise of options not Presently
                Exercisable.




85
 Index




(13)
            Includes
                all shares of the persons denoted in footnotes (6) through
                (12).




**ITEM
      13.**   **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**




Dr.
      Lindsay A. Rosenwald, one of our largest stockholders, is the sole member of
      Paramount BioCapital Investments, LLC (“PBI”), f/k/a Paramount Capital
      Investments, LLC. PBI is a venture capital and merchant banking firm focused
      on
      development stage biotechnology, biomedical and biopharmical companies. Until
      December 2002, we had shared executive offices on a rent-free basis with PBI,
      and also received related back office and financial support and management
      services free of charge.




Dr.
      Rosenwald is also Chairman and sole stockholder of Paramount BioCapital, Inc.
      (“Paramount”) f/k/a Paramount Capital, Inc., an NASD member broker-dealer
      affiliated with PBI. Employees or affiliates of Paramount participated as
      investors in the August 2003 placement of IDDS Series C Preferred
      Stock.




Dr.
      Fred
      Mermelstein, our President, Chief Executive Officer, Secretary and a director,
      had served as the Director of Venture Capital of PBI until July
      2003.




In
      April
      2005, we retained Two River Group Holding LLC, of which Peter M. Kash, one
      of
      our directors, is a member, to provide certain investment relations services.
      The retention was through December 31, 2005 and the fee was a grant of five-year
      warrants for the purchase of 20,000 shares of common stock at an exercise price
      of $3.00 per share.




River
      Bank Securities, Inc., a subsidiary of Two River Group Holding LLC, was a
      co-placement agent in our November 2005 placement for which it received
      $1,151,992.42 in placement fees, placement warrants for the purchase of 512,000
      shares of common stock exercisable at $2.48 per share for five years, and
      reimbursement of its expenses.




Mr.
      Kash
      was Senior Managing Director of Paramount and a director of Paramount BioCapital
      Asset Management, Inc. (“PBCAM”), an affiliate of PBI Paramount, through August
      2004. He also served until September 2004, as a director to The Aries Master
      Fund, The Aries Master Fund II and Aries Select, Ltd., for which PBCAM serves
      as
      general partner.




**ITEM
      14.**   **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**




For
      each
      of the two fiscal years ended December 31, 2005, the fees to our independent
      registered public accounting firm for services they rendered to us were as
      set
      forth below. A portion of the audit fees for 2005 and 2004 were paid in 2006
      and
      2005, respectively.




2005
            
            2004Audit
                fees
            
            $
            150,000
            
            $
            84,893Quarterly
                reviews
            
            
            154,000
            
            
            14,000Merger,
                due diligence on Intrac
            
            
            -
            
            
            95,000SEC
                Filings
            
            
            15,000
            
            
            50,658Total
            
            $
            319,000
            
            $
            244,551





In
      December 2004, we established an Audit Committee. Prior to that date, Intrac
      was
      inactive and IDDS was a private company. The Audit Committee approved all the
      principal accounting fees for fiscal 2005.




86
 Index




**PART
      IV.**




**ITEM
                15.**
            **EXHIBITS
                AND****FINANCIAL
                STATEMENT SCHEDULES**




(b) Exhibits,
      including those incorporated by reference.




Exhibit
                No.
            Description2.1
            Agreement
                and Plan of Merger dated December 6, 2004 among Intrac, Inc. (“Intrac”),
                Intrac Merger Sub Inc. (“Intrac Sub”), and Innovative Drug Delivery
                Systems, Inc.(“IDDS”) [incorporated by reference to Exhibit 2.1 in the
                Company’s Form 8-K filed December 10, 2004 (the “December 10 Form
                8-K”)].3.1
            Certificate
                of Incorporation [incorporated by reference to Exhibit 3.1 to the
                Company’s Form 8-K, filed September 9, 2005 (the “September 2005 Form
                8-K”)].3.2
            Bylaws
                [incorporated by reference to Exhibit 3.2 to the Company’s September 2005
                Form 8-K].3.4
            Certificate
                of Merger between the Company and Intrac Inc., filed on September
                7, 2005
                with the Secretary of State of the State of Delaware [incorporated
                by
                reference to Exhibit 3.3 to the September 2005 Form 8-K].4.1
            2004
                Omnibus Stock Incentive Plan [incorporated by reference to Exhibit
                4.1 to
                the December 10 Form 8-K].4.2
            Form
                of Common Stock Purchase Warrant, dated November 5, 2004, issued
                by IDDS
                as part of bridge financing [incorporated by reference to Exhibit
                4.3 to
                the 2005 Form SB 2].4.3
            Placement
                Agent Warrant Agreement, dated December 6, 2004, issued by IDDS
                [incorporated by reference to Exhibit 4.4 to the 2005 Form
                SB-2].4.4
            Form
                of Common Stock Purchase Warrant [incorporated by reference to Exhibit
                4.1
                to the Company’s Form 8-K, filed November 10, 2005 (the “November 2005
                Form 8-K”)].4.5
            Form
                of Placement Agent Warrants [incorporated by reference to Exhibit
                4.2 to
                the Company’s November 2005 Form 8-K].4.6*
            Common
                Stock Purchase Warrant, dated September 7, 2005,
                issued by the Company to Aurora Capital LLC.4.7.1*
            Common
                Stock Purchase Warrant, dated September 7, 2005,
                issued by the Company to The Investor Relations Group,
                Inc..4.7.2*
            Common
                Stock Purchase Warrant, dated September 30,
                2005, issued by the Company to The Investor Relations Group,
                Inc..4.8*
            Common
                Stock Purchase Warrant, dated September 7, 2005,
                issued by the Company to Two River Group Holding, LLC.10.1.1
            Form
                of Subscription Agreement for December 2004 IDDS Placement [incorporated
                by reference to Exhibit 10.2 to the December 10 Form 8-K].10.1.2
            Form
                of Registration Rights Agreement dated as of December 6, 2004 between
                IDDS
                and each purchaser in the December 2004 IDDS Placement [incorporated
                by
                reference to Exhibit 10.3 to the December 10 Form 8-K].




87
 Index




10.2
            License
                Agreement effective as of December 14, 2001 among Farmarc N.A.N.V.,
                Farmarc Netherlands B.V., Shimoda Biotech (Proprietary) Ltd. and
                IDDS
                [incorporated by reference to Exhibit 10.11 to IDDS Registration
                Statement
                on Form S-1 (No. 333-76190)(the “IDDS Form S 1”)].10.3.1
            License
                Agreement dated as of August 25, 2000 among West Pharmaceutical Services,
                Inc., West Pharmaceutical Services Drug Delivery & Clinical Research
                Centre Ltd. and IDDS [incorporated by reference to Exhibit 10.4 to
                the
                IDDS Form S-1].10.3.2
            Amendment,
                dated February 8, 2005 to West Pharmaceutical Services Agreement
                [incorporated by reference to Exhibit 10.3.2 to the 2004 Form
                10KSB].10.4
            License
                Agreement effective as of February 25, 1998 between Dr. Stuart Weg
                and
                IDDS (as successor in interest to Pain Management, Inc.) [incorporated
                by
                reference to Exhibit 10.2 to the IDDS Form S-1].10.5
            Employment
                Agreement, dated as of September 7, 2004, between IDDS and Daniel
                B. Carr
                [incorporated by reference to Exhibit 10.5 to the December 10 Form
                8-K
                ].10.6.1
            Securities
                Purchase Agreement dated as of November 4, 2004 among the Purchasers
                therein and IDDS [incorporated by reference to Exhibit 10.6.1 to
                the 2005
                Form SB-2].10.6.2
            Form
                of 10% Senior Secured Debenture, dated November 4, 2004, in the aggregate
                principal amount of $1,000,000 issued by IDDS [incorporated by reference
                to Exhibit 10.6.2 to the 2005 Form SB-2].10.7.1
            Securities
                Purchase Agreement, dated as of November 3, 2005 among the investors
                therein and the Company [incorporated by reference to item 10.1 to
                the
                November 2005 Form 8-K].10.7.2
            Registration
                Rights Agreement, dated as of November 7, 2005, among the Holders
                therein
                and the Company [incorporated by reference to item 10.2 to the November
                2005 Form 8-K].16.1
            Letter
                from Paritz & Company, P.A., dated December 13, 2004 [incorporated by
                reference to Exhibit 16.1 to the Company’s Form 8-K filed for an event of
                December 13, 2004].21*
            Subsidiaries24*
            Power
                of Attorney (on signature page).31.1*
            Rule
                13a-15(a)/15d-15(a) Certification of Daniel B.
                Carr, Chief Executive Officer and Chief Medical Officer.31.2*
            Rule
                13a-15(a)/15d-15(a) Certification of Douglas A.
                Hamilton, Chief Operating Officer and Chief Financial
                Officer.32.1*
            Certification
                pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.32.2*
            Certification
                pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002.


___________


*
      Filed
      herewith




88
 Index




**SIGNATURES**


Pursuant
      to
      the requirements of the Section 13 or 15(d) of the Securities Exchange Act
      of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized on the 14th day of April
      2006.




JAVELIN
                  PHARMACEUTICALS, INC.By:
              /s/
                Daniel B. CarrDaniel
                  B. CarrChief
                  Executive Officer and Chief Medical
                  Officer






**POWER
      OF ATTORNEY**




Each
      director and/or officer of the registrant whose signature appears below hereby
      appoints Daniel B. Carr, M.D. or Fred H. Mermelstein as his attorney-in-fact
      to
      sign in his name and behalf, in any and all capacities stated below, and to
      file
      with the Securities and Exchange Commission, any and all amendments, to this
      Annual Report of Form 10-K.




Pursuant
      to the requirements of the Securities Exchange Act of 1934 this report has
      been
      signed by the following persons in the capacities and on the dates
      indicated.




**Signature**
                  
                  /s/
                    Douglas G. Watson
                
                **Title**
                **Date**Douglas
                    G. Watson
                  
                  /s/
                      Douglas A. Hamilton
                
                Chairman
                    of the Board and Director
                April 14,
                    2006Douglas
                    A. Hamilton
                  
                  /s/
                      Daniel B. Carr
                
                Chief
                    Operating Officer and Chief Financial Officer (Principal Financial
                    and
                    Accounting Officer)
                April 14,
                    2006Daniel
                    B. Carr
                  
                  /s/
                      Jackie M. Clegg
                
                Director
                April 14,
                    2006Jackie
                    M. Clegg
                  
                  /s/
                      Peter M. Kash
                
                Director
                April 14,
                    2006Peter
                    M. Kash
                  
                  /s/
                      Fred H. Mermelstein
                
                Director
                April 14,
                    2006Fred
                    H. Mermelstein
                  
                  /s/
                      William P. Peters
                
                Director
                April 14,
                    2006William
                    P. Peters
                
                Director
                April 14,
                    2006
  89
 Index